Facility Location Decisions

Experience teaches that men are so much

governed by what they are accustomed to see and
practice, that the simplest and most obvious
improvements in the most ordinary occupations are
adopted with hesitation, reluctance, and by slow
graduations.

Alexander Hamilton, 1791

Chapter 13
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13-1
Facility Location in Location
Strategy

Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals

CONTROLLING
ORGANIZING
• Purchasing and supply • Transport decisions

PLANNING
scheduling decisions Customer
• Storage fundamentals service goals
• Storage decisions • The product
• Logistics service
• Ord . proc. & info. sys.

Location Strategy
Locationdecisions
••Location decisions
• The network planning process

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13-2
 Location Overview
What's located?
 Sourcing points
 Plants
 Vendors
 Ports
 Intermediate points
 Warehouses
 Terminals
 Public facilities (fire, police, and ambulance
stations)
 Service centers
 Sink points
 Retail outlets
 Customers/Users
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 Location Overview (Cont’d)
Key Questions
 How many facilities should there be?
 Where should they be located?
 What size should they be?
Why Location is Important
 Gives structure to the network
 Significantly affects inventory and
transportation costs
 Impacts on the level of customer service to
be achieved
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 Location Overview (Cont’d)
Methods of Solution
 Single warehouse location
– Graphic
– Grid, or center-of-gravity, approach
 Multiple warehouse location
– Simulation
– Optimization
– Heuristics
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 Nature of Location Analysis
Manufacturing (plants & warehouses)
Decisions are driven by economics. Relevant costs
such as transportation, inventory carrying, labor, and
taxes are traded off against each other to find good
locations.
Retail
Decisions are driven by revenue. Traffic flow and
resulting revenue are primary location factors, cost is
considered after revenue.
Service
Decisions are driven by service factors. Response
time, accessibility, and availability are key dimensions
for locating in the service industry.
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 Weber’s Classification of
Industries

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13-7
 Agglomeration
Based on the observation that the output of one
industry is the input of another. Customers for an
industry’s products are the workers of those
industries. Hence, suppliers, manufacturers, and
customers group together, especially where
transportation costs are high. Historically, the
growth of the auto industry showed this pattern.
Today, the electronics industry (silicon valley) has a
similar pattern although it is less obvious since the
product value is high and transportation costs are a
small portion of total product price.

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 COG Method
Method appraisal
 A continuous location method
 Locates on the basis of transportation costs alone

The COG method involves

 Determining the volumes by source and destination
point
 Determining the transportation costs based on
$/unit/mi.
 Overlaying a grid to determine the coordinates of
source and/or destination points
 Finding the weighted center of gravity for the graph

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 COG Method (Cont’d)

X
 VR X i i i i
,Y 
i
VR Y i i i

 VR i i i  VR i i i

where
Vi = volume flowing from (to) point I
Ri = transportation rate to ship Vi from (to) point i
Xi,Yi = coordinate points for point i
X, Y
= coordinate points for facility to be located

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 COG Method (Cont’d)
Example Suppose a regional medical warehouse is to be
established to serve several Veterans Administration hospitals
throughout the country. The supplies originate at S1 and S2 and
are destined for hospitals at H1 through H4. The relative locations
are shown on the map grid. Other data are: Note rate is a
Annual Rate, per mile cost
Point Prod- volume, $/cwt/
i ucts
Location cwt. mi. Xi Yi
1 S1 A Seattle 8,000 0.02 0.6 7.3
2 S2 B Atlanta 10,000 0.02 8.6 3.0
3 H1 A&B
Los 5,000 0.05 2.0 3.0
Angeles
4 H 2 A & B Dallas 3,000 0.05 5.5 2.4
5 H 3 A & B Chicago 4,000 0.05 7.9 5.5
6 H 4 A & B New York 6,000 0.05 10.6 5.2

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 COG Method (Cont’d)
Map scaling factor, K

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 COG Method (Cont’d)
Solve the COG equations in table form

i Xi Yi Vi Ri ViRi ViRiXi ViRiYi

1 0.6 7.3 8,000 0.02 160 96 1,168
2 8.6 3.0 10,000 0.02 200 1,720 600
3 2.0 3.0 5,000 0.05 250 500 750
4 5.5 2.4 3,000 0.05 150 825 360
5 7.9 5.5 4,000 0.05 200 1,580 1,100
6 10.6 5.2 6,000 0.05 300 3,180 1,560
1,260 7,901 5,538

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 COG Method (Cont’d)
Now,

X = 7,901/1,260 = 6.27

Y = 5,538/1,260 = 4.40

This is approximately Columbia, MO.

The total cost for this location is found by:

TC  i Vi Ri K ( X i  X ) 2  (Yi  Y )2

where K is the map scaling factor to convert

coordinates into miles.
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 COG Method (Cont’d) COG

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 COG Method (Cont’d)
TC1  8,000(0.02)(500) (0.6  6.27)2  (7.3  4.40)2

Calculate total cost at COG

i Xi Yi Vi Ri TC
1 0.6 7.3 8,000 0.02 509,482
2 8.6 3.0 10,000 0.02 271,825
3 2.0 3.0 5,000 0.05 561,706
4 5.5 2.4 3,000 0.05 160,733
5 7.9 5.5 4,000 0.05 196,644
6 10.6 5.2 6,000 0.05 660,492
Total 2,360,882
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 COG Method (Cont’d)
Note The center-of-gravity method does not necessarily
give optimal answers, but will give good answers if there are
a large numbers of points in the problem (>30) and the
volume for any one point is not a high proportion of the total
volume. However, optimal locations can be found by the
exact center of gravity method.

X 
n V R X /d
i i i i i n
,Y 
V R Y /d
i i i i i

V R /d
i i i i V R /d
i i i i

where
n n
di  (Xi  X )2  (Yi  Y )2

and n is the iteration number.

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 COG Method (Cont’d)

Solution procedure for exact COG

1) Solve for COG
2) Using X ,Y find di
3) Re-solve for X ,Y using exact formulation
4) Use revised X ,Y to find revised di
5) Repeat steps 3 through 5 until there is no
change in X ,Y
6) Calculate total costs using final coordinates

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 Multiple Location Methods
 A more complex problem that most firms have.
 It involves trading off the following costs:
 Transportation inbound to and outbound from the facilities
 Storage and handling costs
 Inventory carrying costs
 Production/purchase costs
 Facility fixed costs
 Subject to:
 Customer service constraints
 Facility capacity restrictions
 Mathematical methods are popular for this type of problem
that:
 Search for the best combination of facilities to minimize
costs
 Do so within a reasonable computational time
 Do not require enormous amounts of data for the analysis
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 Location Cost Trade-Offs

Total cost
Cost

Warehouse
fixed

Inventory carrying
and warehousing

Production/purchase
and order processing

Inbound and
outbound
transportation
0
0
Number of warehouses 13-20
CR (2004) Prentice Hall, Inc.
 Multiple COG
Formulated as basic COG model
Can search for the best locations for a selected number of
sites.
Fixed costs and inventory consolidation effects are handled
outside of the model.
A multiple COG procedure
Rank demand points from highest to lowest volume
Use the M largest as initial facility locations and assign
remaining demand centers to these locations
Compute the COG of the M locations
Reassign all demand centers to the M COGs on the basis
of proximity
Recompute the COGs and repeat the demand center
assignments, stopping this iterative process when there is
no further change in the assignments or COGs 13-21
CR (2004) Prentice Hall, Inc.
 Examples of Practical COG
Model Use
Location of truck maintenance terminals

Location of public facilities such as offices, and

police and fire stations

Location of medical facilities

Location of most any facility where transportation

cost (rather than inventory carrying cost and
facility fixed cost) is the driving factor in location

As a suggestor of sites for further evaluation 13-22

CR (2004) Prentice Hall, Inc.
 Mixed Integer Programming

 A method used commercially

- Has good problem scope
- Can be implemented on a PC
- Running times may be long and memory
requirements substantial
- Handles fixed costs well
- Nonlinear inventory costs are not well
handled

 A linear programming-like solution procedure

can be used (MIPROG in LOGWARE)

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 MIP (Cont’d)
Example

The database for the illustrated problem is prepared as file

ILP02.DAT in MIPROG. The form is dictated by the problem
formulation in the technical supplement of the location chapter.

The solution is to open only one warehouse (W2) with resulting

costs of:
Category Cost
Production $1,020,000
Transportation 1,220,000
Warehouse
handling 310,000
Warehouse fixed 500,000
Total $3,050,000

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The situation
Product 1
Handling = $2/cwt. $4
/cw
t
Customer C1 MIP

t.
$0/cwt. 50,000 cwt.

/cw
(Cont’d)

$2
$5
Plant P1 Warehouse W1 $3
/cw

/cw
Production = $4/cwt. t.

t .
Capacity = .t
60,000 cwt. /cw
$1 Customer C2
Handling = $1/cwt.

t.
100,000 cwt.

/cw
$2

$4

$5
/cw

/cw
t. t
cw Warehouse W2
$2/

t.
Plant P2
Fixed = $100,000
A Multiple
Production = $4/cwt.
Capacity =
Unrestricted
Capacity = 110,000 cwt.
Fixed = $500,000
Customer C3
50,000 cwt.
Product
Capacity =
Unrestricted
Network
Product 2
Handling = $2/cwt.
$3
/cw
t
Customer C1 Design

t.
$0/cwt.
Problem
20,000 cwt.

cw
$3/
$5

Plant P1 Warehouse W1 $2
/cw
cw/

Production = $3/cwt. t.
t .

Capacity = t.
50,000 cwt. /cw
$2 Customer C2
Handling = $1/cwt.
t.

30,000 cwt.
/cw

$3
$4

$4
/cw
/cw

t. t
cw
$2 / Warehouse W2
t.

Plant P2
Production = $2/cwt.
Capacity = Customer C3
Unrestricted 60,000 cwt.
13-25
Mixed Integer programming

13-26
13-27
 Guided Linear Programming
Searches for the best locations.
A typical problem is shown in the next figure and can be configured as
a transportation problem of linear programming in terms of its variable
costs.

 The inventory and warehouse fixed costs are computed as per-unit

costs, but this depends on the warehouse throughput. They are
placed along with the variable costs in the linear programming
problem.

 The linear programming problem is solved. This gives revised

demand assignments to warehouses. Some may have no
throughput and are closed.

 Fixed costs and inventory carrying costs are recomputed based on

revised warehouse throughputs.

 When there is no change in the solution from one iteration to the

next, STOP.
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Guided Linear Programming (Cont’d)
The situation
Handling = $2/cwt.
Capacity = 60,000 cwt.
Fixed = $100,000
/ cwt Customer C1
$4
$0/cwt. 50,000 cwt.

c wt.
$2/
$3
$5
Plant P1 Warehouse W1 /c
/cw
wt
Production = $4/cwt. .
t.
.
Capacity =
/c wt
60,000 cwt. $1 Customer C2
t.

100,000 cwt.
cw
$4/

$5/
$2
/c

cwt
t. Warehouse W2 wt
/ c w

.
$2
Handling = $1/cwt.
Capacity =
Plant P2
Unrestricted
Production = $4/cwt. Customer C3
Fixed = $400,000
Capacity = 50,000 cwt.
Unrestricted Inventory carrying cost =
100(Throughput)0.7
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13-29
 Guided Linear Programming (Cont’d)
Example
 Use data from the network figure.
 Allocate the fixed costs. Assume initially that each warehouse handles the
entire volume. Hence,

Warehouse 1
100,000/200,000 = $0.50/cwt.

Warehouse 2
400,000/200,000 = $2.00/cwt.

 Allocate inventory carrying costs. Assume that throughput for each product is
equally divided between warehouses.
Total customer demand
Each warehouse
0.7
100{[200,000/2) ]/(200,000/2)} = $3.2
No. of whses

 Build the cost matrix for the transportation problem of LP. Note its special
structure.
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 Matrix of Cell Costs and Solution Values for the First
Iteration in the Example Problem
Warehouses Customers
Plant &
warehouse
W1 W2 C1 C2 C3 capacities
a b
4 9 99 99 99
P1 60,000 60,000
Plants
8 6 99 99 99 c
P2 140,000 999,999
d
0 99 9.7 8.7 10.7
W1 60,000 60,000
Warehouses b e
99 0 8.2 7.2 8.2 c
W2 50,000 40,000 50,000 999,999
Warehouse
capacity &
customer
c
demand 60,000 999,999 50,000 100,000 50,000
a
Production plus inbound transport rates, that is, 4 + 0 = 4.
b
Used to represent an infinitely high cost.
c
Used to represent unlimited capacity.
d
Inventory carrying, warehousing, outbound transportation, and fixed rates, that is,
3.2 + 2 + 4 + 0.5 = 9.7.
e
3.2 + 1 + 2 + 2.0 = 8.2. 13-39
 Guided Linear Programming (Cont’d)
 Solve as an LP problem, transportation type. Note the results in the
solution matrix.
 Recompute the per-unit fixed and inventory costs from the first solution
results as follows.

Ware- Per-unit Fixed Cost, Per-Unit Inventory Carrying Cost,

house $/cwt. $/cwt.
0.7
W1 $100,000/60,000 cwt. $100(60,000 cwt.) /60,000 cwt.
= 1.67 = 3.69
0.7
W2 $400,000/140,000 cwt. $100(140,000 cwt.) /140,000 cwt.
= 2.86 = 2.86

 Place these per-unit costs along with transportation costs in the

transportation matrix. The portion of the matrix that is revised is:

C1 C2 C3
a
W1 11.36 10.36 12.36
b
W2 8.72 7.72 8.72
a
2 + 4 + 1.67 + 3.69 = 11.36
b
1 + 2 + 3.57 + 2.86 = 9.43
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Guided Linear Programming (Cont’d)
The revised solution shows that all volume should be produced at plant 2
and all customers served from warehouse 2.
 Once the throughputs are known, they are used to compute the cost
summaries shown in the solution table. Actual costs are used, not the
cell costs of the LP problem. The solution is:
Warehouse 1 Warehouse 2
Cost type 0 cwt. 200,000 cwt.
Production $0 200,0004 = $800,000
Inbound transportation 0 200,0002 = 400,000
Outbound transportation 50,0002 = 100,000
100,0001 = 100,000
0 50,0002 = 100,000
Fixed 0 400,000
0.7
Inventory carrying 0 100(200,000) = 513,714
Handling 0 200,0001 = 200,000
Subtotal $0 $2,613,714
Total $2,613,714
 The iterative process is repeated until there are no changes. The answer
is to have only warehouse 2 open. 13-33
 Location by Simulation
•Can include more variables than typical algorithmic
methods

•Cost representations can be precise so problem can

be more accurately described than with most
algorithmic methods

•Mathematical optimization usually is not

guaranteed, although heuristics can be included to
guide solution process toward satisfactory solutions
•Data requirements can be extensive
•Has limited use in practice
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 Start

Shycon/Maffei Simulation
Read in
all customer
order data
and locations

Volume
Preprocessing
shipment
program
orders

Orders filled
through ware-
housing system

Read in Read in
Test warehouse
freight rates,
warehousing costs, program location
taxes, etc. configuration
to be evaluated

Cost of warehouse
location configuration

Is another Yes
run desired?

No
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13-35
Stop
 Commercial Models for Location

Features
•Includes most relevant location costs
•Constrains to specified capacity and customer
service levels
•Replicates the cost of specified designs
•Handles multiple locations over multiple echelons
•Handles multiple product categories
•Searches for the best network design
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 Commercial Models (Cont’d)
Plants/ Level 2 Level 1 Customers/
vendors/ warehouses warehouses demand
ports/ or stocking or stocking centers/
sources points points sinks

Supply

Demand

Inventory &
warehousing Inventory &
costs warehousing
Production/
costs
purchase costs Transportation costs
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 Commercial Models (Cont’d)

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 Dynamic Location
 The general long-range nature of the location problem
- Network configurations are not implemented immediately
- There are fixed charges associated with moving to a new
configuration
 We seek to find a set of network configurations that minimizes the present
value over the planning horizon

Retail Location
 Contrasts with plant and warehouse location.
- Revenue rather than cost driven
- Factors other than costs such as parking, nearness to competitive
outlets, and nearness to customers are dominant

Methods
 Weighted checklist
- Good where many subjective factors are involved
- Quantifies the comparison among alternate locations
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 A Hypothetical Weighted Factor Checklist for a
Retail Location Example
(1) (2) (3)=(1)(2)
Factor
Weight Factor Score Weighted
a b
(1 to 10) Location Factors (1 to 10) Score
8 Proximity to competing stores 5 40
5 Space rent/lease
considerations 3 15
8 Parking space 10 80
7 Proximity to complementary
stores 8 56
6 Modernity of store space 9 54
9 Customer accessibility 8 72
3 Local taxes 2 6
3 Community service 4 12
8 Proximity to major
transportation arteries 7 56
Total index 391
a
Weights approaching 10 indicate great importance.
b
Scores approaching 10 refer to a favored location status.
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