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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 Facility Location in Location
Strategy

Inventory Strategy
Forecasting Transport Strategy
Inventory decisions Transport fundamentals
Purchasing and supply Transport decisions
scheduling decisions Customer

ORGANIZING

CONTROLLING
service goals

PLANNING
Storage fundamentals
Storage decisions The product
Logistics service
Ord . proc. & info. sys.

Location Strategy
Location decisions
The network planning process

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 Location Overview
What is 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 (Contd)
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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Classification of Location Problems
Driving force
Economic factors, revenue, accessibility, etc.

Number of facilities
Single vs. multiple

Discreteness of the choices

Continuous vs. discrete

Degree of data aggregation

Time horizon
Static vs. dynamic

Distance metrics
Rectilinear, Euclidean, etc.
6-5
 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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 Desirable Features
As close as possible to raw material sources and
customers
Skilled labor must be readily available in the vicinity
Taxes, property insurance, construction and land prices
must not be too high
Utilities must be readily available at a reasonable price
Local, state and other government regulations must be
conducive to business
Business climate must be favorable and the community
must have adequate support services and facilities

6-7
 Webers Classification of Industries

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 Agglomeration
Based on the observation that the output of one industry
is the input of another.
Customers for an industrys 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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 Location Overview (Contd)
Methods of Solution
Single warehouse location
Median method
Grid, or center-of-gravity, approach
Multiple warehouse location
Simulation
Optimization
Heuristics
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Facility Location for the Rectilinear Distance
Metric
Continuous location model

1-dimensional problem
All demand points are on a horizontal line

Consider the following notation

: volume of flow into demand point
: transportation rate (trips per volume) to demand point
: coordinate of demand point
coordinate of the facility to be located
:
: total transportation cost to be minimized

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 Facility Location for the Rectilinear Distance
Metric
Total cost function

=
=1

Let =
Median method
1. List the existing facilities in non-decreasing order of the x-
coordinates
2. Find the -coordinate in the list at which the cumulative weight
equals or exceeds half the total weight for the first time, that is,

1
=1 <
=1

and =1
=1
2 2

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 Facility Location for the Rectilinear Distance
Metric
Example
A gas station is planned to be opened to serve a set of
neighborhoods along the main road of a city. The coordinates and
monthly demands of the neighborhoods are as follows. Find the
optimal location.

Neighborhood Coordinate Demand

A 7 25
B 11 75
C 19 80
D 2 45
E 6 65
F 18 95
G 1 10

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Facility Location for the Rectilinear Distance
Metric
The problem in two dimensions

, = +

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Facility Location for the Rectilinear Distance
Metric
Total cost function

= +
=1

Solution method (cont'd)

3. List the existing facilities in non-decreasing order of the y-
coordinates
4. Find the y-coordinate in the list at which the cumulative
weight equals or exceeds half the total weight for the first time,
that is,

1
=1 <
=1

and =1
=1
2 2

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Facility Location for the Rectilinear Distance
Metric
Example
A maintenance department aims to locate a machine tool, which
serves five machines. Coordinates of the machines and number
of trips per day are given as follows:
Machine Coordinates Trips/day
1 (1,1) 10
2 (6,2) 20
3 (2,8) 25
4 (3,6) 20
5 (8,4) 25

Find the optimal location of the tool and optimal total weighted
distance if rectilinear distances are used.

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Facility Location for the Rectilinear Distance
Metric
Example (cont'd)

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 Facility Location for the Squared Euclidean
Distance Metric
Total cost function

= 2
+ 2

=1

Let =
Take the first derivatives and find the optimal coordinates

Resulting solution is the "center of gravity"

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 Facility Location for the Squared Euclidean
Distance Metric
Example
A maintenance department aims to locate a machine tool, which
serves five machines. Coordinates of the machines and number of
trips per day are given as follows:

Machine Coordinates Trips/day

1 (1,1) 10
2 (6,2) 20
3 (2,8) 25
4 (3,6) 20
5 (8,4) 25

Find the optimal location of the tool and optimal total weighted
distance if squared Euclidean distances are used.

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 Facility Location for the Euclidean Distance
Metric
Total cost function

= 2 + 2

=1
Let =
Take the first derivatives and find the optimal coordinates


=1
2 + 2
=


=1
2 + 2

=1
2 + 2
=


=1
2 + 2
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 COG Method
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
,Y
n
=
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
d i = (X i X ) 2 + (Y i Y ) 2

and n is the iteration number.

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 COG Method (Contd)

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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 COG Method (Contd)
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
1S 1 A Seattle 8,000 0.02 0.6 7.3
2S 2 B Atlanta 10,000 0.02 8.6 3.0
3H 1 A&B Los 5,000 0.05 2.0 3.0
Angeles
4H 2 A&B Dallas 3,000 0.05 5.5 2.4
5H 3 A&B Chicago 4,000 0.05 7.9 5.5
6H 4 A&B New York 6,000 0.05 10.6 5.2

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 COG Method (Contd)
Map scaling factor, K

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 COG Method (Contd)

Solve the COG equations in table form

i Xi Yi Vi Ri Wi W iX i WiY i
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 (Contd)
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 (Contd) COG

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 COG Method (Contd)
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

Calculating the next location

i Xi Yi wi wiXi wiYi di Wi/di WiXi/di WiYi/di

S1 0.6 7.3 160 96 1168 3184.29 0.050247 0.030148 0.366800
S2 8.6 3 200 1720 600 1359.13 0.147153 1.265519 0.441460
H1 2 3 250 500 750 2246.83 0.111268 0.222536 0.333804
H2 5.5 2.4 150 825 360 1071.55 0.139984 0.769911 0.335961
H3 7.9 5.5 200 1580 1100 983.22 0.203413 1.606962 1.118771
H4 10.6 5.2 300 3180 1560 2201.64 0.136262 1.444377 0.708562
Total 0.788327 5.339453 3.305359

New and ?

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 COG Method
n Location of the warehouse in subsequent iterations
Iteration x y Objective
0 6.2700 4.4000 2,360,888
1 6.7731 4.1929 2,317,129
2 7.0454 4.2105 2,304,099
3 7.2082 4.2577 2,298,826
4 7.3056 4.2984 2,296,735
5 7.3629 4.3283 2,295,939
6 7.3963 4.3489 2,295,642
7 7.4158 4.3626 2,295,532
8 7.4271 4.3716 2,295,491
9 7.4339 4.3773 2,295,476
10 7.4379 4.3810 2,295,470

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 COG Method (Contd)

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 Multiple Location Methods
A more complex problem
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

Warehouse
Cost

fixed

Inventory carrying
and warehousing

Production/purchase
and order processing

Inbound and
outbound
transportation
0
0
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 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
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 Multiple COG
Example
A maintenance department aims to locate two machine tools,
which serve seven machines. Coordinates of the machines and
number of trips per day are given as follows:
Machine Coordinates Trips/day
1 (1,1) 10
2 (6,2) 20
3 (2,8) 25
4 (3,6) 20
5 (8,4) 25
6 (5,3) 15
7 (4,7) 20

Find the location of the tool and total weighted distance (i) using
multiple COG and (ii) if rectilinear distances are used.

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 Multiple COG

Solution

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 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 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

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 Mixed Integer Programming

Simplest case: p-median problem

Locate p facilities by choosing among candidate locations so that
total weighted distance from all customers is minimized

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The situation
Product 1
Handling = $2/cwt. $4
/c wt
Customer C1
MIP

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

/c
(Contd)

$2
$5
Plant P1 Warehouse W1 $3

/cw
Production = $4/cwt. /c wt
.

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

.
wt
100,000 cwt.

/c
$4

$5
$2
/cw

/c wt.
wt. t
c Warehouse W2
$2/
A Multiple
Plant P2
Production = $4/cwt. Fixed = $100,000
Capacity = 110,000 cwt.
Product Network
Capacity = Customer C3
Unrestricted Fixed = $500,000 50,000 cwt. Design Problem
Capacity =
Unrestricted
Product 2
Handling = $2/cwt. /c wt
$3 Customer C1

wt.
$0/cwt. 20,000 cwt.

/c
$3
$5

Plant P1 Warehouse W1 $2
/cw

Production = $3/cwt. /c wt
.
t.

Capacity = t.
50,000 cwt. /c w
$2 Customer C2
Handling = $1/cwt.
.
wt

30,000 cwt.
/c
$4

$4
$3
/cw
/cw

t. t
cw
t.

$2/ Warehouse W2

Plant P2
Production = $2/cwt.
Capacity = Customer C3
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 Mixed Integer Programming

Available supply of plants cannot be exceeded for each

product
The demand for all products must be met
The throughput for each warehouse cannot exceed its
capacity
A minimum throughput of a warehouse must be
achieved before it can be opened
All products from the same customer must be served by
the same warehouse

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Mixed Integer Programming

13-41
Mixed Integer Programming Model

13-42
 MIP (Contd)
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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 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

Read in
all customer

Shycon/Maffei Simulation
order data
and locations

Volume
Preprocessing
shipment
program
orders

Orders filled
through ware-
housing system

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

Cost of warehouse
location configuration

Is another Yes
run desired?

No
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 Covering Location Models - Example

A hospital would like to position emergency services in

surrounding communities
No patient should drive for more than 10 minutes
Would like to minimize the number of emergency rooms
Distance matrix
Potential Emergency Room Site
Neighborhood 1 2 3 4 5 6
A 0 5 15 25 25 15
B 5 0 20 30 15 5
C 15 20 0 10 25 15
D 25 30 10 0 10 20
E 25 15 25 10 0 9
F 15 5 15 20 9 0

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 Covering Location Models - Example

MIP model

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 Other Location Problems

Hub and Spoke

Obnoxious Facilities
Microlocation

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 Commercial Models for Location

Features
Includes most relevant location costs
Constraints 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 (Contd)
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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 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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