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design and product allocation

DOI: 10.1080/00207540412331285841

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International Journal of Production Research,

Vol. 43, No. 2, 15 January 2005, 327338

Rensselaer Polytechnic Institute, Troy, NY 12180, USA

zUniversity of Twente, Enschede, the Netherlands

The two primary functions of a warehouse include (1) temporary storage and

protection of goods and (2) providing value added services such as fullment of

individual customer orders, packaging of goods, after sales services, repairs, test-

ing, inspection and assembly. To perform the above functions, the warehouse is

divided into several functional areas such as reserve storage area, forward (order

collation) area and cross-docking. The paper presents a mathematical model and

a heuristic algorithm that jointly determine product allocation to the functional

areas in the warehouse as well as the size of each area using data readily available

to a warehouse manager.

1. Introduction

The two primary functions of warehouse include (1) temporary storage and protec-

tion of goods and (2) providing value added services such as fullment of individual

customer orders, packaging of goods, after sales services, repairs, testing, inspection

and assembly. A warehouse is generally divided into the following areas to perform

the above functions: reserve storage area, forward area and cross-docking area.

The reserve area is where goods are held until they are required for shipment to

the customer or for performing value added services or order collation. The latter

is typically done in the forward area. The forward area could also be used to store

fast movers that do not occupy much space. Cross-docking refers to the process

in which items, cartons or pallet loads are taken directly from the receiving trucks

to the shipping trucks. It provides a fast product ow and reduces or eliminates

the costs associated with handling and holding inventory. Typically, conveyors or

fork-lift trucks are used to transfer materials from receiving to shipping in the

cross-docking area.

The design of a warehouse is a complex problem. It includes a large number

of interrelated decisions among the warehouse processes, warehouse resources and

warehouse organizations. Rouwenhorst et al. (2000) classify the warehouse design

International Journal of Production Research ISSN 00207543 print/ISSN 1366588X online # 2005 Taylor & Francis Ltd

http://www.tandf.co.uk/journals

DOI: 10.1080/00207540412331285841

328 S. S. Heragu et al.

and planning problems into three levels of decisions: strategic, tactical and opera-

tional. At the strategic level, there are several decisions that need to be made that

range from determining the number of warehouses, their size and locations to

designing and building the warehouse, to selecting the material-handling equipment

necessary for achieving the desired throughput rate. It also includes determining the

functional areas in the warehouse, their sizes, designing the process ow determina-

tion of the warehouse layout and the selection of a warehouse management system.

At the tactical level, the main concerns include determination of manpower to

operate the system, allocation of products to the functional areas, developing

order picking and replenishment policies, capacity planning, etc. At the operational

level, the concerns include the selection of routing policies, the determination of

batch size, the dock assignment, short-term (daily or weekly) work force assignment

and the task assignment.

After the warehouse location, number and size have been determined, the ware-

house designer may want to determine what storage areas are to be included and

the size of each, so that an appropriate material-handling system can be selected and

the warehouse laid out. Although determining the size of each functional area is

a strategic-level problem, it depends upon another tactical level problem: how the

products will be distributed among the functional areas. The latter is the product

allocation problem. Thus, a joint solution of the functional area size determination

and product allocation problems is desirable. However, the general approach under-

taken by practitioners is to solve the two problems sequentially by generating mul-

tiple alternatives for the functional area size problem and then determine how the

products can be allocated for each of these alternatives. This paper develops a higher

level model that jointly determines the functional area sizes and the product alloca-

tion in a way that minimizes the total material-handling cost. The output of this

model serves as a base for further detailed warehouse design. Note that although the

internal sizing problem in a warehouse is a strategic problem, the relative size of the

functional areas can change over the lifetime of the warehouse depending upon

shifting trends in product demand.

Section 2 surveys the literature related to the warehouse design problem. Section 3

provides a pictorial representation of the problem and states some assumptions in

the approach. A mathematical model for the joint solution of the two problems

discussed above is presented in section 4. A heuristic to solve the model is presented

in section 5, a numerical example is given in section 6, experimental results are given

in section 7 and conclusions are drawn in section 8.

2. Literature review

Ashayeri and Gelders (1985) compare two dierent approaches, analytical and

simulation, for warehouse design problems. They conclude that, in general, neither

a pure analytical approach nor an approach that uses only simulation will lead to a

practical design method. They suggest a combination of the two approaches is likely

to lead to a good design method. Cormier and Gunn (1992) present a survey on the

throughput capacity models, storage capacity models and warehouse design models.

Van den Berg (1999) presents a literature survey on methods and techniques for

the planning and control of warehouse systems. Rouwenhorst et al. (2000) present

Mathematical model for warehouse design and product allocation 329

blems. An extensive review of the literature is also presented. They conclude that

a majority of the papers are analysis oriented and provide some guidelines toward

a more design-oriented research approach for warehousing problems.

There are some publications concerning warehouse design methods. Gray et al.

(1992) propose a hierarchical design method and describe the application of their

method by an example design. Yoon and Sharp (1995, 1996) suggest an elaborate

conceptual procedure for the design of an order picking system. For the product

allocation problem, there are some publications dealing with design of forward and

reserve areas. Bozer (1985) considers the problem of splitting a pallet rack into an

upper reserve and lower forward area. Hackman and Rosenblatt (1990) present a

model for forward/reserve problem that considers both assignment (which product)

and allocation (what amounts). They provide a heuristic that attempts to minimize

the total costs for picking and replenishment. Frazelle et al. (1994) provide a frame-

work for determining the size of forward area together with the allocation of pro-

ducts to that area. Hackman and Platzman (1990) present a mathematical

programming procedure that solves more general instances of the assignment and

allocation problems in a warehouse. Van den Berg et al. (1998) consider a warehouse

with a busy and idle period where reserve picking is possible. There are a limited

number of publications that relate to the design of cross-docking operations.

Napolitano (2000) provides a practical guide to the planning, design and implemen-

tation of a cross-docking operation. Bartholdi and Gue (2000) use travel cost models

to develop layouts that minimize labour costs in a less than truckload (LTL) cross-

docking terminal. Tsui and Cheng (1990, 1992) study the problem of assigning

trailers to doors on a dock.

3. Model assumptions

This paper considers warehouse congurations that include a subset of the following

ve functional areas: receiving, shipping, staging for cross-docking operation,

reserve and forward. In the receiving area, pallet loads or individual cartons of

products are received. If necessary, they are staged for a short period and then

moved either to the shipping area directly (cross-docking operation) or to the storage

area. In the shipping area, picked order items are readied (e.g. shrink-wrapped,

packed) and staged (if necessary) for shipping to the next destination. In the staging

area for cross-docking, products are sorted and accumulated for further outbound

operations. The reserve area is a storage area for bulky product items that typically

reside in the warehouse for a relatively longer duration. Normally, the reserve area

uses high-density storage equipment to achieve the goal of high space utilization.

The forward area is a relatively smaller storage area typically used for fast

order picking or performing value-added operations or order collation. Thus, the

following material ows are possible in a warehouse (gure 1):

. Flow 1: Receiving ! cross-docking ! shipping.

. Flow 2: Receiving ! reserve area ! shipping.

. Flow 3: Receiving ! reserve area ! forward area ! shipping.

. Flow 4: Receiving ! forward area ! shipping.

330 S. S. Heragu et al.

Flow 2

Receiving

Shipping

Reserve

Flow 3

Forward

Flow 4

Flow 1 is the cross-docking operation. Upon receipt, product items are either

put into a staging area for a short period and then moved to the shipping area,

or directly moved to the shipping area. The received products are typically

presorted at suppliers facilities. The operation here is simply to pass on the product

to a customer or the next facility in the supply chain. A number of companies

use this strategy for ecient operation and management of the supply chain

(Editor 2001).

Flow 2 is a typical warehouse operation. Products are stored in a reserve area

and order-picking operation is performed as required. It is assumed that, typically,

only those items that remain in the warehouse for relatively extended periods and

shipped as is (or with minimal value added operations) will be allocated to the

reserve storage area.

Flow 3 is also a typical warehouse operation. Products are rst stored in the

reserve area typically in pallet loads, broken into smaller loads (cartons or cases)

and then moved to the forward area for fast order picking, order consolidation or

performing value added operations.

Flow 4 can be thought of as another form of cross-docking operation. Products

are received and then are directly put into forward area to perform the order con-

solidation. This type of operation is usually seen in the supplier warehouses or when

there is a need to consolidate large orders.

The next section presents a mathematical model that determines the ow to

which each product must be assigned and as result, the size of the functional areas

within the warehouse. It assumes the following:

. Available total storage space is known.

. Expected time a product spends on the shelves is known. This is referred to

here as the dwell time.

. Cost of handling each product in each ow is known.

. Dwell time and cost have a linear relationship.

. Annual product demand rates are known.

. Storage policies and material-handling equipment are known and these aect

the unit handling and storage costs.

Mathematical model for warehouse design and product allocation 331

4. Model formulation

Parameters:

i number of products, i 1, 2, . . . , n,

j type of material ow, j 1, 2, 3, 4,

i annual demand rate of product i in unit loads,

Ai order cost for product i,

Pi price per unit load of product i,

pi average percentage of time a unit load of product i spends in reserve

area if product is assigned to material ow 3,

qij 1 when product i is assigned to material ow j 1, 2 or 4; ddie 1

when product i is assigned to ow j 3, where di is the ratio of the

size of the unit load in reserve area to that in forward area and ddie

is the largest integer greater than or equal to di,

a,b,c levels of space available in the vertical dimension in each functional

area, a cross-docking, b reserve and c forward,

r inventory carrying cost rate,

Hij cost of handling a unit load of product i in material ow j,

Cij cost of storing a unit load of product i in material ow j per year,

Si space required for storing a unit load of product i,

TS total available storage space,

Qi order quantity for product i (in unit loads),

Ti dwell time (years) per unit load of product i,

LLCD, ULCD lower and upper storage space limit for the cross-docking area,

LLF, ULF lower and upper storage space limit for the forward area,

LLR, ULR lower and upper storage space limit for the reserve area.

Decision variables:

Xij 1 if product i is assigned to ow type j; 0 otherwise,

, , proportion of available space assigned to each functional area,

cross-docking, reserve and forward.

Model 1:

X

n X

4 n X

X 4

min 2 qij Hij li Xij qij Cij Qi Xij =2 1

i1 j1 i1 j1

X

4

Xij 1 8i 2

j1

X

n

Qi Si Xi1 =2 aTS 3

i1

X

n X

n

Qi Si Xi2 =2 pi Qi Si Xi3 =2 bTS 4

i1 i1

332 S. S. Heragu et al.

X

n X

n

1 pi Qi Si Xi3 =2 Qi Si Xi4 =2 c TS 5

i1 i1

1 6

, , 0 10

Xij 0 or 1 8i, j: 11

The dwell time is the average duration a product stays on the shelf and is

assumed to be known or can be estimated by the warehouse manager. In fact,

based on annual product demand i, order cost Ai, price per unit load of product

Pi and carrying cost rate r, a simple economic order quantity (EOQ) model can be

used to determine the optimal order quantity Qi, as well as the average time a unit

load of product spends on the shelves. For example, since the time between two

successive replenishments is Qi/i, the average dwell time per unit load of product i

is Ti Qi/(2i). Note that Qi/2 iTi and this value or another reasonable estimate

must be used in the objective function (1), which minimizes the total cost of handling

the average, annual loads of each product assigned to its respective area as well as

the corresponding annual storage costs. The reader should not confuse storage costs

with inventory holding costs. While inventory holding costs depend only upon the

value of the inventory, they are the same whether the inventory is in reserve or

forward or cross-docking area. Storing costs, on the other hand, depend upon the

area in which the product is stored and these costs tend to carry a premium for the

cross-docking and forward areas (because these are considered prime real estate in

a warehouse) and are relatively not that expensive for the reserve area. Of course,

the handling costs are dierent (in fact, the opposite) for these areas and thus our

model trades o storage costs against handling costs. Note that Xij tells us whether

or not product i is assigned to ow j, and QiXij/2 gives the average number of the

corresponding unit loads in inventory.

The model implicitly assumes that the unit load size for each product is

not dependent upon the ow to which the product is assigned. In general, the

size of a unit load for a product i that remains in one area is equal to that received

from the supplier. The exception is for products assigned to ow 3 because these

products have dierent unit load sizes in the two areas encompassing ow 3. The

unit load size of products assigned to ow 3 could be equal to that received from

the suppliers in the reserve area, but dierent when handled in the forward area.

This occurs because a pallet load is broken down to cases or cartons in the forward

area. This is only for products assigned to ow 3. Hence, we introduce di to denote

the ratio of the size of the unit load in the reserve area to that in the forward area

and qij for j 3 accounts for the fact that product i is handled ddie 1 times.

Hij and Cij should therefore correspond to aggregate handling and storage costs

for j 3. The model also implicitly assumes that for a product assigned to ow 3,

Mathematical model for warehouse design and product allocation 333

the unit load size decreases as it moves from the reserve to forward area. If necessary

this assumption can be relaxed and a more general model can be developed rather

easily.

The model also assumes that each product incurs two material-handling transac-

tions, one for receiving and another for shipping, regardless of the area to

which it is assigned. If products assigned to a particular ow require more than

two (or only one) material-handling transactions, the coecient of the correspond-

ing terms in the objective function must be appropriately weighted. For example,

in some cases, the products assigned to the combined forward/reserve ow may incur

three transactions, one for receiving at the reserve area, another for shipping to

forward area and a third for shipping. If this is the case, that term must have a

coecient of 3. Constraint (2) ensures that each product is assigned to only one type

of material ow. If the same product could be allocated to multiple ows due to

dierent demand patterns, then our model requires that the manager at least knows

or can estimate the percentage of this product that could be assigned to two or more

of the four ows. For modelling purposes, additional versions of this product are

then created (depending upon how many ows this product could be assigned to)

with the demand data appropriately reduced. For example, assume that 70% of

a certain product whose demand is a 10 000 units per year on average is likely to

be assigned to one of the four ows, say reserve storage and another 30% to another,

say cross-docking. For modelling purposes, an additional version of this product is

therefore created with demand equal to 7000 and 3000 for the two products. Note

that although the manager might assume that the product is likely to be split on a 7:3

ratio to reserve:cross-docking, the model may provide a dierent assignment based

on the total costs. Constraints (3)(5) ensure that the space constraints for the cross-

docking, reserve and forward areas are met. The right-hand side includes three

additional variables whose sum is required to be 1 (constraint 6). This is to ensure

100% of the space available is allocated to the three areas. Constraints (7)(9) serve

to enforce upper and lower limits on the space that can be allocated to cross-docking,

forward and reserve areas.

We believe much of the input data such as the type and number of products,

annual demand for each, order cost, unit price, carrying cost rate, etc., are readily

available to the warehouse designer. The storage cost Cij is typically a function of the

size of a products unit load, warehouse leasing/construction costs per square foot,

as well as the type of shelving used in each area encompassing ow j. Cij and Hij for

ow 3 must be aggregated to account for the fact that a pallet load could be broken

down into cases or cartons. The cost of handling a unit load of product i in each ow

j is a function of the product size, its handling characteristics as well as the material-

handling system used in the area(s) included in ow j. Tamashunas et al. (1990)

provide a simple formula to estimate these costs based on labour, non-labour as

well as prorated capital recover costs of the material-handling system (Heragu 1997,

chapter 3). This formula is adapted to the warehouse application using the following

additional notation:

Lj average percentage of time material-handling device in ow j travels

loaded,

SPj average speed of material-handling device in ow j (feet/min),

334 S. S. Heragu et al.

ow j (per min),

LULij average loading and unloading time in minutes for product i using

material-handling device in ow j,

dij average distance travelled to store or retrieve product i in ow j,

Nij average number of unit loads of product i handled in ow j.

TCij

Hij , where 12

Nij

Nij LULij dij =Lj SPj dij

TCij ICj n N OP LUL : 13

P ij j ij

Lj SPj

Nij LULij dij =Lj SPj

i1

Note that the rst part of (13) prorates the investment or leasing cost of the

material-handling device (assigned to a ow) to each product and the second part

assigns the operating costs. Dividing this term by the number of unit loads of the

product assigned to the ow under consideration, we estimated the per unit load-

handling cost. The only disadvantage with this method is that it requires knowledge

of the product assignment to each ow, the main decision variable in the mathemat-

ical model (1)(11). To overcome this disadvantage, we recommend that the deci-

sion-maker uses this model in two passes. First, assuming some initial assignment of

products to ows, calculate the Hij values. Use these values to solve the model. Based

on the product assignment obtained from the model, change the Hij values and re-

solve the model.

As will be seen in the experimental section, Model 1 may require much compu-

tation time, especially for large-scale problems. To solve large-scale problems, we

modify the bounds or change the inequalities to equalities. Two such modied

models are shown below.

Model 2:

X

n X

4 n X

X 4

min 2 qij Hij li Xij qij Cij Qi Xij =2 1

i1 j1 i1 j1

1 14

Model 3:

n X

X 4 n X

X 4

min 2 qij Hij li Xij qij Cij Qi Xij =2 1

i1 j1 i1 j1

X

n

Qi Si Xi1 =2 aTS 16

i1

Mathematical model for warehouse design and product allocation 335

X

n X

n

Qi Si Xi2 =2 pi Qi Si Xi3 b TS 17

i1 i1

X

n X

n

1 pi Qi Si Xi3 =2 Qi Si Xi4 =2 c TS: 18

i1 i1

5. Heuristic algorithm

Although large instances (e.g. 3000 products) of the warehouse design model

presented above can be solved directly using an available branch-and-bound-based

algorithm for mixed-integer programming problems (tables 1 and 2), when the

problem is severely constrained so that there are a limited number of feasible

solutions, or when the number of products is in the hundreds of thousands, the

number of binary integer variables increases considerably and solving the resulting

model takes signicant computational time. Hence, proposed below is an ecient

heuristic for solving the model.

Heuristic algorithm:

Step 1. For each i 1, 2, . . . , n, nd minj1, 2,3, 4 2qij Hij li qij Cij Qi =2 :

Let minj1, 2, 3, 4 2qij Hij li qij Cij Qi =2 occur for j j*.

Set Xij* 1, remaining Xik 0, k 1, 2, 3, 4, k 6 j*.

Step 2. Calculate , , and using equations (1618). If > 1, stop because

the problem is infeasible. Otherwise, go to Step 3.

Step 3. Calculate the upper bound on , , and as follows:

ULCD ULR ULF

UB ; UB ; and UB :

aTS bTS cTS

If UB , UB , and UB , stop because there is a feasible, optimal

solution. Otherwise, go to Step 4.

Number of products (h:min:s) integer variables Branch Pivots

500 0:1:25.24 2000 373 20 446

1000 0:0:32.24 4000 18 1224

3000 0:17:8.54 12 000 422 19 265

Table 2. Lower bound (LB) and optimal objective function values (OFVs) for four

problems; 0.2 0.5, 0 1,0.1 0.3.

500 6 312 950 6 313 062 0.265674 0.434319 0.300007

1000 12 904 700 12 904 750 0.282854 0.417169 0.299977

3000 37 172 464 37 174 840 0.271169 0.428842 0.299989

336 S. S. Heragu et al.

Step 4. Let max UB , UB , UB occur for area k, k 1, 2, 3, and

min UB , UB , UB occur for area l, l 1, 2, 3. Set k* k,

l* l, place k* in set P, l* in set Q, and the remaining index m in set P

if the areas total space coecient exceeds the corresponding upper bound.

Otherwise, place the remaining index m in set Q.

Step 5. Pick a product i* in area k* and place it in area l* provided:

(i) the upper bound space constraint in area l* is not violated, and

(ii) 2qil Hil li qil Cil Qi =2 2qik Hik li qik Cik Qi =2 is minimum for

i i*.

If no product satisfying conditions (i) and (ii) exists, set k* m and repeat

Step 5. If no product satisfying conditions (i) and (ii) exists, stop, because no

feasible solution is found.

Step 6. If the current solution is feasible stop. Otherwise, repeat Step 2.

Several aspects of the above algorithm are worth discussing. First, it is easy to

show that the solution obtained in Step 1 is optimal for the model in Section 4

excluding the space constraints (3)(10). If such a solution does not exceed the

upper bounds on the three total space coecients UB , UB , and UB , then it is an

optimal solution to Model M1 (see Step 3). Thus, the solution obtained at the end of

Step 1 provides a very tight lower bound on the objective function value for the model

specied by constraints (1)(11). It is thus no surprise that the general-purpose

branch-and-bound algorithm in LINDO can solve problems with 15 000 products.

Second, no feasible solution may be available at the end of Step 2. It can be shown that

if > 1, then no feasible solution to the problem can be developed without

increasing the total space (TS). Third, Step 4 places the areas for which the total space

coecient exceeds the corresponding upper bound in set P and the others in set Q.

Only three areascross-docking, reserve and forwardare considered here, so the

two sets can have only three elements. Step 5 examines the area for which the total

space coecient exceeds the corresponding upper bound the most and transfers it

to the area with the most available space, i.e. the area in set Q. Note that the space

constraint is not violated for the areas belonging to set Q. Fourth, if the heuristic

algorithm cannot transfer products from one of the areas in set P to another in set Q

according to the two conditions in Step 5, it terminates because it cannot nd a feasible

solution. Otherwise, Steps 25 are repeated until a feasible solution is found.

Whenever the heuristic algorithm cannot nd a feasible solution, we recommend

that the total space be increased and the problem resolved. Fifth, instead of

terminating the heuristic after nding a feasible solution in Step 6, one could apply

the simulated annealing algorithm using the procedure outlined in Heragu (1997).

The simulated annealing algorithm systematically considers swapping a product

currently assigned to ow j to another ow as well as swapping pairs of assignments

provided such an exchange yields a feasible solution. For example, if product i is

assigned to ow p and j is assigned to ow q, the algorithm considers assigning

product i to ow q and j to ow p. It is not presented for reasons stated below.

6. Experimental results

Table 1 shows some solution details (CPU time, integer variables, pivots

and branches) explored by the branch-and-bound algorithm in LINGO version 6

Mathematical model for warehouse design and product allocation 337

Number of products

15 000 75 000 150 000

Lower bound 7.7596 108 1.64 109 3.2738 109

gap (%) 0.43 * *

CPU time 1 468 * *

Heuristic algorithm OFV 7.8695 108 1.6433 109 3.2779 109

Gap (%) 1.4 0.2 0.13

CPU time 34 1 102 5 324

Simulated annealing algorithm OFV 7.863 108 1.6433 109 3.2779 109

Gap (%) 1.3 0.2 0.13

CPU time 4 273 26 858 82 461

*Due to the size of the generator matrix, the computer did not have sucient memory.

LINGO was used to solve the model directly for four problem instances. Table 2

provides further details concerning solution quality. In particular, note that the gap

between the lower bound (obtained by solving an LP relaxation of the model in

Section 4) and the optimal value is insignicant indicating the power of the model.

Also shown in table 2 are the , , values indicating the percentage of space

allocated to cross-docking, reserve and forward areas, respectively.

Table 3 shows additional computational results for larger problems ranging in

size from 15 000 to 150 000 products. The objective function values (OFV), compu-

tation (CPU) times, as well as the gap between lower bound and the solution

obtained (CPU time and object value) using three algorithms: the optimal branch-

and-bound algorithm, the heuristic algorithm presented in Section 5 as well as the

simulated annealing variant of the heuristic algorithm. It is clear that the CPU time

of the heuristic is much smaller than the other two algorithms. Even though the

simulated annealing algorithm can improve the solution obtained by the heuristic

somewhat for the problem with 75 000 products, it requires signicantly higher

computation time. The following facts may be summarized based on the computa-

tional results.

The model is very ecient as it can be used to solve problems with 15 000 stock

keeping units (SKUs) optimally.

The heuristic algorithm can nd solutions that are very close to optimal (in fact

less than 1.5%) even for problems with 150 000 products.

It appears that more sophisticated techniques, e.g. decomposition techniques,

could be used to circumvent the memory problem encountered with the branch-

and-bound algorithm and solve very large instances of the joint warehouse design

and product allocation problem jointly.

7. Conclusions

This paper has simultaneously considered the product allocation and functional area

size determination problems in the design of a warehouse. It provides a mathemat-

ical model and a heuristic algorithm to solve the two problems jointly so that annual

handing and storage costs can be minimized. The input data requirement for this

338 S. S. Heragu et al.

model is readily available in most warehouses and the model considers realistic

constraints. We believe this is the only available model that considers the two prob-

lems simultaneously and allows the user to solve them optimally.

Acknowledgement

Research was supported in part by NSF Grant No. DMI-9900039. The authors

gratefully acknowledge its support. The authors are grateful to Chih-Shah Huang

for his help with earlier versions of this paper.

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