Computers & Industrial Engineering 120 (2018) 83–93

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Computers & Industrial Engineering

journal homepage: www.elsevier.com/locate/caie

A two-stage stochastic optimization model for warehouse configuration and T

inventory policy of deteriorating items
⁎
Yu-Siang Lina,b, , Kung-Jeng Wanga
a
Department of Industrial Management, National Taiwan University of Science and Technology, Taipei 106, Taiwan, ROC
b
H. Milton Stewart School of Industrial & Systems Engineering, Georgia Institute of Technology, Atlanta, GA 30332, USA

A R T I C LE I N FO A B S T R A C T

Keywords: The optimal decision of global warehouse/hub deployment is critical to firm profitability. This study resolves the
Warehouse configuration problems of deciding the optimal warehouse location for multiple markets and determining warehouse con-
Inventory control figuration design against stochastic demands. An appropriate inventory policy with owned and rented ware-
Stochastic demands houses for deteriorating items is further designed. The proposed model maximizes the profit under rent ware-
Deteriorating items
house incentives decreasing over time and price-sensitive demands. Furthermore, we propose a solution
algorithm to solve the problem effectively. Sensitivity analysis is conducted to examine the effects of the
parameters for the model of the algorithm.

1. Introduction amount of investments, and the petroleum firm builds refineries to

Firms must optimize the location of their warehouses/hubs strate-
gically to lower cost and achieve agility. For instance, establishing
warehouses in an urban area fulfills market demands promptly but
increases land cost. Establishing the warehouse in a suburban area
lowers setup cost but results in extra transportation expenditures and
harms responsiveness to market demands. Therefore, a trade-off be-
tween demand fulfillment and cost efficiency is necessary for estab-
lishing warehouses. In addition, most owned warehouses (OWs) of a
firm have limited capacity because of cost consideration. Therefore,
many firms consider storing their goods in a rented warehouse (RW),
creating more flexibility in terms of space capacity. This situation re-
quires an optimal decision of alternative warehouses configuration. Yu,
Wang, and Lin (2015) claimed that warehouse configuration is a stra-
tegic setting for OWs and RWs.
The warehouse system design and the inventory operations design is
a hierarchical decision-making process. In a large-scaled firm with
many target markets, the headquarter usually decides at a high level on
the warehouse location and their configuration, whereas the local
managers of individual markets then develop their inventory operation
policy. For example, Acer Inc. decides on six sites (in the United States,
Taiwan, the Philippines, the Netherlands, Mexico, and China) to re-
spond to global markets (Yang & Cheng, 2003). The region manager
then formulates their respective inventory policies. Other examples
include petroleum companies. A refinery requires a considerable
cover several oil depots to satisfy demand in distinct areas. Each oil
depot can be operated by OW or RW, and the oil depot manager needs
to optimize their inventory policy. This kind of sequential decision
process can be considered as two-stage decision making (Angalakudati
et al., 2014; Wang & Nguyen, 2017).
The changes in technology and global competition have new influ-
ences to facility location (Porter, 2000). Facility location decisions play
a critical role for companies since it is a huge investment. Facility lo-
cation has been a well-established research area (Melo, Nickel, &
Saldanha-da-Gama, 2009). Moreover, warehouse configuration is more
flexible to the warehouse location, such as two-warehouse (Yu et al.,
2015). Most literature assumes that facilities have been located opti-
mally prior to the inventory decisions, and hence ignores the potential
impact of facility location issues (Tsao, Mangotra, Lu, & Dong, 2012).
Decisions of facility location and inventory allocation are dependent on
each other. To name a few, the transportation cost of facility location
depends on the frequency of inventory replenishment (Manatkar,
Karthik, Kumar, & Tiwari, 2016; Tsao et al., 2012). Inventory policy is
highly affected by demand, and location influences most parts of de-
mand (Yadav, Gupta, Garg, & Swami, 2015). Most type of commodities
either deteriorate or become obsolete in the course of time (Goyal &
Giri, 2001), hence research on inventory management of deteriorating
items is also important.
A firm needs two-stage decision making for selecting the warehouse
location and configuration for serving multiple markets against

⁎
Corresponding author at: Department of Industrial Management, National Taiwan University of Science and Technology, No.43, Keelung Rd., Sec.4, Da'an Dist., Taipei City 10607,
Taiwan, ROC.
E-mail addresses: yslin@mail.ntust.edu.tw (Y.-S. Lin), kjwang@mail.ntust.edu.tw (K.-J. Wang).

https://doi.org/10.1016/j.cie.2018.04.008
Received 3 May 2015; Received in revised form 1 January 2018; Accepted 4 April 2018
Available online 06 April 2018
0360-8352/ © 2018 Elsevier Ltd. All rights reserved.
Y.-S. Lin, K.-J. Wang
stochastic demand, as well as inventory policy for managing deterior-
ating items. Therefore, this study develops a model to select locations
and warehouse configurations for serving multiple markets against
stochastic demand and derive an inventory policy for managing dete-
riorating items accordingly. The effect of sale price on demand in
various locations is considered by the parameter of a probability
function. Warehouse rental is decreased to encourage long-term part-
nership with RWs. This study aims to maximize total profit of the entire
system for managing stochastic demands and deteriorating items.
The rest of the paper is organized as follows. A relevant literature
review is discussed in Section 2. Section 3 details the mathematical
model under stochastic demand. A hybrid solution algorithm is pro-
posed in Section 4. Section 5 illustrates numerical examples and sen-
sitivity analyses. Finally, conclusions are provided in Section 6.
2. Literature review
2.1. Location and allocation of facilities
The location and allocation of facilities are important issues because
they significantly affect long-term investments of firms. Researchers
have achieved progress on this problem with respect to representations
and solutions. Laporte, Louveaux, and Hamme (1994) considered a
class of capacitated facility location problems in which customer de-
mands are stochastic. Snyder (2006) reviewed the literature on sto-
chastic and robust facility location models. He mentioned that the two-
stage nature of facility location problems makes these problems ex-
tremely attractive to researchers who are exploring approaches to de-
cision making with uncertainties. Wang, Makond, and Liu (2011) ad-
dressed facility location and task allocation problems of a two-echelon
supply chain against stochastic demand. Gendron, Khuong, and Semet
(2016) considered the two-level uncapacitated facility location pro-
blem, arising in industrial applications in freight transportation and
telecommunications, with single-assignment constraints.
The complexity of this problem could be very high to model and
solve, due to the inclusion of different decisions, various type of deci-
sion variables, and large-scale scenarios. Survey data from literature
also indicate that the addressed location-allocation problems are highly
complex. Laporte et al. (1994) formulated as two-stage stochastic pro-
gramming, with binary variables in the first stage and continuous
variables in the second stage. The problems were then solved to achieve
optimality through a branch-and-cut method. Ignacio, Filho, and
Galvãoa (2008) used the lower and upper bounds of Lagrangean re-
laxation that combine CPLEX tool and Tabu search to determine the
numbers, locations, and allocations of concentrators and routers in
computer networks. Wang et al. (2011) solved the problem by bi-level
stochastic programming, and presented a genetic algorithm (GA) with
efficient greedy heuristics. Manatkar et al. (2016) used both Particle
Swarm Optimization (PSO) and GA to solve the problem. Researchers
have devoted considerable effort in developing optimization-based
approaches that can help solve these problems. However, such ap-
proaches are inefficient in a finite-time context, and several applica-
tions using soft computing remain in their infancy.
2.2. Alternative warehouses
In practice, most enterprises store goods in alternative warehouses
to increase flexibility. For example, they purchase more goods during
peak seasons, then store them in their OW, whereas excess quantities
are often stored in an additional RW. These enterprises strategically
outsource warehousing activities. Researchers have shown interest in
this field of study, and numerous companies are facing this critical issue
in practice. Hartely (1976) was the first author to consider the effect of
a two-warehouse model in inventory research and who developed an
inventory model with an RW storage policy. Kumar Sett, Sarkar, and
Goswamic (2012) considered an inventory model of two warehouses
84
Computers & Industrial Engineering 120 (2018) 83–93
with finite replenishment rate and unequal length of cycle time. Jaggi,
Pareek, Khanna, and Sharma (2015) developed an inventory model of
two warehouses with price dependent demand with inflation. In which,
they also investigated the effect of FIFO and LIFO policies in the model.
In the scenario where FIFO policy is applied, goods in OW will be used
to fulfill customer demand first. In the scenario where LIFO policy is
applied, goods in RW will be used to fulfill customer demand first. The
result of their investigation is the application of FIFO or LIFO policies is
only affected by holding cost and the deteriorating rates.
Many researchers take into account two-warehouse with deterior-
ating items. Sarma (1983) developed a two-warehouse model for de-
teriorating items with infinite replenishment rates and shortages.
Pakkala and Achary (1991) developed a two-warehouse probabilistic
order-level inventory model for deteriorating items. Yang (2004) de-
veloped a two-warehouse inventory model with constant deteriorating
items, a constant demand rate, and complete shortages. Singh, Kumar,
and Kumari (2009) developed an inventory policy for a deteriorating
item with two separate warehouses, that is, an OW with finite dimen-
sion and an RW with infinite dimension, under inflation and time value
of money. Ghiami, Williams, and Wua (2013) investigated a two-
echelon supply chain model for deteriorating inventory in which the
demand rate in the retailer is stock-dependent and in case of any
shortages, the demand is partially backlogged. Yadav et al. (2015)
studied inventory model of two warehouses for deteriorating items with
time-dependent demand and variable holding cost. Yu et al. (2015)
examined inventory control for deteriorating items in a two-warehouse
setting with an incentive policy offered by a rented warehouse that
allows the rental fee to decrease over time.
2.3. Deteriorating items
Research on inventory management of deteriorating items is also
important because the deterioration of stock items considerably affects
industries. Deterioration is generally defined as the decay, damage,
spoilage, dryness, and vaporization of products. The two broad classi-
fications of inventory subject to decay are (i) items with a fixed lifetime
and (ii) items with age-independent ongoing deterioration (Cohen,
1974; Nahmias, 1978). Items with a fixed lifetime (such as foodstuff,
green vegetables, human blood, photographic film, and so on) and a
maximum usable lifetime are known as perishable products. Items with
age-independent ongoing deterioration, such as volatile liquids (al-
cohol, gasoline, and radioactive substances), and those without shelf
life are known as decaying products. The decrease in volatile liquids
can be attributed to evaporation, whereas the decrease in grain in-
ventory can be ascribed to pests or pilferage. The latter group of pro-
ducts generally does not have an expiration date and can be stored
indefinitely, although some of these products may undergo natural at-
tenuation while in inventory. However, their unit value remains basi-
cally the same.
Several authors have studied commodities with age-independent
ongoing deterioration. Ghare and Schrader (1963) developed an
equation for an exponentially decaying inventory. They observed that
commodities such as volatile liquids (alcohol, gasoline, and radioactive
substances) shrink with a certain proportion of time, which can be
approximated by a negative exponential function of time. Covert and
Philip (1973) extended the model of Ghare and Schrader (1963) to
consider deterioration with a two-parameter Weibull distribution.
Goyal and Giri (2001) and Bakker, Riezebos, and Teunter (2012) re-
viewed the advances in the deteriorating inventory literature since
1990 and 2001, respectively. Taleizadeh (2014) developed EOQ model
for a deteriorating product with and without shortage under con-
secutive prepayments which allow purchasers to pay all or a fraction of
the purchase cost in advance.
Many studies have revealed the significance of further investigation
and research on facility location and allocation problems in managing
inventory of decaying products. However, only a few studies
Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

Stochastic Two-Stage Location-Allocation Inventory System rate of market i in scenario k. Assume that demand rates
follow a probability distribution function as a parameter of ρi .
Stage I: Location & Warehouse Configuration Design B(Wi, di) The average setup cost function in OW for market i with
Determine the Location of warehouses and warehouse configurations storage capacity, Wi, and demand, di.
Configuration decisions Inventory policies R(di) The setup cost function in RW for market i with demand, di.
Stage II: Inventory Policy Design Customer with BG The total budget for overall setup cost of OWs and RWs.
Stochastic Demand ED The mathematical expectation with respect to demand state

. .
q1 d1 D.
OW RW

The following notations of parameters for the second stage mod-

qi
eling are used:

. .
qi OW RW di
Oi Ordering cost per ordering in market i ($/ordering).
bi The unit administration cost of RW in market i ($/unit/year).
HOi The unit holding cost of OW in market i ($/unit/year).
qn OW RW dn HRi The unit holding cost of RW in market i ($/unit/year), HRi > bi.
Pi The unit deteriorating cost in market i ($/unit).
θOi Deterioration rate of goods of OW in market i.
Fig. 1. Conceptual research framework. θRi Deterioration rate of goods of RW in market i.
U The unit purchasing price.
simultaneously consider the inventory policy and the warehouse loca-
tion and configuration, especially in a two-warehouse case. Several The following notations of decision variables for the first stage are
decision-making issues for location and allocation involved in ware- used:
house configuration about a two-warehouse setting also remain un-
clear, particularly when an incentive policy is incorporated by RWs. xi xi = 1 if an OW is built for market i; otherwise xi = 0.
yi yi = 1 if an RW is rented for market i; otherwise yi = 0.
3. Two-stage model that considers stochastic demand (xi, yi) is a pair notation of the warehouse configuration, as listed in
Table 1.
A two-stage model is developed as a mixed-integer nonlinear pro- Wi Storage capacity of OW for market i.
gramming for location–allocation decision and inventory policy for
deteriorating items. Warehouse configuration in terms of two-ware- The following notations of decision variables for the second stage
house settings for multiple markets is determined in the first stage. The are used:
total budget for the overall setup cost of alternative warehouses is
confined. If an OW is decided to be established, then the storage ca- qi Ordering lot size for market i.
pacity of the OW is assigned further. In the second stage, an inventory tRi Usage duration of RW for market i.
policy is developed for the corresponding warehouse configuration tOi Usage duration of OW for market i.
determined in the first stage. In addition, the use of RWs is considered Ti Replenishment cycle time for market i.
when rental fee decreases with the length of storage, and ordering lot
size is modified by the conditions. A conceptual framework is shown in Since tRi, tOi and Ti are inter-dependent on qi, the inventory policy can
Fig. 1. Our objective is to determine the optimal warehouse config- be defined as qi.
uration and storage capacity of an OW (that is, the location issue) at the
first stage and the optimal inventory policies for managing warehouses
3.1. First stage: determining warehouse location and configuration
and deteriorating items (that is, the allocation issue) on the second
stage.
The location and warehouse configuration problem on whether and
The mathematical model developed in this study is based on the
where to build OW/RW for markets is modeled in the first stage. The
following assumptions. (i) OWs have a limited storage capacity because
objective function (1) maximizes the expected profit of K demand
of budget constraint. By contrast, RWs have no storage capacity limit. A
scenarios by initially adding the setup costs of OW and RW for all
firm can rent alternative warehouses to satisfy its storage requirement.
markets to the inventory cost, and then subtracting the sum from the
(ii) RWs provide an incentive policy in which warehouse rental ex-
gross profit. ED is the mathematical expectation of the total profit with
ponentially decreases over rental (usage) time. Warehouse rental is
respect to K demand scenarios.
usually charged by usage time to encourage firms to rent for a long
duration. An RW owner specifically proposes an incentive policy that I I
⎛ ⎞
rental fee will decrease by ui% per unit of time between timin and timax , Minimize ED ⎜∑ x i B (Wi ,di ) + ∑ yi R (di )−L (x ,y,W ,D) ⎟
where timin is the least amount of storage time desired by the RW owner, ⎝ i=1 i=1 ⎠ (1)
and timax is the amount of time reached by the rental bi (Yu et al., 2015).
(iii) The products have deteriorated property, but the replacement of
deteriorated products is not considered (Yang, 2004). Table 1
Warehouse configuration representation.
The following notations of the parameters for the first stage mod-
eling are used: (xi, yi) Warehouse configuration

(0,0) Setup no warehousea

ρi The unit sale price in market i. i = {1, 2, … , I} where I is the
(0,1) Use RW-only
total number of candidate markets. (1,0) Use OW-only
Dk A set of demand rate of markets in scenario k, (1,1) Use Two-warehouse
k = {1, 2, … , K} where K is the total number of demand
a
scenarios; D k = {d1k,d 2k,…,dik,…,dIk } where dik is the demand (xi = 0, yi = 0) represents that neither OW nor RW is
setup in market i, market i is abandoned.

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

where L (x ,y,W ,D) is the total inventory cost provided by the second Inventory Level
stage.
Subjectto x i ∈ {0,1}, yi ∈ {0,1}, 0 ⩽ Wi ⩽ x i di qi
(2) IRi(t )
I I
IOi(t )
∑ x i B (Wi ,di ) + ∑ yi R (di ) ⩽ BG Wi
i=1 i=1 (3)
Li
Constraint (3) is a limitation of the total budget for the whole setup cost
in OWs and RWs.

3.2. The second stage: determining inventory policy

tRi tOi Time

The inventory policy in terms of replenishment cycle and ordering
Ti
lot size within a specific location and warehouse configuration is
modeled in the second stage. Fig. 3. Inventory level of the ith market uses both OW and RW (i.e., xi = 1 and
yi = 1).
3.2.1. Incentive policy of RWs
In the second stage, an RW provides an incentive policy if the stock Inventory level
is stored for a long period. In market i, warehouse rental will decrease
by ui% per unit time. The unit holding cost of RW at time t in market i is Wi

, 0 ⩽ t ⩽ timin qi
⎧ HRi
⎪ min )
hi (t ) = HRi ·e −λi (t − ti , timin ⩽ t ⩽ timax
⎨ max min
⎪ bi = HRi ·e−λi (ti − ti ) , timax < t (4)
⎩
I Oi (t)
where timin is the least amount of storage time desired by the RW owner,
timax is the longest amount of storage time desired by the RW owner and
λi is given by λi = −ln(1−ui /100) . The relation of hi(t) to various times is
depicted in Fig. 2.

3.2.2. Modeling inventory cost

The inventory level of the ith market, which uses both OW and RW is tOi
depicted in Fig. 3. Figs. 4 and 5 show that the ith market only uses OW Ti Time
or RW, respectively.
th
The inventory level in the ith OW, dIOi(t), during an infinitesimal Fig. 4. Inventory level as the i market uses OW only (i.e., xi = 1 and yi = 0).
time, dt, is a function of the deterioration rate θOi, demand rate di and
inventory level IOi(t). The inventory level in the ith RW, dIRi(t), during Inventory level
an infinitesimal time, dt, is a function of the deterioration rate θRi,
demand rate di and inventory level IRi(t). qi
IRi(t) is the inventory level in RW of the ith market at time t. The
change in inventory level of RW is formulated as
dIRi (t )
= −di−θRi IRi (t ), 0 ⩽ t ⩽ tRi, if yi = 1
dt (5) I Ri (t)

From the above differential equations, after adjusting for constant of

integration with the various boundary conditions: IRi(0) = qi − xiWi
and IRi(tRi) = 0 under yi = 1, one has

Unit holding
cost t Ri
Ti Time
th
Fig. 5. Inventory level as the i market uses RW only (i.e., xi = 0 and yi = 1).

di θRi (tRi− t )
IRi (t ) = (e −1), 0 ⩽ t ⩽ tRi, if yi = 1
min
θRi (6)
i (tRi ti )
H Ri e
The corresponding time is

1 ⎡ (qi−x i Wi ) θRi
tRi = ln + 1⎤, if yi = 1
θRi ⎢ ⎣ di ⎥
⎦ (7)
The Eq. (6) can be combined as
yi ⎡ (qi−x i Wi ) θRi
t imin timax Time tRi = ln + 1⎤
θRi ⎢ ⎣ di ⎥
⎦ (8)
Fig. 2. Unit holding cost decreases with time. th
IOi(t) is the inventory level in OW of the i market at time t. The change

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

tRi
in inventory level of OW during an infinitesimal time can be formulated
as
(
DCRi = Pi IRi (0)− ∫0 )
di dt = Pi (qi−x i Wi −di tRi )
(17)

( )
dIOi (t ) tOi

dt
= −θOi IOi (t ), 0 ⩽ t ⩽ tRi, if yi = 1,x i = 1
(9)
DCOi = x i Pi IOi (0)−IOi (tRi ) + IOi (tRi )− ∫t Ri
di dt

= x i Pi (yi Wi + (1−yi ) qi−di (tOi−tRi )) (18)

dIOi (t )
= −di−θOi IOi (t ), tRi ⩽ t ⩽ tOi, if x i = 1 th
dt (10) The inventory cost of the i market is the sum of the purchasing cost
(U × ordering lot size), ordering cost (Oi), holding cost (HCRi and HCOi),
From Eqs. (9) and (10), and with the various boundary conditions
and deteriorating cost (DCRi and DCOi). Thus, the following equation is
IOi(tOi) = 0, IOi(tRi) = Li, IOi(0) = Wi under yi = 1 and xi = 1, and
obtained:
IOi(0) = qi under yi = 0 and xi = 1, the solution of the above differential
equations is TCi = U ·qi + Oi + HCRi + HCOi + DCRi + DCOi (19)
−θ t −θ t
⎧ yi Wi e Oi + (1−yi ) qi e Oi , 0 ⩽ t ⩽ tRi
IOi (t ) = 1 θ (t − t ) θ (t − t )
, if x i = 1 3.2.3. Maximizing joint profit of all markets
⎨ θ (Li θOi e Oi Ri + di (e Oi Ri −1)), tRi ⩽ t ⩽ tOi
⎩ Oi The optimization problem of L (x ,y,W ,D) , that is, the total profit of
(11) all markets under x, y, W, and D, is a constrained nonlinear program-
ming which is expressed as:
The inventory level of OW at tRi is
TCi
Li = yi Wi e−θOi·tRi + (1−yi ) qi (12)
Maximize L (x ,y,W ,D) = ∑ ρi di−
Ti
i ∈ {xi = 1 or yi = 1} (20)
The replenishment cycle is
Subject to tRi ⩾ 0, tOi ⩾ 0, Ti = max{tRi,tOi}, 0 ⩽ qi ⩽ x i Wi + yi M (21)
1 ⎡ Li θOi
tOi = tRi + ln + 1⎤, if x i = 1 where M is a larger number.
θOi ⎢ ⎣ di ⎥
⎦ (13)

The Eq. (12) can be combined as 4. Hybrid solution algorithm

x i ⎡ Li θOi The problem that includes integer and continuous decision variables
tOi = x i tRi + ln + 1⎤
θOi ⎢ ⎣ di ⎥
⎦ (14) is highly complex; thus, we develop a hybrid solution algorithm that
uses a GA for the first stage and a gradient method for the second stage,
The RW holding cost in the ith market during the period Ti can be
as shown in Fig. 6. The GA is developed with a repair mechanism. The
derived as
proposed GA consists of making following two decisions. (i) What kind
t
Ri min of warehouse configuration should be established, and (ii) what the
⎧ HRi ∫0 IRi (t ) dt , 0 ⩽ tRi ⩽ ti
⎪ storage capacity of the OW should be designed. This study uses a ge-
min
⎪ H ⎛∫ti I (t ) dt + ∫tRi I (t )·e−λi (t − timin) dt ⎞, t min < t ⩽ t max netic search strategy to identify the most appropriate values for the
⎪ Ri ⎝ 0 Ri timin Ri i Ri i
⎪ ⎠ decision variables in the first stage and a gradient method to calculate
HCRi = min max
continuous variables in the second stage. The general procedures for the
⎨ HRi ⎛∫ti IRi (t ) dt + ∫minti min
IRi (t )·e−λi (t − ti ) dt
⎪ ⎝ 0 ti proposed GA and gradient method are presented in Figs. 7 and 8, re-
⎪ spectively.
⎪ max min tRi
+ e−λi (ti − ti ) ∫t max IRi (t ) dt ⎞, timax < tRi
⎪ i ⎠
⎩
4.1. GA implementation
(15)
The OW holding cost in the ith market during the planning horizon 4.1.1. Chromosome design and fitness value
Ti is Each chromosome is cascaded by three sets of genes, namely, the
binary codes of xi (build an OW) and yi (rent an RW), and the real
HCOi = HOi (∫ 0
tRi
IOi (t ) dt + x i ∫t
Ri
tOi
IOi (t ) dt ) (16)
number of Wi (storage capacity of the OW). A two-dimensional chro-
mosome matrix, A, is constructed to conform to its domain applications,
th
The deteriorating cost of the i market during the planning horizon as shown in Fig. 9. A population has P chromosomes, and each chro-
Ti can be expressed as mosome has K demand scenarios (Fig. 10).

Step 3: Evolution
Step 2: Evaluation
No Reproduction
Step 1 Constrained
Initialization Gradient
Initialize method for Yes Crossover
population Stage II
(for Stage I End
variables) Mutation
Evaluate the
whole system Next generation
Repair

(for Stage I variables)

Fig. 6. A hybrid solution framework.

87
Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

// GA with a repair mechanism

G=1 // G is number of generations
Initialize F(G) // F(G) is a population of chromosomes of the Gth generation.
Use gradient method to calculate the maximum profit of the second stage.
Evaluate the whole system for all the chromosomes in F(G).
While (meet the termination condition)
For scenario=1 to K
Reproduction: reproduce chromosomes in F(G) with high fitness value and
retain them by employing a reproduction rate.
Crossover: crossover the pairs of chromosomes in F(G) to C(G) by employing
a crossover rate.
Mutation: mutate of the genes of C(G) to M(G) by employing a crossover rate.
Repair: repair all the infeasible chromosomes in M(G) to be a feasible one.
Each chromosome is fed into the second stage to calculate L ( x , y , W , D ) with
the gradient method
Evaluate the whole system, that is
I I
ED xi B(Wi , di ) yi R( di ) L( x, y,W , D ) .
i 1 i 1

End for scenario

Evaluate the objective function (1).
G=G+1
End while
Output the result xi, yi, Wi, qi, tRi, tOi and Ti from the best chromosome
Termination

Fig. 7. The proposed GA with a chromosome repair mechanism.

The fitness function of the proposed algorithm is assigned as Eq. proposed GA. Two random numbers between 1 and K are selected, and
(21). The difference between Eqs. (21) and (1) lies in the evaluation of each corresponding substring between the selected points is swapped to
the expected value of Eq. (1). The expected value in this study adopts render two child chromosomes, as illustrated in Fig. 11. The mutation
the sample average approximation (SAA) scheme that assumes K de- chromosomes are selected, according to the mutation rate. A gene of the
mand scenarios. Then, Eq. (1) is approximated by the SAA function of selected mutation chromosome is a uniform mutation (also refer to Gen
Eq. (21). & Cheng, 2000; Haupt & Haupt, 1998; and Wang, Wang, & Chen, 2008).
n n
When a chromosome is operated by mutation operator, it becomes
1⎛ ⎞ infeasible in Wi against Constraints (2) or (3). Thus, a repairing op-
Maximize ∑ xi B (Wi ,di) +
K ⎜ i=1
∑ yi R (di )−L (x ,y,W ,D) ⎟
⎝ i=1 ⎠ (22) eration is required. If a chromosome completes the process but does not
satisfy Constraint (2), then the values of Wi are set as the nearest value
K demand scenarios are randomly selected from a lognormal distribu- fitted in the constraint interval. If Constraint (3) is not satisfied, a lo-
tion as customer demand in each generation. The sampling procedure is cation is randomly chosen to reduce the storage capacity or abandon
defined as D ∼ LogN(μ, σ2), where μ and σ2 are the mean and variance RW until Constraint (3) is fitted.
of customer demands, respectively. Lognormal distributions are well
suited for modeling stochastic economic variables, such as demands
(Kamath & Pakkala, 2002). 4.2. Gradient method for the second stage

4.1.2. Crossover, mutation, and repair mechanism
Fitness-proportionate selection (Beasley, Bull, & Martin, 1933;
Jadaan, Rajamani, & Rao, 2005) is implemented to select the chromo-
somes (the structure is shown in Fig. 10) for the operation of crossover.
A two-point crossover operation (Chambers, 1995) is applied to the
HCRi values differ with respect to tRi intervals, thus the second stage
is a piecewise continuous optimization problem. Thus, the problem
must be solved by dividing TCi in terms of tRi, which is referred to as
TPi. A simple constrained optimization procedure for solving TPi(qi) is
provided in Fig. 8.

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

// Gradient method for the second stage

Use Lemma 1 to find tmax. (refer to Appendix A for details)
Compute the bounds of qi by Formula B2, B4, and B6 (refer to Appendix B for
details)
Divide TPi functions in terms of HCRi, hence we can derive three continuous TPi
a a
functions, that is TCi , qi qimin and TCib , timin tRi timax and TCic , timax tRi .

For j=a to c
* dTCi j (qij ) j *
(i) Find the optimal q i j by 0 for each TPi . If q i j conforms
dqij
j
to the constraint of each TPi (i.e., Formula B2, B4, and B6), then go to

(ii); else go to (iii).

*
(ii) Set q i j as the nearest value that is fitted in the constraint interval.
a min * * min
If qi qi and qia qimin , then set q ia as qi .
min * *
If qi qib qimax and qib qimin , then set q ib as qi
min
.
min * *
If qi qib qimax and qib qimax , then set q ib as qi
max
.
c max * * max
If qi qi and qic qimax , then set qic as qi .

*
(iii) Substitute q i j into Equation (19).

End for j

*
The global optimal is the maximum among TC i j ( q i j ) .

Fig. 8. The procedure of the proposed gradient method.

5. Experiments and discussion

i xi yi Wi

1 5.1. Experiment setting

A=
: In the experiments, population size P is set to 30; the crossover rate
is 0.85; the mutation rate is 0.05; and the GA is terminated when the
I fitness no longer produces better results after 100 iterations (Sadegheih,
2006; Wang et al., 2011). Five demand scenarios for each of the ten
Fig. 9. A two-dimensional chromosome matrix, A.
candidate markets are randomly selected from a lognormal distribution
with the parameters μ and σ as the mean and standard deviation of the
Scenario associated normal distribution, respectively. μ is also a linear decrease
1 … K
Chromosome function with increasing sale price, that is, dik ∼ Lognormal
1 A11 A1k A1K (1000 − 2ρi, 1002) and sale price, ρi ∼ U(175, 225). The other para-
: Ap1 Apk ApK meters are set, as listed in Table 2. A personal computer with i7-2600
P AP1 APk APK CPU (4 cores) and 8 GB RAM is used to solve the problem.

Fig. 10. A population of proposed GA.

Fig. 11. Illustration for a two-point cross-

over operation.

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

Table 2 Table 3
Parameters setting. The best solution.
Parameter Description Value sampled from The first stage The second stage

Oi Ordering cost Uniform(500,1000) i xi yi Wi Scenario K=1 K=2 K=3 K=4 K=5

bi Basic administration cost of RW Uniform(6,8)
HOi Holding cost of OW Uniform(8,10) 1 0 1 0 q1 228.75 228.13 225.93 222.21 225.58
HRi Holding cost of RW Uniform(10,12) 2 0 1 0 q2 192.47 190.68 192.17 197.05 191.87
Pi Deteriorating cost Uniform(90,110) 3 0 1 0 q3 209.37 207.43 209.05 205.12 208.73
θOi Deterioration rate of goods in OW Uniform(0.03,0.07) 4 0 1 0 q4 198.93 201.03 201.08 201.08 198.31
θRi Deterioration rate of goods in RW Uniform(0.03,0.07) 5 0 1 0 q5 226.28 234.53 225.93 224.70 225.58
timin The least storage time required by RW Uniform(0.2,0.4) 6 1 0 236 q6 188.00 194.00 190.00 188.00 190.00
ui Decreased rate of warehouse rental Uniform(5,15) 7 0 1 0 q7 184.49 182.77 177.76 183.99 181.46
U Purchasing price 40 8 0 1 0 q8 243.18 236.97 236.36 245.82 242.43
B(Wi, di) The average setup cost function of OW 15 Wi + 10 di 9 1 0 67 q9 67.00 67.00 67.00 67.00 67.00
R(di) The setup cost function of RW 10 di 10 0 1 0 q10 245.65 230.57 238.82 241.79 244.89
BG The total budget for whole setup cost 1.5 Millions

Table 4
5.2. Solution Factorial design of experiments for the parameters of GA.
Factor Level
Fig. 12 indicates the time consumed by our hybrid algorithm. The
proposed algorithm achieves the best solution −864,008.76 at the 33rd −1 (Low) +1 (High)
generation and consumes 7795 s. The best solution for each decision
Population size 30 100
variable is shown in Table 3. Crossover rate 0.6 0.85
Mutation rate 0.05 0.1
Termination condition 50 100
5.3. Sensitivity analysis on algorithmic parameters

This section examines the effects of the parameters on the proposed
algorithm through sensitivity analysis. A two-level factorial design,
including 24 = 16 combinations, is constructed. Several vital factors
that influence the fitness value and time consumed are identified. The
size of the problem being investigated is five demand scenarios and ten
candidate markets. Table 4 depicts a 4-factor and 2-level factorial de-
sign. Other parameters are the same as those in Section 5. The results,
including the fitness value, time consumed, and GA generation for each
experiment of the factorial design, are shown in Table 5. The best
combination of the parameters with the highest fitness value of
−868,763.10 is population size = 100, crossover rate = 0.6, and mu-
tation rate = 0.05. The GA is terminated when the fitness no longer
produces better results after 100 iterations.
Through ANOVA, and using the experimental results in Table 5 as
basis, population size and crossover rate are determined to be sig-
nificant factors that affect the fitness value [Table 6(a)], whereas po-
pulation size and terminal condition are factors that significantly affect
time consumed [Table 6(b)]. Although a higher population size sig-
nificantly contributes to the fitness value, it is also time consuming [the

Generation
5
x 10 22 44 66 88 110 132
-6.8

-7

-7.2

-7.4

-7.6
Fitness

-7.8

-8

-8.2

-8.4

-8.6

-8.8
0 0.5 1 1.5 2 2.5 3
4
CPU time (Seconds) x 10
Fig. 12. Fitness evolution of the proposed hybrid algorithm.

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

Table 5
The results for each experiment of factorial design.
Run Population size Crossover rate Mutation rate Terminal condition Fitness value (best solution) Time consumeda GA generation achieved

1 30 0.6 0.05 50 −840,306.69 21,759 55

2 30 0.6 0.05 100 −852,611.42 64,547 187
3 30 0.6 0.1 50 −836,779.72 33,897 91
4 30 0.6 0.1 100 −836,779.72 51,150 141
5 30 0.85 0.05 50 −864,008.76 18,493 82
6 30 0.85 0.05 100 −864,008.76 30,006 132
7 30 0.85 0.1 50 −863,135.75 36,771 119
8 30 0.85 0.1 100 −863,135.75 54,657 169
9 100 0.6 0.05 50 −850,812.56 68,775 61
10 100 0.6 0.05 100 −868,763.10 175,949 199
11 100 0.6 0.1 50 −866,162.19 105,233 121
12 100 0.6 0.1 100 −866,162.19 140,191 171
13 100 0.85 0.05 50 −861,667.54 60,409 53
14 100 0.85 0.05 100 −865,342.98 185,279 191
15 100 0.85 0.1 50 −865,212.25 111,015 135
16 100 0.85 0.1 100 −865,212.25 151,527 185

a
In seconds.

Table 6 Table 7
Analysis of Variance (ANOVA). The results from different standard deviation.
Source DF SS MS F p-value σ Fitness valuea, F1 Fitness valueb, F2 TDPc PTDPd

(a) ANOVA (fitness value as response) 0 −861,722.99 −861,722.99

Population size 1 490,273,762 490,273,762 7.38 0.020 100 −864,008.76 −869,518.46 5,040.62 −0.58%
Crossover rate 1 544,597,278 544,597,278 8.19 0.015 200 −847,310.44 −859,341.43 8,397.06 −0.97%
Mutation rate 1 1,526,465 1,526,465 0.02 0.882 250 −848,683.36 −858,886.90 7,937.86 −0.94%
Termination 1 71,955,793 71,955,793 1.08 0.320 400 −837,394.11 −853,726.11 16,162.88 −1.90%
condition 500 −853,450.11 −849,012.13 10,491.87 −1.25%
Error 11 731,173,280 66,470,298 1000 −838,431.13 −850,535.38 17,239.73 −2.00%
Total 15 1,839,526,578 1600 −835,855.93 −854,057.28 16,766.39 −2.00%

(b) ANOVA (time consumed as response)

Population size 1 29,506,478,850 29,506,478,850 47.18 0.000
a
The first set of the experiments under distinct standard deviation, σ.
Crossover rate 1 11,128,896 11,128,896 0.02 0.896
b
The second set of the experiments under distinct standard deviation, σ.
Mutation rate 1 219,217,636 219,217,636 0.35 0.566
c
TDP: The Total difference in profit between σ to σ = 0,
Termination 1 9,848,279,882 9,848,279,882 15.75 0.002 ∑i |Fiσ −F σ = 0|/2, i = 1,2 .
condition d
PTDP: The percentage of the total difference in profit, TDP/ F σ = 0 .
Error 11 6,879,452,571 625,404,779
Total 15 46,464,557,836
that σ = 0 implies no hedging (with respect to demand risk); its ob-
jective function is the total profit of the optimal location and allocation
sum of the squares for population size is more than half of the total sum for alternative warehouse configurations.
of the squares in Table 6(b)]. The number of iterations that must be Fig. 13 shows the fitness histograms from different standard de-
terminated when the fitness no longer produces better results, that is, viations (100, 400, and 1600) of the demand for a lognormal dis-
the terminal condition, significantly increases the amount of time tribution. A more precise decision can be made with a smaller standard
consumed [p-value = 0.002 in Table 6(b)] but with less improvement deviation of the demand rate. The optimal solution also features a
in the fitness value [p-value = 0.320 in Table 6(a)]. Changing the higher probability of reaching the actual case. High risk causes either
crossover rate does not affect the amount of time consumed [p- overestimation or underestimation of profits, which affects actual
value = 0.896 in Table 6(b)]. However, the fitness value significantly profit.
increases as the crossover rate increases. In summary, increasing the
crossover rate is advantageous and efficient to the fitness value without
increasing the amount of time consumed. 6. Conclusions

In this study, a two-stage stochastic model is developed to maximize

5.4. Sensitivity analysis on demand variation
Demand variation affects the result of the decision-making process
on location and allocation. Table 7 analyzes the effects of the demand
rate from different standard deviations (σ) of the lognormal distribu-
tion. Population size, crossover rate, mutation rate, and termination
condition are 30, 0.85, 0.05, and 50, respectively, following the con-
clusion in the last paragraph. The demand rate with a higher standard
deviation results in a wide range of the target on the objective function.
However, both overestimation and underestimation of profits affect a
firm. As shown in Table 7, the percentage of the total difference in
profit increases as standard deviation increases. We also present the
value of information, that is, $5040.62 is required to reduce σ from
σ = 100, and $16,766.39 is required to reduce σ from σ = 1600. Note
profit in the context of alternative warehouse configurations for mul-
tiple markets and deteriorating products. The model of the first stage
optimizes the warehouse location and configuration. The model of the
second stage corresponds to an inventory policy for deteriorating items
based on rent warehouse incentive allowing a rental fee to decrease
over time and stochastic demands. Moreover, a hybrid solution algo-
rithm is proposed to solve the proposed two-stage stochastic program-
ming effectively. Our experiments also identify the significant para-
meters of the model. The value of information with regard to demand
accuracy is presented, thus providing decision-makers with an idea of
the cost of a more accurate demand rate to avoid overestimation or
underestimation.
The proposed model can guide firms in making decisions regarding
global warehouse/hub arrangement, and corresponding inventory

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

Fig. 13. The fitness histogram by different standard deviations of the demand.

policy. By adopting the proposed model and solution approach, firms
have a potential to optimize the location for their warehouses/hubs
strategically, lower operational cost, and achieve high agility. Further,
the inherent complexity of the addressed problem is high. Our proposed
two-stage programming enables efficient and effective selection of the
warehouse location and configuration to serve multiple markets against
stochastic demands as well as optimize inventory policy to manage
items with deterioration, which commonly exist, yet unsolved in in-
dustry. Industries that need dual warehouses, such as global logistics,
international trading, and large-scale manufacturing firms, will benefit
from our proposed method if the model is appropriately adopted.
The experiments reveal the several parameters are significant.
Appropriate selection on the parameter will facilitate the usage of the
proposed model and solution method. The best solution, −864,008.76,
is found, in which our experiment suggests optimal settings of popu-
lation size with 30, crossover rate with 0.85, and mutation rate with
0.05. These parameters are optimized by using design of experiment.
The population size of P = 30 is preferred than P = 100 because higher
population size provides higher fitness value, but it is time-consuming.
The mutation rate neither affects the fitness value nor time consumed;
thus, mutation rate = 0.05, which provides the highest fitness value in
the experimental design, is chosen. Crossover rate = 0.85 is preferred
than 0.6 because a higher crossover rate can provide higher fitness
value without increasing the amount of time consumed. Crossover rate
has few effect on the time consumed, but the fitness value significantly
increases as crossover rate increased. Therefore, we suggest that
crossover rate should be tuned to obtain efficient fitness and consuming
time.
Several interesting extensions of this research can be conducted in
the future. First, the optimal parameter setting of the proposed GA is
worthy to be fully examined. Second, other significant characteristics
commonly occurred in the industry, such as decreasing price and per-
iodical demand, can be further considered in the model. Third, a multi-
stage programming for a multi-echelon supply chain system is worthy
of being further studied by extending the proposed model.
Acknowledgement
The authors gratefully acknowledge the comments and suggestions
of the editor and the anonymous referees. This work is partially sup-
ported by the Ministry of Science and Technology of the Republic of
China (Taiwan) under the grant number MOST 106-2917-I-564-016
and 105-2221-E-011-106-MY2.

Appendix A. Lemma for timax

According to this RW incentive policy, the following lemma regarding timax is proved.
Lemma 1.

1 ⎛ HRi ⎞
timax = ln ⎜ + timin ⎟

λi ⎝ bi ⎠

Proof.. An incentive policy of RW is stopped by timax . Hence, the unit holding cost of RW, hi(t), at time timax is
max − t min )
HRi ·e−λi (ti i = bi
One has

1 ⎛ HRi ⎞
timax = ln ⎜ + timin ⎟ □
λi ⎝ bi ⎠

Appendix B. Computing the bounds of qi by converting the bounds of tRi for each interval

Interval 1 (0 ⩽ tRi ⩽ timin ): Substitute Eq. (4) into 0 ⩽ tRi ⩽ timin as

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Y.-S. Lin, K.-J. Wang Computers & Industrial Engineering 120 (2018) 83–93

1 ⎡ (qi−Wi ) θRi
tRi = ln + 1⎤ ⩽ timin, if yi = 1
θRi ⎢ ⎣ di ⎥
⎦ (A1)
Thus,
min θ
di (eti Ri−1)
qi ⩽ + Wi , if yi = 1
θRi (A2)
Interval 2 (timin < tRi ⩽ timax ): Substitute Eq. (4) into timin < tRi ⩽ timax as

1 ⎡ (qi−Wi ) θRi
timin < tRi = ln + 1⎤ ⩽ timax, if yi = 1
θRi ⎢ ⎣ di ⎥
⎦ (A3)
Thus,
min θ max θ
di (eti Ri−1) di (eti Ri−1)
+ Wi < qi ⩽ + Wi , if yi = 1
θRi θRi (A4)
Interval 3 (timax < tRi ): Substitute Eq. (4) into timax < tRi as

1 ⎡ (qi−Wi ) θRi
tRi = ln + 1⎤ > timax, if yi = 1
θRi ⎢ ⎣ di ⎥
⎦ (A5)
Thus,
max θ
di (eti Ri−1)
qi > + Wi , if yi = 1
θRi (A6)

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