Different Models for Facility Location/Assignment

1. Cost minimization model

Given the following information regarding cost of transportation between any pair of facility and
demand cluster

Demand (index j)
1 2 3 . . m Maximum
Capacity
1 c11 c12 c13 c1m K1
Facility (index i)

2 c21 . . . . K2
3 .
. .
. .
n cn1 . . . . cnm Kn
Maximum D1 D2 Dm
Demand

You are required to find the allocation as given below

Demand (index j)
1 2 3 . . m Maximum
Capacity
1 x11 x12 x13 x1m K1
Facility (index i)

2 x21 . . . . K2
3 .
. .
. .
n xn1 . . . . xnm Kn
Maximum D1 D2 Dm
Demand

Here the assumptions are:

a. The fixed costs of operating a plant is not considered
b. The maximum capacity of a plant (facility) cannot be breached.
c. The demand in each cluster should be satisfied entirely.

This can be modelled as an optimization problem as below:

n m
Min  cij xij
i 1 j 1

Subject to:
 n

x
i 1
ij  D j for j  1, ,m
m

x
j 1
ij  K i for i  1, ,n

In addition, there would be non-negativity (and/or integer ) constraints for decision variables.

This first constraint is to ensure that the maximum capacity of any facility is not exceeded. The
second constraint ensures that the demand at a cluster is fully satisfied. Note the equality constraint
for total demand. If this was written as ‘less than equal’ like in the previous constraint, the model
would settle to zero allocations in all the cells, which is undesirable.

In case you do not wish to fulfil all the demand, then a certain lower cap should be kept so that the
decision variables do not collapse to zero. In that case, the second constraint would get split into
two- one ensuring a minimum total demand satisfied in each cluster, and one ensuring a maximum
demand.

2. Cost minimization model with fixed cost of facility

Here, as an addition to the previous model, we have the option to operate a particular facility or not.
Each facility incurs a fixed cost of operation Fi depending on whether the facility is operated or not.
Another set of decision variables yi are introduced which are binary in nature. Each such variable
takes a value of 1 if that corresponding facility is operated and 0 if not.

Demand (index j)
Fixed Cost 1 2 3 . . m Maximum
(annualized) Capacity
1 f1 c11 c12 c13 c1m K1
Facility (index i)

2 f2 c21 . . . . K2
3 f3 .
. .
. .
n fn cn1 . . . . cnm Kn
Maximum D1 D2 Dm
Demand

Demand (index j)
Facility 1 2 3 . . m Maximum
selected? Capacity
1 y1 x11 x12 x13 x1m K1
Facility (index i)

2 y2 x21 . . . . K2
3 y3 .
. .
. .
n yn xn1 . . . . xnm Kn
Maximum D1 D2 Dm
Demand
 Note that the fixed cost needs to be annualized – expressed in terms of annual fixed costs.

This can be modelled as an optimization problem as below:

n n m
Min  fi y i   cij xij
i 1 i 1 j 1

Subject to
𝑛

∑ 𝑥𝑖𝑗 = 𝐷𝑗 𝑓𝑜𝑟 𝑗 = 1, … , 𝑚
𝑖=1
𝑚

∑ 𝑥𝑖𝑗 ≤ 𝐾𝑖 𝑦𝑖 𝑓𝑜𝑟 𝑖 = 1, … , 𝑛
𝑗=1
𝑦𝑖 ∈ {0,1} 𝑓𝑜𝑟 𝑖 = 1, … , 𝑛, 𝑥𝑖𝑗 ≥ 0

The second constraint here ensures that the allocations are made only of the facility is operational.

3. Profit Maximization model with fixed cost of facility

Assuming each demand cluster would fetch a price , rj the model would change to a profit
maximization model instead of a cost minimization model.

Demand (index j)
Fixed Cost 1 2 3 . . m Maximum
(annualized) Capacity
1 f1 c11 c12 c13 c1m K1
Facility (index i)

2 f2 c21 . . . . K2
3 f3 .
. .
. .
n fn cn1 . . . . cnm Kn
Maximum D1 D2 Dm
Demand
Price in a r1 r2 rm
particular
cluster
 Demand (index j)
Facility 1 2 3 . . m Maximum
selected? Capacity
1 y1 x11 x12 x13 x1m K1
Facility (index i)

2 y2 x21 . . . . K2
3 y3 .
. .
. .
n yn xn1 . . . . xnm Kn
Maximum D1 D2 Dm
Demand

This can be modelled as below:

m n n n m
Max  r j  xij   Fi y i  cij xij
j 1 i 1 i 1 i 1 j 1

Subject to
𝑛

∑ 𝑥𝑖𝑗 ≤ 𝐷𝑗 𝑓𝑜𝑟 𝑗 = 1, … , 𝑚
𝑖=1
𝑚

∑ 𝑥𝑖𝑗 ≤ 𝐾𝑖 𝑦𝑖 𝑓𝑜𝑟 𝑖 = 1, … , 𝑛
𝑗=1
𝑦𝑖 ∈ {0,1} 𝑓𝑜𝑟 𝑖 = 1, … , 𝑛, 𝑥𝑖𝑗 ≥ 0

Notice that the total demand constraint (the first constraint) now becomes an inequality constraint
instead of an equality constraint as in the previous models. Since this is a maximization model, there
is no risk of all allocations becoming zero. In other words, we are getting the additional flexibility to
either completely stop serving or partially serve some markets which are not as profitable as others.

4. Centre of Gravity Model

This is used to find potential sites for a single facility given a particular geography of demand/supply.

Inputs:

xn , y n :
coordinate location of either a market or supply source n

Fn :
cost of shipping one unit for one mile between the facility and either market or supply
source n
Dn :
quantity to be shipped between facility and market or supply source n

The distance between any two locations can be defined as:

d. Euclidean
e. Rectilinear
f. Square Euclidiean
g. Any other distance metric depending on the situation

In this case, we consider the Euclidean distance given by:

dn   x – xn    y – y n 
2 2

Our idea here is to minimize the total cost of operations given by

k
TC   d n Dn Fn
n 1

Steps to find optimal solution

1. For each supply source or market n, evaluate dn

2. Obtain a new location (x’, y’) for the facility, where

k k
Dn Fn xn Dn Fn y n
 dn
 dn
x'  n 1k and y'  n 1
k
Dn Fn Dn Fn

n 1 d n

n 1 d n

3. If the new location (x’ , y’ ) is almost the same as

(x, y) stop. Otherwise, set (x, y) = (x’ , y’ ) and go to step 1

5. Scorecard Method

This is used to find the ideal location for a single facility when several factors are to be considered
and not just the cost. Experts are asked to rate different locations based on several parameters.

Factors Access to Labour Proximity . . n

power
Weightage W1 W2 W3 . . Wn
Normalized Weighted
Scores Score
Location 1
Location 2
.
.
Location n
It needs to be noted that the scores given should be in same scale for each factor. Further, the
weights should add up to 100%. The location which has the highest weighted normalized score is
selected.