European Journal of Operational Research 289 (2021) 31–43

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European Journal of Operational Research

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

Discrete Optimization

Optimizing facility location and designR

Robert Aboolian a,∗, Oded Berman b, Dmitry Krass b
a
Department of Operations and Supply Chain Management, California State University San Marcos, 333 S. Twin Oaks Valley Rd., San Marcos, CA, 92096,
USA
b
Joseph L. Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario, M5S 3E6, Canada

a r t i c l e i n f o a b s t r a c t

Article history: In this paper we develop a generalized framework and a novel methodology to simultaneously optimize
Received 25 November 2019 locations and design decisions for a set of facilities that are facing competition from pre-existing facilities.
Accepted 25 June 2020
The framework encompasses multi-attribute design decisions, an elastic customer demand mechanism
Available online 8 July 2020
that can capture both expansion and cannibalization effects, and a flexible demand allocation mecha-
Keywords: nism that encompasses both, proportional allocation (“gravity type”) and all-or-nothing models (such as
Location p−median). Many classic location models appear as special cases of our Generalized Facility Location and
Facility planning and design Design Problem (GFLDP). We present an effective solution methodology, that allows us to approximate
Competitive location exact solutions to GDFLP to pre-selected accuracy levels. Our results show that not combining design and
Combinatorial optimization location decisions within a single model can lead to very substantial optimality gaps, thus underscoring
the importance of GDFLP approach.
© 2020 Elsevier B.V. All rights reserved.

1. Introduction dimensions may include facility size, appearance, accessibil-

We develop a general facility location model and an ac-
companying solution methodology. Our model incorporates
multi-attribute design decisions, elastic customer demand, and
pre-existing competitive facilities; it includes most well-known
location models in the literature as special cases (including
p−median, uncapacitated facility location, gravity, and many other
models). Yet, the solution methodology we develop is quite effec-
tive for the general case. The location modelling framework we
introduce incorporates the following elements:
1. A revenue-maximizing decision-maker who wants to locate
one or more new facilities in the market where pre-existing
competitive facilities may be present. The key decisions are
how many facilities to locate, where to locate them, and how
to split the available budget between fixed costs for opening
new facilities, and design improvements (over basic mini-
mum levels) for each facility.
2. The design decisions affect attractiveness of a given facility.
Our treatment of facility design is multi-attribute - allowing
the decision maker to make decisions on the specific dimen-
sions of the facility design which should be improved. These
R
This research was supported by NSERC grants of second and third authors.
∗
Corresponding author.
E-mail addresses: raboolia@csusm.edu (R. Aboolian),
berman@rotman.utoronto.ca (O. Berman), krass@rotman.utoronto.ca (D. Krass).
ity, layout, availability of parking space, etc. We note that
in the classical location-design models, originating with e.g.,
Huff(1962,1964), facility attractiveness is uni-dimensional,
with the only attractiveness attribute being the facility size.
3. Customer utility function which evaluates the utility derived
by customers residing at a given location from a certain ser-
vice facility. The utility function depends on both, the attrac-
tiveness (design) of the facility and its proximity (or travel
time) to customers’ location.
4. Elastic customer demand. The customer is assumed to follow
a two-stage process in determining how much to spend at a
given facility. First, she decides how much of her available
“budget” to spend, in total, on the services provided by all
the available facilities (both new and pre-existing) - this is
the “category-level” expenditure decision. Next she decides
where to spend it, i.e. how to allocate the expenditure be-
tween the available facilities (the allocation decision).
5. The first-stage decision is represented as a function of the
total utility derived from all facilities. This form of the
demand function allows us to capture “category expansion”
effects, where customer expenditures may increase as new
facilities enter the market and the overall category gains
market share (e.g. a single Thai restaurant in a certain
location may benefit by a Thai-themed restaurant chain
entering the market and making this type of cuisine more
popular). Traditional models, that view customer’s decisions

https://doi.org/10.1016/j.ejor.2020.06.044
0377-2217/© 2020 Elsevier B.V. All rights reserved.
32 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
as one-stage, can capture only the “cannibalization” effects,
where customer expenditures at existing facilities can only
decrease (or remain constant) when new facilities are added.
6. The second-stage customer decision is how to allocate her
total expenditure among the available facilities. Two pri-
mary mechanisms have been employed in the location lit-
erature: “all-or-nothing”, under which demand from a given
customer is allocated to the utility-maximizing facility, and
“proportional allocation” which assumes that customer de-
mand is allocated to all facilities in proportion to the utility
derived from each facility. Our framework incorporates both
cases.
We call our model the Generalized Facility Location and De-
sign Problem (GFLDP); to the best of our knowledge, it is the
first model to incorporate all of the elements listed above. In
Section 3 below we discuss how some classic location models arise
as special cases of (GFLDP). Of course, developing a very general
model is not very valuable unless there is an accompanying effi-
cient solution methodology. Such a methodology is developed in
the current paper in three steps:
Step 1 We first focus on the single-facility case, and show that
the multi-attribute optimal design problem (with a spec-
ified location and design budget), can, under some mild
assumptions, be solved in linear time by leveraging some
results for non-linear knapsack models.
Step 2 By analyzing the structure of the optimal solution for the
single-facility case, we develop a closed-form expression
for the optimal objective value as a piece-wise concave
function of the design budget. The breakpoints of this
function are computable in advance. The optimal solu-
tion (i.e., the optimal value of each design characteristic)
is also shown to be a closed-form function of the design
budget.
Step 3 Applying the single-facility results to the general multi-
facility case results in a non-linear integer program with
special structure that can be further exploited. We de-
velop an Iterated Tangent Line Approximation technique
(see Aboolian, Berman, & Krass, 2007b) to obtain a linear
MIP formulation which approximates the original GFDLP
to the error tolerance level specified by the user.
We note that a direct formulation of (GFLDP) as an optimiza-
tion problem results in a non-linear, non-convex bi-level discrete
optimization problem, where the (lower-level) two-stage customer
utility maximization problem is embedded within the (upper level)
facility location and design problem (in fact, the upper level model
can also be regarded as two-stage: first decide the number and
locations of facilities, and then optimize the design for each loca-
tion). Both levels have non-linearities and integrality constraints.
In addition, the resulting optimization problem has high dimen-
sionality: the decision variables include facility locations, budget
allocated to each facility, and the design characteristics for each
located facility. This makes (GFDLP) very difficult for standard
solvers.
The methodology we develop reduces the dimensionality and
removes non-linearities, resulting in MIPs that are solvable with
standard software. As shown below, when this methodology is
applied to some classic location models, it recovers standard IP
formulations; however, it allows for significant generalizations as
well. Computational experiments show that for the general case
the resulting MIPs are quite solvable for realistic-size instances.
Thus, the methodology we develop appears to be flexible and prac-
tical for many location models, automatically capitalizing on sim-
plified structure when it is present.
The plan for the paper is as follows. We review the relevant lit-
erature in Section 2. The model is formally introduced in Section 3.
Section 4 develops the methodology for the single-facility case. The
multiple-facility model is analyzed in Section 5, where the iterated
TLA technique is also developed. Results of computational exper-
iments are presented in 6. Model extensions and open problems
are discussed in Section 7. All proofs can be found in the Supple-
mentary On-line Appendix.
2. Literature review
The paper builds on several streams of literature in facility lo-
cation, including “all or nothing” location models with pre-existing
competition, gravity-type proportional allocation models, and facil-
ity design models.
The first stream originates with the classic p−median model.
The version of the model incorporating pre-existing competition
appears to originate from Hakimi (1983); a similar model called
MAXCAP, including an integer programming formulation was ana-
lyzed by Revelle (Revelle, 1986). See Daskin and Maass (2015) for
a recent review. Another classic model with similar all-or-nothing
allocation mechanism is the uncapacitated facility location model
(UFLP). This model is a generalization of p−median; see Fernandez
and Landette (2015) for a survey.
The second stream of literature, proportional allocation
(gravity-based) models, dates back to Huff (1964); these mod-
els are closely related to the Multi-Competitive Interaction (MCI)
model of Nakanishi and Cooper (1974) and the Multinomial Logit
(MNL) model (McFadden, 1974). A review of this class of models
in location literature is provided in Ghosh, McLafferty, and Craig
(1995) and Berman, Drezner, Drezner, and Krass (2009). A good
discussion contrasting the all-or-nothing vs. proportional alloca-
tion mechanisms and related models is found in Serra and Colome
(2001). All of the models above assume inelastic demand; the elas-
tic demand in the context of gravity-type location models on a net-
work was introduced by Berman and Krass (2002).
The third, and arguably, most relevant stream of literature fo-
cuses on models integrating location and design aspects. This, rel-
atively new and quite active, stream appears to have originated
with Plastria and Carizosa (2004), who investigated a one-facility
problem on a plane, where the facility “design” was represented
by a single attribute called “quality”. Pre-existing competitive facil-
ities were assumed. Customer demand was treated as non-elastic,
with the framework incorporating both, “all-or-nothing” and “pro-
portional allocation” mechanisms. We note that this framework has
many similarities to the current paper, while also differing in sev-
eral key aspects: single-attribute vs. multi-attribute design deci-
sion, inelastic vs elastic customer demand, single vs multi-facility
setting, planar vs discrete location space. Since many subsequent
papers adopted the single-attribute design network, it is worth-
while to note that, while it certainly simplifies the solution algo-
rithms, “quality”, unlike e.g., the shopping floor size or the number
of parking spots, is not under the direct control of the decision-
maker, and thus investments in “quality” are hard to relate to real-
life design decisions. In our multi-attribute framework, we model
the actual design characteristics and the cost for their improve-
ments above some minimal mandated level. On the other hand,
one of the key steps in our methodology, detailed in Section 6.1, is
to reduce the multi-attribute design decisions to a single budgetary
decision, thus providing explicit and endogenous linkage between
multi-attribute and single-attribute decisions.
The second “founding” paper in location design models appears
to be Aboolian, Berman, and Krass (2007a). This paper introduced
several important elements of our framework: elastic customer de-
mand with two-stage decision mechanism, multi-attribute design
decisions, and multiple facility setting in a discrete location space.
However, the design decision was discretized, picking from a fi-
nite number of pre-determined facility designs, and the allocation
 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
mechanism was limited to proportional allocation. The paper also
employed TLA-based methodology, which we generalize in Section
5.1.
Most of subsequent papers in location design stream appear to
have followed the basic framework of Plastria and Carizosa (2004),
with some generalizations; a nice review of this literature is pre-
sented in Drezner (2014). The following papers introduced signif-
icant generalizations of the original framework. Redondo, Fernan-
dez, Fernandez, and Ortigosa (2009) introduced a multi-facility ver-
sion PC model with proportional allocation mechanism, for which
they proposed evolutionary-based heuristics. Arrondo, Fernandez,
Redondo, and Ortigosa (2014) assumed elastic customer demand
with two-stage decision mechanism adopted from Aboolian et al.
(2007a), with the remaining framework similar to Plastria and
Carizosa (2004), but restricted to the proportional allocation mech-
anism. In particular, a planar, one-facility setting is assumed.
They focus on parallelizable algorithms, presenting both exact and
heuristic approaches. Redondo, Fernandez, Hervas, Arrondo, and
Ortigosa (2015) introduced a bi-objective version to the setting of
Plastria and Carizosa (2004), with proportional allocation mecha-
nism; they consider a franchisor-franchisee model with the former
interested in maximizing total market share for the franchise, and
the latter (the owner of the new facility) interested in maximiz-
ing their own profitability. Fernandez, G-Toth, Redondo, Ortigosa,
and Arrondo (2017) modified the setting of Plastria and Carizosa
(2004) by introducing a different version of the two-stage cus-
tomer demand function: in the first stage, the customer decides
how to allocate their available demand amongst different chains
(at least two pre-existing chains are assumed), by considering only
the best (i.e., utility-maximizing) facility from each chain. In the
second stage, the customer allocates the demand for each chain
amongst the facilities belonging to this chain. We note that in this
setting, unlike that of Aboolian et al. (2007b) and Arrondo et al.
(2014), adding a new facility to the network can only reduce the
demand seen by the facilities belonging to the other chains (how-
ever, it is possible for the demand of other facilities in the same
chain to increase).
The papers mentioned above, as well as the current paper, as-
sume pre-existing competitive facilities, thus focusing on the “fol-
lower” problem. There is a separate, but growing, stream of litera-
ture focusing on the leader’s problem, which adds very significant
additional challenges (and for which only heuristic treatments are
available). As this represents an extension to our model, we will
comment on some of these papers in Section 7.
3. Definitions and preliminaries
We assume that customer demand is concentrated in a discrete
subset N of size n = |N| of metric space P equipped with a distance
function dij , i, j ∈ N. Each of the n points represents a “market”, i.e.,
a set of customers who are homogeneous with respect to their fa-
cility preferences and expenditure decisions; in view of assumed
homogeneity we will often refer to each i ∈ N as “customer i”. The
maximum potential demand for i ∈ N is given by wi ; this can be
usefully viewed as the available “expenditure budget” for customer
i, who, depending on the attractiveness and convenience of service
offered by the facilities, may choose to spend all, part, or none of
it.
The set of potential facility locations P is assumed to be dis-
crete; without loss of generality, we assume P ⊂ N. There may be
pre-existing competitive facilities on the network located in set C
with P ∩ C = ∅.
We first describe the basic components of our modeling struc-
ture, and then provide more details for each component below.
33
• The decision-maker (DM) makes two basic sets of decisions.
The first decision is to select a set S⊆P of locations for the new
facilities, which includes deciding on |S| - the number of new
facilities to be opened. Then, for each j ∈ S, the DM must deter-
mine the “design” of facility j by specifying the values of design
characteristics (as described below), yielding the attractiveness
value of Aj . Note that to simplify the notation (and the task
of estimating the model parameters), we will assume that the
perception of attractiveness Aj of facility j is the same for all
customers i ∈ N, though some extensions to customer-specific
forms will be discussed later. The locations of opened facilities
and their design (as well as the location and design of compet-
itive facilities) is viewed as “offered service” by the customers.
• Each customer i ∈ N evaluates the individual attractiveness (util-
ity) of each facility j ∈ S ∪ C:
ui j = A j g(di j ), where g(d ) ∈ [0, 1],
g(0 ) = 1 is non-increasing and convex in d (1)
Note that since uij depends on both the proximity dij of facil-
ity j and its perceived attractiveness, the utilities different cus-
tomers derive from facility j are different, even though the per-
ceived attractiveness Aj is the same for all customers. The func-
tion g(d) ≥ 0 represents distance sensitivity of customers. We
may want to have higher utility for facilities in C vs similar fa-
cilities in S to reflect customer inertia, i.e. reluctance to switch
from the facilities they are already patronizing. This is easy to
incorporate via the attractiveness term Ai as described in the
“Facility Design” discussion below.
• Next, each customer computes the aggregate utility of all new
facilities. We consider two alternative forms of the aggregate
utility function:

UiA (S ) = ui j (2)
j∈S
UiM (S ) = [max ui j ] ∗ I{max ui j > max ui j } (3)
j∈S j∈S j∈C
(where I{ · } is the indicator function; note that we require an
improvement in utility in order to attract a customer away
from an existing facility). Under UiA (S ) specification (super-
script A indicates “all”), customer i sums the utilities derived
from all facilities in S. As we will see later, this specification
is required to represent location models with proportional or
“gravity-type” assignments, where customers patronize more
than one facility and facilities compete for market share of cus-
tomer’s expenditures. Under the second mechanism, UiM (S ) (su-
perscript M stands for “maximum”), the aggregate utility is de-
termined by the utility-maximizing facility only. This mecha-
nism is needed to represent all-or-nothing assignments, where
customer only patronizes the utility-maximizing facility. Note
that if customers’ utility is maximized by a facility belonging to
the competitor (i.e. j ∈ C) then UiM (S ) = 0. As we will see below,
these two mechanisms provide sufficient flexibility to represent
most previously-described location models. When either mech-
anism can be used, we will use the notation Ui (S) (without the
superscript) for the aggregate utility.
• The final decision made by customer i ∈ N is how much of the
available funds to spend on the service offered by the facilities
in S. We use V(Ui (S)) to represent the proportion of the available
funds that customer i ∈ N spends on service offered by facilities
in S, where we assume that V (U ) ∈ [0, 1], V (0 ) = 0, lim V (U ) =
U→∞
1, and V(U) is concave, non-decreasing, and twice-differentiable
function in U; we will refer to V(U) as the “demand” function.
The total expenditure for i ∈ N is given by wiV (Ui (S )). Note that
even though the form of the demand function V(U) is assumed
34 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
to be the same for all customers, no substantial difficulties arise
from making this form customer-specific.
• Finally, the model is completed by specifying the objective
of the DM. Letting C(U(S), S) represent the cost of locat-
ing new facilities in set S and ensuring utility vector U (S ) =
[Ui (S ), . . . , Un (S )] for customers in N, the GDFLP can be stated
in compact form as follows:
 
 form of g(d), as long as g(d) is non-increasing and g(0 ) = 1.
max Z (S ) = wiV (Ui (S )) | S ⊂ P, |S| ≤ m, C (U (S ), S ) ≤ b ,
i∈N
(4)
where m represents the maximum number of facilities that can
be located, and b represents the total budget available to the
DM. Constraints on the budget and the maximum number of
facilities are included mainly for consistency with other loca-
tion models; either one can be dropped. In fact, an alternative
formulation, where DM seeks to maximize net revenue and the
budget constraint is dropped, will be discussed in Section 7.
To complete the model description we next specify how Aj is
related to design decisions and the associated costs.
Facility design
Following Aboolian et al. (2007a), we assume that each poten-
tial site j possesses a “base” attractiveness level of α j ≥ 0 which can
be interpreted as the attractiveness of the basic facility that could
feasibly be located at j - i.e., that would satisfy all required reg-
ulations and municipal codes with respect to safety, parking, etc.
at the minimal level. Note that α j incorporates site-specific charac-
teristics such as visibility, ease of access, etc. We also assume that
there is set K of design characteristics along which facility j can be
further improved. The decision variables Yjk ≥ 0 represent the im-
provement of the basic design with respect to characteristic k ∈ K,
with the value Y jk = 0 if no improvement over the basic level is
made. The resulting attractiveness Aj of a facility at j ∈ P is assumed
to be a log-linear function:
 
Aj = αj (1 + Y jk )θk , (5)
k∈K
where θ k > 0 is the sensitivity parameter for the kth attraction
characteristic (throughout this paper we adopt the convention that
the product evaluated over an empty set equals 1, thus A j = α j
when K = ∅). As discussed in Aboolian et al. (2007a), this form is
similar to both MCI and MNL models (Nakanishi & Cooper, 1974,
McFadden, 1974), which are commonly used to model customer
choice and product market shares for competing multi-attribute
products. The methodology for estimating the values of θ k , k ∈ K
is well-developed using past customer choice data.
We will typically assume that Y jk ∈ [0, ymax
k
], i.e., the value of
each design characteristic can be adjusted continuously within this
interval, even though for some qualitative characteristics only dis-
crete values may make sense; the extension to incorporate qualita-
tive characteristics will be discussed in Section 7 below. We make
the following assumption regarding the parameters θ k , k ∈ K:
Assumption 1. For all k ∈ K, θ k ∈ (0, 1].
This ensures that Aj is concave with respect to every Yjk , k ∈ K,
implying that the marginal attractiveness is decreasing as the de-
sign improvements are made; this is a common assumption in eco-
nomics literature. For some of our results it will be necessary to
make a stronger assumption:
Assumption 2.  k ∈ K θ k ∈ (0, 1].
As will be shown below, Assumption 2 ensures that Aj is con-
cave with respect to the overall expenditure on improvements for
facility j; we believe this assumption should also be reasonable in
most cases.
We note that it may be natural to regard travel distance as just
another characteristic of a facility, which results in the following
specification in Eq. (1): g(d ) = (1 + d )−β . Here β > 0 is a distance
elasticity parameter playing the same role as θ k , k ∈ K above. While
this form simplifies the practical task of estimating model param-
eters (using the MCI methodology), we do not require a specific
Eq. (5) for estimating attractiveness of a facility can be directly
applied to pre-existing facilities to obtain Aj for j ∈ C. Of course, the
values of design characteristics Yjk are fixed in this case. Moreover,
as discussed earlier, we may want to provide an attractiveness ad-
vantage to pre-existing facilities to reflect customer reluctance to
change their established shopping habits. The most direct way of
doing this is to set the base attractiveness α j = E α j for j ∈ C, where
E > 1 is a constant reflecting the “customer inertia” factor for ex-
isting facilities. For example, setting E = 1.05 ensures that a pre-
existing facility has a 5% higher attractiveness compared to a new
facility with exactly the same design characteristics.
To complete the formulation we define the facility costs as fol-
lows. For a potential location j ∈ P, the parameter fj ≥ 0 represents
the fixed cost of locating a facility with basic design at j, while cjk
is the variable cost of improving the design characteristic k by one
unit (we assume that both fixed and variable costs are properly an-
nualized). Thus, assuming a new facility is opened at j, the cost of
locating a facility with design attributes Y j1 , . . . , Y jK is given by

Bj = fj + c jkY jk , (6)
k∈K
where Bj is the total allocated budget for new facility j ∈ S. This ex-
pression assumes linear cost structure with respect to design char-
acteristics. While this is likely a simplification of the actual costs
involved in design decisions, the linearity enables us to develop
efficient solution approaches below; we will discuss possible gen-
eralizations in Section 7.
In view of the previous expression, the overall costs of locat-
ing facilities in set S to induce the customer utility vector U(S) are
given by C (U (S ); S ) = j∈S B j , and the budget constraint in GFLDP
formulation (4) can be rewritten as  j ∈ S Bj ≤ b.
This completes the formulation of GFLDP. We first demonstrate
the flexibility of the framework outlined above by showing how it
generalizes a number of previously analyzed location problems.
Location models with proportional allocation. In this class of
models each customer is assumed to divide their spending be-
tween several (potentially all) open facilities in proportion to the
utility derived from each facility. The basic model of this type as-
sumes inelastic demand, (i.e. each customer i ∈ N spends the max-
imum amount wi ) and no flexibility in facility design (i.e., K = ∅).
The utility customer i ∈ N derives from each facility j ∈ S ∪ C is given
by ui j = α j g(di j ), where g(d) is some decreasing function of dis-
tance (note that for some popular forms, e.g. g(d ) = d−2 , one must
make sure that some minimal distance 0 < d < dij exists for all
i ∈ N, j ∈ S). Once a location set is defined, the market shares are
computed via
ui j
MSi j =  , i ∈ N, j ∈ S ∪ C (7)
k∈S∪C uik
and the problem is to find a location set S, |S| ≤ m to maximize

ZPA (S ) = wi MSi j . (8)
i∈N j∈S

We also observe that j∈S∪C MSi j = 1 and thus the problem loses

meaning when C = ∅, as ZPA (S ) = i∈N wi irrespective of S. To re-
cast this problem into our framework we set A j = α j , and thus uij
 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
is already in the form given by (1) above. We use the additive form

(2) to define Ui = j∈S ui j and define the demand function
Ui
V (Ui (S )) = , (9)
Ui + UiC
 We also show that the optimal attractiveness is a concave function
where UiC = j∈C ui j is the total utility derived by i ∈ N from
the competitive facilities - a constant that can be pre-computed
since C is assumed to be known. It is easy to see that ZPA (S ) =
 cannot be derived over the whole range Bj ∈ [0, b], such expressions
i∈N wiV (Ui (S )) and that V(U) is concave and non-decreasing in
U. Thus, the basic proportional allocation model is easily repre-
sentable in our GFLDP framework.
We also note two extensions of the basic model: elastic de-
mand, described in Berman and Krass (2002), and flexible design
with limited number of design scenarios, (Aboolian et al., 2007a).
Both extensions are easily represented within the GFDLP frame-
work.
Full capture location models. The second major class of loca-
tion models (in terms of customer-facility interaction) are the “full-
capture” (also known as “all-or-nothing” models) where each cus-
tomer i ∈ N is assumed to patronize only the facility j∗ that is
utility-maximizing for them. It is assumed that for each j ∈ P ∪ C, a
customer at i ∈ N derives “benefit” rij when obtaining service from
facility j, and the objective is to find S, |S| ≤ m which maximizes

ZF C ( S ) = wi ri j ∗ ,
i∈N j ∗ ∈S
where j∗ = arg max ri j with ties typically broken in favor of the
j∈S∪C
new facility. This is the MAXCAP model. To recast it into GFLDP
form we can simply treat the benefits rij as reciprocals of distances
di j = 1/ri j after assuming, without loss of generality, that rij val-
ues are scaled to be in (0, 1]. Next we set K = ∅, α j = 1 for all
j ∈ P ∪ C and g(d ) = 1/d. It can be seen that ui j = ri j in this case.
Selecting Ui = U M in (3) we see than Ui = ri j∗ for all i and the with
 k
Vi (Ui ) = Ui we have ZF C (S ) = i∈S wiV (Ui (S )) showing that MAX-
CAP is a special case of GFLDP.
We can extend the basic model by allowing for elastic demand:
this is easily accomplished by re-defining Vi (U) to be a concave
non-decreasing function of U with range in [0, 1]. We can also
add the design component by re-defining ri j = A j (y )g(di j ), where
Aj and g(D) are given by (5), (1), respectively.
Having demonstrated the versatility of GFLDP framework we
next address the solvability issues. While the (GFLDP) can be for-
mulated as a non-linear integer program using the standard bi-
nary location variables Xj augmented with the design variables Yjk
for j ∈ S, k ∈ K, the practicality of this formulation is doubtful since
the demand function Vi (Ui (S)) is a non-linear function of the util-
ity vector, which, in turn, is non-linear in the design variables Y.
Thus, direct solution approaches are unlikely to be successful. We
thus develop an alternate approach by first focusing on the single-
facility optimal design problem which arises once the decision to
locate a facility at j ∈ P has been made.
4. Single facility design problem (SFDP)
In this section assume that we have already decided to locate
a new facility at some location j ∈ P and address the problem of
determining the optimal design for this facility. We initially assume
that the available budget Bj is fixed and develop a simple algorithm
for this case in Section 4.1. This problem may be of interest in its
own right for the case where only one new facility is to be located:
set b j = b and solve SFDP for every potential j ∈ P.
Next, in Section 4.2 we focus on developing a closed-form ex-
pression of optimal facility attractiveness as a function of the avail-
able budget: Aj (Bj ) for Bj ∈ [0, b] (note that optimal values of design
characteristics are implicitly accounted for in this expression). This
35
is a crucial step in our development of multi-facility algorithm:
it allows us to substitute the expression above into the objective
function (4), greatly simplifying the resulting optimization prob-
lem since this eliminates all the design variables Yjk , k ∈ K from
the formulation - they are replaced by a single budget variable Bj .
of Bj , which will allow us to establish concavity properties in the
multi-facility case. While a single closed-form expression for Aj (Bj )
exist over sub-intervals B j ∈ [B jq , B j (q+1 )], q ∈ Q, where Q is a finite
set of breakpoints. We develop a simple algorithm to pre-compute
all breakpoints and discuss how the expressions Aj (Bj ) changes as
breakpoints are crossed. Interestingly, the concavity of Aj (Bj ) is pre-
served over the whole range Bj ∈ [0, b].
Since the facility location j is fixed, to simplify the notation in
this section, we will drop the subscript j, replacing Bj by B, etc. For
a fixed location and budget B, the intuition would suggest that the
goal of SFDP should be to identify the design resulting in the most
attractive facility. Indeed, since the overall objective Z(S) given by
(4) above is clearly non-decreasing in the components of the utility
vector, and since by (1), each utility component Ui is an increasing
function of the attractiveness A(B), we have the following formula-
tion:
K
max A j (B j ) ≡ A(B ) = α ( 1 + y k ) θk (10)
k=1
Subject to
K
k=1 ck yk ≤B− f (11)
0 ≤ yk ≤ ymax
k
, k ∈ K. (12)
To avoid infeasibility or the trivial solution yk = ymax for all k, we
 k
will assume that f ≤ B < f + k∈K ck ymax .
4.1. Solving the SFDP for a Given B
By Assumption 1, θ k ≤ 1 for all k ∈ K, implying that the objec-
tive function is concave. Taking logarithm of the objective, we see
that (SFDP) is equivalent to a separable, concave knapsack prob-
lem - a generalization of the classic “knapsack problem” which has
a linear objective subject to constraints (11,12). This class of knap-
sack problems, where the objective is a sum of concave univariate
functions, is well-solved: the complexity is known to be not much
harder than that of the linear knapsack problem; see Bitran and
Hax (1981), and Bretthauer and Shetty (2002).
In Lemma 1 below we provide a closed-form solution for the
case where the upper and lower bounds in (12) are automati-
cally satisfied by the unconstrained solution (see Appendix for the
proof).
Lemma 1. For k ∈ K, let

θk ( B − f + cr )
yˆk (K, B ) =  r∈K
− 1. (13)
ck r∈K θr
If 0 ≤ yˆk (K, B ) ≤ ymax
k
for all k ∈ K, then yˆk (K, B ), k ∈ K is an optimal
solution to (SFDP).
This result, together with the “pegging” approach of Bitran and
Hax (1981), allows us to develop the following efficient algorithm
for SFDP. In each step, (13) is calculated for all k ∈ K, and either
a feasible solution is obtained, or there are some design variables
for which either the upper bound ymax k
, or the lower bound of 0
are violated. We evaluate the total cost of all upper bound viola-
tions and the total cost of all lower bound violations. If the for-
mer is larger, all variables violating the upper bounds are ”pegged”
by fixing their values to the respective upper bounds. If the more
36 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43

costly violations are due to lower bounds, the respective variables Indeed, in view of (14), we can substitute (13) into (10) for k ∈
are pegged to 0. We then remove the pegged variables from the K − L − U, yk = ymax
k
for k ∈ U, and yk = 0 for k ∈ L to obtain:
set K, add them to sets U (those fixed to the upper bounds) or L  
(those fixed to lower bounds), and update the available budget by A (B ) = α [ (B − f + cr
reducing it by c p ymax
p for each pegged variable p added to U. Next, k∈K−L−U r∈K−L−U

we execute another iteration of the algorithm. Since at each step,  θk 

− cr ymax )  ] θk (ymax + 1 ) θk . (15)
at least one design characteristic is removed from K, the process
r∈U
r
ck r∈K−L−U θr k∈U
k

terminates after at most |K| steps. We refer to this procedure as

Algorithm 1 - please see Appendix for a formal description. This expression is somewhat misleading as the sets L, U depend
The correctness of Algorithm 1 is established in the following on B. We ignore this dependency for the moment, treating these
result. Part (1) follows from Theorem 4 in Bitran and Hax (1981); sets as fixed (we will analyze the dependency in some detail later).
part (2) follows from Lemma 1 since the optimal solution must Let
satisfy the optimality conditions.  
γ=f− cr + cr ymax
r ,
 max r∈K−L−U
Theorem 1. Assume f ≤ B < f + k∈K c k yk . Then: r∈U

and
(1) Algorithm 1 computes an optimal solution yk , k ∈ K to (SFDP)  θk
in O(|K|2 ) time.  θk 
(2) Let L, U be the final values of sets Li , Ui produced by Algorithm δ=  (ymax + 1 ) θk .
k∈K−L−U
ck r∈K−L−U θr k∈U
k
1. Then
⎧ Then, (15) takes the form
⎪<0 if k ∈ L 
 ⎨ A(B ) = αδ (B − γ ) k∈K−L−U θk , (16)
yˆk (K −L −U, B − f − cr ymax ) >ymax if k ∈ U
r
⎪
⎩
k
where δ > 0 and γ < B. This function is continuous and in-
r∈U
= yk ∈ [0, ymax ] if k ∈ K − L − U 
k creasing in B. It is also concave in B if k∈K−L−U θk ≤ 1, i.e.,
(14) when Assumption 2 holds. This also provides an interpreta-
tion of Assumption 2: it ensures that A(B) is concave (versus
Note that upon termination, set L contains all design character- Assumption 1 which imposes a similar condition with respect to
istics set to 0, set U contains all characteristics set to ymax r , r ∈ U, each individual design characteristic).
and set K contains all characteristics with intermediate levels given Note that expression (16) is exactly the form we need to use
by (13) applied to reduced set of design characteristics and bud- in the general multi-facility case. Once the values of δ and γ are
get. It is also interesting to observe from (13) that the amount al- computed during the pre-processing stage, this expression can be
located to characteristic k depends on the relative attractiveness substituted into (4), and the only decisions that need to be made
θ k / r ∈ K θ r divided by the unit cost ck , i.e., larger budget will be are whether a facility should be open at a certain location and how
allocated to the characteristics that have higher relative attractive- much budget should be allocated to this facility; all design deci-
ness per dollar. Finally, we note that since, in practice, the num- sions are implicit in the expression (16).
ber of design characteristics |K| is usually quite small, Algorithm 1 However, as observed above, the sets L, U are themselves af-
executes nearly instantaneously. The preceding discussion is illus- fected by the value of B; thus the expressions above holds only
trated with the following simple example. for values of B where these sets do not change. It is obvious from
(13) and (14) that for any value of B we can find values B, B̄ such
Example 1. Consider an instance of (SFDP) with three design char-
that sets L, U are invariant in the interval B ∈ [B, B̄]; the breakpoints
acteristics and the following data:
B, B̄ designate budget levels where the membership of sets L, U
ymax = (1, 1, 1 ), c = (.5, 1, 2 ), θ = (.5, .3, .1 ), f = 0 and B = .7 changes. We analyze the mechanism of these changes next.
Consider first the upper breakpoint B̄. Since yˆk (K, B ) is lin-
We first compute yˆk (K, B ) with K = {1, 2, 3}, obtaining: yˆ(K, .7 ) = ear and increasing in B, as B is increased, any k ∈ U will remain
(3.667, .4, −.767 ). Since yˆ1 > ymax1
, and yˆ3 < 0, the solution is not in set U. Similarly, any k ∈ L will remain outside of L (since the
feasible. We next evaluate the cost of the violations. For k = 1, the corresponding component of yˆk will remain positive). Thus, B̄ is
violation is 3.667 − 1 = 2.667 with the cost of .5 ∗ 2.667 = 1.334. reached when either some element leaves L or some element en-
For k = 3, the violation is 0.767 with the cost of 2 ∗ 0.767 = 1.534. ters U. Consider the former case first. Suppose k ∈ L, implying that

Therefore, the latter is the more costly. We thus peg y3 = 0 and up- yˆk (K − L − U, B − j∈U c j ymax
j
) < 0. By (13) this is equivalent to
date K = {1, 2}, L = {3}, U = ∅, and the available budget remains
ck   
at .7. The algorithm terminates with the solution: y = (1, .2, 0 ), L = θr + ymax cr − cr > B − f ,
 θk r
{3}, U = {1}. Note that K − L − U = {2}, B − r∈U cr ymax r = .7 − .5 = r∈K−U−L r∈U r∈K−L−U
.2, and yˆ({2}, .2 ) = (3, .2, −.8 ), verifying part 2 of Theorem 1, since
and as B is increased, k will leave L when the inequality above no
the component in U exceeds the upper bound, the component in L
longer holds. The first k to leave L will be the one for which the
is negative, and the component in K − L − U falls between its upper
expression of the left-hand side is the smallest. A similar condition
and lower bounds. 
is easily derived for when k which is currently not in U will enter
U. This leads to the following expression:
4.2. Deriving optimal attraction as a function of B   
ck   
As discussed in Section 4 above, our goal in this section B̄ = min min f + θr + ymax cr − cr ,
k∈L θk r
is to derive a closed form expression for A(B), where, with a  r∈K−U−L r∈U r∈K−L−U

slight abuse of notation, this expression represents the optimal (ymax + 1 )ck   
min k
θr + ymax cr − cr + f .
value of the SFDP objective for a given budget B. This allows us k∈K−L−U θk r
r∈K−L−U
to completely eliminate the design variables yk , k ∈ K from the r∈K−U−L r∈U

formulation. (17)
 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43 37

Similarly, the lower endpoint B occurs when some k ∈ U leaves described in Section 3. We start by formulating the problem as a
U or some k ∈ K − L − U enters L as B is reduced, resulting in the non-linear integer program and then, in Section 5.1 apply an ex-
following condition: tension of the TLA technique to develop an approximation scheme
   via a single linear integer program.
ck    The primary decision variables we use are (1) binary variable
B = max max θr + ymax cr − cr + f ,
k∈K−L−U θk r xj , j ∈ P, indicating whether a facility is opened at j (x j = 1) or not
 r∈K−U−L r∈U r∈K−L−U
 (x j = 0), and (2) continuous decision variables Bj , j ∈ P represent
(ymax + 1 )ck    the budget allocated to an open facility at j. We also use Ui , i ∈ N to
max k
θr + ymax cr − cr + f .
k∈U θk r∈K−U−L r∈U
r
r∈K−L−U
represent the total utility derived by customer i from the new fa-
cilities. Two versions of the problem, depending on the type of the
(18) aggregator Ui used, are presented. We start with the Ui = UiA de-
The expressions above suggest the following procedure to iden- fined by (2); recall that this aggregator is used to represent partial

tify all breakpoints of A(B), which we call Algorithm 2. Our initial capture models. Note that under this version, Ui = i∈P A j (B j )gi j ,
breakpoint is B1 = f, since all design characteristics are 0 at this where gi j = g(di j ) is a parameter representing the sensitivity to
budget. Set q = 1, pick some small  > 0, and set B = Bq +  . Solve travel distance dij for customer i and Aj (Bj ) is the funciton relat-
the SFDP problem (use Algorithm 1) for this budget to find sets ing optimal attractiveness of facility j to budget Bj derived in the
L, U and then apply (17) to find the next breakpoint Bq+1 (at this previous section; as noted above we set A j (0 ) = 0. We call the cor-
point we can also use (18) to make sure that the lower endpoint responding formulation (GFLDP-A):
coincides with Bq ; if not, we should reduce  and repeat). We now 
 max Z = wiV (Ui ) (19)
increment q and proceed until the Bq+1 = k∈K ck ymax k
is reached.
i∈N
At this point we can stop since all design characteristics are at
their upper bound ymax k
at this point (a more formal description 
of Algorithm 2 can be found in the Appendix). Bj ≤ b (20)
The main results of this section are summarized in the follow- j∈P

ing theorem, whose proof can be found in the Appendix: 

Theorem 2. There exist a finite set Q of increasing breakpoints xj f j ≤ Bj ≤ xj( f j + ck ymax
k ) j∈P (21)

B1 , . . . , BQ , with B1 = f and BQ = k∈K ck ymax
k
such that k

(1) For q = 1, . . . , Q − 1 and B ∈ [Bq , Bq+1 ], the optimal value A(B) of 

Ui = A j ( B j ) gi j i ∈ N (22)
the objective function of (SFDP) is given by (15). Moreover, the
j∈P
number of breakpoints Q ≤ 2|K|.
(2) The function A(B) is non-decreasing and continuous for B ∈ [B1 , BQ ]
(3) If  k ∈ K θ k ≤ 1 (i.e., Assumption 2 holds), then A(B) is concave for B j ≥ 0, Ui ≥ 0, x j ∈ {0, 1} i ∈ N, j ∈ P (23)
B ∈ [B1 , BQ ].
The objective function (19) is given by (4). Constraint (20) speci-
We note that the condition in part (3) of the theorem can fies the allocation of the available budget (if desired, a constraint

be relaxed to k∈K−L−U θk ≤ 1 for all L, U induced by breakpoints on the maximum number of new facilities can also be added). Con-
B1 , . . . , BQ . straint (21) ensures that Bj is large enough to cover the fixed con-
Example 2. To illustrate the Algorithm 2 and the preceding re- struction costs, but does not exceed the maximum improvement
sult, we continue with the setting of Example 1 and compute the budget when x j = 1, and that B j = 0, if x j = 0. Constraint (22) de-
set of budgetary breakpoints Q. We set  = .01. Since f = 0 and fines the utility Ui , as discussed above (note that this constraint
 max = .5 + 1 + 2 = 3.5, the relevant search range is B ∈ [0,
k ck yk
can be aggregated into the objective, eliminating variables Ui ).
3.5]. Next we formulate (GFLDP) with the maximum aggregator Ui =
We start with B1 = 0, set B = B1 +  = .01 and apply Algorithm UiM defined by (3) and used to represent full capture models. The
1. This results in the optimal solution: (y1 , y2 , y3 ) = (.02, 0, 0 ) with corresponding formulation, referred to as (GFLDP-M) replaces con-
L = {2, 3} and U = ∅. Now we compute B̄ = 0.5, B = 0 using (17), straint (22) with the following four constraints:
(18), respectively. Since B = B1 , no breakpoints have been missed
Ui ≤ (1 − Ri j )M + A j (B j )gi j i ∈ N, j ∈ P (24)
by taking too large a step. We thus add the upper breakpoint to the
set of break points, set B2 = 0.5, B = 0.5 +  = .51 and apply Algo-
rithm 1 again. The new optimal solution is (y1 , y2 , y3 ) = (1, .01, 0 )  
M Ri j ≥ Ui > UiC Ri j i ∈ N (25)
with L = {3}, U = {1} (note that node 1 entered U, while node 2
j∈P j∈P
simultaneously left L). Here B = 0.5, so no breakpoints have been
missed, and B3 = B̄ = 1.5. At the next iteration with B = 1.5 +  = 
1.51 we obtain (y1 , y2 , y3 ) = (1, 1, .005 ), L = ∅, U = {1, 2}, with Ri j ≤ 1 (26)
B = 1.5, B̄ = 3.5. Since the upper breakpoint has reached the limit j∈P

of the relevant range, the algorithm stops with the final set
of breakpoints Q = {0, 0.5, 1.5, 3.5}. Note that for each budgetary
range we have also computed the corresponding sets L, U. 
Since our intention is to use A(B) in a multi-facility setting, it
is useful to extend its range to below the lowest breakpoint B ∈ [0,
B1 ). Since for B < B1 , no facility can be located we set attractiveness
A(B ) = 0 for any B ∈ [0, B1 ).
5. Multi-facility GFLDP
In this section we show how the (SFDP) solution methodology
developed above can be applied to multi-facility (GFLDP) problem
Ri j ∈ {0, 1} i ∈ N, j ∈ P (27)
Here the binary decision variable Rij , i ∈ N, j ∈ P indicates whether
customer i ∈ N is captured by the new facility j ∈ P and M is a suf-

ficiently large constant (e.g., M = max j∈P α j k∈K ymax ). Constraint
k
(24) ensures that Ui cannot exceed the utility of the facility cap-
turing customer i (this constraint is inactive for all other facilities).
Constraint (26) ensures that at most one new facility can capture
customer i. Finally, constraint (25) ensures that capture only takes
place if the utility of the new facility is larger than the utility UiC
derived from the best facility (to represent strict inequality we can
38 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43

simply add a small ε > 0 to the right-hand side and convert in- vi (u ) ≤ vφi (u ) ≤ (1 + φ )vi (u ) for u ∈ [umin , umax ],
equality to ≥ form). Observe that if A j (B j )gi j < UiC for all j ∈ P, then φ
the only feasible solution is Ri j = 0, j ∈ P with Ui = 0. On the other ui (b ) ≤ ui (b ) ≤ (1 + φ )ui (b ) for all b ∈ [0, B]n .
hand, if A j (B j )gi j ≥ UiC for some j, then the capturing facility will φ φ
Then for all i ∈ N and b ∈ [0, B]n , we have vi (ui (b )) ≤ vi (ui (b )) ≤
be the one for which the utility Aj (Bj )gij is maximized - since the
objective function is increasing in Ui .
(1 +  )vi (ui (b )), and
 φ
We note that formulation (GFLDP-M) has significantly more z(b ) ≤ z (b ) := vi (uφi (b )) ≤ (1 +  )z(b ).
binary decision variables than (GFLDP-A) - this is in typical for i∈N
full-capture models where it is important to know which facility
Thus z (b) is a piece-wise linear  −approximator of z(b) for b ∈ [0,
provides service to the customer, not just whether the customer is
B]n .
served or not.
Formulations (GFLDP-A) and (GFLDP-M) are mixed integer pro- The previous result allows us to develop linearized versions
grams with non-linearities in both the objective and the con- of (GDFLP-A) and (GDFLP-M) formulations as √ follows. First, for a
straints. As all non-linearities involve concave functions (when specified maximum error  > 0, we let φ = 1 +  − 1, and apply
Assumption 2 holds), these models fall within the class of con- φ
the TLA procedure to obtain piece-wise linear approximator A j (B )
vex mixed-integer non-linear programs, see Bonami, Kilin, and Lin-
for every j ∈ P. Suppose this approximator consists of r(j) linear
deroth (2011). In the next section we exploit the special structure
segments with lengths rA, j , r = 1, . . . , r ( j ), and slopes h1A, j > h2A, j >
of these models to develop an efficient solution approach based on
r( j)
obtaining linear MIPs that approximate the models above to within . . . > hA, j . It is not hard to show that constraints (22) can now be
the pre-specified error bounds. replaced with the following set of constraints:
r( j)

5.1. Generalized TLA approach B j = f jx j + rA, j QA,
r
j, j∈P (29)
r=1
Our approach is based on the Tangent Line Approximation (TLA)
developed by Aboolian et al. (2007b), which develops an “approx- r
QA, j ≤ x j, j ∈ P, r ∈ {1, . . . , r ( j )} (30)
imation scheme” (i.e., approximates the optimal solution of the
original model to the error tolerance specified by the user) for a
 
class of concave non-linear integer programs. The main idea is to r( j)
φ

approximate the non-linear terms in the objective by a piece-wise Ui j = gi j A j ( f j )x j + rA, j hrA, j QA,
r
j , i ∈ N, j ∈ P (31)
linear over-approximator. The most relevant result from Aboolian r=1
et al. (2007b) is summarized below.
 φ
 Ui = Ui j , i∈N (32)
Theorem 3. Consider z(u ) = i∈N wi v(ui ), where v(ui ) ≥ 0 is a
concave, non-decreasing function of ui ∈ [umin , umax ] for i ∈ N and j∈P

0 ≤ umin < umax are constants. Then

1. For a specified  > 0 the TLA algorithm computes a concave φ
r
QA, j ≥ 0, Ui j ≥ 0, j ∈ P, r ∈ {1, . . . , r ( j )} (33)
piece-wise linear function v (u ), u ∈ [umin , umax ] such that
φ
Constraint (31) defines the approximate value Ui j of the utility
v(u ) ≤ v (u ) ≤ (1 +  )v(u ) for all u ∈ [umin , umax ], (28)
term, which replace decision variables Uij in the original formu-
and the number of linear segments in v is minimal for all piece-wise lation. The approximate customer-level utility Ui is given by (32).
linear functions satisfying the inequality above. To linearize the objective function of (GFLDP-A) we apply the

2. Inequality z(u ) ≤ z (u ) := i∈N v (ui ) ≤ (1 +  )z(u ) holds for same process to each term Vi (U) for i ∈ N. Suppose the piece-wise
φ
all u ∈ [umin , umax ]n . Note that z (u) is a piece-wise linear function. linear approximator Vi (U ) consists of ρ (i) linear segments with
computable in O(n/ ) time. lengths V,i r , r = 1, . . . , ρ (i ), and non-increasing slopes hr , r =
V,i
1, . . . , ρ (i ). Proceeding as before, we can replace the non-linear ob-
A direct application of Theorem 3 is insufficient to linearize the jective function (19) with the linear objective and the following
models (GFLDP-A) and (GFLDP-M): while we obtain piece-wise lin- set of constraints (this discussion is summarized in Corollary 1 be-
ear objectives, non-linearities remain in the constraints as each low):
Ui is itself a non-linear function of the budget variables Bj , j ∈ S.  φ
Observing that the terms Ui are expressible as linear functions of Z = wiVi , (34)
A(Bj ), j ∈ N, and that, by Theorem 2 (under Assumption 2), A(Bj ) is i∈N
a concave function of Bj for each j ∈ N, a natural idea is to apply
the TLA procedure iteratively: first to construct piece-wise linear ρ(i )

approximators A (Bj ), j ∈ N, yielding piece-wise linear Ui (B ), and Ui = r
V,i r
QV,i ,i ∈ N (35)
then to each Vi (U), i ∈ N. However, this “direct” approach may lead r=1
to violation of the specified error bound  for the piece-wise lin-
ear approximator of Vi (U) (since the argument is evaluated at Ui ρ(i )

φ r r r
instead of Ui ). The “correct” iterative generalization of the TLA is Vi = V,i hV,i QV,i ,i ∈ N (36)
developed below. r=1
√
Theorem 4. For a specified error tolerance  > 0, let φ = 1 +  −
 r
QV,i ∈ [0, 1] i ∈ N, r ∈ {1, . . . , ρ (i )} (37)
1, and consider z(b ) = i∈N vi (ui (b ) ). Suppose that for each i ∈ N,
vi (u ) ≥ 0 is a concave, non-decreasing function of u ∈ [umin , umax ], Corollary 1. Suppose A(B) is concave (i.e., part (3) of Theorem
and ui (b) is a non-decreasing function of b = (b1 , . . . , bn ), bi ∈ [0, B] 2 holds). For a given error tolerance  > 0 consider the Integer Pro-
with the range ui (b) ∈ [umin , umax ]. Suppose further that piece-wise gram (IP) with objective Z given by (34) and constraints (20),
φ φ
linear approximators vi and ui are available such that for all i ∈ N, (23),(29–33), (35–37). The optimal value of this IP approximates from
 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
above the optimal value of (GFLDP-A) with the maximum relative er-
ror of  .
To obtain a similar result for the full capture version of (GFLDP)
we only need to replace constraint (32) with
φ of facilities mmin , mmax that could be placed, and then, for m ∈
Ui ≤ (1 − yi j )M + Ui j , i ∈ N, j ∈ P
and use the formulation (GFLDP-M), leading to the following
result.
Corollary 2. Suppose A(B) is concave. For a given error tolerance
 > 0 consider the Integer Program (IP) with objective Z given by
(34) and constraints (20), (23),(25–27), (29–31), (38),(33), and (35–
37). The optimal value of this IP approximates from above the optimal
value of (GFLDP-M) with the maximum relative error of  .
A few remarks are in order with respect to these results. First,
in view of the discrete nature of the solution space, by setting
 small enough we can guarantee that the solution obtained by
our approximating IPs in the previous two corollaries yield ex-
act (rather than approximate) optimal solutions. However, this ap-
proach may be computationally expensive: the smaller the  , the
more linear segments are required in the TLA approximators for
Aj (B) and Vi (U), increasing the values of r(j), j ∈ P and ρ (i), i ∈ N,
which increases the dimensionality of the resulting IPs, which typ-
ically increases computation times. On the other hand, as previ-
ously observed in Aboolian et al. (2007b), the number of segments
in the TLA approximation tends to grow quite slowly with  , mak-
ing small values of the relative error  achievable for moderate-
size problems.
Second, after solving an approximate IP we can use the (x, B)
components of the solution to evaluate the objective value of cor-
responding (GFLDP-A) or (GFLDP-M) model. This yields a lower
bound on the optimal value, and, together with the approximat-
ing IP solution, an upper bound on the relative error. As observed
in our experimental results (reported in Section 6), this bound is
typically far below the value of  used in deriving the approxi-
mating IPs (note that  represents the worst-case relative errors).
Thus a relative desired error tolerance can typically be achieved
at a much higher value of  . in fact, we find that  = 5% typically
leads to optimal solutions for most instances. This is in line with
the computational results reported in (Aboolian √ et al., 2007b).
Third, while the same error tolerance φ = 1 +  − 1 was used
to derive TLA approximators of both Aj (B) and Vi (U) above, this
is not the only choice. In fact, any values φ 1 , φ 2 such that (1 +
φ1 )(1 + φ2 ) =  can be used in Theorem 4. Thus, if it turns out
that some non-linear components are substantially more difficult
to approximate than others, the tolerance levels could be increased
for “tougher” components and decreased for “easier” ones.
Finally, we observe that Assumption 2 provides sufficient con-
dition for Corollaries 1,2 above. When concavity of A(B) does not
hold, the TLA approach still yields a linear IPs that approximate
(GFLDP-A) and (GFLDP-M). However, the relative error bounds may
no longer be valid, and thus the resulting approach can be re-
garded as a heuristic.
6. Computational experiments
In this section we conduct a set of computational experiments
to solve the (GFLDP) via the techniques developed in the previous
sections. To evaluate the quality of the resulting solutions, we re-
quire a reasonable ”baseline” procedure. Since the goal of the cur-
rent paper is to develop algorithms for joint optimization of lo-
cation and design of the facilities in contrast to the “traditional”
approach where facility locations and design decisions are made
sequentially, we develop procedure ”HS” replicating this sequential
approach.
39
Algorithm HS first finds “good” locations via the m−median
model, and then determines the optimal design for each facility
using the single facility design problem (SFDP). It conducts an
exhaustive search over all feasible values of m: for a given bud-
get b, HS first determines the minimum and maximum number
(38)
{mmin , . . . , mmax }, solves an m-median problem to find facility lo-
cations that minimize customer travel. Next, a ”basic” facility is
opened at each location (if budget allows) and any leftover budget
is allocated to the open facilities in proportion to their intercepted
demand. Finally, an SFDP is solved for each open facility to deter-
mine the optimal design for the allocated budget. The procedure
is repeated for every possible value of m ∈ {mmin , . . . , mmax } and
the best solution is retained; please see Appendix for a detailed
description.
We note that HS sets a fairly high “baseline” level: both the
facility locations and the designs are determined via optimization
procedures; an exhaustive search is performed to determine the
best number of facilities to open. In fact, the resulting computa-
tional effort may well be higher than for the (GFLPDP) approach
developed in the previous sections. Indeed, the key difference be-
tween (HS) and (GFLDP) solutions is the sequential allocation of
“facility improvement” budget in the former and the joint alloca-
tion in the latter.
For our experiments we used a subset of networks from the
set of p-median test problems by Beasley (1990) with number of
nodes N ranging from 100 to 900; these instances provided the
network structure, as well as node weights. We also used the fol-
lowing functional forms:
• Demand function V (U ) = 1 − exp(−λU ), λ > 0.
• Distance function g(d ) = (1 + d )−β , β > 0.

• Utility aggregator UiA = j∈P Ui j .
6.1. Solving single-facility problem - computational experiments
Computational results for SFDP presented below compare the
optimal solutions (obtained via Algorithms 1) with those of the HS
algorithm. The following parameter values were used:
1. The number of design characteristics |K| was set to 3, 10, 100.
For each k ∈ K, the sensitivity parameter θ k in the attractiveness
formula (5) was randomly drawn from U[0, 1]. We fixed α j = 1, j ∈
N and ymax k
= 1, k ∈ K. Also C = ∅.
2. The costs ck were randomly drawn from U[1, 10] for each
k ∈ K. The budget was set to b = 7.5|K |. We set and the fixed costs
f j = (M∗ /M j )2.5|K | where M∗ and Mj are the values of the optimal
1−median solution and solution at j ∈ N, respectively, ensuring that
there is some budget for facility design at each location, but that
more attractive locations have higher fixed costs.
3. The distance sensitivities β were set to 1.5, 2, 2.5 and de-
mand sensitivities λ to .5, 1, 1.5.
Altogether, 271 instances were generated. Results can be found
on Table 6.1. Columns 3–5 contain the average run time (sec), the
average number of breakpoints of the A(B) function in Algorithm
2, and the average ratio of objective values of (HS), denoted by Zm ,
and of Algorithm 1, denoted by Zsfdp .
First, observe that SFDP solution is extremely fast. Second, the
number of breakpoints of the A(B) function appears to scale ap-
proximately linearly with the number of design characteristics. Fi-
nally, the average gap between (HS) and (SFDP) solutions is about
12%. Note that since both procedures are limited to 1 facility, this
difference is due to the fact that the SFDP solution first computes
the optimal design for each node, and then selects the best node-
design combination, while the HS selects 1−median as the facility
location and then optimizes the design for this location. Further
examination of results shows that this gap is strongly affected by β
40 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
Table 6.1
Computational results for SFDP model; β = 2.5, λ = .5 used for last column.
and λ; when β is high and λ is low, the gaps are quite large - this
is displayed in the last column of Table 6.1. This observation makes
sense: when both, strong distance sensitivity and demand elastic-
ity are present, separating location and design decisions may result
in optimality gaps of over 50%. These results demonstrate the im-
portance of jointly considering design and location decisions, even
in 1−facility settings.
6.2. Solving Multi-facility (GDFLP) - Computational experiments
The basic setup for the multi-facility experiments was similar
to the one used in the previous section, with the following adjust-
ments:
1. P-median Beasley set instances 1, 4 (n = 100 for both), and 7,
10 (n=200 for both) were used. The set of potential locations
was the node set N.
2. The number of competitive facilities |C| was set to 0, 1, 3,
5. The competitor was treated as a leader: we first solved
GFDLP (assuming no competition and same parameter val-
ues and budgetary constraints as for own facilities) to find
optimal locations and design for competitive facilities, then
fixed these facilities, and found optimal locations and de-
signs for own facilities.
3. We set the base attractiveness level α j = 1 for all j, the
number of design characteristics |K | = 3, and ymax k
= 1 for
k ∈ K. The values of θ k were drawn from U[10, 100] distribu-

tion and then rescaled to make sure k∈K θk = 1, to ensure
Assumption 2 holds.
4. The design improvement costs were set as follows: ck =

 f¯2(θk −1) , where f¯ = (1/n ) j∈N f j is the average fixed cost
and  is the “design cost parameter”. This cost structure en-
sures that (a) the characteristics with higher θ k values (i.e.,
having more impact on attractiveness) are also more expen-
sive to improve, and (b) design costs are scaled relative to to
fixed costs. The parameter  allows us to control the overall
cost of design improvements relative to fixed location costs;
we used  ∈ {0.1, . . . , 0.5}.
5. Budget b was calibrated to be approximately equal to the
cost of opening m “basic” facilities, where m was set to 5,
7, 10 for n = 100 and 10, 15, 20 for n = 200. This allows the
model to locate up to m basic facilities, or a smaller number
of improved facilities.
All GFLDP instances were solved using the iterated TLA ap-
proach described in Section 5 with  = 5% (we tested several val-
ues of  and this one seems to strike a good balance between solu-
tion quality and running times). All MIPs were solved using CPLEX
solver with the time limit set to one hour. If convergence was not
achieved within this time, the best found solution was used. The
final TLA values were used to compute GFLDP solutions. HS heuris-
tic solution was also obtained for every problem instance; we used
standard IP formulations to obtain m−median solutions and Algo-
rithm 1 to obtain optimal designs. Altogether, 4320 problem in-
stances were solved. We report a summary of key results below;
full results are available from authors upon request. Most obser-
vations reported below were confirmed with statistical analysis of
the results.
We start by analyzing runtimes (in seconds) for both GFLDP
and HS solutions on Tables 6.2(a)–(d). First, we observe from
Table 6.2(a) that the methodology developed above for GFLDP
leads to runtimes that are, on average, significantly smaller than
for the HS heuristic: while the difference is minor for n = 100 case,
it increases to nearly four times for n = 200 networks. This effect
was also verified on larger networks (results available on request).
We see that runtimes increase with the network size n and maxi-
mum number of facilities m for both GFLDP and HS. However, the
second parameter has much stronger impact on HS runtimes vs.
GFLDP.
Table 6.2 (b) shows that runtimes tend to decrease as the num-
ber of competitive facilities grows (again, the effect is stronger for
HS) - this is likely due to the fact that in the presence of many
competitive facilities, many potential locations can be quickly re-
jected as non-viable.
Statistical analysis of runtimes shows that one of the strongest
factors is the design cost parameter  ; its effect is illustrated on
6.2(c). This effect is intuitive: higher values of  make design im-
provements more costly, thus limiting feasible design options. On
the other hand, this parameter has no impact on HS runtimes: as
we saw in the preceding section, for a fixed location and budget,
finding optimal design is nearly instantaneous. Indeed, instances
with the lowest value of  were the only ones where average run-
times for HS were smaller than for GFLDP.
Table 6.2 (d) focuses on cases where iterated TLA could not find
an optimal solution to GFLDP within the 3600 second time limit.
These cases are labeled as “Current” in the “GFLDP Status” column;
there were 11 out of 2160 such instances for n = 100 case, and
164 out of 2160 instances for n = 200 case; all cases were solved
within the time limit by (HS). It can be seen that all of these cases
come from low  conditions - further confirming that relative cost
of facility design is a key determinant of the computational diffi-
culty of GDFLP instance. As we will see below, even when optimal-
ity cannot be established within the time limit, the quality of the
best-found solutions appears to be quite high.
Overall, we conclude that problems with n ≤ 200, m ≤ 20 can
typically be solved quite quickly using the iterated TLA approach;
quite often substantially faster than via the sequential (HS) proce-
dure (we do note that the latter can be speeded up by using more
efficient m−median algorithms).
 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43 41

Table 6.2
Analysis of runtimes (in sec) for GFLDP and HS.

Table 6.3
Analysis of the number of facilities in the optimal solution of GFLDP and HS algorithms.

Fig. 1. Analysis of HS Gap (the relative difference between HS and GFLDP solutions) with respect to model parameters.

We next turn our attention to solution quality, focusing on the
”HS gap” - the relative difference between the best solutions ob-
tained by GFLDP and HS for each problem instance; the results are
displayed on Fig. 1. While the average HS Gap is about 16%, there
is a wide level of variation, from 1% to over 40%. Statistical analy-
sis shows that the key drivers of this gap are design cost parame-
ter  , the demand elasticity λ, and distance sensitivity β (the lat-
ter two parameters were also identified in the previous section as
key drivers in the single-facility case). From Fig. 1 we see that the
largest determinant of the gap is  : for values of.5 (correspond-
ing to very costly design improvements), the gaps are quite small,
between 1% and 4%. On the other, when  = 0.1, gaps tend to be
42 R. Aboolian, O. Berman and D. Krass / European Journal of Operational Research 289 (2021) 31–43
quite large, exceeding 30% when coupled with low value of λ and
high value of β . It is interesting to note that some of the largest
gaps were observed for GFLDP instances which the iterated TLA
was not able to solve to optimality - recall that this occurs only
when the value of  is low. We conclude that there are signifi-
cant advantages of jointly optimizing design and location decisions
(GDFLP) vs. making these decisions sequentially (HS), particularly
when there are many feasible design options (low  conditions).
In Tables 6.3(a),(b) we explore the structural differences be-
tween GFLDP and HS solutions. Two measures are displayed: the
number of facilities opened by each algorithm, and the ratio of
total fixed costs to the available budget (i.e., the portion of the
available budget that was spent on location, rather than design
improvements). Here the differences between GFLDP and HS so-
lutions are quite dramatic: Table 6.3(a) shows that GFLDP locates
about 50% fewer facilities than HS (note that m is an upper bound
on the number of facilities for GFLDP but not for HS). The last
two columns of the table show that while GFLDP splits the avail-
able budget almost evenly between fixed location and design im-
provement costs, HS tends to spend 94% of the available budget
on the former. Table 6.3(b) shows that design cost parameter 
is the key determinant of the percentage of budget spent on lo-
cation vs. improvement for GFLDP, while it has almost no impact
on HS solution - thus even when opportunities for cost efficient
design improvements exist, HS algorithm cannot take advantage of
them. We conclude that optimization of location and design leads
to a smaller number of “improved” facilities, while sequential op-
timization leads to a large number of “basic” facilities.
7. Concluding remarks and directions for future research
In this paper we have developed a general GFLDP model that
allows us to represent a rich variety of location and design models,
including models with elastic demand, pre-existing competitive
facilities, all-or-nothing or proportional customer allocation mech-
anisms, and different design characteristics. We also develop an
efficient solution methodology for GFDLP which allows us to solve
medium-size problems (with several hundred potential facility
locations and up to 20 new facilities to be located) within rea-
sonable times; our results compare favorably to the computational
results for non-linear convex MIPs reported in Bonami et al. (2011).
The computational results also show that joint optimization of
location and design decisions may be quite important in practice
- separating design and location decisions, even in a reasonably
sophisticated way as represented by our HS heuristic, leads to
significant optimality gaps.
We close with a few comments on extensions of the model.
Perhaps the most obvious is changing the objective to profit
optimization instead of maximizing revenue for a given budget.
While making budget b a decision variable leads to no technical
difficulties at all (all of our methodological developments extend
to this version), the relative error guarantee of Theorem 4 no
longer holds: the iterated TLA approach, which bounds the relative
error of the revenue term, may lead to large relative error for the
optimal profit when the profit margins are slim. It would be nice
to develop an approach that provides guarantees on the overall
relative error for the profit-maximizing version of the GFLDP.
We also note that GFDLP assumes that all design improvement
decisions are continuous; in reality many design decisions may
be discrete (e.g., to offer a certain feature or not). While the
basic model easily extends to incorporate discrete values of Yk
variables, their presence obviously complicates the single-facility
problem (the closed-form knapsack solution is not available) and
the parametric analysis. When the number (and possible values)
of discrete characteristics is small, the GDFLP extension is easy
by (essentially) incorporating the structure of the scenario-based
model in Aboolian et al. (2007a); if this is not the case, new
solution methodology is required.
Another obvious (and difficult) extension is to focus on the
leader. As is the case for much of discrete-network competitive lo-
cation models, GFLDP essentially solves the follower’s problem in
a leader-follower game. The leader’s problem is more difficult (as
shown by Hendrix, 2016, Nash equilibria with both players active
in the market may not exist even when players are each limited to
one facility). We note a paper by Kochetov, Sokolova, Amirgaliyeva,
and Amirgaliyeva (2015) who, under the framework of Aboolian
et al., 2007b solve the leader’s problem by repeatedly alternating
leader and follower solutions until either a Nash equilibrium is
achieved or a previously observed location pattern reappears. An
extension of this approach to the GDFLP framework may be of in-
terest.
Supplementary material
Supplementary material associated with this article can be
found, in the online version, at doi:10.1016/j.ejor.2020.06.044.
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