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A Heuristic Programming Algorithm for Warehouse

Location
a b
Robert E. Shannon & James P. Ignizio
a
University of Alabama in Huntsville ,
b
Virginia Polytechnic Institute and State University ,
Published online: 09 Jul 2007.

To cite this article: Robert E. Shannon & James P. Ignizio (1970) A Heuristic Programming Algorithm for Warehouse Location,
A I I E Transactions, 2:4, 334-339, DOI: 10.1080/05695557008974773

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 A Heuristic Programming Algorithm
for Warehouse Location
ROBERT E. SHANNON, Senior Member, AIIE
University of Alabama in Huntsville
JAMES P. IGNIZIO
Virginia Polytechnic Institute and State University
Abstract: A new heuristic programming method of solving a
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particular type of warehouse location problem is presented.
The problem is to allocate K or less facilities to N possible
locations so as to service M demand centers at minimum cost.
The algorithm presented is suitable for hand calculation of
medium-size problems (50x50) or when computerized will
readily solve large-scale problems of the order of (600 X600);
i.e., 600 demand centers and 600 possible locations.
* * *
This article describes a new heuristic programming ap-
proach to the problem of selecting locations for ware-
houses in large-scale distribution networks in which the
maximum number of warehouses has been specified. One
industry-wide survey (26) indicated that physical dis-
tribution costs absorb between 10 and 25 percent of net
sales income. Thus, the reduction of distribution costs can
constitute a substantial cost saving area. Perhaps, of
equal importance in highly competitive marketing situa-
tions is the opportunity for improving customer service by
achieving a better position from which to offer the
customer what he wants, when he wants it (16). Other
components of the distribution system such as marketing
strategy, sales, customer service, and inventory manage-
ment are directly influenced by these decisions related to
the locations and sizes of warehouses.
Regional warehouses can serve a variety of functions in
the distribution system. Among these are reduction of
transportation costs by permitting bulk or quantity
shipments of goods from factory to warehouse and im-
provement of customer relations by reducing delivery
time, thereby permitting customers to reduce their inven-
tories. However, there are substantial costs associated
with the construction and operation of a regional ware-
house system. The problem of minimizing distribution
cost thus becomes one of balancing shipping against
warehousing costs. The objective is to locate and size the
warehouses and to determine which demand centers are
supplied from which warehouses so as to minimize overall
costs. The distribution costs to be considered are trans-
334 AIIE Tr
portation costs from factory to warehouse and from ware-
house to demand center, plus the cost of building and
operating the warehouses.
Several approaches have been proposed for attacking
the problem as discussed here, as well as for solving the
problem when the maximum number of warehouses is not
specified. Theoretically, a linear programming approach
using an all integer algorithm could be used to solve the
problem (I), (2). In practice, however, the size and non-
linearities involved are such that even small sample prob-
lems often involve so many variables and constraints that
they cannot be handled even by large-scale third-
generation computing equipment.
Analogue computer solutions have been proposed by
several investigators (4), (5), (9), (1I), (15). Although the
analogue approach allows the nonlinearities to be readily
handled, computing equipment characteristics again
present a severe limitation as to the size of the problem
which can be handled. Eilon and Deziel (9) note that to
solve a problem with m customers and n warehouses re-
quires approximately 4+2n+5m amplifiers. Thus, a
sample problem such as that solved by Kuehn and Ham-
burger (12) with 50 demand centers and 24 potential
warehouse sites would require approximately 302 ampli-
fiers, while the one discussed by Feldman (10) with 49
potential sites and 200 demand centers would require
1102 amplifiers.
Branch-and-bound techniques have also been proposed
(7), (S), (17), (IS), (22), (23) as well as dynamic pro-
gramming (6). Although these techniques work well for
medium-size problems, say of size (m X n = 50 X 200), they
become impractical for large-size studies. The only
realistic approaches suggested for analysis of practical
large-scale problems have either used approximation
(I), (2), (14) or heuristic algorithms (lo), (12), (13), (20),
(25)-
The definition of an algorithm generally used by math-
ematicians is that it is a systematic method for computa-
Volume I1 No. 4
 tion, i.e., one which can be taught to an intelligent clerk
or programmed on a computer. Simon (21) has referred
to heuristics as rules of thumb selected on the basis of
aiding in problem solving or contributing to a reduc-
tion in the average time spent in searching for a solution.
Making use of these definitions, a heuristic algorithm is
defined here as a problem-solving program, explicitly
stated, which utilizes certain common-sense principles or
devices to derive acceptable, although not necessarily
optimal solutions.
Heuristic techniques are most often used when the
problem is of such size and complexity that exact opti-
mizing algorithms are not available or not practical. The
heuristic approach seeks solutions based upon accepta-
bility characteristics rather than optimizing rules. It gives
explicit consideration to a number of factors (for ex-
ample, computer storage capacity and solution time) in
addition to the quality of the solution produced. In
addition, the evaluation of heuristic techniques is usually
done by inductive rather than deductive procedures.
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Specific heuristics are justified, not because they attain
a n analytically verifiable optimum solution, but, rather,
because experimentation has proven that they are use-
ful in practice (24).
The heuristic algorithm proposed in this article for
locating and sizing warehouses consists of two parts:
(1) The main program which picks warehouse locations
one a t a time until either the maximum number of loca-
tions have been chosen or until additional warehouses
would not decrease the total distribution network costs.
(2) The improvement check and elimination subrou-
tine which is designed to remove from solution those
locations chosen early which become uneconomical due
t o later choices.
PROBLEM FORMULATION
Several factors affect the way in which this problem is
treated. In most formulations of the problem, the num-
ber of potential warehouse sites is finite. Cooper ( 5 ) ,
however, has considered an infinite-site case, where the
set of feasible sites is a two-dimensional continuum and
where some of the various analogue models are appro-
priate. Another variation in problem formulation deals
with the treatment of the various costs; i.e., whether they
are fixed, linear or curvilinear. Most of the investigators
assume a fixed amount of potential sales for each demand
center, but Shenoy and Sifferd (20) have considered the
case where there is an inverse relationship between dis-
tance from the warehouse and market share at each de-
mand point.
The specific problem dealt with in this article is that of
locating and sizing a fixed number (K) of warehouses
from out of N possible locations. Consequently, the maxi-
mum number of warehouses is fixed and thus not a
decision variable as would be the case in the more general
December 1970 AIIE Transactions
formulation. This is the identical problem type as dis-
cussed previously by Curry and Skeith (6).
In order to demonstrate the key steps of the basic
algorithm and to expose the rationale behind them, a
formulation will be used which has already appeared in
the literature (6). Let M demand locations be considered,
each with a specified demand Qi per time period. It is
desired to place K warehouses in N possible locations
(K 6 N) and assign the demands to the warehouses such
that the total cost (quantity times distance traveled)
is minimized.
The following additional notations are used to formu-
late the mathematical model of the problem and in the
steps of the algorithm:
T = Total cost = (distance X demand)
Dd3= Distance from demand center i to location j
yj= {01ifif aa warehouse
warehouse is allocated to locationj
is not allocated to location j
1 if demand i is allocated to warehouse j
2i3=
{0 if demand i is not allocated to warehouse
j
A= ((ciaj)) =matrix (M XN) of cost coefficients
aij= Cost of supplying demand location i from ware-
house location j, thus aij= (DijXQi).
0 = ( j l when Yi=l, l ~ j 6 N ) .
The objective function to be minimized is then
Subject to the following three constraints :
Equation 2 insures that all demands are assigned to
some warehouse location. Each demand location is as-
signed to only one warehouse location, thus giving rise to
Equation 3, while Equation 4 sets the maximum number
of warehouses to be allocated.
STEPS OF THE ALGORITHM
As stated in the preceding section, a problem which
has already appeared in the literature will be used for
demonstration purposes. One of the problems that Curry
and Skeith (6) consider is that of finding a dynamic pro-
gramming solution to a problem where three warehouses
are to be allocated to four possible locations. The associ-
ated distances and demands are presented in Table 1.
The total demand from a demand center is to be met from
only one warehouse. However, more than one demand
335
 center can be assigned to the same warehouse. The
mathematical formulation of this problem was presented
in the preceding section.
For each column Ai where jee, calculate Sf
= CE1 min(ai,-aij*, 0). I
f S i < O for some j. then find
The steps of the algorithm are then as follows: min Xi. For this j, set Y, = 1 and place j in the next posi-
tion of 8 (see Table 4). (If all S i 2 0 , then this indicates
that additional warehouses will not reduce transportation
Establish the problem in matrix form, where for each costs. If this occurs the procedure is terminated as follows.
column vector Aj, the coefficients aij are the costs associ- Let R be the matrix with columns Aol, AO2, . . . , Aok,
ated with supplying demand i from source j (see Table 2). where k is the number of warehouses thus far selected.
Go to step 9.)

Table 1 : Distances and demands for the example problem

Facility Locations
L I I1 I11 IV
0
D C
E A 1 1 9 17 24
M T 2 10 2 8 15 171
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A I 3 16 8
N O 4 20 12
D N 5 24 16 10
S

Table 2 : Step 1
Remove the column vector with j E 9 (as selected in
Location I I1 I11 IV step 3). Replace A* with a new column vector A*, where
1 75 675 1,275 1,800 a;* = minjee ( a~ ] with i= 1, 2, . . . , M (see Table 5).
2 1,710 342 1,368 2,565 This step serves to indicate the results obtained with the
3 2,448 1,224 306 1,683 combination of warehouses thus far obtained.
4 2,740 1,644 548 685 If xE1Yj=2, repeat steps 3 and 4. Otherwise, pro-
5 19,320 12,880 8,050 805 ceed to step 5 .

Let k represent the number of warehouses thus far

selected. Thus, 8= (81, 02, . , B k ) . Let R be the matrix
STEP2 (SELECTION
OF FIRST LOCATION) with columns AB,, A B ~ ,. , Aok, A*. For each column
For each column vector Aj, calculate Ti= xE1
ad* of R, define E = t h e elimination effect. Then calculate
Select the column vector A, with the minimum Tias the
first location and designate i t A*. Set Y, = 1,place j in the
ordered set 8 (see Table 3).
Table 5 : Step 4

Location I
-
II I11
Best A*
Combination
Table 3 : Step 2
1 75 1,257 675
Location I I1 I11 IV(A*) 2 1,710 1,368 342
3 2,448 306 1,224
1 75 675 1,275 1,800 4 2,740 548 685
2 1,710 342 1,368 2,565 5 19,320 8,050 805
3 2,448 1,224 306 1,683 ---
4 2,740 1,644 548 685 Repeat of -600 - 1,058 Step 4
5 19,320 12,880 8,050 805 Step 3 -+

Ti 26,293 16,765 11,547 7,538 Note: Location 111 selected when Step 3 is repeated.

336 AIIE Transactions Volume I1 No. 4

 EA, =
..

z=1
1 min at,, - at*]
ZEB,l#~
for j = el, e,, . . , 0,
min {ao). See circled costs in Table 7.
Thus, for our example problem, the solution is to assign
demands 1and 2 to warehouse location 11,demands 3 and
(see Table 6). 4 to warehouse location 111, and demand 5 to warehouse
location IV. The total cost (distancexdemand) for this
. solution is the sum of the elements in the final column
vector A* or 2676. The solution is identical to that of
Table 6 : Combination improvement check-matrix R
Curry and Skeith (6).
Location IV I1 I11 A* The rationale or heuristics behind the algorithm are
-- fairly self-evident. The solution at the end of step 2 is
1 1,800 675 1,257 675 obviously the best answer if only one warehouse location
2 2,568 342 1,368 342
3 1,683 1,224 306 306 is chosen. The sum of the column vector A* at each step
4 685 1,644 548 548 is the value of T or the total cost at that stage. Steps 3 and
5 805 12,880 8,050 805 4 are merely calculating in a straightforward manner
Step 6 ---------
which of the remaining warehouse locations would im-
Elimi- prove the solution most if picked next. Steps 5 and 6 may
nation 7,245 1,608 1,055 -
Effect not be so readily apparent.
(EAJ)
Note: In Table 6 , column A* is formed from 0 =
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Table 7 : Assignment-Step 9
(IV, 11, I11 ] in the first repeat of Step 4.
Location IV I1 111 A*
-
1 1,800 1,257 675
2 2,568 1,368 342
If min EA,= E A ~proceed
~, to step 8. If not, remove the 3 1,683 1,224 306
Aj with min E Afrom
~ matrix R (i.e., from the solution), 4 685 1,644 548
remove j from 0. Set Y j= 0. Proceed to step 7. 5 12,880 8,050 805
STEP7 (FORMATION
OF IMPROVED BEST COMBINATION)
Solution 2,676
Construct a new column vector A*, where ai* Cost
-
=minigo (aij) with i = 1, 2, . - , M. Use this new A*
to replace the previous A* of step 4. Return to step 3.
As more and more warehouse locations are added to
STEPS (CHECK) the solution, it is possible for a location chosen earlier to
Determine if x:,
Y j = K . If not, return to step 3.
Otherwise, proceed to step 9.
no longer be significant to the combined solution. Step 5
serves to calculate the effect of eliminating a particular
chosen location from the solution. If the location with the
smallest elimination effect was one chosen earlier, there
From matrix R, find min(aii) for i=l, 2, . - , M is a chance that there is a better location at this stage.
and j= 01, 02, - . . , Oh. Assign demand i to be supplied We test this by eliminating it from the solution and
from warehouse j for those i and j corresponding to each choosing another location. If it was not insignificant or

Table 8 : Results
Number of Average Maximum Average Problems Method of
Problem Problems Time Error Error Solved Problem
Size Solved (Seconds) (Percent) (Percent) Without Error Generation
40 X 100 3 2.3 4 1.3 2 C
50 X50 6 1.9 3 0.5 3 C
28 X70 1 1.0 3.6 3.6 0 C
16 X34 1 0.3 0 0 1 C
20 X20 29 0.3 2.1 0.2 25 A=25, B = 4
15x15 54 0.2 1.9 0.2 44 A=48, B = 6
10 X 10 224 0.1 2.8 0.1 195 A=174, B = 5 0
-
Totals 318 4 percent 0 . 2 percent 270

December 1970 AIIE Transactions 337

 redundant, it will come back into the solution a t a later
iteration, and only one iteration computing time will have
been lost. This procedure is analogous to Kuehn and
Hamburger's "Bump and Shift" routine (12).
Because this is a heuristic algorithm, it is known that
an exact optimum is not guaranteed. Several hundred
problems of different sizes have been run and checked by
other exact techniques where feasible. In 85 percent of
the cases, an optimum solution was obtained, and in no
case has the error exceeded four percent. It should be
pointed out that, to date, no one has reported a truly
practical method for obtaining a guaranteed optimum for
large problems (larger than 50x200) with existing com-
puter equipment.
Table 8 represents the results thus far obtained with
this algorithm. The technique was programmed in
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FORTRAN and run on the Univac 1108 computer. At
present, the program is in a preliminary form, and should
be capable of being improved in both speed and scope.
Three problem types have been considered. Problem type
A has been generated by simply using random numbers as
matrix elements. A check on the heuristic results on type
A problems was made with a branch-and-bound program
developed in conjunction with the heuristic. Problem
type B was generated to simulate the more realistic prob-
lem by choosing cities and distances from maps. Again, the
branch-and-bound method was used to verify results.
Problem type C represents somewhat larger problems
that were generated with known solutions.
The heuristic algorithm presented in the preceding
section has several distinct advantages over previously
suggested procedures. The first of these advantages is its
simplicity. The only operations involved are addition
and subtraction. Knowledge of Lagrange multipliers,
dynamic programming, difference equations, and branch-
and-bound techniques is not required. Secondly, hand
solutions of reasonably large problems are feasible. The
solution of the example problem, including setting up the
problem, took seven minutes by hand. Medium-size prob-
lems (50 X50) have been solved in 30 to 40 minutes with
only a desk calculator. Thirdly, because it is an additive
algorithm, the solution time goes up linearly as problem
size increases, rather than exponentially as do most of the
other algorithms proposed. Fourthly, the nonlinear objec-
tive function, nonlinear constraints, and discrete (zero-
one) domains of the decision variables can be handled
with ease. Fifthly, the algorithm may be used to generate
a very good (and usually exact) initial solution which can
then be used as a starting point for other more elaborate
methods. Sixthly, the algorithm is general in nature and
can be used for solving a rather broad class of zero-one,
nonlinear covering (location-allocation) problems (19).
Seventhly, it is capable of providing a solution to prob-
338 AIIE Transactions
lems that are simply too large for any exact methods.
Finally, not only is a final solution calculated, but also,
in the process, the best solution for 1, 2, 3, .-
. , K-1,
and K warehouses. This is of interest if funds are avail-
able to build only a portion of the K warehouses initially,
and gives the priority ranking under which warehouses
should be added.
The method described here evolved from a study, the
initial purpose of which was to obtain an efficient and fast
method of generating an approximate, feasible solution
that could be used as a "starter" (i.e., a good starting
point) for exact methods. The heuristic method of this
article was the end result of this study. However, in test-
ing this heuristic, it was found that, not only was the
method fast and efficient, but it was also much more ac-
curate than might be expected. The method is in essence
a straightforward search technique with the additional
aspect of the elimination routine. The fact that the
method obtains such very good results for this type of
problem has not been explained, and is presently under
investigation.
In addition, the method is even more accurate for
realistic problems (type B) than the figure of 85 percent
given above for all types of problems. Where more
realistic data and problems were used, the method solved
57 out of 60 cases exactly and was in error less than one
percent on the remaining three cases. Efforts are now being
directed to programming the technique for large-scale
problems (600 to 800 possible locations and 600 to 800
demand centers).
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I
Origin," Management Sciences, Volume 16, No. 3, Novem- holds a B S E E from the University of A k r o n and a n M S E
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December 1970 AIIE Transactions 339