1 FACILITY LOCATION

 Facility location
 Mathematical modelling
 Locating pure service organizations

Sources: [2] Nahmias, S, and Olsen, T. L., for math models

[1] Meredith, J. R., for locating service organizations

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
2

 The uncapacitated fixed-charge location problem chooses

facility locations in order to minimize the total cost of
 building the facilities (or renting/leasing the facilities)
and
 transporting goods from facilities to customers.

 The problem makes location decisions for a single echelon,

and the facilities in that echelon are assumed to serve
facilities in a downstream echelon, all of whose locations
are fixed.

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 This model is generic, and the two echelons may contain

other types of facilities: e.g.
 factories and warehouses;

 regional and local DCs;

 fire stations and houses.

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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Facilities (DCs) ??? Customers (fixed, known)

1 1
. .
. .

i j

. .
. .

n m

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 Each potential facility (say DC) location has a fixed cost that
represents building (or leasing) the facility; the fixed cost is
independent of the volume that passes through the DC.
 Transportation cost per unit of product shipped from a DC to
each customer.
 A single product (or a family of similar products).
 DCs have no capacity restrictions; any amount of product can
be handled by any DC.
 The problem: to choose facility (DC) locations to minimize the
fixed cost of building facilities plus the transportation cost to
transport product from DCs to customers, subject to constraints
requiring every customer to be served by some open DC.

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 So the key tradeoff in the problem is between
 Fixed cost and
 Transportation cost.
 We will try to find the right balance, and optimize both the number of
facilities, and their locations.
 Formulation
 Sets:
I= set of customers
J= set of potential facility locations
 Parameters:
hi = annual demand of customer i I
cij = cost to transport one unit of demand from facility j J
to customer i I
fj = fixed (annual) cost to open a facility at site j J
IE 323 Lecture Notes - 4 27/10/2022
 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 Decision variables:
xj = 1 if facility j is opened, 0 otherwise
yij = the fraction of customer i demand that is served by facility j

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 The problem is formulated as follows:

minimize f
jJ
j x j   hi cij yij
iI jJ
(1)

subject to y
jJ
ij 1 i  I (2)

yij  x j i  I, j  J (3)

x j  0,1 j  J (4)

yij  0 i  I, j  J (5)
IE 323 Lecture Notes - 4 27/10/2022
 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 The objective function (1) computes the total (fixed plus

transportation) cost.
 Constraints (2) require the full amount of every customer’s
demand to be assigned to one or more facilities.  assignment
constraints.
 Constraints (3) prohibit a customer from being assigned to a
facility that has not been opened.  linking constraints.
 Constraints (4) require the location (x) variables to be binary.
 Constraints (5) require the assignment (y) variables to be non-
negative.

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
uncapacitated fixed-charge facility location problem
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 Constraints (2) and (5) together ensure that 0 ≤ yij ≤ 1.

 In fact it is always optimal to assign each customer solely to its nearest
open facility. Why?
 Therefore there always exists an optimal solution in which yij{0,1} for all
i and j.  single sourcing (a customer is supplied from one facility only)
 Many firms insist on or strongly prefer such «single sourcing» solutions as
they make the management of the supply chain considerably simpler (and
lean).
 It is hence appropriate to think of yij as binary variables and to talk
about «the facility to which customer i is assigned».
 Another way to write constraints (3) is: y
iI
ij  I xj j  J (6).
 CPLEX or another IP solver can be used to solve this facility location
problem with 1000s of potential facility sites in a matter of minutes.
IE 323 Lecture Notes - 4 27/10/2022
 FACILITY LOCATION -
capacitated fixed-charge facility location problem
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 Capacitated version of the problem:

 In the uncapacitated problem, we assume that there are no
capacity restrictions on the facilities that will be opened. 
unrealistic assumption in practice?
 But the uncapacitated formulation can easily be modified to
account for capacity restrictions. The resulting problem is called
the capacitated fixed-charge location problem.
 Suppose vj is the maximum demand that can be served by
facility j per time period. Then the formulation is as follows:

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
capacitated fixed-charge facility location problem
12

 Capacitated version of the problem:

minimize f
jJ
j x j   hi cij yij
iI jJ

subject to y
jJ
ij 1 i  I

h y
iI
i ij  vj xj j  J  new constraint

yij  0 i  I, j  J

x j  0,1 j  J

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
capacitated fixed-charge facility location problem
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 Capacitated version of the problem:

 Generally the optimal solution to this capacitated facility
location problem will not have yij’s all 0 and 1 as in the
uncapacitated version. Why?
  some customers will receive product from more than one DC.
 But we can prohibit this from happening by requiring all yij’s to
be binary  single-sourcing constraint.
 The problem with single sourcing constraints is harder to solve.
Why?

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION - p-median problem
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 p-median problem :
 These problems are intended to find the median points among the
candidate points, so that the sum of costs (or distances only) can be
minimized.
 This cost depends on factors like distance between the demand node
and servicing facility node, and volume of demand.
 Examples: establishment of the public services including schools,
hospitals, firefighting, ambulance, technical audit stations of cars, etc.
 An additional constraint: p many facilities are to be established (in the
uncapacitated problem).
 Assuming that: the fixed costs are the same for each facility (fj = f, for
each j ɛ J) and equal to f p , hence can be omitted).
IE 323 Lecture Notes - 4 27/10/2022
 FACILITY LOCATION - p-median problem
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minimize  h c
iI jJ
i ij yij

subject to y
jJ
ij 1 i  I

x
jJ
j p

yij  x j i  I, j  J
x j  0,1 j  J
yij  0 i  I, j  J
IE 323 Lecture Notes - 4 27/10/2022
 FACILITY LOCATION -
locating pure service organizations
16

RECIPIENT TO FACILITY
 So to attract the same number of recipients

 Quadruple the size ~ halve the distance travelled

 All other factors then seem to be insignificant (price, quality ?)
 Again this type of relationship is known as a gravity method, drawing
nearby objects in.
 Consider the public services (health care facilities, libraries, schools).
Problem is more on choosing the measures of service: number of
recipients served (a surrogate measure), change in the recipient’s
condition (a benefit measure), quantity of services offered (a surrogate
measure), facility utilization, travel distance per visit.

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
locating pure service organizations
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FACILITY TO RECIPIENT
 Examples: fire, police, ambulance.

 Again how to measure service?

 number of recipients served

 Average wait time for service
 Value of property saved
 Number of service facilities ..

IE 323 Lecture Notes - 4 27/10/2022

 FACILITY LOCATION -
locating pure service organizations
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 Two general (extreme) cases encountered:

 High-density demand for a single station but with multiple vehicles
 Fire station, ambulance. Queueing theory applications.
 Widely distributed (sparse) demand for distributed multiple stations
 ATM, Post office.
 Results in these cases are basically the same.
 Significant dropoff in returns as more facilities are added to the
system  diminishing marginal returns
 Poorer service with the incremental approach to selecting additional
facility locations than a total relocation analysis of all facilities.

IE 323 Lecture Notes - 4 27/10/2022