Location and Layout Decisions

Location and Layout Decisions
• Assignment model
• Covering problem
• 1-Median problem
• P-Median problem
• Fixed charge problem
• Fixed charge problem with dedicated facilities
• Supply chain - Location and allocation and in multiple stages
• Supply chain - Multiple locations and dedicated supply
• Facilities layout
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Location and Layout Decisions
• Location decisions are about locating factories, warehouses and distribution centres.
• Layout decisions are about relative allocation of facilities in a given location.
• Location decisions can be classified into:
1. Qualitative decisions
2. Quantitative decisions
2
Source: Srinivasan (2018)
Qualitative decisions
Qualitative factors that influence location decisions are:

1. Nearness to customer
2. Nearness to raw material
3. Nearness to seaport
4. Nearness to labor availability
5. Policies of the government
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1. Assignment model
We consider the cost of assigning facilities to sites where there is a fixed cost of setting up facilities
in chosen sites. There are an equal number of facilities (factories) and sites and also there is a cost
setting up factory in site . Each factory is assigned to one site and each site gets only one factory.
Subject to
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Example
Consider the problem of assigning four factories to four sites. The cost of assignment (in
crores) is given in table below. Find the optimal assignment that minimizes the total cost. If
the capacities are 800, 600, 400 and 200 and the requirement is to create factories to get a
minimum capacity of 1200, find the number of factories and the assignments.
Site 1 Site 2 Site 3 Site 4

Factory 1 827 645 483 701
Factory 2 757 688 504 666
Factory 3 985 723 550 700
Factory 4 823 757 613 825
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1. Assignment model
Now, constraints change to:
Additional constraint:
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2. Covering problem
• We consider a set of retailers (or demand points) and factories have to be located in some
of these points. All the points are not connected to each other. The problem is to create
minimum number of facilities such that it is possible to meet the demand which means
that every point either has a facility assigned or is connected to at least one point that has
a facility.
• Let if a facility is located in node . The objective is to
• For each arc, we have and .
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2. Covering problem
Consider 8 points where demand for a product is to be met. The connectivity among the
points is given by 1-3, 1-5, 1-6, 1-8, 2-3, 2-4, 2-7, 2-8, 3-5, 3-7, 4-5, 4-6, 4-8, 5-7, 5-8, 6-8,
7-8. Find the minimum number of factories to be created to meet the demand of all the
points.
2 3
4
1
8
6
7
11
12
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3. 1-Median model
• We assume that there are retail points and all the points are connected to all other points.
The distance between points and is . The objective is to locate a single facility which can
meet the demand of all the points such that the distance travelled is minimized.
• The factory is located in a point such that
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3. 1-Median model
Consider 6 points with the distance given in table below:
1 2 3 4 5 6
1 - 20 18 14 16 12
2 20 - 22 18 30 26
3 18 22 - 32 20 22
4 14 18 32 - 20 22
5 16 30 20 20 - 30
6 12 26 22 22 30 -
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1 2 3 4 5 6 Total
1 - 20 18 14 16 12 80
2 20 - 22 18 30 26 116
3 18 22 - 32 20 22 114
4 14 18 32 - 20 22 106
5 16 30 20 20 - 30 116
6 12 26 22 22 30 - 112
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4. p-Median location models
The problem is to locate a fixed number of distribution centres from the eight demand points such
that the demand of the eight points is met from the three centres. Each demand point is assigned to
only one distribution centre. The distance of transportation between the demand points and the
distribution centres to which it is assigned is minimized. The distance between point and is and all
points are connected to each other.
2 3
4
1
8
6
Source: Srinivasan (2018) 7 17

Subject to:
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Consider six points whose distances are given in table below. Solve a p-median problem to
locate two facilities among these six points. Also solve a p-median problem to locate three
facilities among these six points.
1 2 3 4 5 6
1 - 20 18 14 16 12
2 20 - 22 18 30 26
3 18 22 - 32 20 22
4 14 18 32 - 20 22
5 16 30 20 20 - 30
6 12 26 22 22 30 -
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• The p-median formulation for 6 points and 2 medians (facilities) has 36 (=6 2) decision variables and
37 zero-one variables. The optimal solution is given by:
• Here points 1 and 2 act as medians where the plants have to be located. Points 3, 4, 5 and 6 are
attached to median 1.
• The p-median formulation for 5 points and 3 medians (facilities) has 36 decision variables and 37
zero-one variables. The optimal solution is given by:
• Since median 2 and 5 do not attract any point, we may not eventually create a facility there. A p-
median problem with two medians is more appropriate.
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5. Fixed charge problem - Location allocation problem
We show eight demand points and three potential locations for factories (or warehouses). In
general, we may have demand points and potential location. There is a fixed cost of
locating a facility in site . There is a capacity if a facility is located in site . There is a
demand in point and there is a transportation cost of between and .
4
2
1
5
1
2 7
3
3 6 8
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Subject to:
Transportation
Fixed cost
cost
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4
The fixed costs of locating facilities in the three potential location 2
1
are as follows: 5
1
1. Location 1: $5,000,000
2. Location 2: $4,000,000 7
2
3. Location 3: $5,500,000 3
The capacities of the three locations are 1,000,000; 800,000 and
1,250,000. The demand at the eight demand points are 200,000 for 8
the first-four points and 250,000 for the remaining points. The unit 3 6
transportation costs are given in table below:
D1 D2 D3 D4 D5 D6 D7 D8
Location 1 4 5 5 4 4 4.2 3.3 5
Location 2 2.5 3.5 4.5 3 2.2 4 2.6 5
Location 3 2 4 5 2.5 2.6 3.8 2.9 5.5
Solve the fixed charge problem assuming that all demand points are
connected to all the facilities. Also, solve considering only those
connections shown in above figure.
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24
25
26
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6. Fixed charge with dedicated facilities
• In the above formulation, we have assumed that the demand of a customer can be met from more
than one created facility.
• We can consider situations where all the demands of a customer can be met from a single facility.
The formulation becomes slightly different.
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The formulation where all the demands are met from a single facility is as follows:
Subject to:
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30
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7. Supply chain - Location and allocation and in multiple stages
We consider a two-stage location-allocation problem. We assume that the products are made in
factories, transported to warehouses from which they are transported to the customers. A typical
supply chain of 3 plants, 3 warehouses and 4 customers is shown in below figure:
1 1 1
2
2 2
3
3 3 4
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Each plant has a capacity of . Each warehouse has a capacity of . There is a fixed cost of creating
and operating plant and a fixed cost of creating and operating warehouse . There is a unit
transportation cost between plant and warehouse and a unit transportation cost of between
warehouse and customer . The problem is to locate plants and warehouses and transport the product
such that the total cost of location and allocation is minimized.
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Subject to:
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Consider the two-stage network given in figure below. The unit cost of transportation from the plants
to the warehouses is given in the following table:
1 1 1
W1 W2 W3
Plant 1 4 5 4.5 2
Plant 2 3 3.6 4
2 2
3
Plant 3 4.2 5 4.5
3 3 4
The unit cost of transportation from the warehouses to the customers is given in table below:
C1 C2 C3 C4
Warehouse 1 2 1.8 2.2 3
Warehouse 2 4 3.8 3.2 3.6
Warehouse 3 2.4 2 2.3 2
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The capacities of the three potential plants are 3000, 2000 and 2600 units. The fixed costs for the
plants are $8000, $7000 and $9000 respectively. The capacities of the three potential warehouses are
2500, 2400 and 2000 units. The fixed costs for the warehouses are $5000, $6000 and $4000
respectively. The demands at the customer are 1000, 800, 1200 and 900 units.
Solve a two-stage location-allocation model to minimize the sum of fixed costs and the
transportation costs.
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37
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8. Supply chain - Multiple locations and dedicated supply
We may consider situations where all the demands of a customer can be met from a single
warehouse.
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Subject to:
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Consider the two-stage network given in figure below. The unit cost of transportation from the plants
to the warehouses is given in the following table:
1 1 1
W1 W2 W3
Plant 1 4 5 4.5 2
Plant 2 3 3.6 4
2 2
3
Plant 3 4.2 5 4.5
3 3 4
The unit cost of transportation from the warehouses to the customers is given in table below:
C1 C2 C3 C4
Warehouse 1 2 1.8 2.2 3
Warehouse 2 4 3.8 3.2 3.6
Warehouse 3 2.4 2 2.3 2
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The capacities of the three potential plants are 3000, 2000 and 2600 units. The fixed costs for the
plants are $8000, $7000 and $9000 respectively. The capacities of the three potential warehouses are
2500, 2400 and 2000 units. The fixed costs for the warehouses are $5000, $6000 and $4000
respectively. The demands at the customer are 1000, 800, 1200 and 900 units.
Apply the dedicated supply model to solve the above problem.
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A company transports two items from three factories (F1 to F3) to four distributors (D1 to D4) via warehouse
(W1 to W3). The factories produce 4000, 8000, 6000 units of item 1 and 6000, 7500 and 9000 units of item 2
per month. The requirement at the four retailers are 5000, 4000, 6000, 3000 units of item 1 and 6000, 3000,
7000, 6000 units of item 2 respectively. The company has the following alternatives:
a. Warehouse W1 that costs $300000 and has a capacity of 16000 units. The capacity can be increased up to
22000 at the rate of $30000 for every 1000 increase.
b. Warehouse W2 that costs $350000 and has capacity of 18000 units or costs $500000 for capacity of 25000
units.
c. Rent warehouse W3 costs at the rate of $50000 for every 1000 units stored. The maximum capacity that
can be rented is 20000.
The cost of transportation per unit is the same for both items and is given in table below:
F1 F2 F3 D1 D2 D3 D4
W1 4 6 7 12 10 8 11
W2 5 8 9 15 12 9 7.5
W3 7 5.5 10 8.5 10 12 9
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In addition there is inventory holding cost of $3/unit/month in W1, $2/unit/month in W2 and

$1/unit/month in W3. The demand and supply quantities are for one month and the expected
inventory is also is also for one month. The fixed costs are equivalent costs for one month.
The company would also like to have a warehouse capacity for 50000 units to take care of
fluctuations in the demand in the future months.
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The constraints:
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9. Facilities layout
• In facilities layout, we address the problem of relatively placing departments in a given total area.
• We have both qualitative and quantitative models for layout. Both types consider the load that
moves among the facilities and the distances the load has to travel. Minimizing the load distance
travelled is the most important objective in layout problems.
• The qualitative models start with a matrix where the user provides information on how much the
user wants two facilities to be closed to each other. This is given in the form of a matrix where the
entry represents the importance. The following letters are used representing various levels of
importance:
1. A = Absolutely essential
2. E = Essential
3. I = Important
4. O = Ordinary closeness desirable
5. U = Unimportant
6. X = Not to be placed next to each other
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9. Facilities layout
Consider the problem of relatively placing four departments (called 1 to 4). The matrix of closeness
is given in table below:
1 2 3 4
1 - O A I
2 - E E
3 - O
4 -
We are given that the area requirement for the four facilities are 240, 160, 260 and 140 square units.
An area of 40x20 is available.
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Location and Layout Decisions

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Location and Layout Decisions

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Location and Layout Decisions

Qualitative factors that influence location decisions are:

Site 1 Site 2 Site 3 Site 4

Now, constraints change to:

• For each arc, we have and .

Consider 6 points with the distance given in table below:

Source: Srinivasan (2018) 7 17

In addition there is inventory holding cost of $3/unit/month in W1, $2/unit/month in W2 and

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