Course: Supply Chain and Logistics Management

Lesson 2 – Location Theory

Prof. Dr. Ir. Francesco Viti
Chair of Transport Planning & Management
University of Luxembourg
Research Unit - Engineering
 Location theory

• Introduction
• Examples/ Interactive exercises
• Uncapacitated facility location: model and algorithm
• Capacitated facility location: model and ideas
• Distribution system design: model

2
 Sources

• Chapter 4 - Chopra
• Reference (in Moodle):
– Verter, Uncapacitated and Capacitated Facility Location
Problems. (Chap 2 of Foundation of Location Analysis)

3
 Facility Location Problems

Where to do things?

Long-term horizon (strategic level)

Planning and design of a system

Real life problems analyzed mostly from a mathematical

aspect

4
 Response Time – Facilities
• Firms that target customers who can tolerate a large response time
require few locations and can provide larger varieties (e.g. Amazon
vs. local bookstore)

5
Where inventory needs to be for a one week order response time - typical results --> 1 DC

Customer
DC

6
Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs

Customer
DC

7
Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs

Customer
DC

8
Where inventory needs to be for a next day order response time - typical results --> 13
DCs

Customer
DC

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Where inventory needs to be for a same day / next day order response time - typical
results --> 26 DCs

Customer
DC

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IKEA

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 The Cost-Response Time
Frontier

Local FG
Hi
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi

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 Inventory costs and facilities

Inventory
Costs

Number of facilities
13
 Transport costs & facilities

Transport
Costs

Number of facilities
14
 Facility costs and number of
facilities

Facility
Costs

Number of facilities
15
 Total Costs - Number of
Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

4-16 Number of Facilities 16

 Total Costs and response time
Response Time

Total Costs

Number of Facilities
4-17
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 Practical location factors
1. Raw materials
– Extraction mineral mines
2. Energy
– Oil plants, electricity farms
3. Working force
– Cheap work labour market
4. Size of the market
– Potential consumers
5. Transportation
– Accessibility
6. Specialisation (ex. Silicon Valley, Detroit)
– Know-how
– Sharing of facilities (e.g. shopping malls)
7. Macroeconomic factors
– Quotas, tariffs, and tax incentives, exchange rate and demand risk
8. Political factors
– Political stability
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Example: Airbus 380

19 19
Location theory

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 Layout problem
Layout problem (inside the point in space that describes the facility)
– place for production process
– interconnection with roads/waterways/railways: accessibility for inbound
goods and outbound goods
– plans of expansions/upgrades
– possibility to expand the facility or part of the facility to accommodate
the growth of the company

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 Assumptions (1)
Issues of problem formulation
• distance between facilities and clients single number
– facility locations and customer zones considered discrete points
– accessibility / mobility over a region simplified (e.g. road net)
• single-product assumption (aka single commodity)
– e.g. distribution of newspapers
• allocation of clients to facilities
– service customer from one depot or many?
– fraction of customers over a region assigned to one facility

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 Assumptions (2)
Issues of problem formulation
• single versus competing firms
– interaction with competitors: e.g. locating bank branches
• static, deterministic models
– demand known with certainty
– production/distribution costs fixed over a period (e.g. a year)
– aspect of time, changes in costs, behaviour of people neglected

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 Some simple example (1)

A couple is looking for a place to stay.

He works in Brussels, she works in Antwerp.
He has to work 4 days a week, she 5 days a week.

If they want to minimize their traveling cost, where should

they live?

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 Some simple examples (2)
• The president of Chile wants a harbour for the very
small Chilean fleet. Its role is a purely defensive one.
• Every part of the territorial waters should be reached
as quickly as possible, in the case of an emergency.

a) Where do you recommend the harbour should be

built?

b) What is the objective function you propose?

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 i Pi

Some simple examples (3)

8 0,55

In a building with 8 floors, people complain about 7

the fact that they have to wait too long in front of
the elevator. 6
One proposes to place the elevator at a strategic
location, to minimise the waiting time. 5 0,1
Chances for someone to call for the elevator on
a certain floor are given in the table. 4 0,15

3 0,1
• Determine the strategic location.
2 0,05

1 0,05
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 Some simple examples (4)
The air-conditioning of the buildings on the campus is
done using chilled water.
The water is centrally cooled in the “chiller plant” and
transported using pipes to the different buildings.
Every building is directly connected to the chiller plant.
The energy loss is proportional to the (distance)2
between the chiller plant – and the point of gravity of the
building.

Where do you advise to locate the chiller plant?

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 Some simple examples (4)

10 B

8 C
A

2 D

2 6 10 28
 Some simple examples (5)
Two salt depots have to be located along the highway
from D to C. Salt spreading has to be done in both
directions once using a truck with capacity c. The tours
start and end at the salt depots (closed tours).

Distance corresponding
with capacity c U-turns possible

Where would you locate the depots to minimise dead-

mileage? Determine all optimal locations.

29
 Some simple examples (6)
Where should we install a photocopier machine when
five divisions are making use of it?
Use Manhattan distances.

7
P.S.: The numbers next to the
5 different divisions give an indication
of the size of interaction between the
2 division and the photocopier.

30
 Some simple examples (7)
• A spider wishes to position itself in the optimal
location of its web (a rectangular isosceles triangle
with a hypothenuse of 40 cm along the x-axis).

What is the optimal “dwell-point” for

a) an euclidean spider
b) a Manhattan spider

(what is the objective function?)

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Uncapacitated facility location
problem

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 Uncapacitated facility location
problem
• Location problems so far had no fixed setup cost

 P-median problem

• Choose the location of facilities, such as industrial plants

or warehouses, to minimize the cost of satisfying demand
for some commodity

• When capacity limitations are not required, we have the

simple or uncapacitated facility location problem
(SFLP or UFLP problem)
33
Representation

Possible location for facility

Customer location 34
Representation

Possible location for facility

Customer location 35
Mathematical formulation

36
 Mathematical formulation
Variable costs Fixed costs

min  c
iI jJ
ij xij   f i yi
iI
Demand constraint (All
s.t. demand must be covered)

x
iI
ij 1 j Supply constraint (Supply
must cover demand)
yi  xij  0 i, j Facility exists or not

yi  {0,1} i Share of demand

0  xij  1 i, j
37
 Mathematical formulation
• In the UFLP problem the number of facilities that are open in an
optimal solution is not specified; it is determined by the solution.

• Sometimes the number of open facilities is an input parameter:

p

• the last constraints yields the p-median problem

y
iI
i p y
iI
i p

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Dual formulation

max v j
j J
s.t .
v j  w ij  cij i , j

 w ij  fi i
j J
w ij  0 i , j

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Dual ascent

40
Heuristic procedure

41
A small example

1 2 3 4 5 fix

1 10 20 60 30 20 50

2 30 10 70 80 20 60

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 A small example
Max  vj

s.t. v1-w1110
v1-w2130
v2-w1220
v2-w2210
v3-w1360
v3-w2370
v4-w1430
v4-w2480
v5-w1520
v5-w25 20
w11+w12+w13+w14+w15 50
w21+w22+w23+w24+w25 60

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 A small example
Max  vj

s.t. v1-w1110
v1-w2130
v2-w1220
v2-w2210
v3-w1360
v3-w2370
v4-w1430
v4-w2480
v5-w1520
v5-w25 20
w11+w12+w13+w14+w15 50
w21+w22+w23+w24+w25 60

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 A small example: iteration 1
v1 = 10, v2 = 10, v3 = 60, v4 = 30, v5 = 20

with all wij equal to 0

 vj = 130 (lower bound)

• Increasing some wij allows us to increase some vj and so our lower

bound
• e.g. increasing w11 by 20, v1 can increase also by 20 and both v1-wi1
 ci1 constraints are now binding, and the lower bound = 150

45
 A small example: iteration 2
• continuing this procedure, we find
v1 = 30, v2 = 20, v3 = 60, v4 = 60 and v5 = 20
with lower bound = 190.

• Based on the complementary slackness conditions one can find a

primal feasible solution:
y1= x11= x12 = x13= x14= x15 = 1

with total cost of 190, so the solution is an optimal one.

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The capacitated facility
location problem

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Formulations
m m n
min  f y   c x
i 1
i i
i 1 j 1
ij ij

s.t.
n

d
j 1
j ijx  capi yi i

x
i 1
ij 1 j

yi  {0, 1}, xij  0 i, j

or
yi , xij  {0, 1} i, j

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 Some examples
• In a developing country, between points A and B (see drawing),
four bridges will be constructed to facilitate the crossing over the
highway.
• At the moment, no pedestrian bridges exist and it has been
observed that pedestrians cross the highway mainly at points:
P1, P2, …, P10.

200 m
B
A

p1 p2 p3 p4 p5 p6 p7 p8 p9 p10

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 Some examples
• Per day the number of pedestrians are: 200, 800, 300, 700, 200, 900, 400,
200, 900, and 500.
• No pedestrian will make a detour of more than 2*400m (400m at each side
of the route) to cross such a highway.
• Between 2*200m and 2*400m, on average 50 % of the pedestrians will
make a detour to cross safely the highway.
• If the detour is less than 2*200m all pedestrians will use the bridge.

200 m
B
A

p1 p2 p3 p4 p5 p6 p7 p8 p9 p10

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 Some examples

a) Determine the location of the four bridges (is it possible to limit

the possible locations to points on a multiple of 200m from A ?
why ?)

b) Formulate the problem as a mathematical optimisation problem,

how would you characterise the problem ?

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 Iterative heuristics procedure
• We decide to open the cheapest (best) facility
• we assign in full the supply based on the demand
• we compute new residual demand
• we iterate until done

52
Distribution network design

53
 A distribution system design
problem
• location of plants?
• what should be produced where?
• stock, where, how many?
• suppliers?
• which products from where to where?

54
Demand Allocation

n supply points m demand points

c11 D1
K1 c12
c13
D2

K2 D3

D4
K3

D5

55
 A distribution system design
problem
• l: index for the plants, l = 1, …, L
• j: index for the possible warehouse location, j = 1, …, J
• i: index for the retailers, i = 1, …, I
• cljk: cost of shipping one unit of k from plant l to warehouse j
• djik: cost of shipping one unit of k from warehouse j to retailer I
• f j: fixed cost for warehouse j when in use

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 A distribution system design
problem
• vlk: supply of product k at plant l
• wik: demand for product k at retailer i
• sk: volume of one unit of product k
• qj: capacity (in volume) of a warehouse at site j
• yj: is the location variable, being one if a warehouse is located
at location j, 0 otherwise.
• uljk: is the amount of product k transported from plant l to
warehouse j
• xjik: is the variable indicating delivery of product k from
warehouse j to retailer i and, being 1 if this is the case, 0
otherwise.
• It is assumed that a retailer can be delivered from only one
warehouse.

57
A distribution system design
problem
L J K J I K J
min  c
l 1 j 1 k 1
u   d ijk wik x jik   f j y j
ljk ljk
j 1 i 1 k 1 j 1
J
s.t. x
j 1
jik 1 i, k

I K

 s w
i 1 k 1
k ik x jik  q j y j j
I L

w
i 1
ik x jik   uljk
l 1
j , k
J

u
j 1
ljk  vlk l , k

y
j 1
j w

y j , x jik  0, 1 j , i, k
uljk  0 l , j , k
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 A distribution system design
problem
• The objective function (1) minimises total transportation and
fixed costs.
• Constraints (2) are the demand constraints, while constraints (3)
are the capacity restrictions for the different warehouses.
• The balance constraints for the warehouses are represented by
constraints (4), while constraints (5) are the capacity constraints
for the different plants.
• Constraint (6) sets the number of warehouses to be chosen.
• Constraints (7) and (8) are the integrality and nonnegativity
constraints respectively.

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 Dell: Network Design in Europe

SC design decision #1: Where to do manufacturing?

SC design decision #2: Which market for which product?

60
 Dell: Network Design in Europe
SC design decision #1: Where to do manufacturing?

61
Dell: Network Design in Europe

$19
$31

$23

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 Example: Dell Facility Location

SC design decision #3: Which market for which product?

? ?
?

63
 Example: Dell Market Allocation

What are the decisions?

What are the constraints? 64
 Example: Dell Market Allocation

What are the decisions?

What are the constraints? 65
 Example: Dell Market
Allocation
• Constraints (Satisfy demand at each market)
– 0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France
– 0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany
– 0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy
– 0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain
– 0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK

Romenia Poland Ireland Demand

France 23 19 31 15,000
Germany 9 15 11 20,000
Italy 23 21 40 13,000
Spain 29 26 40 12,000
United Kingdom 33 36 20 19,000

66
 Example: Dell Market
Allocation
• Constraints (Capacity cannot be exceeded)
– 0  30,000
- XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK
– 0  30,000
- XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK
– 0  30,000
- XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK

Romenia Poland Ireland Demand

France 23 19 31 15,000
Germany 9 15 11 20,000
Italy 23 21 40 13,000
Spain 29 26 40 12,000
United Kingdom 33 36 20 19,000
Capacity 30,000 30,000 30,000
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 Summary
• Introduction
• Examples/ Interactive exercises
• Uncapacitated facility location
• Capacitated facility location
• Distribution network design

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