1.

Facility location with economies of scale: literature review

1.1 Overview

The problem of Facility Location and Planning deals with the optimum distribution of one or

more facilities, given a set of customers at multiple locations who need to be serviced. Recently

this problem has achieved particular importance due to the development of large, distributed

supply chains that must remain flexible and react quickly to changing customer demands, while

at the same time maintaining low fixed facility costs. While the facility location problem is in

general NP-hard, a number of variants have been proposed, such as: restricted number of

facilities; opening cost associated with one or more facilities; facilities with or without capacity

constraints; and a variety of objective functions that need to be optimized. Some of the factors

that influence the location of facilities are: location of supply centers; potential market demand;

projected facility cost in terms of labor and raw material costs; transportation costs from various

facilities; response time from the facility; inventory maintenance cost; tax structure and

regulatory laws of the state or country in which the facilities are to be located; etc. An extensive

body of literature has studied many aspects of these variants, including classic ones such as the

multiple-source Weber problem and the P-median problem. Correspondingly, many different

approaches have been presented to solve these problems, involving the use of metaheuristics,

simulation and optimization methods. This review will review some of these problem variants

and their proposed solution methods.

1.2 Different types of Facility Location problems

Facility location problems were first shown to be NP-hard by Hansen and Mladenovic (1997),

who tried to minimize the total transportation cost while setting up p facilities in a set of L
locations and for a set of U locations of users. Also known as the P-median problem, the authors

proposed a class of Variable Neighborhood Search (VNS) heuristics and compared these with

another heuristics known as the Tabu search (originally proposed by Fred Glover in 1986). The

VNS algorithm considers a finite set of neighboring locations having k (k=1,..,kmax), so that

k(x) is the set of solutions in the kth neighborhood of x. for multiple neighborhoods, the

objectives usualy are: find out which k is to be used and how many; their search order; and the

search strategy to be used.

The simplest type of these problems is single facility location, some examples of which

are the location of a new warehouse, or a hospital in a city, or a classroom in a school, or a node

within a computer network. The more complex problem corresponds to location of multiple

facilities, in which there must be at least one link with each other between every new facility.

Another category is the Location Allocation problem, originally proposed by Cooper in 1963, in

which the new facilities locations must be optimized to service customers at minimum

transportation cost. On the other hand, the Quadratic Allocation Problem studies the case when

the facility cost is proportional to its distance from other facilities. The Covering Problem

specifies a critical coverage distance, Dc, the value of which determines whether or not a

customer will receive service from a particular facility. Perhaps the most important type of

facility location problem is the median problem, as mentioned above, and which can be either 1-

Median or P-Median. Two other variations are the Uncapacitated Facility Location Problem

(UFLP) and Capacitated Facility Location Problem (CFLP). In UFLP, the sum of fixed and

distributed costs is sought to be minimized for specified sets of facility locations and customer

locations, there being only a fixed cost. In CFLP, the same costs are sought to be minimized
under the same conditions as before, but with the added constraint that facilities also have

associated capacities (Eds. Farahani and Hekmatfar, 2009).

1.3 Mathematical Formulations of Facility Location problems

1.3.3 Capacitated FLP

Classical facility location models are usually of four types: analytical, which make several

simplifying assumptions; continuous problems, including the Weber type, which represent reality

geometrically and treat locations as continuous; network models consisting of links and nodes;

and discrete models, such as the N-median discrete problem or the uncapacitated problem in

which locations are treated as discrete.

The single facility location problem, also known as the Fermat-Weber problem, is the

simplest, and will be formulated first: it is one of locating a facility X* so as to minimize the

annual transportation cost f(x), defined as

() = (, )
=1

where i is the facility index, wi is the weight assigned to the i-th facility, ( , ) is distance

between facility i and a new one, and = ( , ) is the co-ordinated for the i-th facility.

Tragantalerngsak, Holt and Ronnqvist (2000) considered a capacitated single-source location

problem by implementing a Lagrangian brand and bound algorithm. They observed that the

Lagrangian relaxation technique could effectively solve most problems within a few seconds of

CPU time, except for the case where the randomness in the capacity considered was too high.
 The multi facility location problem is one of locating more than one facility to serve

multiple customers, so that the facilities are located optimally and the customers are also

assigned optimally (hence it is also known as the location allocation problem). One of the earliest

formulations of the problem was by Elzinga, Hearn and Randolph (1976), as a distance objective

function MiniMax task; for m given facilities, locate n new facilities such that their maximum

weighed distance is minimized:

1
= { [( )2 + ( )2 ]2 = 1, , ,

1
= 1, , ; [( )2 + ( )2 ]2 1 < < }

where represent weights between new and existing facilities, represent weights between

two new facilities and : ( , ) represent co-ordinates of existing facilities. In addition to the

above formulation, other variations exist, such as: discrete or continuous solving for the area;

MiniMax or MiniSum objective functions; rectangular, Euclidean, squared Euclidean or lp

distance; stochastic or deterministic parameters; etc. (Eds. Farahani and Hekmatfar, 2009). Not

all of the above variations have been studied in detail; many of the studies reported in literature

relax the NP-hard nature of the problem by using probabilistic assignments. For example, Iyigun

and Ben-Israel (2010) used the well-known iterative Weiszfeld technique for solving a multi-

facility location problem. They considered xi as customer locations, wi as their weighted

demands, and the problem of locating K facilities such that 1 < (N being the set of data

points). Customers were each assigned to a facility such that the weighted sum was minimized:


( , )
1 , 2 , ,
=1
where ck represents facility locations and represents the customer cluster at the k-th facility.

The problem is NP-hard in 1 < < , and the authors used the assumption that customers were

1
more likely to be assigned to closer facilities: ()(, ) = (),
1, , where x is

weighted by w and () represents a function independent of x. Another variant of the problem is

the existence of an exclusion zone, or barrier, where travel is not allowed for example

mountains, water bodies or other natural obstacles, or commercial zoning restrictions in urban

areas. While this problem was first studied by I. N. Katz and L. Cooper in 1981, using circular

barriers, a more general case of polyhedral barriers was investigated by Bischoff, Fleischmann

and Klamroth (2006) as a mixed integer optimization problem. While such barriers can also be

modeled by using region-wise fixed opening costs of the type

=1 ( ), Bischoff et al. used K

pairwise disjoint polyhedral barriers of the form 2

=1 , where the allowed zone

2
(where facilities can be set up and traversed) was defined by the function = (). They also

defined a path to be feasible if it did not intersect inside a barrier zone, and hence reformulated

the multi-Weber problem as follows:

( , )
=1 =1

= 1, = 1, ,
=1

{0,1}, = 1, , , = 1, ,

, = 1, ,
The authors showed the distances to be Euclidean, and developed a numerical method to solve

reasonably large problem sets within a reasonable amount of computation time. For example

they solved a well-known barrier location problem earlier introduced by Aneja and Parlar (1994),

in which 18 existing location facilites and 12 exclusion zones were considered. The co-ordinates

of existing facilities and extrema of the exlusion zones were both specified, and a problem set of

1-18 new facilities was considered. Figure 1A below shows the best locations and allocation

clusters obtained for the case N=3 (3 new facilities), while the 1B shows a graph of the lowest

objective function values as the number of new facilities being condiered increases (N=1-18):

Figure 1: A multi-facility problem solution set. (A) Location and cluster allocation for 3 new

facilities (B) lowest function values as new facilities considered increases, with and without

barrier zones. Source: Bischoff, Fleischmann and Klamroth (2006).

For larger facility location problems of 300 facilities and 300 customers, Avella, Boccia, Sforza

and Vasilev (2009) used a maximized Lagrangian relaxation method, followed by a branch and

cut algorithm to determine an upper limit to a CFLP. Considering a set of I facilities, J clients, dj
as the demand of the j-th client and fi as the fixed cost for the i-th new facility, they formulated

their objective function as

With the following constraints: each clients entire demand must be met; the demand to a facility

does not exceed its capacity ( ); and closed facilities do not serve clients.

The authors used their algorithm consisting of a relaxation, core selection and branch-and-cut on

the core set, on up to 2000 facilities and were able to solve the problems within a maximum time

of 8 minutes using a desktop computer.

In contrast to CFLPs, UFLPs have perhaps been studied more in literature, and they have

a variety of conditions. A general formulation for a static UFLP with a MiniSum objective

function is as follows:

() = min { + }

where the symbols have their previous meanings (Galvao 2004). Another type of UFLP is that of

dynamic location, which can be extended from the class of static allocation problems by

excluding fixed costs. An early study of an extension to this class of problems was conducted by

Warszawski (1973), who considered a combination of multi-commodity and multi-stage

(installation, maintenance and transportation costs) problem. A closely related formulation of the

objective function, due to Roy & Erlenkotter (1982), is as follows:

= min { + }

where fik denotes the sum of establishment and maintenance costs, and is the fixed cost incurred

for opening facility i during period k. A variety of algorithms have been suggested for solving

this problem, including dynamic programming, a combination of exact and heuristic phase in-

phase out algorithm, and a dual-based heuristic.

1.4 Practical Facility Location Problems

 References

1. Hansen, P. and Mladenovic, N. (1997) Variable Neighborhood Search for the P-median,

Location Science, 5, 207226.

2. Farahani, R. Z. and Hekmatfar, M. (2009). Facility Location Concepts, Models,

Algorithms and Case Studies. Berlin: Springer-Verlag.

3. Tragantalerngsak, S., Holt, J. and Ronnqvist, M. (2000). An exact method for the two-

echelon, single-source, capacitated facility location problem. European Journal of

Operational Research, 123, 473-489.

4. Elzinga, D. J., Hearn, D. W., Randolph, W. R. (1976). Minimax multifacility location

with euclidean distances. Transport Sci, 10(4), 321336.

5. Iyigun, C. and Ben-Israel, A. (2010). A generalized Weiszfeld method for the multi-

facility location problem. Operations Research Letters, 38, 207-214.

6. Bischoff, M., Fleischmann, T. and Klamroth, K. (2006). The Multi-Facility Location-

Allocation Problem with Polyhedral Barriers. Computers & Operations Research, 36(5),

1376-1392.

7. Aneja, Y. P. and Parlar, M. (1994). Algorithms for Weber facility location in the presence

of forbidden regions and/or barriers to travel. Transportation Science, 28, 1994.

8. Avella, P., Boccia, M., Sforza, A. and Vasilev, I. (2009). An effective heuristic for large-

scale capacitated facility location problems. Journal of Heuristics, 15(6), 597-615.

9. Galvo, R.D. (2004). Uncapacitated facility location problems: contributions. Pesquisa

Operacional, 24, 7-38.

10. Warszawski, A. (1973). Multi-dimensional location problems. Operational Research

Quarterly, 24, 165-179.

11. Roy, T. J. N. and Erlenkotter, D. (1982). A dual-based procedure for dynamic facility

location. Management Science, 28, 1091-1105.