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A Multicriteria Warehouse Location

Model*
by Gary I. Green**, Chang S. Kim** and Sang M. Lee**

Introduction
Determination of new warehouse locations is an important managerial decision. The
problem typically involves a number of considerations such as cost per distance of
distribution to and from the warehouse, volume of distribution, fixed and variable
site costs, service performance of the warehouse and potential increases in demand
(or service), as well as many other factors [8]. The economic significance of
warehouse location decisions is increasing, particularly due to expected increases in
transportation costs, competition for market share and changing demand patterns.
Location decisions for additional warehouse facilities have been dominated by extent of demand (volume) and transportation costs. Many authors have reviewed the
general location problem involving the basic criterion of minimising transportation
costs [3,4,5,20,23]. New facility sites would be selected based upon an organisation's
overall distribution requirements and cost per distance, as well as fixed facility costs
[12,19,27]. Distribution both to and from warehouses may be presumed to involve
significant costs, particularly in an environment where energy costs are expected to
rapidly increase.
Organisational policy also plays a predominant role in location decisions. Jucker
and Carlson [11] note that the behavioural characteristics of the firm are important
and should be included in determining locations. For example, a particular location
in a region may dominate all others in terms of best overall costs and ability to
satisfy demand requirements. Also a firm's attitude toward risk may play a significant role in location selection. Furthermore, customer service, supplier contracts
and potential customer needs should be seriously evaluated in location decisions [10,
25]. Location of new facilities and capacity decisons may also be dictated by an
organisation's strategy for decentralisation, particularly if it is providing service
[14].
This study was undertaken for two major purposes. First, a real-world warehouse
location problem for a restaurant equipment supply company considering expansion
needed a solution. The owner of the company had multiple objectives in locating
new warehouses but did not know how to incorporate them in analysis. Second, this
problem was formulated as an integer goal programming model. Thus, it could
demonstrate the practical application of a multiple criteria model to the warehouse
location problem.
* The original version of this paper was presented at the annual Academy of Management Conference,
Detroit, 1980.
** Department of Management, College of Business Administration, University of Nebraska-Lincoln.

6 | IJPD & MM 11, 1

The Location Problem and Applied Approaches

Extensive effort has been devoted to solving location problems employing a wide
range of methodology. Geoffrion [8], for example, includes decomposition, mixed
integer linear programming, simulation and heuristics that may be used in analysing
location problems. Most location problems formulated, either as static or dynamic
models, typically involve a single criterion function such as cost minimisation.
Static procedures utilised to analyse location problems do not account for decision outcomes of future time periods. Nevertheless, they have played a valuable role
in location analysis. Various forms of mathematical optimisation, heuristics and
stochastic methods have been applied to the general problem of locating facilities to
meet requirements at a minimum cost. Examples of application of mathematical
programming techniques abound. Baumol and Wolfe [3] solved the location problem for minimum total delivery cost with nonlinear programming. Love and Yerex
[20] utilised the linear programming format to minimise cost per distance in determining facility location. Kennington and Unger [12] employed the transportation
problem and methods of penalty in a structured integer programming formulation.
Meyer [22] utilised a mixed integer programming method based on a ratio of net
returns on assets as an objective for facility location.
Several have developed efficient heuristics and applied them to location problems.
Early work by Kuehn and Hamburger [15] has been greatly extended. Virgin and
Rogers [26] used a pattern search to locate facilities based on cost per distance.
Walker [27] employed a search procedure to evaluate extreme adjacent points in an
attempt to improve distribution costs. A branch and bound shortest route heuristic
based on cost per distance was applied by El-Shaieb [6]. Given the capacity constraints, Merchant [21] was able to solve the location problem with a modified
transportation method heuristic. Cooper [15] also demonstrated the applicability of
heuristics in location analysis. Minimisation of both production and transportation
costs while servicing demand was analysed by heuristics [1]. Halpern [9] defined a
dual objective function as minimising facilities distribution to customers and moving the furthest customer as near as possible.
Assumptions about costs (such as distribution, fixed charge, and so on) and
revenue (such as demand, pricing, etc) may be tested under conditions of uncertainty
with stochastic methods. Jucker and Carlson [11] demonstrated that, given identification of a firm's risk taking behaviour, the location problem could be solved by
incorporating uncertainty and decomposition as sub-problems. Harrison [10]
recently discussed his application of stochastic programming whereby the model
permits the analysis of a variety of alternatives that include distribution capacity,
customer demand patterns and unit delivery costs. Wesolowsky [29] reported
development of a method for including probability distribution of demand points as
well as a system of criterion weights assuming a multivariate normal distribution.
Dynamic considerations in location analysis are important and have been accounted for by several researchers. Relocation costs, possible expansion and changes
in customer locations over time are features that would require dynamic location
methodologies. Ballou [2] solved the warehouse location-relocation problem with
dynamic programming. Khumawala and Whybark [13] formulated a multiperiod
warehouse location problem using an implicit enumeration approach that included

Warehouse Location | 7

changing markets and costs from one period to the next. An incomplete dynamic
programming method was introduced by Erlenkotter [7]. Rosenthal, White, and
Young [24] combined the stochastic location of existing facilities with the dynamic
relocations of new and existing facilities. One may consider minimising present
worth of all costs if dynamic relocation of new facilities interacting with existing
facilities is permitted [24]. Wesolowsky and Trescott [28] dealt with dynamic
aspects of optimal plant location and relocation in response to changes in predicted
demand volume originating at different points. Their study also included costs of
vacating and entering sites with dynamic programming.
Several conclusions may be made from the above review of methodologies for
facilities location. First, the location problem becomes more complex if more
facilities, uncertainties and decision criteria are introduced. Single facility location
analysis based on minimum transportation costs with known demand will obviously
be a fairly easy task relative to multiple facility location analysis with multiple objectives and unknown demand. Second, there are numerous methodologies that may be
applied to location problems. Analysts should be aware of potential advantages versus costs in comparing available methodologies. Third, most methodologies employ
a single objective function: minimisation of total cost including transportation costs
and fixed costs. Finally, very little attention has been directed at resolving multiple
and perhaps competing objectives in solving location problems [17, 18]. Any
pragmatic methodology must include many issues other than cost per distance in
analysing facility locations.
The Problem
AJ Equipment and Supply Company of Lincoln, Nebraska, is a faimily-owned
wholesale distributor of food service equipment and supplies. The firm has grown to
be very successful due to its rapid account servicing and competitive pricing.
Management desires to expand to other cities in the midwest area where sales potential may exceed one million dollars per year and where there exist adequate ancillary
services and labour. Management at AJ selected 12 midwest cities (see Table I)
as possible sites for expansion based primarily upon population, competition density, geographical proximity to Lincoln and adequate services. The problem with
which management at AJ was confronted was the traditional problem of location
analysis: given several objectives, which locations would best satisfy overall requirements?
Management, during an interview, identified seven objectives for determining
new warehouse locations. These objectives (prioritised) were ranked in order of importance in the form of pre-emptive priorities as follows: Pj >>> Pj +1,which implies that Pj always takes priority over Pj+1 [16].
P1: Locate new warehouse facilities in cities where there was insufficient competitive saturation of the marketplace
P2 Limit the total fixed cost of new warehouses to $900,000
P3: Avoid warehouse proximity within a 200 mile radius
P4: If either Sioux Falls or Minneapolis were selected then both cities would be
required to have warehouses

8 | IJPD & MM 11, 1

Table I. Competition Density, Fixed Costs, Distance from the Home Office
and Capacity for Potential Warehouse Sites
Decision
Variables

1
2
3
4
5
6
7
8
9
10
11
12

Warehouse
Site

Salina
Topeka
Kansas City
Des Moines
Sioux Falls
Denver
Davenport
Oklahoma City
Tulsa
Springfield
Minneapolis
Grand Island

Competition
Density

85
438
165
275
63
155
50
77
298
90
120
74

Fixed
Distance
From the
Cost
Home Office (Square
(Miles)
Foot)*
$

180
160
210
190
210
490
410
410
350
440
330
120

14.00
14.00
14.50
16.00
13.50
17.00
16.00
13.50
14.00
13.50
15.50
13.00

Capacity
(Square
Feet)

Total
Fixed
Costs
(in
1,000s)
$

9,000
15,000
25,000
15,000
9,000
20,000
20,000
15,000
15,000
10,000
25,000
9,000

126
210
363
240
122
340
320
203
210
135
388
117

* This information was provided by Nebraska General Contractors, courtesy of Mr Cat Solem.

P5: Meet favoured customer service

P6: Locate no more than one warehouse outside a 400 mile radius of Lincoln
P7: Minimise transportation costs of distribution
Model Formulation
A zero one integer goal programming model (developed by Lee [16]) permits a
satisficing solution based upon prioritised objectives and identified constraints imposed upon the system. There are 12 decision variables for this particular case
represented by Xj as in Table I. If warehouse location Xj is selected then Xj = 1,
otherwise Xj = 0.
Model Constraints
The firm's multiple objectives involved in the warehouse location problem are
represented by the following goal constraints:
(1) Competition Density
First, competition density is a constraint that accounts for the relative ratio of
restaurants and bars to existing equipment and supply distributors for a given location. The model should be constrained to avoid locations with a low competition
density ratiolocations where current competitors have saturated the market. Each
competition density coefficient was obtained from reported restaurants/bars and
equipment supply distributors from each area. The right hand side value was based

Warehouse Location | 9

upon an estimated minimum cumulative competition density that would be deemed

favourable to AJ management, and d-1 should be minimised:
85X1 + 438X2 + 165 X3 + 275X4 + 63X5 + 155X6 + 50X7 + 77X8 + 298X9
+ 90X10 + 120X11 + 74X12 + d-1 d1+ = 750

(1)
(2) Fixed Costs
Available funding is a second major constraint. AJ could realistically obtain
approximately $900,000 for construction of new warehouse facilities. Total fixed
charges for each potential location differed because of construction costs and size of
facility. Table I indicates that size was related to population as well as AJ's assessment of potential growth, development and volume of expected business. The competition density of each location does not directly account for anticipated volume of
business. Fixed cost per square foot estimates assumed current prices (October 1979)
for a concrete warehouse on an industrial lot (land included). In the following total
fixed cost constraint function (in 1,000s), d2+ is to be minimised.
126X1 + 210 X2 + 363X3 + 240X4 + 122X5 + 340X5 + 320X 7 + 203X8 +
210ZX9 + 135X10 + 388X00 + 177X12 + d2- d2+ = 900
(2)
(3) Service Overlap
Management at AJ desires to avoid overlap of service between locations, while also
accounting for efficient use of sales staff. In order to meet these criteria it was decided that warehouses must be located a minimum of 200 miles apart. Following, are
the mutually exclusive locations representing the warehouse proximity constraints,
and d1+ is to be minimised.
X2 + X3 + d3- d3+ = 1 (Topeka and Kansas City)
(3)
Xl + X2 + d4- d4- = 1 (Salina and Topeka)
(4)
X8 + X9 + d5 + d5+ = 1 (Oklahoma City and Tulsa)
(5)
X4 + X11 + d6- d6+ = 1 (Des Moines and Davenport)
(6)
(4) Mutual Dependency
Management at AJ decided that if locations were selected in either South Dakota or
Minnesota then both states should have warehouses. This mutually dependent constraint represents expansion and requisite support for AJ's potential location in the
northern midwest area. AJ believes that it could benefit from such a shared distribution and market experience. Therefore, in the following mutually dependent constraint, d7+ is to be minimised.
X5 X11 + d7- d7+ = 0 (Sioux Falls and Minneapolis)
(7)
(5) Favoured Customer Service
Favoured customer service is a common practice of most organisations. AJ has extensive experience and familiarity with markets in both Kansas and Missouri. Due to
AJ's knowledge of business climates, competition and cultural values, it desires to
locate at least two new warehouses in Kansas and Missouri.
Xl + X2 + X3 + X10 + d8- d8+ = 2

(8)

10 | IJPD & MM 11, 1

(6) Distance from the Home Office

AJ management will service all locations from its current home office in Lincoln,
Nebraska, and will travel to AJ's future warehouse sites. It is desirable that potential
warehouses be located within one day's transportation time by highway
travel, or approximately within a 400 mile radius of Lincoln in order to avoid
geographical decentralisation. Thus, the goal constraint is formulated to limit only
one warehouse outside a 400 mile radius of Lincoln.
X6 + X7 + X8 + X10 + d9- d9+ = 1

(9)

(7) Distribution Costs

Obviously, AJ would desire to minimise transportation costs from the main facility
in Lincoln to each possible site (a constant 30 cents per mile is used). The right hand
side value was set at zero and d10+ is to be minimised. This is in fact a cost
minimisation process (in terms of mileage).
1.8X1 + 1.6X2 + 2.1X3 + 1.9X4 + 2.1X5 + 4.9X6 + 4.1X7 +
4.1X8 + 3.5X9 + 4.4X10 + 3.3X11 + 1.2X12 + d10- d10+ = 0

(10)

The objective function for the AJ's warehouse location problem can be formulated as follows:
Minimise Z = P1d1- + P2d2+ + P 3 d i

+ P4d7+ +
P5 d8- + P6d9+ + P7d10

Results and Discussion

A generalised integer goal programming methodology (IBRANCH) using a branch
and bound heuristic [16] produced an optimal solution that included three decision
variables: X2 (Topeka); X4 (Des Moines); and X10 (Springfield). All goals were fully
attained with the exception of P1 (minimising total transportation costs). Of course
it was expected that this goal would not be completely attained. The solution
resulted in a weekly cost of $237, assuming one trip per site per week at 30 cents per
mile (a total of 790 miles per week). Annual estimated distribution costs for servicing these selected sites on a weekly basis is $12,324. The total fixed costs for three
new warehouses amounted to $585,000. All deviational variables for this solution
were zero with the exception of the following:
d1+
d2d-5d10+

= 5 3 (over-achievement of competition density)

= $315,000 (under-utilisation of amount allocated for fixed cost)
= 1 (no selection in Oklahoma)
= 790 miles (total distance from main distributor to other warehouses)

Recommendations to A J to locate new warehouse facilities in Topeka, Des Moines

and Springfield, based on the results of this goal programming model, must be
ameliorated by further analysis. AJ would be well advised to conduct a detailed site
study of the suggested locations. For example, competition density differs

Warehouse Location | 11

significantly for the selected locations. Warehouse capacity was fixed at the
specified size (see Table I) but management may explore the impact of a change in
capacity. It might be possible that AJ could consider another expansion in a few
years and alternative sites might be evaluated from those sites that were not selected
in this study as well as other candidate cities. Another important aspect of this investigation is the assumption that AJ will distribute all items from its main location
in Lincoln. Other potential allocation schemes should be considered particularly
with respect to the selected cities. For example, drop-offs of factory shipments, partial orders versus higher inventory holding costs and so on could be evaluated.
Methodologically, integer goal programming would appear to offer valuable aid
to practising managers involved in the decision of warehouse locations. Many other
factors in addition to minimisation of total costs should be incorporated as
demonstrated in this paper. Obviously management must clearly identify both tangible and intangible objectives for the results to have credibility.
Based on the review of methodology available for solving location problems, it
would appear that extensive effort should be devoted to incorporating both the
dynamic and stochastic aspects of the problem. Chance-constrained goal programming would resolve the issue of assessing changes in demand patterns, transportation and fixed costs, and capacity. It would be of interest to test the concept of
dynamic goal programming especially for location problems. Perhaps development
of dynamic chance-constrained goal programming might take place but until such
time integer goal programming would appear to offer managers an opportunity to
include multiple and conflicting objectives in the determination of warehouse locations.
Conclusion
Warehouse location problems have been solved by a variety of methods. This paper
reviewed the location problem and many solution techniques, with two basic purposes: first, the resolution of an actual organisational warehouse location problem
for a restaurant equipment supply company; and second, the resolution of the problem by a method for including multiple and competing objectives in the determination of new locations. Integer goal programming model results based on information supplied by management of the firm studied indicated that three sites should be
selected.
Additional research should be conducted to determine the feasibility of dynamic
and stochastic features incorporated in a multiple objective study of location of
multiple facilities. Nonetheless, integer goal programming may indeed be applied to
the multiple warehouse location problem, as evidenced in this paper.
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12 | IJPD & MM 11, 1

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Warehouse Location | 13

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