Reconfiguring a Multi-period Facility Model – An Empirical Test in a Dynamic Setting

Abstract

Facility location is an important problem faced by companies in many industries. Finding an optimal location for facilities and determining their size involves the consideration of many factors, including proximity to customers and suppliers, availability of skilled employees and support services, and cost-related factors, for example, construction or leasing costs, utility costs, taxes, availability of support services, and others. The demand of the surrounding region plays an important role in location decisions. A high population density may not necessarily cause a proportional demand for products or services. The demography of a region could dictate the demand for products, and this, in turn, affects a facility’s size and location. The location of a company’s competitors also affects the location of that company’s facilities. Another important aspect in facility location modeling is that many models focus on current demand and do not adequately consider future demand. However, while making location decisions in an industry in decline, carefully and accurately considering future demand is especially important, and the question in focus is whether to shrink or close down certain facilities with the objective of keeping a certain market share or maximizing profit, especially in a competitive environment. This paper develops a model which enables companies to select sites for their businesses according to their strategy. The model analyzes the strategic position of the company and forms a guideline for the decision. It investigates which facilities should be closed, (re)opened, shrunk, or expanded. If facilities are to shrink or expand, the model also determines their new capacities. It depicts the impact on market share and accounts for the costs of closure and reopening. A number of papers deal with location theory and its applications, but few have been written for modeling a competitive environment in the case of declining demand. Existing papers in this area of research are mostly static in nature, do not offer multi-period approaches, nor do they incorporate the behavior of competitors in the market. To demonstrate the validity of the model, it is first solved using a small problem set–three facilities, three demand locations, and three periods–in LINGO solver. To get a better understanding of the model’s behavior, several additional scenarios were constructed. First, the number of demand locations was extended to 10. Our findings show that the model presented provides an extension of existing facility location models that can be applied to a variety of location problems in commercial and industry sectors that need to make their decisions considering future periods and competitors. The developed heuristic shows multiple options for solving the problem, including their advantages and disadvantages, respectively. The Java code and LINGO fragments thus developed can be used to provide easy access to related problems.