BOHR International Journal of Operations Management Research and Practices

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.