Planning horizon results for the dynamic warehouse location problem
Authors: Kelly David L. , Marucheck Ann S. 
Published: October 2002

In the last decade, a number of models for the dynamic facility location problem have been proposed. The various models contain differing assumptions regarding the revenues and costs realized in the opening, operation, and closure of a facility as well as considering which of the facility sites are candidates for acquisition or disposal at the beginning of a time period. Since the problem becomes extremely large for practical applications, much of the research has been directed toward developing efficient solution techniques. Most of the models and solutions assume that the facilities will be disposed of at the end of the time horizon since distant future conditions usually can't be forecasted with any reasonable degree of accuracy. The problem with this approach is that the “optimal” solution is optimal for only one hypothesized post horizon facility configuration and may become nonoptimal under a different configuration. Post‐optimality analysis is needed to assure management that the “optimal” decision to open or close a facility at a given point in time won't prove to be “nonoptimal” when the planning horizon is extended or when design parameters in subsequent time periods change. If management has some guarantee that the decision to open or close a facility in a given time period won't change, it can safely direct attention to the accuracy of the design parameters within that time period.

This paper proposes a mixed integer linear programming model to determine which of a finite set of warehouse sites will be operating in each time period of a finite planning horizon. The model is general in the sense that it can reflect a number of acquisition alternatives—purchase, lease or rent. The principal assumptions of the model are: a) Warehouses are assumed to have infinite capacity in meeting customer demand, b) In each time period, any non‐operating warehouse is a candidate for becoming operational, and likewise any operating warehouse is a candidate for disposal, c) During a given time period, the fixed costs of becoming operational at a site are greater than the disposal value at that site to reflect the nonrecoverable costs involved in operating a warehouse. These costs are separate from the acquisition and liquidation values of the site. d) During a time period the operation of a warehouse incurs overhead and maintenance costs as well as a depreciation in the disposal value.

To solve the model, it is first simplified and a partial optimal solution is obtained by the iterative examination by both lower and upper bounds on the savings realized if a site is opened in a given time period. An attempt is made to fix each warehouse open or closed in each time period. The bounds are based on the delta and omega tests proposed by Efroymson and Ray (1966) and Khumawala (1972) with adjustment for changes in the value of the warehouse between the beginning and end of a time period. A complete optimal solution is obtained by solving the reduced model with Benders' decomposition procedure. The optimal solution is then tested to determine which time periods contain “tentative” decisions that may be affected by post horizon data by analyzing the relationship between the lower (or upper) bounds used in the model simplification time period. If the warehouse decisions made in a time period satisfy these relationships and are thus unaffected by data changes in subsequent time periods, then the decisions made in earlier time periods will also be unaffected by future changes.