Capacitated plant selection in a decentralized manufacturing environment: A bilevel optimization approach

Most facility selection and production planning approaches assume centralized decision making using monolithic models. In this paper, we address a capacitated plant selection problem in a decentralized manufacturing environment where the principal firm and the auxilary plants operate independently in an organizational hierarchy. A non-monolithic model is developed for plant selection in the decentralized decision making process. The developed model considers the independence relationship between the principal firm and the selected plants. It also takes into account the opportunity costs of over-setting production capacities in the opened plants. The developed mathematical programming model is a two-level nonlinear programming model with integer and continuous decision variables. It was transformed into an equivalent single level model, linearized and solved by available optimization software. Computational examples are presented.