A logit-based model for facility placement planning in supply chain management

The facility placement in supply chain management entails suppliers and consumers along with the terminals in between for distributing commodities. This study seeks to find the best terminal placement by taking into consideration the costs for both transportation and terminal construction. We call this a supplier‐terminal‐consumer (STC) problem and show that the STC is an NP‐hard quadratic assignment problem. The NP‐hard problems in real‐size are proven to be intractable; hence, we develop a two‐fold heuristic method for solving the STC problems. First, we identify the commodity flow by using a logit‐based mathematical programming (Logit‐MP) methodology based on the demand for the commodity and the locations of the candidate‐terminals. We apply Logit‐MP in an iterative process and specify the maximum utilisation of the candidate‐terminals. Second, the best possible locations for the terminals are identified by analysing the utilisation rates in a geographic information system interface and using an interpolation method for converting the point‐based utilisation rates into spatial data. We present numerical results of a large‐size transportation case study for the city of Chicago where the commodity, terminals and consumers are interpreted as wheat, silos and bakeries, respectively.