Production, Manufacturing and Logistics

Capacitated plant selection in a decentralized

manufacturing environment: A bilevel optimization approach
Dong Cao, Mingyuan Chen
*
Department of Mechanical and Industrial Engineering, Concordia University, 1455 de Maisonneuve West, Montreal,
Quebec, Canada H3G 1M8
Received 25 February 2002; accepted 13 May 2004
Available online 3 August 2004
Abstract
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 rm and the auxiliary plants operate independently in an organizational hierarchy. A non-mono-
lithic model is developed for plant selection in the decentralized decision making process. The developed model consid-
ers the independence relationship between the principal rm and the selected plants. It also takes into account the
opportunity costs of over-setting production capacities in the opened plants. The developed mathematical program-
ming model is a two-level nonlinear programming model with integer and continuous decision variables. It was trans-
formed into an equivalent single level model, linearized and solved by available optimization software. Computational
examples are presented.
2004 Elsevier B.V. All rights reserved.
Keywords: Multiple criteria analysis; Two-level optimization; Mixed integer programming; Plant selection
1. Introduction
Manufacturing processes have become increasingly complicated since many manufactured products in
todays market are much more complex than those several decades ago. Many products are made of large
0377-2217/$ - see front matter 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejor.2004.05.016
*
Corresponding author. Tel.: +1 514 848 2424x3134; fax: +1 514 848 3175.
E-mail address: mychen@me.concordia.ca (M. Chen).
European Journal of Operational Research 169 (2006) 97110
www.elsevier.com/locate/ejor
number of mechanical, electrical and electronic components and are made from dierent materials. Very
often these components are manufactured by several plants belonging to the same or dierent companies.
The plants or companies supply the components to a large manufacturing company for subassembly or
nal assembly of the products. It is a common practice that the large manufacturing company, or the
principal rm, is associated with or operates several manufacturing plants at dierent locations. The
plants supplying components to the principal rm are normally constrained by their maximum produc-
tion capacities and economical production levels. Due to market changes, the principal rm needs to
make plant selection decisions from time to time in optimizing the companys overall productivity.
One of the important decisions is to open new plants or to close existing plants if they are subsidiaries
of the principal rm. If it decides to open new plants, it needs to determine which plants to open for pro-
duction within the plants capacities. This type of capacitated plant selection problems have been dis-
cussed by several researchers as found in recent literature. Diaz and Fernandez (2002) considered a
single source capacitated plant location problem to determine the plants to be opened and the clients
to be served by each opened plant subject to the plants capacity. A branch and price algorithm was
developed to solve the problem. Ghiani et al. (2002) introduced a capacitated plant location problem with
multiple facilities in the same site. Their research originated from a real-world application arising from
locating polling stations and assigning voters to the stations. Canel and Khumawala (2001) discussed a
facilities location problem at international level and provided a general framework to solve such prob-
lems. Jaramillo et al. (2002) used genetic algorithms to solve both un-capacitated and capacitated plant
location problems with xed charge costs. In many cases, solving the capacitated plant location problems
is to select one or more subsidiary plants from a larger number of candidate plants to minimize associated
xed cost and operational costs (Ghiani et al., 2002). Some researchers proposed monolithic models in
modeling and solving such problems. They implicitly assumed that each production facility in the supply
chain is willing to reveal its local constraints and parameters, and is ready to implement a centrally im-
posed solution. As pointed out in Ertogral and Wu (2000), such assumptions can be unrealistic, especially
when the associated production facilities are owned by other companies, or when the auxiliary facilities
have limited knowledge on the principal rms overall objectives. When the principal rm and the aux-
iliary production plants operate independently, monolithic plant selection models cannot be used to solve
plant selection problems. The inherent independence relationship in the hierarchical decision making
process cannot be captured by monolithic models. In this paper, we developed a non-monolithic model
to address capacitated plant selection problems in decentralized manufacturing environments. The prin-
cipal rm selects and opens the plants for production, but does not control the production activities in
the selected plants. We assume that there exists close business relationship or long term contracts between
the principal rm and the opened plants. Or the opened plants may simply be subsidiaries of the principal
rm. The principal rm selects the plants based on its overall business objectives. The selected plants
manage their activities to minimize their own production and operation costs in fullling the demand
from the principal rm. On the other hand, decision making at the principal rm level and at
the plant level are independent, cooperation between the selected plants may exist. The relative independ-
ence of the plants from the principal rm in the decision making process is a critical factor considered in
formulating the mathematical programming model in this paper. The proposed model is a two-level non-
linear programming model with mixed integer and continuous decision variables. In the next section, we
will present details of the model. In Section 3, the model is investigated and transformed into an equiv-
alent single-level nonlinear programming model. The nonlinear model is further linearized to become a
mixed integer programming model. It can then be solved by available optimization software. In Section
4, several numerical examples are presented to illustrate the proposed non-monolithic model for solving
the decentralized plant selection problems. These examples also demonstrate the dierences between mon-
olithic and non-monolithic models in solving such problems. Conclusions and future research in this area
are presented in Section 5.
98 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110
2. Problem description and model development
In this section, details of the capacitated plant selection problems are discussed followed by the proposed
two-level mathematical programming model for solving such problems.
2.1. The hierarchical decision making scheme
As mentioned in Section 1, monolithic models are not suitable for solving plant selection problems in
decentralized manufacturing environments since they do not consider the independence relationship be-
tween the principal rm and the associated plants. The hierarchical structure of the non-monolithic decision
making process considered in this research is shown in Fig. 1.
As can be seen in Fig. 1, the principal rm at the upper level selects the plants based on its overall business
considerations. These considerations are to minimize the cost to open the plants and the opportunity costs of
over-setting the production capacities of the opened plants. The opened plants at the lower level operate
independently to minimize their own production and operation costs. The principal rm may have full
knowledge on the plants goals and operation strategies while the selected plants may not have full insight
of the principal rms decision making considerations. The whole decision making process is nested since the
performance achievements depend on the decisions taken at dierent levels. At the upper level, the selection
criteria depend not only on the cost to open the plants, but also on the production capacities of the opened
plants. At the lower level, the decisions are to minimize the plants operation costs. Solving the capacitated
plant selection problem is to nd the optimal solution within such a decision making scheme. In this decision
making process, the principal rms objective can be optimized while the benets of the selected plants are
considered. This scheme realistically reects the independence relationship between the principal rm and
the selected plants of a wide range decentralized manufacturing systems. The plant selection problem can
be viewed as a two-level mathematical programming problem in game theory. Studies on two-level
Flow of Decision Information
Selected Plants Level
{Productions Related
Operational Cost}
Principal Firm Level
{
Plant Opening Cost +
Opportunity Cost for Over -
Setting Production Capacities}
Plant Selection
By the Principal
Firm (Design Decision)
Plants Production
Strategies
(Operational Decision)
Fig. 1. A hierarchical decision making scheme.
D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110 99
programming problems can be found in, for example, Bialas and Karwan (1984), Bard (1998), Vicente and
Calamai (1994), Sakawa et al. (2001) and Cao and Leung (2002). In game theory context, the principal rm is
the leader and the selected plants are the followers in the decision making process. Next we present the pro-
posed mathematical programming model to solve this type of problems.
2.2. A two-level optimization model
Before the mathematical programming model is presented, we rst give the denitions and notations to
be used in the model.
Parameters
m number of potential plants
n number of product types
p
i
opportunity cost for unused production capacity of plant i after it is opened
d
j
customer demand of product j
a
ij
capacity consumption ratio for processing product j in plant i
w
i
cost to use production capacity in plant i
Cap
i
available production capacity in plant i
IS
i
the group of products that can be produced in plant i
JS
j
the set of plants that can produce product j
R
ij
transportation cost for transferring product j from the principal rm to plant i
f
i
opening cost for plant i
Decision variables
x
ij
Non-negative continuous variable, corresponding to the fraction of demand of product j produced
in plant i, i =1, . . ., m, j 2IS
i
y
i
1 if plant i is selected and opened;
0 otherwise

With the above notations and denitions, the model for the capacitated plant selection problem is for-
mulated as below.
Model 1
min
y2S
xy
z
1

X
m
i1
f
i
y
i

X
m
i1
p
i
Cap
i
y
i

X
j2IS
i
d
j
a
ij
x
ij
!
1
s:t: min
x2S
xy
z
2

X
m
i1
w
i
X
j2IS
i
d
j
a
ij
x
ij
!

X
m
i1
X
j2IS
i
d
j
R
ij
x
ij
(
2
s:t:
X
i2JS
j
x
ij
1; j 1; . . . ; n; 3
X
j2IS
i
d
j
a
ij
x
ij
6Cap
i
y
i
; i 1; . . . ; m; 4
X
j2IS
i
x
ij
6ny
i
; i 1; . . . ; m; 5
x
ij
P0; y
i
2 f0; 1g; i 1; . . . ; m; j 2 IS
i
)
: 6
100 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110
In the above model, S
xy
in Eqs. (1) and (2) is the feasible region determined by Eqs. (3)(6). Eq. (1) is to
minimize the cost to open the plants and the cost related to the unused capacities of the selected plants. This
is the objective of the principal rm. The rst term in Eq. (1) is the xed charge cost. The second term is the
opportunity cost for extra production capacities of the selected plants. The objective function is decided by
both y
i
and x
ij
. The selection of y
i
is the direct decision of the principal rm. The determination of x
ij
is the
results of the selected plants operations. Eq. (2) is the objective function to minimize the total operation
cost of the selected plants. In this second objective function, the rst term is the cost related to production
capacity consumptions. The second term is transportation cost for shipping components or subassemblies
to the principal rm. Eq. (3) ensures that demand for each type product be satised. Eq. (4) presents the
opened plant production capacities. Eq. (5) means that no product can be produced if a plant is not se-
lected. Eq. (6) gives the binary constraints on plant selection variables and the non-negative constraints
on production quantities. The production quantities of product j produced in plant i are approximated
by d
j
x
ij
.
Model 1 is a two-level mixed integer nonlinear programming model. The principal rm, or the leader,
controls variables y
i
to optimize its objective function z
1
at the upper level. In this paper, we assume that
the selected plants cooperate with each other to minimize the total production cost in satisfying the produc-
tion requirement set by the principal rm. In the model proposed in Sakawa and Nishizaki (1999), it was
assumed that decision makers at dierent levels can coordinate their decisions. In our model, the cooper-
ation is assumed to exist between the selected plants at the lower level only. Similar models exist in practice
and have been summarized in literature. In a warehouse planning process (Miller, 2001), for example, the
facility selection (or design) and the activity planning can be done using a hierarchical planning methodol-
ogy. The hierarchical structure identies and integrates the functional relationships between the facility
selection level and the activity planning level. The facility selection decision is made at strategic level while
the decision variables at operational level are grouped into a hierarchical order. Such decision making
structure is the same as the one presented in this paper. In the model proposed in this paper, the two dif-
ferent objective functions at dierent levels explicitly represent the eventual conict between the strategic
and operational levels.
One may notice that this model does not t into a multi-attribute decision making model (Steuer, 1987).
The objective function of this model is not based on a mutually agreed criterion with compromised interests
between the principal rm and the opened plants. In the past twenty years, various models and solution
methods have been developed to solve this type of two-level mathematical programming problems (Bard
and Falk, 1982; Bard, 1998; White and Anandalingam, 1993; Wen and Huang, 1996). In theory, two-level
optimization problems are NP hard even in the simplest linear cases (Audet et al., 1997). In this research,
we investigate and utilize specic features of the plant selection problem to derive an equivalent single level
model. The linearized version of the single level model can be solved by available optimization software as
shown in the next section and in Section 4.
3. Model transformation and linearization
In this section, we rst transform the two-level optimization model into an equivalent single level model.
The nonlinear mixed integer programming problem is then linearized to be solved by available optimization
software. We rst present the two-level to one-level model transformation.
3.1. Model transformation
In Model 1, y
i
at the upper level are binary variables and x
ij
at the lower level are continuous variables.
These types of decision variables allow us to transform the two-level problem into an equivalent single level
D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110 101
model, if the decision making at the lower level partially cooperates with that at the upper level. Partial coop-
eration means that if there exist multiple optimal solutions at the lower level, the one favorable to the upper
level objective function will be chosen and implemented. This is a practical assumption since the production
costs associated with multiple optimal solutions are the same for the selected plants. From the study of two-
level decision making process in Bialas and Karwan (1984) and from the partial cooperation assumption, we
can transform Model 1, the two-level decision making model, into the following model.
Model 2
min
y
z
1

X
m
i1
f
i
y
i

X
m
i1
p
i
Cap
i
y
i

X
j2IS
i
d
j
a
ij
x
ij
y
!
7
s:t: y
i
2 S
xy
; 8
x
ij
y arg min
x2S
xy
z
2

X
m
i1
w
i
X
j2IS
i
d
j
a
ij
x
ij
!

X
m
i1
X
j2IS
i
d
j
R
ij
x
ij
; 9
where S
xy
is the feasible region formed by the constraints in Eqs. (3)(6).
With the partial cooperation assumption, both Model 1 and Model 2 are optimistic two-level optimiza-
tion models as discussed in Mallozzi and Morgan (1996) and in Cao and Leung (2002). Further, consider
the following single level nonlinear integer programming model.
Model 3
min
y;x;t;u;v
z
1

X
m
i1
f
i
y
i

X
m
i1
p
i
Cap
i
y
i

X
j2IS
i
d
j
a
ij
x
ij
!
10
s:t: y
i
; x
ij
2 S
xy
; 11
X
m
i1
w
i
X
j2IS
i
d
j
a
ij
x
ij
!

X
m
i1
X
j2IS
i
d
j
R
ij
x
ij
6
X
n
j1
t
j

X
m
i1
Cap
i
y
i
u
i
ny
i
v
i
; 12
t
j
d
j
a
ij
u
i
v
i
6w
i
d
j
a
ij
d
j
R
ij
; i 1; . . . ; m; j 2 IS
i
; 13
t
j
2 R
1
; v
i
60; u
i
60; i 1; . . . ; m; j 1; . . . ; n: 14
In this Model 3, t
j
, u
i
, v
i
are dual variables corresponding to Eqs. (3)(5) in Model 1 when decision variables
y
i
are xed at the upper level. The left hand side of Eq. (12) is the primal objective value of the selected
plants at the lower level. The right hand side of Eq. (12) is its dual objective value. This transformation
to Model 3 is similar to that presented in Bard (1998) in converting a bi-level optimization problem to a
nonlinear integer programming problem using KarushKuhnTucker conditions. For the single level opti-
mization problem presented in Model 3, we have the following conclusion.
Theorem 1. With the partial cooperation assumption, Model 3 is equivalent to Model 1.
Proof. With the partial cooperation assumption, the inequality constraint in Eq. (12) can be satised only
in the situation where the equality holds and when the dual gap vanishes. In this situation, x
ij
are the lower
level reaction decisions to optimize objective function z
2
when the upper level decision variables are xed by
the values of y
i
. Hence Model 3 is optimized with
x
ij
2 arg min
x2S
xy
z
2

X
m
i1
w
i
X
j2IS
i
d
j
a
ij
x
ij
!

X
m
i1
X
j2IS
i
d
j
R
ij
x
ij
:
102 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110
Therefore, Model 3 is equivalent to Model 2. Solving Model 3 is equivalent to solving the original two-level
problem Model 1 from the equivalence between Model 1 and Model 2. h
By Theorem 1, solving the plant selection problem in a decentralized environment is equivalent to solv-
ing the single objective nonlinear integer programming problem formulated in Model 3. The nonlinear
terms are those quadratic terms in Eq. (12). They are the products of continuous variables u
i
or v
i
with bin-
ary variables y
i
. These terms can be linearized as shown below.
3.2. Model linearization
The nonlinear terms Cap
i
y
i
u
i
+n y
i
v
i
in Eq. (12) of Model 3 can be linearized with added linear con-
straints. After these terms are linearized, the problem can easily be solved by available optimization soft-
ware. To linearize these terms we follow the procedure similar to that used in Chen (2001) and Fortuny and
McCarl (1981). Let
b
i
y
i
fCap
i
u
i
nv
i
g:
This implies that
b
i

Cap
i
u
i
nv
i
; if y
i
1;
0; if y
i
0:

Then Eq. (12) can be replaced by the following set of linear inequalities:
X
m
i1
w
i
X
j2IS
i
d
j
a
ij
x
ij
!

X
m
i1
X
j2IS
i
d
j
R
ij
x
ij
6
X
n
j1
t
j

X
m
i1
b
i
; 12:1
b
i
6Cap
i
u
i
nv
i
My
i
M; i 1; . . . ; m; 12:2
b
i
PCap
i
u
i
nv
i
; i 1; . . . ; m; 12:3
b
i
P My
i
; i 1; . . . ; m; 12:4
b
i
60; i 1; . . . ; m; 12:5
where in Eq. (12.2), M is a large positive number. Eqs. (12.2) and (12.3) enforce b
i
=Cap
i
u
i
+nv
i
when y
i
is
set to 1; Eqs. (12.4) and (12.5) make b
i
=0, when y
i
is set to 0. Eqs. (12.2) and (12.3) will have no eect on b
i
when y
i
is 0, since u
i
, v
i
6 0 and {Cap
i
u
i
+nv
i
} is always non-positive. Similarly, Eqs. (12.4) and (12.5) will
have no eect on b
i
when y
i
is 1. With the nonlinear constraint Eq. (12) replaced by Eqs. (12.1)(12.5), we
have the following approximate mixed integer programming model.
Model 4
min
y;x;t;u;v;b
z
1

X
m
i1
f
i
y
i

X
m
i1
p
i
Cap
i
y
i

X
j2IS
i
d
j
a
ij
x
ij
!
15
s:t: y
i
; x
ij
2 S
xy
; 16
X
m
i1
w
i
X
j2IS
i
d
j
a
ij
x
ij
!

X
m
i1
X
j2IS
i
d
j
R
ij
x
ij
6
X
n
j1
t
j

X
m
i1
b
i
; 17
b
i
6Cap
i
u
i
nv
i
My
i
M; i 1; . . . ; m; 18
b
i
PCap
i
u
i
nv
i
; i 1; . . . ; m; 19
b
i
P My
i
; i 1; . . . ; m; 20
t
j
d
j
a
ij
u
i
v
i
6w
i
d
j
a
ij
d
j
R
ij
; i 1; . . . ; m; j 2 IS
i
; 21
t
j
2 R
1
; b
i
; v
i
; u
i
60; i 1; . . . ; m; j 1; . . . ; n: 22
D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110 103
The following theorem states the relationship between Model 3 and Model 4.
Theorem 2. If Model 3 has feasible solutions, then there exists a positive number M

such that for any

MPM

, Model 4 has optimal solutions which are also optimal for Model 3.
Proof. It is only necessary to show that there exists a positive number M

such that the following equality

holds for any MPM

:
b
i

Cap
i
u
i
nv
i
; if y
i
1;
0; if y
i
0:

For any given decision variable set {y

i
,u
i
,v
i
} let
M

max
i1;...;m
fCap
i
u
i
nv
i
g 23
If y
i
=0, from Eq. (20) and the non-positivity requirement on b
i
, we have b
i
=0 for any M P M

. In fact,
when y
i
=0, setting M P M

enforces b
i
to be 0 while Eqs. (18)(20) always hold. If y
i
=1, setting
M P M

, enforces b
i
to be uniquely determined by Eqs. (18)(20) while Eq. (20) is automatically satised.
That is, b
i
=Cap
i
u
i
+n v
i
, when y
i
=1. Since the original problem expressed in Model 3 is assumed to have
optimal solutions, the feasible region of decision variable pair (u
i
,v
i
) is bounded. This means that M

dened in Eq. (23) is bounded from above. h

Theorem 2 presents important results in developing a suitable solution method to solve Model 3. From
the results of this theorem, for any M P M

, Model 4, the approximate model, becomes an exact model

for the original problem expressed in Model 3. Generally speaking, the feasibility of Model 4 cannot be
guaranteed due to the existence of the dual gap when duality principle is applied. However, Theorem 2
shows that the optimal solution of the original nonlinear programming problem can be obtained by solving
a linearized mixed integer programming problem with the parameter M set to a large number. The linea-
rized model becomes much easier to solve by available commercial software such as LINDO (Schrage,
1991) than the nonlinear model. Although NP hardness remains in solving the linearized model, optimal
solutions of practical problems can be reached within tolerable computational times. In the next section,
we present several example problems to illustrate the model and its computational features.
4. Numerical examples
In this section, ve numerical examples are presented to illustrate the proposed model for capacitated
plant selection in a decentralized decision making environment. These example problems are based on dif-
ferent types of relationship between the principal rm and the associated plants. They are presented to illus-
trate the two-level decision making process for plant selection. These example problems also demonstrate
dierences between monolithic and non-monolithic models developed in this research.
4.1. Example 1
In this example problem, the principal rm selects a maximum of 6 plants to produce 8 dierent types of
products. We assume that the principal rm and the plants operate independently. The principal rm is to
minimize the sum of the plant opening cost and the opportunity cost for over-setting production capacities
in these plants. The objective function of the model is set as presented in Model 1. The selected plants min-
imize their production costs and partially cooperate with the principal rm. The implication of partial
cooperation was explained in Section 3. Data for this example problem are presented in Tables 14. In
104 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110
Table 1, the second row corresponds to the xed costs for opening the plants. The third row gives the
opportunity costs for unused production capacity of the opened plants. Data in the fourth row are the costs
for consuming per unit production capacities. The fth row presents the production capacities of the plants.
Table 2 presents the demand for dierent types of products to be produced by the plants. Table 3 shows the
production capacity consumption ratio a
ij
. In this table, a
12
=1.0, for example, means that processing one
unit of type 2 product in plant 1 consumes 1 unit capacity of plant 1. The symbol in this table means
that the plant cannot produce the corresponding type of product. Table 4 presents the transportation cost
for transferring type j product from plant i to the principal rm. Using the data shown in Tables 14, we
rst solved this problem following Model 4 with z
1
and z
2
dened in Eqs. (1) and (2), respectively, and M set
to 10000. The optimal plant selection and production decisions are shown in Tables 5 and 6. It indicates
that plants 2 and 3 should be selected and products 1 to 4 should be produced in plant 2. Products 5 to
8 should be produced in plant 3. Such plant selection decision results in the minimum sum of the plant
Table 1
Candidate plants data
Plant i 1 2 3 4 5 6
f
i
400 265 265 200 150 100
p
i
1.0 0.55 0.55 0.5 0.45 0.40
w
i
1.0 0.55 0.55 0.5 0.45 0.40
Cap
i
450 250 250 200 150 100
Table 2
Product demand
Product j 1 2 3 4 5 6 7 8
d
j
60 60 60 60 60 60 60 60
Table 3
Production capacity consumption ratio a
ij
a
ij
j =1 j =2 j =3 j =4 j =5 j =6 j =7 j =8
i =1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
i =2 1.0 1.0 1.0 1.0
i =3 1.0 1.0 1.0 1.0
i =4 0.8 0.8 0.8
i =5 1.1 1.1 1.1 1.1
i =6 1.2 1.2
Table 4
Unit transportation cost R
ij
R
ij
j =1 j =2 j =3 j =4 j =5 j =6 j =7 j =8
i =1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
i =2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
i =3 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08
i =4 0.09 0.09 0.09 0.09 0.09 0.09 0.09 0.09
i =5 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
i =6 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110 105
opening cost and the opportunity costs of the unused production capacities in these plants. The correspond-
ing objective function values are z
1
=541.0 and z
2
=307.2, respectively. This is based on the assumption that
the selected plants operate independently from the principal rm within the two-level decision making
scheme. It was a non-monolithic problem. In testing the developed model, we then solved the correspond-
ing monolithic problem without considering production cost minimization at the plant level. The optimal
solution yields the minimum objective function value z
1
=500. This is lower than the optimal cost value
z
1
=541 from the non-monolithic model. However, z
1
=500 can only be achieved if the production costs
in the opened plants are not considered. If the monolithic plant selection decision is implemented and
the selected plants then arrange their production with minimized cost, it will lead to dierent cost gures
with z
1
=553.33 and z
2
=480.5. These cost gures are both higher than those from the non-monolithic
model. The dierences of z
1
and z
2
from the two models indicate the level of conict between the principal
rm and the associated plants. This information provides a reference for the principal rm to sacrice its
own interest for the interests of the associated plants. Next we present several more example problems to
show the dierences between the developed two-level model and the traditional monolithic model.
4.2. Examples 25
The structure and main features of these example problems are the same as those in Example 1 while
certain modications are made on the data related to the candidate plants and their production capacities.
This is reected in the capacity consumption ratio a
ij
shown in Tables 7 and 8. Furthermore, Examples 25
are distinguished by the following specic assumptions:
Assumption 1 (Example 2): The principal rm and the selected plants operate independently. This is a
two-level problem.
Table 5
Optimal solution y
i
and z
l
for Example 1 (bilevel model)
y
1
y
2
y
3
y
4
y
5
y
6
z
1
z
2
0 1 1 0 0 0 541.0 307.2
Table 6
Optimal decision x
ij
for Example 1 (bilevel model)
x
ij
j =1 j =2 j =3 j =4 j =5 j =6 j =7 j =8
i =1 0 0 0 0 0 0 0 0
i =2 1 1 1 1 0 0 0 0
i =3 0 0 0 0 1 1 1 1
i =4 0 0 0 0 0 0 0 0
i =5 0 0 0 0 0 0 0 0
i =6 0 0 0 0 0 0 0 0
Table 7
Candidate plants data (Examples 25)
Plant i 1 2 3 4 5 6
f
i
260 175 175 140 105 75
p
i
0.70 0.65 0.65 0.60 0.55 0.40
w
i
0.50 0.50 0.50 0.50 0.50 0.50
Cap
i
400 250 250 200 150 100
106 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110
Assumption 2 (Example 3): The principal rm and the selected plants operate independently. However,
the interests of the selected plants and their reactions are taken into account by the principal rm. The
principal rm and the selected plants seek to minimize z
0
=z
1
+z
2
and z
00
=z
2
, respectively. It is a gener-
alized two-level problem where the leader and followers seek to reach two dierent but related goals.
Assumption 3 (Example 4): The principal rm and the selected plants operate jointly to minimize z
1
without considering z
2
. This is a monolithic problem.
Assumption 4 (Example 5): The principal rm and the selected plants operate jointly to minimize
z
0
=z
1
+z
2
. This is also a monolithic problem.
Example problems 25 are solved and presented to further illustrate the dierences between the mono-
lithic model and the two-level model in dierent production environments. Examples 4 and 5 were solved
using Model 4 without constraints in Eqs. (17)(22), i.e., without considering decision making independ-
ence at the plant level. The optimal plant selection and production decisions for these problems are shown
in Tables 9 and 10. Table 9 shows that plants 2 and 3 should be selected in solving Example 2 while plants 3,
5 and 6 should be selected in solving Example 3. Assumptions 3 and 4 in solving Examples 4 and 5, respec-
tively, remove the decision making independence of the associated plants. Results in Table 9 indicate that
plants 1 and 6 should be selected in solving both Examples 4 and 5 with dierent objective function values.
Comparing the optimal objective function values in Examples 25, we notice that those in Examples 4 and 5
Table 8
Production capacity consumption ratio a
ij
(Examples 25)
a
ij
j =1 j =2 j =3 j =4 j =5 j =6 j =7 j =8
i =1 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85
i =2 0.90 0.90 0.90 0.90
i =3 0.90 0.90 0.90 0.90
i =4 1.1 1.1 1.1
i =5 1.1 1.1 1.2 1.2 1.1 1.1
i =6 0.7 0.7 0.7 0.7
Table 9
Optimal solution y
i
and z
l
for Examples 25
y
1
y
2
y
3
y
4
y
5
y
6
z
1
z
2
Example 2 0 1 1 0 0 0 394.2 259.2
Example 3 0 0 1 0 1 1 397.07 247.23
Example 4 1 0 0 0 0 1 335 297.53
Example 5 1 0 0 0 0 1 372.36 250.82
Table 10
Optimal decision x
ij
for Examples 25
x
ij
j =1 j =2 j =3 j =4 j =5 j =6 j =7 j =8
i =1 0/0/0.843/1 0/0/1/1 0/0/1/0.843 0/0/1/1 0/0/1/1 0/0/1/1 0/0/1/1 0/0/1/1
i =2 1/0/0/0 1/0/0/0 1/0/0/0 1/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0
i =3 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0 1/0.619/0 1/1/0/0 1/1/0/0 1/1/0/0
i =4 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0
i =5 0/0/0/0 0/1/0/0 0/0/0/0 0/1/0/0 0/0/0/0 0/0/0/0 0/0/0/0 0/0/0/0
i =6 0/1/0.157/0 0/0/0/0 0/1/0/0.157 0/0/0/0 0/0.381/0/0 0/0/0/0 0/0/0/0 0/0/0/0
Where q
1
/q
2
/q
3
/q
4
indicate the optimal decisions x
ij
for Examples 2, 3, 4 and 5 respectively.
D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110 107
are better than those in Examples 2 and 3. That is, monolithic models lead to lower overall costs in plant
selection and production operations. However, these lower cost gures cannot actually be achieved in the
decentralized environment when the associated plants operate independently to the principal rm in min-
imizing the total operation cost. The computational results from these example problems have certain
implications in terms of dierent types of relationship between the principal rm and the plants. If the
plants belong to the principal rm, the principal rm should select those plants to minimize the plant open-
ing cost, plant opportunity costs of extra capacities and plant production costs. If the selected plants belong
to dierent companies, the principal rm will select those plants to minimize the plant opening costs and the
opportunity costs only. The results from Example 5 also show that a Pareto solution from solving the mon-
olithic problem may not be a correct solution to a decentralized plant selection problem. As discussed in
Soismaa (1999) and Wen and Hsu (1991), a two-level problem does not, in general, generate a Pareto solu-
tion due to the lack of full cooperation between the leader and the followers in the decision making process.
The presented results from the above example problems are consistent with such conclusion. Finally, in
comparing the results of Examples 15 in terms of the objective function z
1
+z
2
, we observe that in Example
1, the total cost from the monolithic model is higher than that from the bi-level model. In Examples 2 to 5,
the costs from the monolithic models are lower than those from the bi-level models. Such behaviors are
reasonable since in Examples 1, 2 and 4, the principal rms concern is only z
1
. Due to this reason, the value
of z
1
+z
2
shows no specic tendency when dierent models are used.
Computational features
All the testing problems, including the ve example problems shown in this section were solved following
Model 4 using LINDO (LINGO, 1997), a commercial optimization software package, on a PC computer
with a Pentium 1.0G processor. The above example problems with 6 potential plants and 8 products were
solved in less than 1 second. Solving problems with 50 or so candidate plants to produce 25 products took
about 1 minute on the same platform. In practice, for a rm to consider opening plants to produce certain
products, the number of candidate plants is not expected to be large. It should not exceed, say 100, even in
remotely extreme cases. Todays computing technology is able to generate optimal solutions within accept-
able computational times for the discussed problems of such practical sizes using widely available PC com-
puters. It seems that there is no need to develop heuristic search algorithms to search for sub-optimal
solutions in solving the proposed model, unless it can be utilized for lower level decision making such as
machine or workstation selections.
5. Conclusions and future research
In this paper, a capacitated plant selection problem in decentralized manufacturing environments is dis-
cussed. The decentralized decision making process assumes that the principal rm and the selected plants
operate independently in an organizational hierarchy. Taking into account the opportunity costs for over-
setting production capacities, a non-monolithic model was proposed for the two-level decision making
process. The resulted two-level optimization model was transformed into a single level mixed integer linear
programming model solved by available optimization software. The developed model respects the inherent
independence between the principal rm and the selected plants. Independence relationship among produc-
tion entities is common in many decentralized manufacturing systems. Including opportunity costs in the
model will minimize the unused production capacities of the manufacturing system. Our model can be fur-
ther extended for plant selections in more general situations. One extension is to let the model to decide the
production capacities of the plants instead of being pre-determined. This more general situation will also
lead to two-level nonlinear mathematical programming models. Such problems may still be transformed
108 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110
into single level mixed integer programming problems with more constraints and more integer variables.
Since the two-level optimization problem is NP hard, it may be too dicult to solve the problem using
available commercial software. Meta-heuristic search methods such as Tabu search (Glover and Laguna,
1997), genetic search (Gen and Cheng, 1996) may be used to eciently solve the more general and more
complicated problems. Further research will be conducted to develop the more general models and to
address the computational issues in solving the more general plant selection problems.
Acknowledgements
This research is supported by Research Grant from Natural Sciences and Engineering Research Council
(NSERC) of Canada and Faculty of Engineering and Computer Science Research Support Fund, Concor-
dia University. The authors are grateful to the anonymous referees for their valuable comments on an ear-
lier version of this paper.
References
Audet, C., Hansen, P., Jaumard, B., Savard, G., 1997. Links between linear bilevel and mixed 01 programming problems. Journal of
Optimization Theory and Applications 93, 273300.
Bard, J.F., 1998. Practical Bilevel Optimization. Kluwer Academic Publishers, Dordrecht, The Netherlands.
Bard, J.F., Falk, J.E., 1982. An explicit solution to the multi-level programming problems. Computers & Operations Research 9,
77100.
Bialas, W.F., Karwan, M.H., 1984. Two-level linear programming. Management Science 30, 10041029.
Canel, C., Khumawala, B., 2001. International facilities location: A heuristic procedure for the dynamic uncapacited problem.
International Journal of Production Research 39, 39754000.
Cao, D., Leung, L., 2002. A partial cooperation model for non-unique linear two-level decision problems. European Journal of
Operational Research 140, 135142.
Chen, M., 2001. A model for integrated production planning in cellular manufacturing systems. Integrated Manufacturing Systems 12,
275284.
Diaz, J., Fernandez, E., 2002. A branch-and-price algorithm for single source capacitated plant location problem. Journal of the
Operational Research Society 53, 728739.
Ertogral, K., Wu, S., 2000. Auction-theoretic coordination of production planning in the supply chain. IIE Transactions 32, 931940.
Fortuny, J., McCarl, B., 1981. A representation and economic interpretation of a two-level programming problem. Journal of the
Operational Research Society 32, 783792.
Gen, M., Cheng, R., 1996. Genetic Algorithms and Engineering Design. Wiley, New York, NY.
Ghiani, G., Guerriero, F., Musmanno, R., 2002. The capacitated plant location problem with multiple facilities in the same site.
Computers & Operations Research 29, 19031912.
Glover, F., Laguna, M., 1997. Tabu Search. Kluwer Academic Publishers, Dordrecht, The Netherlands.
Jaramillo, J., Bhadury, J., Batta, R., 2002. On the use of genetic algorithms to solve location problems. Computers & Operations
Research 29, 761769.
LINDO Systems Inc., 1997. LINGO 6.0 Users Guide. Chicago, Ill.
Mallozzi, L., Morgan, J., 1996. Hierarchical systems with weighted reaction set. In: Pillo, G.D., Giannessi, F. (Eds.), Nonlinear
Optimization and Applications. Plenum Press, New York, pp. 271282.
Miller, T., 2001. Hierarchical Operations and Supply Chain Planning. Springer, London.
Sakawa, M., Nishizaki, I., 1999. Interactive fuzzy programming for cooperate two-level linear fractional programming problems with
multiple decision makers. International Journal of Fuzzy Systems 1, 4859.
Sakawa, M., Nishizaki, I., Uemura, Y., 2001. Interactive fuzzy programming for two-level linear and linear fractional production and
assignment problems: a case study. European Journal of Operational Research 135, 142157.
Schrage, L., 1991. LINDO: An Optimization Modeling System. Boyd & Fraser, Danvers, MA.
Soismaa, M., 1999. A note on ecient solution for the linear bilevel programming problem. European Journal of Operational
Research 112, 427431.
Steuer, R., 1987. Multiple Criteria OptimizationTheory, Algorithms and Applications. Wiley, New York.
D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110 109
Vicente, L., Calamai, P., 1994. Bilevel and multilevel programming: A bibliography review. Journal of Global Optimization 15,
291306.
Wen, U.-P., Hsu, S.T., 1991. Ecient solution for the linear bilevel programming problem. European Journal of Operational Research
62, 354362.
Wen, P., Huang, D., 1996. A simple Tabu search method to solve the mixed integer linear bilevel program. European Journal of
Operational Research 88, 563571.
White, D.J., Anandalingam, G., 1993. A penalty function approach for solving bi-level linear programs. Journal of Global
Optimization 3, 397419.
110 D. Cao, M. Chen / European Journal of Operational Research 169 (2006) 97110