A logistics provider’s profit maximization facility location problem with random utility maximizing followers

Abstract

We introduce a strategic decision-making problem faced by logistics providers (LPs) seeking facility location decisions that lead to profitable operations. The profitability depends on the revenue generated through agreements with shippers, and the costs arising when satisfying these agreements. The latter depends, in turn, on the service levels and characteristics of the shippers’ customers. However, at a strategic level, the LP has imperfect information thereof.We propose a stochastic bilevel formulation where a given LP (leader) anticipates the decisions of shippers (followers) arising from a random utility maximization model. Using a sample average approximation and properties of the associated optimal solutions, we propose a heuristic that can compute high-quality solutions. It is based on a reduced single-level mixed integer linear programming formulation that can be solved by a general-purpose solver after a preprocessing phase. We can quickly identify situations that lead to zero expected profit for the LP. Experimental results show that expected profit highly depends on shippers’ price sensitivities. Underestimating price sensitivities can lead to an overestimation of the expected profit.