Multiplant Location with Respect to Price-Elastic Demand

In this paper a model is developed to determine the optimal location of plants by taking into consideration the price elastic demand, production cost, and transportation cost. It is assumed that demand is distributed unevenly. The objective is to determine the location of maximum profit. Each basic function is interrelated with other functions, and the location of maximum profit is a balanced situation of price, demand, economies of scale, and transportation cost. This situation results in a complicated function, and the solution cannot be obtained by techniques of direct calculation. Therefore, a stepwise heuristic approach is used.

First, the number of plants is chosen and the allocation of plants is made with respect to a criterion of minimum distance. Demand and thus optimum locations are calculated according to different prices. The location of maximum net profit is determined for this particular number of plants. This procedure is repeated for a different number of plants. The alternative which has the maximum profit is chosen as being the best system.