FIRM EXPANSION THROUGH FRANCHISING: A MODEL AND SOLUTION PROCEDURES

This paper presents a practical model for firm expansion through franchising. The model allows the possibility of opening both company-owned and franchised stores. The objective is to maximize the expected returns to the franchisor from both types of stores, subject to the total capital outlay budget and the excess capacity available at each warehouse. A relaxation for this problem is studied and a heuristic solution procedure that makes use of this relaxation is developed. Experimental results over a wide range of problem structures show this solution methodology to be very effective, with gaps between feasible solution values and upper bounds generally in the 0 to 1 percent range. An efficient branch-and-bound code also is developed. This code is tested on problems with up to 100 potential store locations and 20 regions. It is found to be at least two orders of magnitude faster than a state-of-the-art commercial integer programming package.

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