Facility location problems form an important class of integer programming problems, with application in the distribution and transportation industries. In this paper we are concerned with a particular type of facility location problem in which there exist two echelons of facilities. Each facility in the second echelon has limited capacity and can be supplied by only one facility (or depot) in the first echelon. Each customer is serviced by only one facility in the second echelon. The number and location of facilities in both echelons together with the allocation of customers to the second-echelon facilities are to be determined simultaneously. We propose a mathematical model for this problem and consider six heuristics based on Lagrangian relaxation for its solution. To solve the dual problem we make use of a subgradient optimization procedure. We present numerical results for a large suite of test problems. These indicate that the lower-bounds obtained from some relaxations have a duality gap which frequently is one third of the one obtained from traditional linear programming relaxation. Furthermore, the overall solution time for the heuristics are less than the time to solve the LP relaxation. (~) 1997 Elsevier Science B.V.