Facility Location

Objective of Location Strategy

Maximize the benefit of location to the

firm

Industrial Location Decisions

Cost focus

-Cost of construction, land cost-Modes of transport, cost of transport -Proximity to raw materials, labor availability-Distribution centers

Retail and Service Location DecisionsRevenue focus-Proximity to customers-Affects volume of business

Warehouse Location Decisions

-Combination of cost and speed of delivery.

In General- Location Decisions Are• Long-term decisions

• Difficult to reverse

• Affect fixed & variable cost

Sequence of Location decisionsSelect a country in which to operateFocus on a region of the chosen countryChose a specific site within a region

Country

© 1995 Corel Corp.

Region/Community

© 1995 Corel Corp.

Site

© 1995 Corel Corp.

Location Decision Sequence

Country

© 1995 Corel Corp.

Region/Community

© 1995 Corel Corp.

Site

© 1995 Corel Corp.

Factors Affecting Choice of CountryGovernment rules, attitudes, political risk, incentives,

stability of government.Economics issues.Potential Market Availability of supplies, communications, energy.Exchange rates and currency risksClimateExport/import regulations

Factors Affecting Regional Location Decisions

Attractiveness of region (culture, taxes, climate, etc.)Labor availability, costs, attitudes towards unionsAvailability of siteEnvironmental regulations of state & town.Proximity to raw materials & customersLand/construction costsCosts and availability of utilitiesBusiness climate

Factors Affecting Site Decisions

Site size and costAir, Rail, Highway, and Waterway systemsNearness of services/supplies neededEnvironmental impact issues

Factors Affecting Location Decision

Market Related Issues-Market for products and ServicesRaw material availabilityNumber and proximity of suppliersAvailability of skilled labor

Cost related issues-Wage ratesTransportation costsTaxes and other tariff issuesLand cost, Labor cost, Raw material cost

Regulatory & Policy IssuesGovernment & economic stabilityQuality of legal and other institutionsTrading blocs and trading agreements.

Other issues-CultureClimateQuality of Life

Location Evaluation MethodsFactor-rating methodLocational break-even

AnalysisCenter of gravity methodLoad distance methodTransportation model

Factor Rating Method Assessing the attractiveness of each potential location.Steps-1. Identify & list all relevant factors called critical success

factors2. Establish the relative importance of each factor in final

decision by assigning weights.3. Develop a scale for each factor ( 1 to 10, or 1 to 100)4. Have management score each location for each factor,

using scale as in step 3.5. Multiply the score by weights for each factor and total

the score for each location.6. Make recommendation based on maximum point score

Illustration

A manufacturer of garments is actively considering 5

alternative locations for setting up his factory. The locations

vary in terms of their advantages to the firm. Based on a

survey, the firm had arrived at 6 factors to be considered for

the final location selection. The ratings of each factor on a

scale of 1 to 100. Using this information obtain a ranking of

the alternative solutions and suggest the best alternative.

Factor Ratings

Factors Rating

1. Availability of infrastructure 90

2.Size of the Market 60

3.Industrial Relations Climate 50

4.Tax Benefits & Concessions 30

5.Availability of cheap labor 30

6.Nearness to port 65

Rating of each location against each factor

Factors Loc.1 Loc.2 Loc.3 Loc.4 Loc.5

1 20 40 60 35 55

2 30 30 40 60 80

3 80 30 50 60 50

4 80 20 10 20 20

5 70 70 45 50 50

6 20 40 90 50 60

SolutionEstablishing the relative importance through Normalization

Factors Rating Relative weights

1 90 90/325 = 0.28

2 60 60/325 = 0.18

3 50 0.15

4 30 0.09

5 30 0.09

6 65 0.20

Sum of all factor ratings

325 1.00

Computing the performance of each location

Overall Rating for location 1 = 20*0.28 +30*0.18+ 80*0.15 + 80*0.09 + 70*0.09 + 20*0.20 = 41.23

Similarly for Loc. 3 =60*0.28 + 40*0.18 + 50*0.15 + 10*0.09 +

45*0.09 + 90*0.20 = 54.45

Factors Wt Loc 1 Loc 2 Loc 3 Loc 4 Loc 5

1 .28 20 40 60 35 55

2 .18 30 30 40 60 80

3 .15 80 30 50 60 50

4 .09 80 20 10 20 20

5 .09 70 70 45 50 50

6 .20 20 40 90 50 60

Overall

Score

41.23 37.54 54.77 46.46 56.15

Ranking 4 5 2 3 1

Illustration

Critical scores (out of 100)Factor weight France DenmarkF1 .25 70 60F2 .05 50 60F3 .10 85 80F4 .39 75 70F5 .21 60 70

Locational Break-Even Analysis

Method of cost-volume analysis to make an economic comparison.

StepsDetermine fixed & variable costs for each locationPlot total cost for each location (Cost on vertical axis,

Annual Volume on horizontal axis)Select location with lowest total cost for expected

production volume

Locational Break-Even Analysis

You’re an analyst considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The selling price per case is $120. What is the best location for an expected volume of 2,000 cases per year?

SolutionFor Akron,Total cost = $30,000 + $75* 2000 = $180,000

For Bowling Green,Total cost = $60,000+ $45*2000 = $150,000

For Chicago,Total cost = $160,000

Location Break-Even Crossover Chart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

Ann

ual C

ost

Akron

Chicago

Bowling Green

Bowling Green lowest cost

Chicago lowest cost

Akron lowest cost

With an expected volume of 2000 units per year, Bowling green provides the lowest cost location.

Expected Profit=Total Revenue – Total Cost = $120 * 2000 - $150,000 =$90,000/year.

Crossover points are 1000 & 2500 units.

Center of Gravity/Centroid Method

X Coordinate

ii

iiix

x W

WdC

Y Coordinate

ii

iiiy

y W

WdC

dix = x coordinate of location i

Wi = Volume of goods moved to or from location i

diy = y coordinate of location i

Given locations of showrooms on grid

A (100,200)D (250,580)Q (790,900)

Showroom No. of z-mobiles sold per monthA 1250D 1900Q 2300

What is the best location for a new Z-mobile warehouse

Q D

A

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Determining the Coordinates of the New Facility

C = 100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49

C = 200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You then compute the new coordinates using the formulas:

Z

New location of facility Z about (443,627)

Illustration: The Burger Doodle restaurant chain purchases ingredients from four different food suppliers. The companyWants to construct a new central distribution center to process and package ingredients before shipping them to their various Restaurants. The suppliers transport ingredient items in truck trailers. The locations of the four suppliers, A, B, C and D, and the annual number of trailer loads that will be transported to the distribution center are given below. Using center-of-gravityDetermine a possible location for the distribution center. Number of TrailersA (200,200) 75B(100,500) 105C(250,600) 135D(500,300) 60

Load Distance MethodEnables a location planner to evaluate two or more

potential candidates for locating a proposed facility vis-à-vis the demand (or supply) points .

Provides an objective measure of total load-distance for each candidate.

22 )()( jijiij YyXxD

The distance measure for the Cartesian coordinates between an existing demand point i and a candidate j for the proposed facility

The load distance for a candidate j for the proposed facility

n

iiijj WDLD

1

*

Suppose the manufacturer came to know that there are constraints in locating the new facility.

Based on an initial survey of possible sites for the proposed facility, the manufacturer identified four candidates.

The figure has the location coordinates of the four candidates (numbered 1 to 4).

What is the best location for the proposed new facility?

Solution Grid Map

100 200 300 400 500 600 700

100

200

300

400

500

600

Distance in Kilometers

Dis

tanc

e in

Kil

omet

ers A (125,550), 200

B (350,400), 450

C (450,125), 175

D (700,300), 150

1 (300,500)

2 (200,500) 3 (500,350)

4 (400,200)

Candidate for proposed facility

Existing Demand (or supply) point

Existing Supply Points Candidates for proposed facility

xi yi Wi Xj Yj A 125 550 200 1 300 500 B 350 400 450 2 200 500 C 450 125 175 3 500 350

D 700 300 150 4 400 200

00.182)50(175()500550()300125()()( 22222

12

11 YyXxD AAA

Dij values

1 2 3 4 A 182.00 90.14 425.00 445.11 B 111.80 180.28 158.11 206.16 C 403.89 450.69 230.49 90.14

D 447.21 538.52 206.16 316.23

LDj values

1 2 3 4

224474.41 258801.57 227410.05 245000.8

Transportation Model

Finds amount to be shipped from several sources to several destinations

Type of linear programming modelObjective: Minimize total production & shipping

costsConstraints

Production capacity at source (factory)Demand requirement at destination