1 Facility Location Facility Location
Dec 20, 2015
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Facility LocationFacility Location
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Location OptionsLocation Options
Expanding existing facilities Building a new facility (for the
beginners) Moving to another facility Addition of one or more facilities to
the existing network in order to expand capacity
Closing of one or more facilities in order to shrink capacity
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Location decisions may arise for a variety of reasons: Addition of new facilities
As part of a marketing strategy to expand
markets Growth in demand that cannot be satisfied by
expanding existing
facilities Depletion of basic inputs requires relocation Shift in markets Cost of doing business at a particular location
makes relocation attractive
The Need for Location DecisionsThe Need for Location Decisions
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Location Decisions: Strategically Location Decisions: Strategically ImportantImportant
Location decisions: Are long-term decisions Are closely tied to an organization’s strategies
Low-cost Convenience to attract market share
Effect capacity and flexibility Are difficult to reverse Represent a long-term commitment of resources Effect investment requirements, Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc) Effect revenues, Effect operations Impact competitive advantage Important to supply chains
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Location Decisions: ObjectivesLocation Decisions: Objectives Location decisions are based on:
Cost or profit potential and customer service Finding a number of acceptable locations from which to choose (no single
location may be better than others) Position in the supply chain
End: accessibility, consumer demographics, traffic patterns, and local customs are important
Middle: locate near suppliers or marketsBeginning: locate near the source of raw materials
Supply chain management issues such as supply chain configurationCentralized vs. decentralized distribution
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Industrial Location DecisionsIndustrial Location Decisions
Cost focusRevenue varies little
between locationsLocation is a major
cost factorLocation effects shipping &
production costs (costs vary greatly between locations
© 1995 Corel Corp.
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Service Location DecisionsService Location DecisionsRevenue focus
Costs vary little between market areasLocation is a major revenue factorFactors such as Traffic volume, good
transportation, customer safety and convenience most important
Location effects amount of customer contact
Locaiton effects volume ofbusiness
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Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets
Government agenciesPolice & fire departmentsPost Office
Retail Sales and ServiceFast food restaurants, supermarkets, gas stationsDrug stores, shopping mallsBakeries
Other ServicesDoctors, lawyers, accountants, barbersBanks, auto repair, motels
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General Procedure for Making General Procedure for Making Location DecisionsLocation Decisions
Decide on the criteria to use for evaluating location alternatives Identify important factors (such as location of markets or raw
materials) Develop location alternatives
- identify the country or countries for location - identify the general region for location
- identify a small number of community alternatives
- identify site alternatives among the cummunity alternatives
Evaluate the alternatives and make a selection
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Location Decision SequenceLocation Decision Sequence
Country
.
Region/Community
.
Site
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FactorsFactors That Affect Location Decisions That Affect Location Decisions
Regional Factors
Site-related FactorsCommunity Considerations
Global Factors
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Global Location: Facilitating Global Location: Facilitating FactorsFactors
Key factors that have contributed to the attractiveness of globalization:Trade Agreements such as
North American Free Trade Agreement (NAFTA)General Agreement on Tarriffs and Trade (GATT)U.S.-China Trade Relations ActEU and WTO efforts to facilitate trade
TechnologyAdvances in communication and information technology
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Global Location: BenefitsGlobal Location: Benefits
A wide range of benefits have accrued to organizations that have globalized operations:MarketsCost savingsLegal and regulatoryFinancialOther
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Global Location: DisadvantagesGlobal Location: Disadvantages
There are a number of disadvantages that may arise when locating globally:Transportation costsSecurity costsUnskilled labor Import restrictionsCriticism for locating out-of-country
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Global Location: RisksGlobal Location: Risks
Organizations locating globally should be aware of potential risk factors related to:Political instability and unrestTerrorismEconomic instabilityLegal regulationEthical considerationsCultural differences
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Managing Global OperationsManaging Global Operations
Managerial implications for global operations:Language and cultural differences
Risk of miscommunicationDevelopment of trustDifferent management stylesCorruption and bribery
Level of technology and resistance to technological change
Domestic personnel may resist locating, even temporarily
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Location: Identifying a CountryLocation: Identifying a Country
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Location: Identifying a RegionLocation: Identifying a RegionPrimary regional factors:
Locating close to the raw materialsNecessityPerishabilityTransportation costs
Locating close to the marketsAs part of a profit-oriented company’s competitive
strategySo not-for-profits can meet the needs of their service usersDistribution costs and perishability
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Location: Identifying a Region Location: Identifying a Region
Labor factorsCost of laborAvailability of suitably skilled workersWage rates in the areaLabor productivityAttitudes toward workWhether unions pose a serious potential problem
Other factorsClimate and taxes may play an important role in
location decisions
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More on More on Regional Location FactorsRegional Location Factors
Labor (availability, education, cost and unions)
Proximity of customers Number of customers Construction/leasing costs Land costs Modes and quality of
transportation Transportation costs
Incentive packages Governmental, legal
regulations, policies and barriers
Environmental regulations Raw material availability Commercial travel Climate Infrastructure (cost and
availability of utilities) Quality of life
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More on More on Regional Location FactorsRegional Location Factors
Community government Local business regulations Government services Business climate Community services Taxes Environmental impact
issues
Availability of sites Financial Services Community
inducements Proximity of suppliers Education system Free trade zones
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Geographic Information System Geographic Information System (GIS)(GIS)
GISA computer-based tool for collecting, storing,
retrieving, and displaying demographic data on mapsAids decision makers in
Targeting market segments Identifying locations relative to their market
potentialPlanning distribution networks
Portraying relevant information on a map makes it easier for decision makers to understand
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Location: Identifying a CommunityLocation: Identifying a Community
Many communities actively attempt to attract new businesses they perceive to be a good fit for the community
Businesses also actively seek attractive communities based on such factors such as: Quality of life Services Attitudes Taxes Environmental regulations Utilities Development support
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Location: Identifying a SiteLocation: Identifying a Site
Primary site location considerations areLandTransportationEnvironmental ZoningLegalOther restrictions
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Site Location FactorsSite Location Factors Customer base Construction/ leasing cost Site costs (land, expansion,
parking, etc. Quality of life issues in the
community (education, health care, sports, cultural activities etc.)
Site size Transportation Traffic
Zoning restrictions Safety/security Competition Area business climate Income level Host community Competitive advantage Utilities including gas,
electric, water and their costs
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Plant StrategiesPlant Strategies
Single Plant StrategyMultiple Plant Strategy
- Product Plant Strategy
- Market Area Plant Strategy
- Process Plant Strategy
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Product plant strategy Entire products or product lines are produced in separate
plants, and each plant usually supplies the entire domestic market
Market area plant strategy Plants are designated to serve a particular geographic
segment of the market Plants produce most, if not all, of a company’s products
Multiple Plant StrategiesMultiple Plant Strategies
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Multiple Plant StrategiesMultiple Plant Strategies
Process plant strategyDifferent plants focus on different aspects of a process
automobile manufacturers – engine plant, body stamping plant, etc.
Coordination across the system becomes a significant issue General-purpose plant strategy
Plants are flexible and capable of handling a range of products
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Service and Retail LocationsService and Retail Locations
Nearness to raw materials is not usually a consideration Customer access is a
Prime consideration for some: restaurants, hotels, etc.Not an important consideration for others: service
call centers, etc. Tend to be profit or revenue driven, and so are
Concerned with demographics, competition, traffic/volume patterns, and convenience
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Evaluating Location AlternativesEvaluating Location Alternatives
Common techniques for location evaluation: Locational cost-volume-
profit analysis Factor rating method Load-distance method Center of gravity method Transportation model (a
specialized linear programming method)
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Locational Cost-Profit-Volume AnalysisLocational Cost-Profit-Volume Analysis
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Locational Cost-Profit-Volume Locational Cost-Profit-Volume AnalysisAnalysis
Locational Cost-Profit-Volume (Break-even)Analysis A technique for evaluating location choices in
economic terms Steps:
1. Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output
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Locational Cost-Profit-Volume Locational Cost-Profit-Volume AnalysisAnalysis
Assumptions1. Fixed costs are constant for the range of
probable output
2. Variable costs are linear for the range of output
3. The required level of output can be closely estimated
4. Only one product is involved
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Locational Cost-Profit-Volume Locational Cost-Profit-Volume AnalysisAnalysis
For a cost analysis, compute the total cost for each alternative location:
output of or volumeQuantity
unitper cost Variable
cost FixedFC
where
FCCost Total
Q
v
Qv
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Example: Cost-Profit-Volume AnalysisExample: Cost-Profit-Volume Analysis
Fixed and variable costs for four potential plant locations are shown below:
LocationFixed Costper Year
Variable Costper Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35
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Example: Cost-Profit-Volume Example: Cost-Profit-Volume AnalysisAnalysis
Fixed Costs
Variable Costs
Total Costs
A B C D
$250,000 100,000 150,000 200,000
$11(10,000) 30(10,000) 20(10,000) 35(10,000)
$360,000 400,000 350,000 550,000
Comparison of total costs at a production volume of 10,000
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Example: Cost-Profit-Volume AnalysisExample: Cost-Profit-Volume Analysis
800700600500400300200100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
B
C
D
Plot of total costs
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Example: SolutionExample: Solution
800700600500400300200100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
B
C
B SuperiorC Superior
A Superior
D
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Example: Cost-Profit-Volume Example: Cost-Profit-Volume AnalysisAnalysis
Range approximations B Superior (up to 4,999 units)
C Superior (>5,000 to 11,111 units)
A superior (11,112 units and up)
000,5
10000,50
30000,10020000,150
B ofCost Total C ofCost Total
Q
Q
11.111,11
9000,100
20000,15011000,250
C ofCost Total A ofCost Total
Q
Q
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Factor Rating MethodFactor Rating Method
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Factor RatingFactor Rating Method Method
A general approach to evaluating locations that includes quantitative and qualitative inputs
Most widely used location technique Useful for service and industrial locations Rates locations using both
tangible (quantitative) factors such as short-run and long-run costs and
intangible (qualitative) factors such as education quality, labor skills.
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Factor RatingFactor RatingProcedure:
Determine which factors are relevant Assign a weight to each factor that indicates its relative importance
compared with all other factors. Weights typically sum to 1.00
Decide on a common scale for all factors (such as 1-100), and set a minimum acceptable score if necessary
Score each location alternative along each factor Multiply the factor weight by the score for each factor, and sum the
results for each location alternative Choose the alternative that has the highest composite score, unless it
fails to meet the minimum acceptable score
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Example: Factor RatingExample: Factor Rating
A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?
Scores(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to existing source .10 100 60
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00
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Example: Factor RatingExample: Factor RatingA photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?
Scores(Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2
Proximity to existing source .10 100 60 .10(100) = 10.0 .10(60) = 6.0
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00 70.6 82.7
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Centre of Gravity MethodCentre of Gravity Method
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Center of Gravity MethodCenter of Gravity Method A method for locating a distribution center that minimizes distribution
costs Finds location of a single distribution center serving several
destinations Used primarily for services Treats distribution costs as a linear function of the distance and the
quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method necessitates to identify coordinates and weights shipped
for each location and includes the use of a map that shows the locations of destinations
The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative
locations
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Center of Gravity MethodCenter of Gravity Method
Considers• Location of existing destinations eg. Markets, retailers etc.• Volume to be shipped• Shipping distances (or costs)
•Shipping cost/unit/mile is constant
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Center of Gravity MethodCenter of Gravity Method
If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates
nsdestinatio ofNumber
n destinatio of scoordinate
n destinatio of scoordinate
where
n
iyy
ixx
n
yy
n
xx
i
i
i
i
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Center of Gravity MethodCenter of Gravity Method
Destination x y
D1 2 2
D2 3 5
D3 5 4
D4 8 5
18 16
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16
5.44
18
n
yy
n
xx
i
i
Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure
Suppose you are attempting to find the center of gravity for the problem .
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Center of Gravity MethodCenter of Gravity Method
When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates
iyy
ixx
iQ
Q
QyC
Q
QxC
i
i
i
i
iiy
i
iix
n destinatio of scoordinate
n destinatio of scoordinate
n destinatio toshipped be oQuantity t
where
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Grid-Map CoordinatesGrid-Map Coordinates
where,Cx, Cy =coordinates of the new facility at center of gravityxi, yi =coordinates of existing facility iVi =annual volume shipped from or to the ith location
nn
VVii
i = i = 11
xxiiQQii
i = i = 11
nn
CCxx = =
nn
VVii
i = i = 11
yyiiQQii
i = i = 11
nn
CCyy = =
xx11 xx22 xx33 xx
yy22
yy
yy11
yy33
1 (1 (xx11, , yy11), ), QQ11
2 (2 (xx22, , yy22), ), QQ22
3 (3 (xx33, , yy33), ), QQ33
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Center of Gravity MethodCenter of Gravity Method: Example 1: Example 1
Suppose the shipments for the problem depicted in Figure are not all equal. Determine the center of gravity based on the following information.
Destination x y WeeklyQuantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 1,000
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Center of Gravity MethodCenter of Gravity Method: Example 1: Example 1
The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7). This south of destination D2 (3, 5).
7.3000,2
400,7
000,2
)100(5)200(4)900(5)800(2
05.3000,2
100,6
000,2
)100(8)200(5)900(3)800(2
iQ
QyC
Q
QxC
i
iiy
i
iix
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Center of Gravity MethodCenter of Gravity Method: Example 1: Example 1
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Center-of-Gravity TechniqueCenter-of-Gravity Technique: : Example 2Example 2
A B C D
x 200 100 250 500y 200 500 600 300Vt 75 105 135 60
y
700
500
600
400
300
200
100
0 x700500 600400300200100
A
B
C
D
(135)
(105)
(75)
(60)
Miles
Mil
es
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Center-of-Gravity TechniqueCenter-of-Gravity Technique: : Example 2Example 2
yy
700700
500500
600600
400400
300300
200200
100100
00 xx700700500500 600600400400300300200200100100
AA
BB
CC
DD
(135)(135)
(105)(105)
(75)(75)
(60)(60)
MilesMiles
Mil
esM
iles
Cx = = = 238n
Wii = 1
xiWii = 1
n
n
Wii = 1
yiWii = 1
n
Cy = = = 444(200)(75) + (500)(105) + (600)(135) + (300)(60)
75 + 105 + 135 + 60
(200)(75) + (100)(105) + (250)(135) + (500)(60)
75 + 105 + 135 + 60
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Center-of-Gravity TechniqueCenter-of-Gravity Technique: : Example 2Example 2
A B C D
x 200 100 250 500y 200 500 600 300Wt 75 105 135 60
y
700
500
600
400
300
200
100
0 x700500 600400300200100
A
B
C
D
(135)
(105)
(75)
(60)
Miles
Mil
es
Center of gravity (238, 444)
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Worldwide Distribution of Worldwide Distribution of Volkswagens and PartsVolkswagens and Parts
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Telemarketing and Internet Telemarketing and Internet IndustriesIndustries
Require neither face-to-face contact with customers (or employees) nor movement of material
Web based retail organizations are effectively location dependent
Presents a whole new perspective on the location problem
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Final ThoughtFinal Thought
The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.