Facility Location

Facility Location

Suhas Rane

Learning Objectives

U shd. be able to IU shd. be able to Identify or Define:dentify or Define: Objective of location strategy

International location issues

Clustering

Geographic information systems

3 methods of solving the location problem3 methods of solving the location problem Factor-rating method Locational breakeven analysis Center-of-gravity method

Facility Location is a Strategic Decision

One time decisions

Difficult to reverse

Affect fixed, variable and distribution costs

Affect sales

Your plant / facility may be ….

• Near the Raw Material sources

(Steel, Cement Plants )

• Near to Market / Customers

(FMCG, Perishables Goods,

Services)

• Best facilities & infrastructure

(MIDC, Union Territories, SEZs)

Country Factors

1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues

3. Location of markets4. Labor availability, attitudes,

productivity, costs5. Availability of supplies,

communications, energy6. Exchange rates and

currency risks

Country Factors

Region / Community Factors

1. Corporate desires

2. Attractiveness of region

3. Labor availability, costs, attitudes towards unions

4. Costs and availability of utilities

5. Environmental regulations

6. Government incentives and fiscal policies

7. Proximity to raw materials and customers

8. Land/construction costs

MN

WI

MI

IL IN OH

Site Factors

1. Site size and cost

2. Air, rail, highway, and

waterway systems

3. Zoning restrictions

4. Nearness of services/

supplies needed

5. Environmental impact

issues

Approach to Location

Profit maximization (Service industry)

Cost minimization (Manufacturing)

Approach to Location

Service/Retail Location Location Goods Mfg.Goods Mfg. Location Location

RevenueRevenue Focus Focus Cost Cost FocusFocus

Volume/revenueDrawing area; purchasing powerDrawing area; purchasing powerCompetition; advertising/pricingCompetition; advertising/pricing

Physical qualityParking, Access; Security,Parking, Access; Security,

Lighting; Appearance, ImageLighting; Appearance, Image

Cost determinantsRent, Rent, Management caliberManagement caliberOperations policies Operations policies

(hours, wage rates)(hours, wage rates)

Tangible costsTransportation cost of raw Transportation cost of raw materialmaterialShipment cost of finished goodsShipment cost of finished goodsEnergy and utility cost; labor;Energy and utility cost; labor;Raw material; taxes, and so onRaw material; taxes, and so on

Intangible and future costsAttitude toward unionAttitude toward unionQuality of lifeQuality of lifeEducation expenditures by stateEducation expenditures by stateQuality of state and local Quality of state and local governmentgovernment

Approach to Location

Service/Retail/Prof.Service/Retail/Prof. Locn. Locn. Goods-mfg.Goods-mfg. Location Location

TechniquesTechniques Techniques Techniques

Regression models to determine Regression models to determine importance of various factorsimportance of various factors

Factor-rating methodFactor-rating methodTraffic countsTraffic countsDemographic analysis of drawing Demographic analysis of drawing

areaareaPurchasing power analysis of areaPurchasing power analysis of area

Center-of-gravity methodmethod

Geographic information systemsGeographic information systems

Transportation methodsTransportation methods

Factor-rating methodmethod

Locational Locational break-even

analysisanalysis

Crossover chartsCrossover charts

Hotel Location ( Case : To open Chain of Hotels across the country )

Location is a strategically important decision in the hospitality industry

Finally, the model considered only four variables

- Property Prices of the inn

- Median income levels

- State population per inn

- Location of nearby businesses / industries/ colleges

Telemarketing Location

Require neither face-to-face contact nor movement of materials

Have very broad location options

Traditional variables are no longer relevant

Cost and availability of labor may drive location decisions

Clustering

Industry LocationsReason for clustering

Wine makers Napa Valley (US); Bordeaux region (France)

Natural resources of land and climate

Software firms Silicon Valley, Boston, Bangalore (India)

Talent resources of bright graduates in sc./tech. areas, venture capitalists nearby

Electronic firms Northern Mexico Duty free export zones

Computer hardware manufacturers

Singapore, Taiwan High tech penetration rate and per capita GDP, Skilled/educated workforce with large pool of engineers

Clustering

Industry LocationsReason for clustering

Textiles Surat, Ludhiana, Tirupur

Automobiles

& Ancillaries

Pune- Chakan, Pithampur, Manesar

Leather Kanpur, Agra,

Chennai

BPO Mind-space

Methods for Location

1. Factor Rating

2. Transportation model

3. Centroid Method

4. Load Distance

5. Break-even Analysis

6. Qualitative Factor Analysis

Factors Factor Rating (1 to 5)

Location Rating (1 to 10)

Rating Product

Location A

Location B

Location A

Location B

1) Proximity to Mkts 4 3 8 12 32

2) Tax advantage 5 6 7 30 35

3) Availability of power

3 7 8 21 2

4) Water availability 4 9 7 36 28

5) Community attitude

2 6 3 12 6

6) Infrastructure Development

2 6 5 12 10

7) Support industry 1 5 3 5 3

128 138

Location B is Preferred to A

Factor rating method

Centre of Gravity Method – Problem

Retail Expected Outlets Demand A 80

B 100C 120D 130E 100F 150

G 90 Total Demand 770

Q. : Where should we set up a centralized warehousing facility?

Centre of Gravity Method

Y-D

ista

nce

(KM

)

04

2

4

6

8

10

12

14

16

8 12 16 20

X- Distance (KM)

• B• G

• Center-of-gravity

• D

• F

• A

• C • E

Centre of Gravity Method

Retail Outlet

Xi

DistYi

DistVolume (Vi) QTY

Vi Xi Vi Yi

A 4 10 80 320 800

B 3.5 15 100 350 1500

C 4 6 120 480 720

D 10 2 130 1300 260

E 16 6 100 1600 600

F 8 5 150 1200 750

G 14 13 90 1260 1170

∑ Vi = 770 ∑ Vi Xi = 6510 ∑ Vi Yi = 8500

Xc=6510/770

= 8.45

Yc = 5800 /770

= 7.53

Load Distance methodUsed to minimise the load distance product for pre selected locations

Matrix Manufacturing is considering where to locate its warehouse in order to service its four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered; Mansfield and Springfield, Ohio. Use the load-distance model to make the decision.

Load Distance method

Computing the Load-Distance Score for SpringfieldCity Load Distance ld

Cleveland 15 20.5 307.5Columbus 10 4.5 45Cincinnati 12 7.5 90Dayton 4 3.5 14

Total Load-Distance Score(456.5)

Computing the Load-Distance Score for MansfieldCity Load Distance ld

Cleveland 15 8 120Columbus 10 8 80Cincinnati 12 20 240Dayton 4 16 64

Total Load-Distance Score(504)

Break Even method

Cost-volume analysis method used for industrial locations

3 Steps in the method –

1. Determine fixed and variable costs for each location

2. Plot the cost for each location

3. Select location with lowest total cost for expected production volume

Cost-Volume-Profit (or Br. Even Analysis)

C

ost

Volume of Sales

TCA

FCA

Vo

Revenue

Break Even Analysis Method

• Location A : Annual fixed costs of Rs.3 L, Variable Costs - Rs. 63 /

unit,

Revenues Rs. 68 per unit.

• Location B : Annual fixed costs Rs. 8 L

Variable costs Rs. 32 per unit,

Revenues are Rs. 68 per unit.

Exp. Sales volume 25000 units per year.

Which location is more attractive?

Answer -Break Even Analysis Method

• B E Volume = Fixed cost / (Contribution / unit)

• VBE (A) = Rs 3 L / 68-63 = 60,000 units• VBE (B) = Rs 8 L / 68-32 = 22,222 units

• At the expected demand of 25000 units, A B

Revenue 17,00,000 17,00,000

Variable Cost 15,75,000 8,00,000 Fixed Cost 3,00,000 8,00,000

Total Cost 18,75,000 16,00,000

Profit (Loss) (1,75,000) 1,00,000

Location B is more attractive, even if annual fixed cost is higher

Transportation method

Finds amount to be shipped from several points of supply to several points of demand

Solution will minimize total production and shipping costs

A special class of linear programming problems

Transportation method

Analytical Delphi Method (for complex multi-location decisions)

1. Coordinating Team (comprising Co-Employees &

External. Consultants ) uses questionnaire to illicit

information from Forecasting Panel.

2. Forecasting Panel - to identify Future Trends in environment, threats, opportunities. Process is repeated several times till consensus is reached.

3. This information is given to Strategic Panel to

identify Long Term Strategic Goals & Objectives.

4. Various ALTERNATIVES are developed.

5. These alternatives are then prioritized

Thank You

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