Facility location and techniques

FACILITY LOCATION

Piyush Sharma

13101002

LOCATION ANALYSIS

Three most important factors in real estate:1. Location2. Location3. Location

Facility location is the process of identifying the best geographic location for a service or production facility

FACTORS AFFECTING LOCATION DECISIONS

Proximity to source of supply:Reduce transportation costs of perishable

or bulky raw materialsProximity to customers:

High population areas, close to JIT partnersProximity to labor:

Local wage rates, attitude toward unions, availability of special skills (silicon valley)

MORE LOCATION FACTORS

Community considerations:Local community’s attitude toward the facility

(prisons, utility plants, etc.) Site considerations:

Local zoning & taxes, access to utilities, etc. Quality-of-life issues:

Climate, cultural attractions, commuting time, etc. Other considerations:

Options for future expansion, local competition, etc.

GLOBALIZATION – SHOULD FIRM GO GLOBAL?

Globalization is the process of locating facilities around the world

Potential advantages: Inside track to foreign markets, avoid trade barriers, gain

access to cheaper labor Potential disadvantages:

Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation

Other issues to consider: Language barriers, different laws & regulations, different

business cultures

MAKING LOCATION DECISIONS

Analysis should follow 3 step process:1. Identify dominant location factors2. Develop location alternatives3. Evaluate locations alternatives

Procedures for evaluation location alternatives include

Factor rating method Load-distance model Center of gravity approach Break-even analysis Transportation method

FACTOR RATING EXAMPLE

A Load-Distance Model Example: 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.

Calculate the rectilinear distance:

Multiply by the number of loads between each site and the four

cities

miles 4515401030dAB

CALCULATING THE LOAD-DISTANCE SCORE FOR SPRINGFIELD VS. MANSFIELD

The load-distance score for Mansfield is higher than for Springfield. The warehouse should be located in Springfield.

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)

THE CENTER OF GRAVITY APPROACH

This approach requires that the analyst find the center of gravity of the geographic area being considered

Computing the Center of Gravity for Matrix Manufacturing

Is there another possible warehouse location closer to the C.G. that should be considered?? Why?

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Computing the Center of Gravity for Matrix ManufacturingCoordinates Load

Location (X,Y) (li) lixi liyi

Cleveland (11,22) 15 165 330Columbus (10,7) 10 165 70Cincinnati (4,1) 12 165 12

Dayton (3,6) 4 165 24Total 41 325 436

BREAK-EVEN ANALYSIS Break-even analysis computes the amount of

goods required to be sold to just cover costs Break-even analysis includes fixed and variable

costs Break-even analysis can be used for location

analysis especially when the costs of each location are known

Step 1: For each location, determine the fixed and variable costsStep 2: Plot the total costs for each location on

one graphStep 3: Identify ranges of output for which each

location has the lowest total costStep 4: Solve algebraically for the break-even

points over the identified ranges

BREAK-EVEN ANALYSIS

Remember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q. Total cost = F + cQ Total revenue = pQ Break-even is where Total Revenue = Total Cost

Q = F/(p-c)Q = break-even quantityp = price/unitc = variable cost/unitF = fixed cost

EXAMPLE USING BREAK-EVEN ANALYSIS: CLEAN-CLOTHES CLEANERS IS CONSIDERING FOUR POSSIBLE SITES FOR ITS NEW OPERATION. THEY EXPECT TO CLEAN 10,000 GARMENTS. THE TABLE AND GRAPH BELOW ARE USED FOR THE ANALYSIS.

Example 9.6 Using Break-Even AnalysisLocation Fixed Cost Variable Cost Total Cost

A $350,000 $ 5(10,000) $400,000B $170,000 $25(10,000) $420,000C $100,000 $40(10,000) $500,000D $250,000 $20(10,000) $450,000

THE TRANSPORTATION METHOD

Can be used to solve specific location problems Is discussed in detail in “Management Science” Could be used to evaluate the cost impact of

adding potential location sites to the network of existing facilities

Could also be used to evaluate adding multiple new sites or completely redesigning the network