Facility Location Models. Location Strategy One of the most important decisions a firm makes Increasingly global in nature Long term impact and.

Facility Location ModelsFacility Location Models

Location StrategyLocation Strategy One of the most important decisions One of the most important decisions

a firm makesa firm makes

Increasingly global in natureIncreasingly global in nature

Long term impact and decisions are Long term impact and decisions are difficult to changedifficult to change

The objective is to maximize the The objective is to maximize the benefit of location to the firmbenefit of location to the firm

Location DecisionsLocation Decisions

Long-term decisions Long-term decisions

Decisions made infrequentlyDecisions made infrequently

Decision greatly affects both fixed Decision greatly affects both fixed and variable costs and variable costs

Once committed to a location, Once committed to a location, many resource and cost issues are many resource and cost issues are difficult to changedifficult to change

Location DecisionsLocation DecisionsCountry DecisionCountry Decision Critical Success FactorsCritical Success Factors

1.1. Political risks, government rules, Political risks, government rules, attitudes, incentivesattitudes, incentives

2.2. Cultural and economic issuesCultural and economic issues

3.3. Location of marketsLocation of markets

4.4. Labor availability, attitudes, Labor availability, attitudes, productivity, costsproductivity, costs

5.5. Availability of supplies, Availability of supplies, communications, energycommunications, energy

6.6. Exchange rates and currency Exchange rates and currency risksrisks

Location DecisionsLocation DecisionsRegion/ Region/

Community Community DecisionDecision

Critical Success FactorsCritical Success Factors

1.1. Corporate desiresCorporate desires

2.2. Attractiveness of region Attractiveness of region

3.3. Labor availability, costs, Labor availability, costs, attitudes towards unionsattitudes towards unions

4.4. Costs and availability of utilitiesCosts and availability of utilities

5.5. Environmental regulationsEnvironmental regulations

6.6. Government incentives and Government incentives and fiscal policiesfiscal policies

7.7. Proximity to raw materials and Proximity to raw materials and customerscustomers

8.8. Land/construction costsLand/construction costs

MN

WI

MI

IL INOH

Location DecisionsLocation DecisionsSite DecisionSite Decision Critical Success FactorsCritical Success Factors

1.1. Site size and costSite size and cost

2.2. Air, rail, highway, and Air, rail, highway, and waterway systemswaterway systems

3.3. Zoning restrictionsZoning restrictions

4.4. Nearness of services/ Nearness of services/ supplies neededsupplies needed

5.5. Environmental impact Environmental impact issuesissues

Factors That Affect Factors That Affect Location DecisionsLocation Decisions

Labor productivityLabor productivity

Wage rates are not the only costWage rates are not the only cost

Lower productivity may increase total costLower productivity may increase total cost

Labor cost per dayLabor cost per day

Productivity (units per day)Productivity (units per day)= cost per unit= cost per unit

AA

= $1.17= $1.17 per unit per unit$70$70

6060 units units

ZZ

= $1.25= $1.25 per unit per unit$25$25

2020 units units

Factors That Affect Factors That Affect Location DecisionsLocation Decisions

Exchange rates and currency risksExchange rates and currency risks

Can have a significant impact on cost Can have a significant impact on cost structurestructure

Rates change over timeRates change over time

CostsCosts

Tangible - easily measured costs such as Tangible - easily measured costs such as utilities, labor, materials, taxesutilities, labor, materials, taxes

Intangible - less easy to quantify and Intangible - less easy to quantify and include education, public transportation, include education, public transportation, community, quality-of-lifecommunity, quality-of-life

Factors That Affect Factors That Affect Location DecisionsLocation Decisions

AttitudesAttitudes

National, state, local governments toward National, state, local governments toward private and intellectual property, zoning, private and intellectual property, zoning, pollution, employment stabilitypollution, employment stability

Worker attitudes towards turnover, unions, Worker attitudes towards turnover, unions, absenteeismabsenteeism

Globally cultures have different attitudes Globally cultures have different attitudes towards punctuality, legal, and ethical towards punctuality, legal, and ethical issuesissues

Factors That Affect Factors That Affect Location DecisionsLocation Decisions

Proximity to marketsProximity to markets

Very important to servicesVery important to services

JIT systems or high transportation costs JIT systems or high transportation costs may make it important to manufacturersmay make it important to manufacturers

Proximity to suppliersProximity to suppliers

Perishable goods, high transportation Perishable goods, high transportation costs, bulky productscosts, bulky products

Types Of FacilitiesTypes Of Facilities

Heavy manufacturingHeavy manufacturingAuto plants, steel mills, chemical plantsAuto plants, steel mills, chemical plants

Light industryLight industrySmall components mfg, assemblySmall components mfg, assembly

Warehouse & distribution centersWarehouse & distribution centersRetail & serviceRetail & service

Factors in Heavy Factors in Heavy Manufacturing LocationManufacturing Location

Construction costsConstruction costsLand costsLand costsRaw material and finished goods Raw material and finished goods

shipment modesshipment modesProximity to raw materialsProximity to raw materialsUtilitiesUtilitiesLabor availabilityLabor availability

Factors in Light Factors in Light Industry LocationIndustry Location

Construction costsConstruction costsLand costsLand costsEasily accessible Easily accessible

geographic regiongeographic regionEducation & training capabilitiesEducation & training capabilities

Factors in Factors in Warehouse LocationWarehouse Location

Transportation costsTransportation costsProximity to marketsProximity to markets

ปั�จจ�ยในการเลื อกทำ�าเลืทำ��ตั้��งปั�จจ�ยในการเลื อกทำ�าเลืทำ��ตั้��งคลื�งสิ�นค�าคลื�งสิ�นค�า

สิ�ทำ�ศา สิรรพก�จไพศาลื, 2550

1. การขนสิ�งทำางบก2. การขนสิ�งทำางรถไฟ3. อย#�ใกลื�ก�บลื#กค�า4. อย#�ใกลื�แหลื�งวั�ตั้ถ�ดิ�บ / โรงงานผลื�ตั้5. สิาธารณู#ปัโภค6. การระบายน��า7. การถ�ายเทำของเสิ�ย / การจ�ดิการของเสิ�ย

ปั�จจ�ยในการเลื อกทำ�าเลืทำ��ตั้��งปั�จจ�ยในการเลื อกทำ�าเลืทำ��ตั้��งคลื�งสิ�นค�าคลื�งสิ�นค�า

สิ�ทำ�ศา สิรรพก�จไพศาลื, 2550

8. การเปั.นเจ�าของทำ��ดิ�น9. แรงจ#งใจจากคลื�งสิ�นค�าทำ��ตั้��งอย#�ก�อน10. แรงงานแลืะค�าจ�าง11. อ�ตั้ราผลืตั้อบแทำนจากการลืงทำ�น12. ระยะเวัลืาค นทำ�น13. มู#ลืค�าเง�นปั�จจ�บ�นสิ�ทำธ�14. การวั�เคราะห0ระยะทำางก�บภาระงาน (Load distance analysis)

Location Analysis Location Analysis TechniquesTechniques

Location rating factorLocation rating factorCenter-of-gravityCenter-of-gravityLoad-distanceLoad-distanceBreak EvenBreak EvenLP and Non-LPLP and Non-LP

Location Rating FactorLocation Rating Factor

Identify important factorsIdentify important factorsWeight factors Weight factors (0.00 - 1.00)(0.00 - 1.00)Subjectively score each factor Subjectively score each factor (0 - 100)(0 - 100)Sum weighted scoresSum weighted scores

Location Factor Rating Location Factor Rating

Labor pool and climateLabor pool and climateProximity to suppliersProximity to suppliersWage ratesWage ratesCommunity environmentCommunity environmentProximity to customersProximity to customersShipping modesShipping modesAir serviceAir service

LOCATION FACTORLOCATION FACTOR

.30.30

.20.20

.15.15

.15.15

.10.10

.05.05

.05.05

WEIGHTWEIGHT

8080100100

60607575656585855050

Site 1Site 1

6565919195958080909092926565

Site 2Site 2

9090757572728080959565659090

Site 3Site 3

SCORES (0 TO 100)SCORES (0 TO 100)

Weighted Score Site 1 = (0.30)(80) = 24Weighted Score Site 1 = (0.30)(80) = 24

Location Factor Rating Location Factor Rating

Labor pool and climateLabor pool and climateProximity to suppliersProximity to suppliersWage ratesWage ratesCommunity environmentCommunity environmentProximity to customersProximity to customersShipping modesShipping modesAir serviceAir service

LOCATION FACTORLOCATION FACTOR

.30.30

.20.20

.15.15

.15.15

.10.10

.05.05

.05.05

WEIGHTWEIGHT

8080100100

60607575656585855050

Site 1Site 1

6565919195958080909092926565

Site 2Site 2

9090757572728080959565659090

Site 3Site 3

SCORES (0 TO 100)SCORES (0 TO 100)

24.0020.00

9.0011.25

6.504.252.50

77.50

Site 1

19.5018.2014.2512.00

9.004.603.25

80.80

Site 2

27.0015.0010.8012.00

9.503.254.50

82.05

Site 3

WEIGHTED SCORES

Weighted Score Site 1 = (0.30)(80) = 24Weighted Score Site 1 = (0.30)(80) = 24

Locate facility at center of geographic area Locate facility at center of geographic area Based on weight and distance traveledBased on weight and distance traveled Establish grid-map of areaEstablish grid-map of area Identify coordinates Identify coordinates

and weights shipped and weights shipped for each locationfor each location

Center-of-Gravity TechniqueCenter-of-Gravity Technique

Grid-Map CoordinatesGrid-Map Coordinates

where,where,xx, , y y ==coordinates of the new coordinates of the new facility at center of gravityfacility at center of gravityxxii, y, yii ==coordinates of existing coordinates of existing

facility facility iiWWii = =annual weight shipped annual weight shipped

from facility from facility ii

nn

WWii

i = i = 11

xxiiWWii

i = i = 11

nn

x =x =

nn

WWii

i = i = 11

yyiiWWii

i = i = 11

nn

y =y =

xx11 xx22 xx33 xx

yy22

yy

yy11

yy33

1 (1 (xx11, , yy11), ), WW11

2 (2 (xx22, , yy22), ), WW22

3 (3 (xx33, , yy33), ), WW33

Center-of-Gravity TechniqueCenter-of-Gravity TechniqueAA BB CC DD

xx 200200 100100 250250 500500yy 200200 500500 600600 300300WtWt 7575 105105 135135 6060

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

Center-of-Gravity TechniqueCenter-of-Gravity Techniqueyy

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

AA BB CC DD

xx 200200 100100 250250 500500yy 200200 500500 600600 300300WtWt 7575 105105 135135 6060x = = = 238

n

Wii = 1

xiWii = 1

n

n

Wii = 1

yiWii = 1

n

y = = = 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

Center-of-Gravity TechniqueCenter-of-Gravity TechniqueAA BB CC DD

xx 200200 100100 250250 500500yy 200200 500500 600600 300300WtWt 7575 105105 135135 6060

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

Center of gravity Center of gravity (238, 444)(238, 444)

Load-Distance Load-Distance TechniqueTechnique

• Compute Load x Distance for each site

• Choose site with lowest Load x Distance

• Distance can be actual or straight-line

SupplemenSupplement 7-t 7-2727

Load-Distance CalculationsLoad-Distance Calculations

llij ij ddijij

j = 1j = 1

nn

LDLDijij = =

LDLDijij= = load-distance value from site load-distance value from site i i to all existing facility to all existing facility jj’s’s

llijij = = load expressed as a weight, number of trips or units load expressed as a weight, number of trips or units

being shipped from proposed site being shipped from proposed site ii and location and location jj

ddijij = = distance between proposed site distance between proposed site ii and location and location jj

ddijij = = (x (xii - x - xjj))22 + (y + (yii - y - yjj))22

(x(xii,y,yii) = ) = coordinates of proposed site coordinates of proposed site ii

(x(xii , y , yjj) = coordinates of existing facility ) = coordinates of existing facility jj

where,where,

where,where,

Load-Distance: ExampleLoad-Distance: Example

Potential SitesPotential SitesSiteSite XX YY

11 360360 18018022 420420 45045033 250250 400400

SuppliersSuppliersAA BB CC DD

XX 200200 100100 250250 500500YY 200200 500500 600600 300300WtWt 7575 105105 135135 6060

Compute distance from each site to each supplierCompute distance from each site to each supplier

= (200-360)= (200-360)22 + (200-180) + (200-180)22dd1A1A = (x = (xAA - x - x11))22 + (y + (yAA - y - y11))22Site 1Site 1 = 161.2= 161.2

= (100-360)= (100-360)22 + (500-180) + (500-180)22dd1B1B = (x = (xBB - x - x11))22 + (y + (yBB - y - y11))22 = 412.3= 412.3

dd1C1C = 434.2 = 434.2 dd1D1D = 184.4 = 184.4

Load-Distance: Example (cont.)Load-Distance: Example (cont.)

Site 2Site 2 dd2A2A = 333 = 333 dd2C2C = 226.7 = 226.7dd2B2B = 323.9 = 323.9 dd2D2D = 170 = 170

Site 3Site 3 dd3A3A = 206.2 = 206.2 dd3C3C = 200 = 200dd3B3B = 180.4 = 180.4 dd3D3D = 269.3 = 269.3

Compute load-distanceCompute load-distance

j = 1j = 1

nn

llijijddijijLDLDij ij ==

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063

Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791

Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*

* Choose site 3* Choose site 3

Break-Even AnalysisBreak-Even Analysis

Method of cost-volume analysis used for Method of cost-volume analysis used for industrial locationsindustrial locations

Three steps in the methodThree steps in the method

1.1. Determine fixed and variable costs Determine fixed and variable costs for each locationfor each location

2.2. Plot the cost for each location Plot the cost for each location

3.3. Select location with lowest total Select location with lowest total cost for expected production cost for expected production volumevolume

Break-Even AnalysisBreak-Even Analysis

Three locations:Three locations:

ChonburiChonburi $30,000$30,000 $75$75 $180,000$180,000

LumphoonLumphoon $60,000$60,000 $45$45 $150,000$150,000

SongklaSongkla $110,000$110,000 $25$25 $160,000$160,000

Selling price Selling price = $120= $120

Expected volumeExpected volume = 2,000 = 2,000 unitsunits

FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost

Total Cost = Fixed Cost + Variable Cost x VolumeTotal Cost = Fixed Cost + Variable Cost x Volume

Break-Even AnalysisBreak-Even Analysis

–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

An

nu

al c

ost

An

nu

al c

ost

| | | | | | |

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000

VolumeVolume

lowest lowest costcost lowest costlowest cost lowest lowest

costcost

Songkla cost curve

Songkla cost curve

Chonburi

Chonburi

cost

curv

e

cost

curv

e

Lumphoon cost

Lumphoon cost

curvecurve