Facility Location

Facility Location Relevance of Facility Location Decisions. Types & Causes of Facility Location. General Process for Facility Location. Trends and Future Strategies. Methods for Facility Location Selection.

Importance of Facility Location • Facility Location decisions are part of the company’s strategy. Infrequent but expensive. • Reasons for the importance: • Facility Location requires large investment that can not be recovered. • Facility Location decisions affect the competitive capacity of the company. • All areas of the company are affected by Facility Location: Operations, but also Business Development, Human Resources, Finance, etc. • The facility location decisions affect not only costs but the company’s income: • For a service business, market proximity is critical to determine the capacity to attract customers. • For a manufacturing business, facility location affects product delivery time and level of customer service, which affects sales. • Regarding costs, facility location affects a great variety of them: • Land costs. • Labor costs. • Raw materials. • Transportation and distribution

Topics • Importance of Facility Location. • Causes & Types of Facility Location. • Issues at Location • General Process for Facility Location. • Trends and Future Strategies. • Locating Service Facilities • Methods for Facility Location Selection. • Centroid Methods • Factors Rating Analysis. • Economic Analysis. • Transportation (Mathematical Programming Methods). • Set Covering.

Causes that originate Location decision problems • An expanding market. • It will require the addition of more capacity at a certain geographic point, either in an existent facility or in a new one. • Introduction of new products or services. • A contracting demand, or changes in the location of the demand. • It may require the shut down and/or relocation of operations. • The exhaustion of raw materials in a certain area. • Example: Extraction companies. • Obsolescence of a manufacturing facility due to the appearance of new technologies. • It means the creation of a new modern plant somewhere else. • The pressure of the competence. • To increase the level of service, it can force the company to increase capacity of certain plants or relocate some of them. • Change in other resources, like labor conditions or subcontracted components, or change in the political or economic environment in a certain region. • Mergers and acquisitions. • Some facilities may appear as redundants, or bad located with respect to others.

Location Alternatives • Expansion of an existent facility. • Only possible if exists enough space. • Attractive alternative when the current facility location is good enough for the company. • Lower costs than other options • Start a new facility in a new area. • Sometimes is a more advantageous option than the previous one (if there are problems related to lose of focus on the company’s objectives). • Shut down of a facility and (or not) starting of a new one somewhere else. • Moving production from one plant to other.

Issues in Facility Location • Proximity to Customers • Business Climate • Total Costs • Infraestructure • Quality of Labor • Suppliers • Other Facilities • Political Risks • Government Barriers • Trading Blocks • Environmental Regulation • Host Community • Competitive Advantage

GLOBAL COMPETITION Competitive STRATEGY PHASE I Supply Chain Strategy INTERNAL CONSTRAINTS Capital, growth strategy, existing network TARIFFS AND TAX INCENTIVES PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility REGIONAL DEMAND Size, growth, homogeneity, local specifications PHASE II Regional Facility Configuration COMPETITIVE ENVIRONMENT POLITICAL, EXCHANGE RATE AND DEMAND RISK PHASE III Desirable Sites AVAILABLE INFRASTRUCTURE PRODUCTION METHODS Skill needs, response time PHASE IV Location Choices FACTOR COSTS Labor, materials, site specific LOGISTICS COSTS Transport, inventory, coordination

Levels of Decisions. Market Potential Market Share Operating Cost Market Region Subregion Transport Cost (RM) Taxes Raw material costs Labor Cost and Availability Access to market/materials Material Cost Labor Cost and Availability Taxes Availability of public services Availabilty of sites Community amenities Community Access to transport Network Site Characterics Taxes Availability of public services Land and acquisition costs Construction Costs Sites

General Process for Facility Location • Creation of a multifunctional team to perform the study. • Preliminary analysis. • Study of the company’s strategies and the policies of the company to translate them into Facility Location requirements. • Due to the big quantity of factors affecting Facility Location, the company should determine which is the criteria to evaluate the different alternatives (transportation needs, land, supplies, labor, infrastructures, services, environmental conditions…). • The multifunctional team must distinguish between: Dominant factors (essential); Secondary factors (desirable). • Search of Location Alternatives. • Establishment of a group of location candidates. • Evaluation of Alternatives (detailed analysis). • Information gathering from each location to be measured against each of the factors considered. • Selection of Facility Location. • Through qualitative and quantitative analysis, the different alternatives will be compared against each other, to determine several valid locations. • Objective: Look for several acceptable locations, to let senior management to decide taking into account subjective factors.

Trends & Future Strategies • Most of the Facility Location factors vary with time: • The accelerated changes in the economic environment are impacting the frequency of Facility Location decisions. • Changes in the economic environment: • International level competition among companies. • Location in countries different than the origin of the company are a common situation for big companies. • Appearance of new markets and unification of others. • Increase of competition pressure. • Logistics factors are more important and complex. • Companies are reviewing their facility locations in order not to loose competitiveness.

Trends & Future Strategies • Changes in the economic environment: • Industry processes automation. • Labor costs become less important: countries with lower labor costs become less attractive. • Labor qualification, flexibility and mobility become more important factors. • However, labor costs are still a main factor in some industries and in certain manufacturing processes of others: Relocation to Mexico, Taiwan, Singapore, etc.

Trends & Future Strategies • Changes in the economic environment: • Transportation and IT development. • Helps in the internationalization of the operations: higher geographical diversity in location decisions. • Tendency to localize close to the markets: emphasis in customer service, direct customer contact, fast development of new products, fast delivery… • Due to flexible technologies, companies have the possibility of starting up more plants at a smaller size. • J.I.T. Systems. • Some industries are forcing their suppliers and customers to locate their facilities in a close area to reduce transportation costs and supply at a higher frequency.

Locating service facilities • Because of the variety of service firms and the relatively low cost of establishing a service facility compared to one for manufacturing, new service facilities are far more common than new factories and warehouses. • Services typically have multiple sites to maintain close contact with customers. The location decision is closely tied to the market selection decision. • Market affects the number of sites to be built and the size and characteristics of the sites. • Whereas manufacturing location decisions are often made by minimizing costs, many service location decision techniques maximize the profit potential of various sites.

Cost vs Response TIme Hi Local FG Mix Regional FG Local WIP Cost Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers Low Low Hi Response Time

Response time vs. Number of facilities Response Time Number of Facilities

Cost vs Number of Facilities Total Costs Percent Service Level Within Promised Time Cost of Operations Facilities Inventory Transportation Labor Number of Facilities

Methods of Facility Location Selection • Centroid Methods • Factors Rating Analysis. • Economic Analysis. • Income independent upon location. • Income dependent upon location. • Transportation (Mathematical Programming Methods). • Set Covering. • No limitation of facilities. • Limitation of facilities.

Factor-Rating Method • Popular because a wide variety of factors can be included in the analysis • Six steps in the method • Develop a list of relevant factors called critical success factors • Assign a weight to each factor • Develop a scale for each factor • Score each location for each factor • Multiply score by weights for each factor for each location • Recommend the location with the highest point score

Facility Location