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Facility Location

Facility Location. Location Decisions. Long-term decisions (expand existing facilities, add new facilities, move) Difficult to reverse Affect fixed & variable costs Transportation cost As much as 25% of product price Other costs: Taxes, wages, rent etc.

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Facility Location

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  1. Facility Location

  2. Location Decisions • Long-term decisions (expand existing facilities, add new facilities, move) • Difficult to reverse • Affect fixed & variable costs • Transportation cost • As much as 25% of product price • Other costs: Taxes, wages, rent etc. • Objective: Maximize benefit of location to firm

  3. Need for Location Decisions • Marketing Strategy • Cost of Doing Business • Growth • Depletion of Resources

  4. Nature of Location Decisions • Strategic Importance of location decisions • Long term commitment/costs • Impact on investments, revenues, and operations • Supply chains • Objectives of location decisions • Profit potential • No single location may be better than others • Identify several locations from which to choose • Location Options • Expand existing facilities • Add new facilities • Move

  5. Industrial Location Decisions • Cost focus • Revenue varies little between locations • Location is a major cost factor • Affects shipping & production costs (e.g., labor) • Costs vary greatly between locations © 1995 Corel Corp.

  6. Service Location Decisions • Revenue focus • Costs vary little between market areas • Location is a major revenue factor • Traffic volume, good transportation, customer safety and convenience most important • Affects amount of customer contact • Affects volume ofbusiness

  7. Comparison of Service and Manufacturing Considerations

  8. Organizations That Need To Be Close to Markets • Government agencies • Police & fire departments • Post Office • Retail Sales and Service • Fast food restaurants, supermarkets, gas stations • Drug stores, shopping malls • Bakeries • Other Services • Doctors, lawyers, accountants, barbers • Banks, auto repair, motels

  9. General Procedure for Making Location Decisions • Decide on the criteria to use for evaluating alternatives • Identify important factors • Develop location alternatives - identify the general region for a location - identify community alternatives - identify site alternatives • Evaluate alternatives and make a selection

  10. Factors That Affect Location Decisions Community Considerations Regional Factors Site-related Factors Multiple Plant Strategies

  11. Regional Factors • Location of raw materials • Location of markets • Labor factors • Climate and taxes

  12. Community Considerations • Quality of life • Services • Attitudes • Taxes • Environmental regulations • Utilities • Developer support

  13. Site Related Factors • Land • Transportation • Environmental • Legal

  14. Plant Strategies • Single Plant Strategy • Multi-Plant Strategies * Product Plant Strategy * Market Area Plant Strategy * Process Plant Strategy

  15. Region/Community Country Site © 1995 Corel Corp. . Location Decision Sequence

  16. Global Location Factors • Government stability • Government regulations • Political and economic systems • Economic stability and growth • Exchange rates • Culture • Climate • Export import regulations, duties and tariffs • Raw material availability • Number and proximity of suppliers • Transportation and distribution system • Labor cost and education • Available technology • Commercial travel • Technical expertise • Cross-border trade regulations • Group trade agreements

  17. Regional Location Factors (1 of 2) • 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 • Labor (availability, education, cost and unions) • Proximity of customers • Number of customers • Construction/leasing costs • Land costs • Modes and quality of transportation • Transportation costs

  18. Regional Location Factors (2 of 2) • 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

  19. Site 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

  20. Location Incentives • Tax credits • Relaxed government regulation • Job training • Infrastructure improvement • Money

  21. Location Evaluation Methods(Methods of Solving Location Problems) • Factor-rating method • Center of gravity method • Load-distance method • Locational break-even analysis • Transportation model (a specialized linear programming method)

  22. 1. Factor Rating Method

  23. Factor-Rating Method (1 of 4) • Decision based on minimum distribution costs • Most widely used location technique • Useful for service & industrial locations • Rates locations using factors • Tangible (quantitative) factors • Example: Short-run & long-run costs • Intangible (qualitative) factors • Example: Education quality, labor skills

  24. Steps in Factor Rating Method (2 of4) • Identify important relevant factors • Assign importance weight to each factor (0.00 – 1.00) • Develop scale for each factor (such as 1 – 100) • Score each location along each factor • Multiply scores by weights for each factor & sum weighted factors • Select location with maximum total score

  25. SCORES (0 TO 100) LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3 Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service .30 .20 .15 .15 .10 .05 .05 80 100 60 75 65 85 50 65 91 95 80 90 92 65 90 75 72 80 95 65 90 Location Factor Rating (3 of 4) Weighted Score Site 1 = (0.30)(80) = 24

  26. WEIGHTED SCORES SCORES (0 TO 100) Site 1 Site 2 Site 3 LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3 24.00 20.00 9.00 11.25 6.50 4.25 2.50 77.50 19.50 18.20 14.25 12.00 9.00 4.60 3.25 80.80 27.00 15.00 10.80 12.00 9.50 3.25 4.50 82.05 Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service .30 .20 .15 .15 .10 .05 .05 80 100 60 75 65 85 50 65 91 95 80 90 92 65 90 75 72 80 95 65 90 Location Factor Rating (4 of 4) Best one

  27. 2. Centre of Gravity Method

  28. 2. Center of Gravity (Centroid) Method (1 of 10) • Decision based on minimum distribution costs • Finds location ofsingle distribution center serving several destinations • Used primarily for services • Considers • Location of existing destinations • Example: Markets, retailers etc. • Volume to be shipped • Shipping distances (or costs) • Shipping cost/unit/mile is constant

  29. Center-of-Gravity Method (2 of 10) • Locate facility at center of geographic area • Based on weight and distance traveled • Establish grid-map of area • Identify coordinates and weights shipped for each location

  30. Center of Gravity Method: Steps (3 of 10) • This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria • Place existing locations on a coordinate grid • Grid has arbitrary origin & scale • Maintains relative distances • Calculate X & Y coordinates for ‘center of gravity’ • Gives location of distribution center • Minimizes transportation cost

  31. y n n   xiVi yiVi i = 1 i = 1 2 (x2, y2), V2 y2 Cx = Cy = n n   Vi Vi i = 1 i = 1 1 (x1, y1), V1 y1 3 (x3, y3), V3 y3 x1 x2 x3 x Grid-Map Coordinates (4 of 10) where, Cx, Cy= coordinates of the new facility at center of gravity xi, yi= coordinates of existing facility i Vi = annual volume shipped from or to the ith location

  32. y A B C D x 200 100 250 500 y 200 500 600 300 Vt 75 105 135 60 700 C 600 (135) B 500 (105) 400 Miles D (60) 300 A (75) 200 100 x 0 100 200 300 400 500 600 700 Miles Center-of-Gravity Technique (5 of 10)Example 1

  33. n  xiWi i = 1 y (200)(75) + (100)(105) + (250)(135) + (500)(60) 75 + 105 + 135 + 60 700 C n Cx = = = 238  600 Wi (135) B i = 1 500 (105) n 400 Miles D  yiWi (60) 300 i = 1 A (200)(75) + (500)(105) + (600)(135) + (300)(60) 75 + 105 + 135 + 60 (75) 200 Cy= = = 444 n  Wi 100 i = 1 x 0 100 200 300 400 500 600 700 Miles Center-of-Gravity Technique (6 of 10)Example 1

  34. y A B C D x 200 100 250 500 y 200 500 600 300 Wt 75 105 135 60 C 700 (135) B 600 (105) 500 Center of gravity (238, 444) Miles D 400 (60) A 300 (75) 200 100 0 x 100 200 300 400 500 600 700 Miles Center-of-Gravity Technique (7 of 10)Example 1

  35. Centre of Gravity Method (8 of 10) Y Q (790,900) D (250,580) A (100,200) (0,0) X Example 2 Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

  36. Centroid Method (9 of 10)Example 2 Y Q (790,900) D (250,580) A (100,200) (0,0) X To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates. You must also have the volume information on the business activity at the existing facilities.

  37. Y New location of facility Z about (443,627) Q (790,900) Z D (250,580) A (100,200) (0,0) X Centroid Method (10 of 10) Example 2 You then compute the new coordinates using the formulas: You then take thecoordinates and place them on the map:

  38. Locational Break-even Analysis

  39. Locational Break-Even Analysis • Method of cost-volume analysis used for industrial locations • Steps • Determine fixed & variable costs for each location • Plot total cost for each location (Cost on vertical axis, annual volume on horizontal axis) • Select location with lowest total cost for expected production volume • Must be above break-even

  40. Location Break-Even Analysis • Assumptions • Fixed costs are constant • Variable costs are linear • Output can be closely estimated • Only one product involved

  41. © 1995 Corel Corp. Locational Break-Even Analysis Example 1(1 of 2) You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are$75, $45, &$25 respectively. The price per case is $120. What is the best location for an expected volume of2,000 cases per year?

  42. 200000 Akron 150000 Chicago 100000 Annual Cost Bowling Green 50000 Bowling Green lowest cost Akron lowest cost Chicago lowest cost 0 0 500 1000 1500 2000 2500 3000 Volume Locational Break-Even Crossover Chart (2 of 2)

  43. Example 2: Cost-Volume Analysis (1 of 3) Fixed and variable costs for four potential locations

  44. Example 2: Solution (2 of 3)

  45. $(000) 800 700 600 500 400 300 200 100 0 D B C A A Superior C Superior B Superior 0 2 4 6 8 10 12 14 16 Annual Output (000) Example 2: Solution (3 of3)

  46. Transportation Method

  47. Transportation Model • Decision based on movement costs of raw materials or finished goods • Finds amount to be shipped from severalsources to several destinations • Used primarily for industrial locations • Seeks to minimize costs of shipping n units to m destinations • Type of linear programming model • Objective: Minimize total production & shipping costs (shipping n units to m destinations) • Constraints • Production capacity at source (factory) • Demand requirements at destinations

  48. Worldwide Distribution of Volkswagens and Parts

  49. Global Locations • Reasons for globalization • Benefits • Disadvantages • Risks • Global operations issues

  50. Globalization • Facilitating Factors • Trade agreements • Technology • Benefits • Markets • Cost savings • Legal and regulatory • Financial

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