Facility Location

Learning Objectives
 Define location analysis

 Describe the relationship between capacity planning and location, and

their importance

 Identify key factors in location analysis

 Describe the decision support tools used for location analysis

 Location Analysis
 3 most important factors in real estate:

1. Location
2. Location
3. Location

 Facility location is the process of identifying the best

geographic location for a service or production facility
 Capacity planning and Location analysis
 Capacity planning and location analysis are actually two separate decisions.
 Capacity planning deals with the maximum output rate that a facility can have,
determined by the size of facilities and equipment.
 Location analysis, on the other hand, deals with the best location for a facility.
 These two decisions are usually made simultaneously.
 When a company decides to open a new facility, it must also decide on both
the size of the facility and its location.
 The size of the facility may also be affected by the location.
 Factors Affecting Location Decisions
1. Proximity to source of supply:
 Reduce transportation costs of perishable or bulky raw materials

 A paper mill is an example. Transporting lumber would be much more

costly than transporting the paper produced.

2. Proximity to customers:
 E.g.: high population areas, close to JIT partners

 Like food items such as groceries, fresh flowers and medications are

perishable.
3. Proximity to labor:
 Local wage rates, attitude toward unions, availability of special skills (e.g.:

silicon valley)
 More Location Factors
4. Community considerations:
 Local community’s attitude toward the facility (e.g.: prisons,
utility plants, etc
 Airport, trash dump site)

5. Site considerations:
 Local zoning & taxes, access to utilities, etc.

6. Quality-of-life issues:
 Climate, cultural attractions, commuting time, etc.

7. 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 (Japanese automobile manufacturers like Toyota have located in
Kentucky/USA and employed American workers.?????
 Cheaper labor: Korea, Taiwan, India….(even the transportation cost is high)
 JIT approach (manufacturers and suppliers needs to be close to each other)
 Potential disadvantages:
 Political risks may increase, loss of control of proprietary technology, local
infrastructure (roads & utilities) may be inadequate, high inflation
 Other issues:
 Language barriers, different laws & regulations, different business cultures
 Making Location Decisions
 Analysis should follow 3 step process:

Step 1: Identify dominant location factors

Step 2: Develop location alternatives
Step 3: Evaluate locations alternatives

 Procedures for evaluation location alternatives include

1. Factor rating method
2. Load-distance model
3. Center of gravity approach
4. Break-even analysis
5. Transportation method
 1. Factor Rating Method

Step 1 Identify dominant factors (e.g., proximity to market, access,

competition, quality of life).

Step 2 Assign weights to factors reflecting the importance of each factor

relative to the other factors. The sum of these weights must be
100.

Step 3 Select a scale by which to evaluate each location relative to each

factor. A commonly used scale is a five-point scale, with 1 being
poor and 5 excellent.
 1. Factor Rating Method

Step 4 Evaluate each alternative relative to each factor, using the scale
selected in Step 3. For example, if you chose to use a five-point
scale, a location that was excellent based on quality of life might
get a 5 for that factor.

Step 5 For each factor and each location, multiply the weight of the factor by
the score for that factor and sum the results for each alternative.
This will give you a score for each alternative based on how you
have rated the factors and how you have weighted each of the factors
at each location.

Step 6 Select the alternative with the highest score.

Factor Rating Example
 Factor Rating Example
Question: Sue and Joe are a young married couple who are considering
purchasing a new home. Their search has been reduced to two homes that they
both like, at different locations. They have decided to use factor rating to help
them make their decision. They have listed the factors they consider important
and assigned a factor score to each location based on a five-point scale. The
information is shown here.
Using the procedure for factor rating, complete the table and help Sue and Joe
make their decision.
 2. The Load-Distance Model
Step 1: Identify distances
Rectilinear distance: The rectilinear distance between two locations, A and B, is
computed by summing the absolute differences between the x coordinates and the
absolute differences between the y coordinates. The equation is as follows:

Step 2: Identify Loads

The next step is to identify the loads between different locations. The notation lij is
used to indicate the load between locations i and j.
Step 3: Calculate the Load-Distance Score for each location
Next we calculate the load–distance score for each location by multiplying the load,
lij, by the distance,dij. We compute the sum of lijdij to get the ld score. Finally, we
select the site with the lowest load–distance score.
 A Load-Distance Model Example: Matrix Manufacturing is considering
where to locate its warehouse in order to service its 4 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: dAB  30  10  40  15  45 miles

 Multiply by the number of loads between each site and the four cities
 Calculating the Load-Distance Score for Springfield vs. Mansfield
Computing the Load-Distance Score for Springfield
 City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)

Computing the Load-Distance Score for Mansfield

City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

 The load-distance score for Mansfield is higher than for Springfield.

 The warehouse should be located in Springfield.
 3. 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

Xc.g. 
 lX
i i

325
 7.9 ; Yc.g. 
l Y
i i

436
 10.6
l i 41 l i 41
 4. 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 costs
 Step 2: Plot the total costs for each location on one graph
 Step 3: Identify ranges of output for which each location has the lowest total cost
 Step 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 + VC(Q)

 Total revenue = SP*Q
 Break-even is where Total Revenue = Total Cost

Q = F/(SP-VC)
Q = break-even quantity
SP = selling price/unit
VC= variable cost/unit
F = fixed cost
 Example using Break-even Analysis: Clean-Clothes Cleaners is
considering 4 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 Analysis

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

 From the graph you can see that the two lowest cost intersections occur between C
& B (4667 units) and B & A (9000 units)
 The best alternative up to 4667 units is C, between 4667 and 9000 units the best is
B, and above 9000 units the best site is A
 The Transportation Method
 The transportation method of linear programming can be used to
solve specific location problems

 It could be used to evaluate the cost impact of adding potential

location sites to the network of existing facilities

 It could also be used to evaluate adding multiple new sites or

completely redesigning the network
 Highlights
 Capacity planning is deciding on the maximum output rate of a facility

 Location analysis is deciding on the best location for a facility

 Capacity planning and location analysis decisions are often made

simultaneously because the location of the facility is usually related to
its capacity.
 When a business decides to expand, it usually also addresses the issue
of where to locate.
 These decisions are very important because they require long-term
investments in buildings and facilities, as well as a sizable financial
outlay.
 Highlights
 In both capacity planning and location analysis, managers must
follow three-step process to make good decision. The steps are
 assessing needs,
 developing alternatives, and
 evaluating alternatives.

 To choose between capacity planning alternatives managers

may use decision trees, which are a modeling tool for evaluating
independent decisions that must be made in sequence.
 Highlights
 Key factors in location analysis included
 proximity to customers,
 transportation,
 source of labor,
 community attitude, and
 proximity to supplies.
 Service and manufacturing firms focus on different factors.
Profit-making and nonprofit organizations also focus on
different factors.
 Highlights
 Several tools can be used to facilitate location analysis.

 Factor rating is a tool that helps managers evaluate qualitative factors.

 The load-distance model and center of gravity approach evaluate the

location decision based on distance.

 Break-even analysis is sued to evaluate location decisions based on

cost values.

 The transportation method is an excellent tool for evaluating the cost

impact of adding sites to the network of current facilities.
 Question
Joe’s Sports Supplies Corporation is considering where to locate its warehouse in
order to service its four stores in four towns: A, B, C, and D. Two possible sites for
the warehouse are being considered, one in Jasper and the other in Longboat.

The following table shows the distances between the two locations being considered
and the four store locations. Also shown are the loads between the warehouse and
the four stores.
Use the load– distance model to determine whether the warehouse should be
located in Jasper or in Longboat.