Facility Location
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Facility Location
▪ Strategic Importance of Location
▪ Factors Affecting Location Decisions
▪ Location Evaluation Methods
▪ Service Location Strategy
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Introduction to facility Location
The need for facility location is very much linked to two
competitive imperatives:
1. The need to produce close to the customer due to time-based
competition, trade agreements, and shipping costs.
2. The need to locate near the appropriate labor pool to take
advantage of low wage costs and/or high technical skills.
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Strategic Importance of Location
▪ Long-term decisions
▪ 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
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Need for Location Decisions…
▪ Marketing Strategy
▪ Cost of Doing Business
▪ Growth
▪ Depletion of Resources
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Locating Manufacturing facilities
▪ It involves the location of both the manufacturing plant and the warehouse or
distribution facilities
▪ As a general rule,
1. Products that decrease in weight and volume during the manufacturing
process tend to be located near the sources of raw materials. E.g. Lumber
mill that is located in a forest &Cement factory
2. Products that increase in weight and volume during the manufacturing
process tend to be located near the consumers. E.g. A soft drink bottler that
is located near a major city. The goal is to reduce distribution costs
▪ In addition, the analysis should include an evaluation of both qualitative and
quantitative factors
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Factors affecting facility location for Manufacturing
Qualitative Factors include: Quantitative Factors include:
1. Local infrastructure 1. Labor costs
2. Worker Education and skills 2. Distribution costs
3. Product content requirements and 3. Facility costs
4. Political/economic stability 4. Exchange rates
5. Tax rates
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Making Location Decisions
1. Decide on the criteria
2. Identify the important factors
3. Develop location alternatives
4. Evaluate the alternatives
5. Make selection
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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
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Service Location Decisions
▪ Revenue focus
▪ Costs vary little between market areas
▪ Location is a major
revenue factor
▪ Affects amount of customer contact
▪ Affects volume of business
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Types of Facilities
• Heavy-manufacturing facilities
– large, require a lot of space, and are expensive
• Light-industry facilities
– smaller, cleaner plants and usually less costly
• Retail and service facilities
– smallest and least costly
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Factors in Heavy Manufacturing Location
▪ Construction costs
▪ Land costs
▪ Raw material and finished goods shipment modes
▪ Proximity to raw materials
▪ Utilities
▪ Means of waste disposal
▪ Labor availability
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Factors in Light Industry Location
▪ Land costs
▪ Transportation costs
▪ Proximity to markets
▪ depending on delivery requirements including frequency of
delivery required by customer
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Factors in Retail Location
▪ Proximity to customers
▪ Location is everything
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Factors Affecting Location Decisions
▪ National/International Factors
▪ Regional/Community Factors
▪ Site Factors
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Location Decision Sequence
Country Region/Community
Site
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Factors Affecting Country
▪ Government & Political stability
▪ Import/export regulation
▪ Culture/Attitude towards foreigners
▪ Economy growth
▪ Exchange rate
▪ Market location
▪ Labor availability, productivity, and cost
▪ Available Technology & Expertise
▪ Infrastructure
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Labor Productivity
▪ Low wages often over-
emphasized Hourly Compensation ($)
Manufacturing Workers
▪ Labor productivity important
▪ Labor cost per
unit should be criterion: Germany 27.37
Labor cost/day
Units made/day Japan 21.38
U.S. 17.10
Hong Kong 4.79
Mexico 2.57
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Region Location Decisions
▪ Attractiveness/Quality of life
▪ Labor (availability, education, cost, and unions)
▪ Utility costs
▪ Government incentives & Regulations
▪ Proximity to customers & suppliers
▪ Land/construction cost
▪ Infrastructures
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Location Incentives
▪ Tax credits
▪ Relaxed government regulation
▪ Job training
▪ Infrastructure improvement
▪ Money/ Credit facility
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Factors Affecting Site
▪ Site size
▪ Site cost
▪ Transportation in/out
▪ Proximity of services
▪ Environmental impact
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Location Evaluation Methods
▪ Factor-rating method
▪ Locational break-even analysis
▪ Center of gravity method
▪ Transportation model
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Factor-Rating Method
▪ Most widely used location technique
▪ Useful for service & industrial locations
▪ Rates locations using factors
▪ Intangible (qualitative) factors
▪ Example: Education quality, labor skills
▪ Tangible (quantitative) factors
▪ Example: Short-run & long-run costs
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Steps in Factor Rating Method
▪ List relevant factors
▪ Assign importance weight to each factor
▪ Develop scale for each factor (0-100, etc.)
▪ Score each location using factor scale
▪ Multiply scores by weights for each factor & total
▪ Select location with maximum total score
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Factor Rating Method - Example
A certain company is evaluating three locations (A,B,C) for a new plant.
It has weighted and scored the factors as shown below.
Using these scores, develop a qualitative factor rating for the three
locations.
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Example – Continued
Relevant Factors A B C
AW S WS S WS S WS
Production cost .33 50 16.50 40 13.20 35 11.55
Raw mat supply .25 70 17.50 80 20.00 75 18.75
Labor availability .20 55 11.00 70 14.00 60 12.00
Cost of living .05 80 4.00 70 3.50 40 2.00
Environment .02 60 1.20 60 1.20 60 1.20
Markets .15 80 12.00 90 13.50 85 12.75
Total 1.00 62.60 65.40 58.25
B is the preferred location.
N.B WS= (AW)*(S)
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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
▪ Select location with lowest total cost for expected production
volume
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Example: Location BEA – Class work
A manufacturer of automobile is considering three locations Addis, Awassa
and Adama for a new plant. Cost studies indicate the fixed costs per year at
the sites are $30,000. $60,000, and $110,000, respectively; and variable
costs are $75 per unit, $45 per unit, and $25 per unit respectively. The
expected selling price of the carburetors produced is $120. The company
wishes to find the most economical location for an expected volume of
zeros units) and the total cost (fixed cost + variable costs) at the expected
volume of output.
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Center of Gravity Method
▪ Finds location of single distribution center serving several destinations
▪ Considers
▪ Location of existing destinations
▪ Example: Markets, retailers etc.
▪ Volume to be shipped
▪ Shipping distance (or cost)
▪ Shipping cost/unit/mile is constant
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Center of Gravity Method Steps
▪ Place existing locations on a coordinate grid
▪ Calculate X & Y coordinates for ‘center of gravity’
▪ Gives location of distribution center
▪ Minimizes transportation cost
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Center of Gravity Method - Example
Several automobile showrooms are located according to the
following grid which represents coordinate locations for each
showroom.
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)
D A 1250
(250,580)
A
D 1900
(100,200)
Q 2300
(0,0) X
Determine the best location for a Z-Mobile warehouse/temporary storage
facility considering only distances and quantities sold per month
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Determining the Coordinates
Y
Q
d V
(790,900)
Cx =
d V ix i
Cy =
iy i
V V
D
(250,580)
i i
A
Cx = X coordinate of center of gravity (100,200)
(0,0) X
Cy = Y coordinate of center of gravity S ho wro o m No o f Z-Mo b ile s
s o ld p e r mo nth
dix = X coordinate of the ith location
A 1250
diy = Y coordinate of the ith location
D 1900
Vi = volume of goods moved to or from ith
Q 2300
location
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Determining the Coordinates - Continued
100(1250) + 250(1900) + 790(2300) 2,417,000
Cx = = = 443.49
1250 + 1900 + 2300 5,450
200(1250) + 580(1900) + 900(2300) 3,422,000
Cy = = = 627.89
1250 + 1900 + 2300 5,450
Y
S ho wro o m No o f Z-Mo b ile s
Q
(790,900) s o ld p e r mo nth
D
(250,580) A 1250
A D 1900
(100,200)
(0,0) X Q 2300
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Grid-Map Coordinates
y n n
xiWi yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
Wi Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of new facility at
3 (x3, y3), W3 center of gravity
y3 xi, yi = coordinates of existing facility
i
Wi = annual weight shipped from
facility i
x1 x2 x3 x
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Center-of-Gravity Technique: Example
y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
500 (105)
Miles
400
D
300
A (60)
200 (75)
100
0 100 200 300 400 500 600 700 x
Miles
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Center-of-Gravity Technique: Example (cont.)
n
xW
i i
i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
x= = 75 + 105 + 135 + 60 = 238
n
Wi
i=1
n
yiWi
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
y= = 75 + 105 + 135 + 60 = 444
n
Wi
i=1
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Center-of-Gravity Technique: Example
(cont.)
y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
500 (105)
Center of gravity (238, 444)
Miles
400
D
300
A (60)
200 (75)
100
0 100 200 300 400 500 600 700 x
Miles
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Transportation Model
▪ Finds amount to be shipped from several sources to several destinations
▪ Used primarily for industrial locations
▪ Type of linear programming model
▪ Objective: Minimize total production
& shipping costs
▪ Constraints
▪ Production capacity at source (factory)
▪ Demand requirement at destination
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Geographic Information Systems (GIS)
▪ Computerized system for storing, managing, creating, analyzing,
integrating, and digitally displaying geographic, i.e., spatial, data
▪ Specifically used for site selection
▪ enables users to integrate large quantities of information about potential
sites and analyze these data with many different, powerful analytical tools
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GIS Diagram
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Service Location Strategy
Components of Volume and Revenue for a Service Firm
– Purchasing power of customer drawing area
– Service and image compatibility with demographics of
the customer drawing area
– Competition in the area
– Uniqueness of the firm’s and competitor’s locations
– Physical qualities of facilities and neighboring
businesses
– Operating policies of the firm
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Location Strategies – Service vs. Industrial
Service Revenue Focus Industrial Cost Focus
Volume/revenue
Tangible costs
Drawing area, purchasing power Transportation cost of raw materials
Competition; advertising/pricing Shipment cost of finished goods
Physical quality Energy and utility cost; labor; raw
material; taxes, etc.
Parking/access; security/ lighting;
appearance/image Intangible and future costs
Cost determinants Attitude toward union
Quality of life
Rent
Education expenditures by state
Management caliber
Quality of state and local government
Operations policies (hours, wage
rates)
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Service vs. Industrial - Continued
Techniques Techniques
Correlation analysis to Linear Programming
determine importance of factors (Transportation method)
for a particular type of
operation Weighted approach to
Demographic analysis of intangibles
drawing area Breakeven analysis
Purchasing power analysis of
drawing area
Assumptions
Assumptions
Location is a major determinate Location is a major determinate
of revenue of cost
Customer contact critical Most major costs can be
Costs are relatively constant for identified explicitly for each
a given area; therefore, revenue site
function is critical Intangible costs can be
objectively evaluated
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