1 Facility Location. 2 Location Options Expanding existing facilities Building a new facility (for the beginners) Moving to another facility Addition

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Facility LocationFacility Location

2

Location OptionsLocation Options

Expanding existing facilities Building a new facility (for the

beginners) Moving to another facility Addition of one or more facilities to

the existing network in order to expand capacity

Closing of one or more facilities in order to shrink capacity

3

Location decisions may arise for a variety of reasons: Addition of new facilities

As part of a marketing strategy to expand

markets Growth in demand that cannot be satisfied by

expanding existing

facilities Depletion of basic inputs requires relocation Shift in markets Cost of doing business at a particular location

makes relocation attractive

The Need for Location DecisionsThe Need for Location Decisions

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Location Decisions: Strategically Location Decisions: Strategically ImportantImportant

Location decisions: Are long-term decisions Are closely tied to an organization’s strategies

Low-cost Convenience to attract market share

Effect capacity and flexibility Are difficult to reverse Represent a long-term commitment of resources Effect investment requirements, Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc) Effect revenues, Effect operations Impact competitive advantage Important to supply chains

5

Location Decisions: ObjectivesLocation Decisions: Objectives Location decisions are based on:

Cost or profit potential and customer service Finding a number of acceptable locations from which to choose (no single

location may be better than others) Position in the supply chain

End: accessibility, consumer demographics, traffic patterns, and local customs are important

Middle: locate near suppliers or marketsBeginning: locate near the source of raw materials

Supply chain management issues such as supply chain configurationCentralized vs. decentralized distribution

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Industrial Location DecisionsIndustrial Location Decisions

Cost focusRevenue varies little

between locationsLocation is a major

cost factorLocation effects shipping &

production costs (costs vary greatly between locations

© 1995 Corel Corp.

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Service Location DecisionsService Location DecisionsRevenue focus

Costs vary little between market areasLocation is a major revenue factorFactors such as Traffic volume, good

transportation, customer safety and convenience most important

Location effects amount of customer contact

Locaiton effects volume ofbusiness

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Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets

Government agenciesPolice & fire departmentsPost Office

Retail Sales and ServiceFast food restaurants, supermarkets, gas stationsDrug stores, shopping mallsBakeries

Other ServicesDoctors, lawyers, accountants, barbersBanks, auto repair, motels

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General Procedure for Making General Procedure for Making Location DecisionsLocation Decisions

Decide on the criteria to use for evaluating location alternatives Identify important factors (such as location of markets or raw

materials) Develop location alternatives

- identify the country or countries for location - identify the general region for location

- identify a small number of community alternatives

- identify site alternatives among the cummunity alternatives

Evaluate the alternatives and make a selection

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Location Decision SequenceLocation Decision Sequence

Country

.

Region/Community

.

Site

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FactorsFactors That Affect Location Decisions That Affect Location Decisions

Regional Factors

Site-related FactorsCommunity Considerations

Global Factors

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Global Location: Facilitating Global Location: Facilitating FactorsFactors

Key factors that have contributed to the attractiveness of globalization:Trade Agreements such as

North American Free Trade Agreement (NAFTA)General Agreement on Tarriffs and Trade (GATT)U.S.-China Trade Relations ActEU and WTO efforts to facilitate trade

TechnologyAdvances in communication and information technology

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Global Location: BenefitsGlobal Location: Benefits

A wide range of benefits have accrued to organizations that have globalized operations:MarketsCost savingsLegal and regulatoryFinancialOther

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Global Location: DisadvantagesGlobal Location: Disadvantages

There are a number of disadvantages that may arise when locating globally:Transportation costsSecurity costsUnskilled labor Import restrictionsCriticism for locating out-of-country

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Global Location: RisksGlobal Location: Risks

Organizations locating globally should be aware of potential risk factors related to:Political instability and unrestTerrorismEconomic instabilityLegal regulationEthical considerationsCultural differences

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Managing Global OperationsManaging Global Operations

Managerial implications for global operations:Language and cultural differences

Risk of miscommunicationDevelopment of trustDifferent management stylesCorruption and bribery

Level of technology and resistance to technological change

Domestic personnel may resist locating, even temporarily

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Location: Identifying a CountryLocation: Identifying a Country

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Location: Identifying a RegionLocation: Identifying a RegionPrimary regional factors:

Locating close to the raw materialsNecessityPerishabilityTransportation costs

Locating close to the marketsAs part of a profit-oriented company’s competitive

strategySo not-for-profits can meet the needs of their service usersDistribution costs and perishability

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Location: Identifying a Region Location: Identifying a Region

Labor factorsCost of laborAvailability of suitably skilled workersWage rates in the areaLabor productivityAttitudes toward workWhether unions pose a serious potential problem

Other factorsClimate and taxes may play an important role in

location decisions

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More on More on Regional Location FactorsRegional Location Factors

Labor (availability, education, cost and unions)

Proximity of customers Number of customers Construction/leasing costs Land costs Modes and quality of

transportation Transportation costs

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

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More on More on Regional Location FactorsRegional Location Factors

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

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Geographic Information System Geographic Information System (GIS)(GIS)

GISA computer-based tool for collecting, storing,

retrieving, and displaying demographic data on mapsAids decision makers in

Targeting market segments Identifying locations relative to their market

potentialPlanning distribution networks

Portraying relevant information on a map makes it easier for decision makers to understand

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Location: Identifying a CommunityLocation: Identifying a Community

Many communities actively attempt to attract new businesses they perceive to be a good fit for the community

Businesses also actively seek attractive communities based on such factors such as: Quality of life Services Attitudes Taxes Environmental regulations Utilities Development support

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Location: Identifying a SiteLocation: Identifying a Site

Primary site location considerations areLandTransportationEnvironmental ZoningLegalOther restrictions

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Site Location FactorsSite 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

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Plant StrategiesPlant Strategies

Single Plant StrategyMultiple Plant Strategy

- Product Plant Strategy

- Market Area Plant Strategy

- Process Plant Strategy

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Product plant strategy Entire products or product lines are produced in separate

plants, and each plant usually supplies the entire domestic market

Market area plant strategy Plants are designated to serve a particular geographic

segment of the market Plants produce most, if not all, of a company’s products

Multiple Plant StrategiesMultiple Plant Strategies

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Multiple Plant StrategiesMultiple Plant Strategies

Process plant strategyDifferent plants focus on different aspects of a process

automobile manufacturers – engine plant, body stamping plant, etc.

Coordination across the system becomes a significant issue General-purpose plant strategy

Plants are flexible and capable of handling a range of products

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Service and Retail LocationsService and Retail Locations

Nearness to raw materials is not usually a consideration Customer access is a

Prime consideration for some: restaurants, hotels, etc.Not an important consideration for others: service

call centers, etc. Tend to be profit or revenue driven, and so are

Concerned with demographics, competition, traffic/volume patterns, and convenience

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Evaluating Location AlternativesEvaluating Location Alternatives

Common techniques for location evaluation: Locational cost-volume-

profit analysis Factor rating method Load-distance method Center of gravity method Transportation model (a

specialized linear programming method)

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Locational Cost-Profit-Volume AnalysisLocational Cost-Profit-Volume Analysis

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Locational Cost-Profit-Volume Locational Cost-Profit-Volume AnalysisAnalysis

Locational Cost-Profit-Volume (Break-even)Analysis A technique for evaluating location choices in

economic terms Steps:

1. Determine the fixed and variable costs for each alternative

2. Plot the total-cost lines for all alternatives on the same graph

3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output

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Assumptions1. Fixed costs are constant for the range of

probable output

2. Variable costs are linear for the range of output

3. The required level of output can be closely estimated

4. Only one product is involved

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For a cost analysis, compute the total cost for each alternative location:

output of or volumeQuantity

unitper cost Variable

cost FixedFC

where

FCCost Total

Q

v

Qv

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Example: Cost-Profit-Volume AnalysisExample: Cost-Profit-Volume Analysis

Fixed and variable costs for four potential plant locations are shown below:

LocationFixed Costper Year

Variable Costper Unit

A $250,000 $11

B $100,000 $30

C $150,000 $20

D $200,000 $35

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Example: Cost-Profit-Volume Example: Cost-Profit-Volume AnalysisAnalysis

Fixed Costs

Variable Costs

Total Costs

A B C D

$250,000 100,000 150,000 200,000

$11(10,000) 30(10,000) 20(10,000) 35(10,000)

$360,000 400,000 350,000 550,000

Comparison of total costs at a production volume of 10,000

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Example: Cost-Profit-Volume AnalysisExample: Cost-Profit-Volume Analysis

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

B

C

D

Plot of total costs

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Example: SolutionExample: Solution

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

B

C

B SuperiorC Superior

A Superior

D

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Example: Cost-Profit-Volume Example: Cost-Profit-Volume AnalysisAnalysis

Range approximations B Superior (up to 4,999 units)

C Superior (>5,000 to 11,111 units)

A superior (11,112 units and up)

000,5

10000,50

30000,10020000,150

B ofCost Total C ofCost Total

Q

Q

QQ

11.111,11

9000,100

20000,15011000,250

C ofCost Total A ofCost Total

Q

Q

QQ

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Factor Rating MethodFactor Rating Method

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Factor RatingFactor Rating Method Method

A general approach to evaluating locations that includes quantitative and qualitative inputs

Most widely used location technique Useful for service and industrial locations Rates locations using both

tangible (quantitative) factors such as short-run and long-run costs and

intangible (qualitative) factors such as education quality, labor skills.

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Factor RatingFactor RatingProcedure:

Determine which factors are relevant Assign a weight to each factor that indicates its relative importance

compared with all other factors. Weights typically sum to 1.00

Decide on a common scale for all factors (such as 1-100), and set a minimum acceptable score if necessary

Score each location alternative along each factor Multiply the factor weight by the score for each factor, and sum the

results for each location alternative Choose the alternative that has the highest composite score, unless it

fails to meet the minimum acceptable score

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Example: Factor RatingExample: Factor Rating

A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?

Scores(Out of 100)

Factor Weight Alt 1 Alt 2

Proximity to existing source .10 100 60

Traffic volume .05 80 80

Rental costs .40 70 90

Size .10 86 92

Layout .20 40 70

Operating Cost .15 80 90

1.00

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Example: Factor RatingExample: Factor RatingA photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?

Scores(Out of 100) Weighted Scores

Factor Weight Alt 1 Alt 2 Alt 1 Alt 2

Proximity to existing source .10 100 60 .10(100) = 10.0 .10(60) = 6.0

Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0

Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0

Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2

Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0

Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5

1.00 70.6 82.7

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Centre of Gravity MethodCentre of Gravity Method

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Center of Gravity MethodCenter of Gravity Method A method for locating a distribution center that minimizes distribution

costs Finds location of a single distribution center serving several

destinations Used primarily for services Treats distribution costs as a linear function of the distance and the

quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method necessitates to identify coordinates and weights shipped

for each location and includes the use of a map that shows the locations of destinations

The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative

locations

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Center of Gravity MethodCenter of Gravity Method

Considers• Location of existing destinations eg. Markets, retailers etc.• Volume to be shipped• Shipping distances (or costs)

•Shipping cost/unit/mile is constant

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If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates

nsdestinatio ofNumber

n destinatio of scoordinate


where

n

iyy

ixx

n

yy

n

xx

i

i

i

i

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Destination x y

D1 2 2

D2 3 5

D3 5 4

D4 8 5

18 16

44

16

5.44

18

n

yy

n

xx

i

i

Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure

Suppose you are attempting to find the center of gravity for the problem .

50


When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates

iyy

ixx

iQ

Q

QyC

Q

QxC

i

i

i

i

iiy

i

iix



n destinatio toshipped be oQuantity t

where

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Grid-Map CoordinatesGrid-Map Coordinates

where,Cx, Cy =coordinates of the new facility at center of gravityxi, yi =coordinates of existing facility iVi =annual volume shipped from or to the ith location

nn

VVii

i = i = 11

xxiiQQii

i = i = 11

nn

CCxx = =

nn

VVii

i = i = 11

yyiiQQii

i = i = 11

nn

CCyy = =

xx11 xx22 xx33 xx

yy22

yy

yy11

yy33

1 (1 (xx11, , yy11), ), QQ11

2 (2 (xx22, , yy22), ), QQ22

3 (3 (xx33, , yy33), ), QQ33

52

Center of Gravity MethodCenter of Gravity Method: Example 1: Example 1

Suppose the shipments for the problem depicted in Figure are not all equal. Determine the center of gravity based on the following information.

Destination x y WeeklyQuantity

D1 2 2 800

D2 3 5 900

D3 5 4 200

D4 8 5 100

18 16 1,000

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The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7). This south of destination D2 (3, 5).

7.3000,2

400,7

000,2

)100(5)200(4)900(5)800(2

05.3000,2

100,6

000,2

)100(8)200(5)900(3)800(2

iQ

QyC

Q

QxC

i

iiy

i

iix

54


55

Center-of-Gravity TechniqueCenter-of-Gravity Technique: : Example 2Example 2

A B C D

x 200 100 250 500y 200 500 600 300Vt 75 105 135 60

y

700

500

600

400

300

200

100

0 x700500 600400300200100

A

B

C

D

(135)

(105)

(75)

(60)

Miles

Mil

es

56


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

Cx = = = 238n

Wii = 1

xiWii = 1

n

n

Wii = 1

yiWii = 1

n

Cy = = = 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

57


A B C D

x 200 100 250 500y 200 500 600 300Wt 75 105 135 60

y

700

500

600

400

300

200

100

0 x700500 600400300200100

A

B

C

D

(135)

(105)

(75)

(60)

Miles

Mil

es

Center of gravity (238, 444)

58

Worldwide Distribution of Worldwide Distribution of Volkswagens and PartsVolkswagens and Parts

59

Telemarketing and Internet Telemarketing and Internet IndustriesIndustries

Require neither face-to-face contact with customers (or employees) nor movement of material

Web based retail organizations are effectively location dependent

Presents a whole new perspective on the location problem

60

Final ThoughtFinal Thought

The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.

Documents

1 Facility Location. 2 Location Options Expanding existing facilities Building a new facility (for the beginners) Moving to another facility Addition