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FACILITY LOCATION
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FACILITY LOCATIONOnce a firm has decided to open a newfacility OR relocate an existing facility, It
must decide where that facility should belocated.
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FACILITY LOCATION Facility locationproblem involves the
evaluation ofvarioussitesfor a newfacility.
There areseveralfactors that influencethe Facility Location Decision:
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Factors Related to Resources Labor Availability, Labor cost, Labor Skills;
Materials Availability, Material cost,material
quality;
Equipment Availability, Equipment Cost;
Land Availability, Land suitability, Land cost;
Energy Availability,energy cost; Water Availability,water quality,water cost.
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Factors Related to the
Infrastructure Availability of Financial Institutions, Strength
of Financial Institutions
Government Stability, Government taxes,Import and Export restrictions.
Quality of life, Culturalissues,
Environmental regulations,Transportation
availability,Transportation cost And finally, Competitorssize, strength and
attitudein that region.
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FACILITY LOCATION Therearemanyanalyticaltechniques
thatcanbeusedinfacilitylocation
decision. Someoftheseare:
1) FactorRating
2) Cost-Profit-Volumeanalysis3) CenterofGravity Method,and
4) Transportationand Simulation Models.
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Methodof Factor Rating Infactorratingmethod,firstwemust
identifythe MostImportantFactorsinevaluatingalternativesitesforthenewfacility.
Thenweshouldassignaweight
between 0 and 100 toeachofthesefactors.
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Methodof Factor RatingEachalternativelocationwillthenberated
basedonthesefactorweights.
Themostweightedalternativeisselectedasthebestalternative.
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Example Samson Ltd.isconsideringthreealternative
sitesforitsnewfacility.
Afterevaluatingthefirms Needs,theManagershave NarrowedthelistofImportantSelection Criteriadownintothreemajor Factors.
- Availabilityofskilledlabor- AvailabilityofRawmaterials,and
- Proximitytothefirmsmarkets.
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Example Weightsreflectingtherelativeimportance
ofeachfactorhavebeenassignedas
follows:
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Example Basedonthesecriteria,thethree
Alternativesiteswerescored
between 0 and 100 points:
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Example Nowwewillmultiplyeachscorebyits
correspondingfactorweight:
Weightedscoresarecalculatedas: (SiteScore)x(Factor Weight)
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Example Fromtheseresults,thelargesttotal
weightisfor Site A. Itappearstobethebestlocation.
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Example Whathappensifwechangethefactor
weights. Letsusethefollowingfactorweights:
Skilledlabor: 0.45; Raw Materials:0.40; and Market: 0.15
Thenthefollowingresultsareobtained:
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Example
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Example In this case, Site C appears to be the best
choice with largest weight score.
Therefore, factor rating method is verysensitive to the weights assigned to eachfactor.
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Example Sincefactorweights,selectedfactors,
andassignedscoresarealldeterminedsubjectively,themanagersshouldbeverycarefulinselectingtheseitemsandnumbers.
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Cost-Profit-Volume
Analysis
Whenthefixedand
variablecostsforeachsitediffer,Cost-profit-volumeanalysis canbe used
toidentifythelocationwiththelowestcost.
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Example Foster Paper Ltd.isconsideringthree
alternativesitesforitsnewproductionfacility.
The Annual Production Costassociatedwitheachalternativeisalinearfunction
oftheproduction volume.Thatis:
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ExampleTotal Production Cost = (Fixed Cost) +
(variableunitcost) x (annualproduction
volume)
AssumethatTheexpectedannual
production volumeis250.000 units. Andfurtherassumethat:
(x: production volume = 250.000)
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ExampleFor Site A: Prod. Cost= 10.000.000 + 250 x
For SiteB: Prod. Cost= 25.000.000 + 150 x
For Site C: Prod. Cost= 60.000.000 + 50 x
Basedontheseinformation, Whichsitehasthelowestcost?
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Example Ataproduction volumeof250.000 units,siteBhasthelowestcost,because
For Site A: Prod. Cost= 10.000.000 + 250(250.000) = 72.500.000
For SiteB: Prod. Cost= 25.000.000 + 150(250.000) = 62.500.000
For Site C: Prod. Cost= 60.000.000 + 50(250.000) = 72.500.000
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Example
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Example Thisgraphicshowsthatannualproduction
costchangeswithdifferentproductionvolumes.
-Iftheexpectedannualproduction volumeisbelow 150.000 units,thenchoosesite A.
-Iftheexpectedannualproduction volumeisbetween 150.000 and350.000 units,then
choosesiteB. -Iftheexpectedannualproduction volumeis
over350.000 units,thenchoosesite C.
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Centerof Gravity Method Thecenterofgravitymethodisusedto
findalocationthatMinimizesthe Sum
ofTransportation Costinbetweennewfacilityandoldfacilities.
Transportationcostisassumedtobea
linearfunctionofthe NumberofUnitsShipped AND theTraveling Distance.
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TransportationModel Thetransportationmodeltechniquecan
beusedtodeterminehowmanyunits
shouldbeshippedfromeachplanttoeachwarehouseTo MinimizeTotalTransportation Cost.
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SimulationModels
Firmsoften Considermany variablesandFactorswhentheychooseafacilitylocation.
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SimulationModelsThese variablesareoftendifficultto
estimateandtheyalsochangeintime.
Inthese kindsofDynamic Situations,Simulation maybethebestmodelingtechnique.
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SimulationModelsSimulationmodelsallowmanagersto
examinearangeofScenariosandare
wellsuitedtoopen-endedproblems.However,thedeterminationofthe
parametersinasimulationisalsoachallengingtask.
Also,developingasimulationmodelmaytakeconsiderabletimeandeffort.