Chapter 10
Facility Location in a
Global Environment
IDS 605
M. Busing
Spring 1999
Facility Location

Facility Location is the placement of facility with respect to
customers, suppliers and other interacting facilities. It
should consider:
»
»
»
»
Operating costs
Customer convenience
Transportation costs
Access to key related services
such as banking and
educational opportunities
» Strategic factors
Transparency 10.1
Location as a Strategic Decision
1. Long-term commitment
2. Linked to customer base
3. Regional facility supplies specific area
4. Product facility supplies globally
5. Combination of regional and product facilities
Regional or Global
Transparency 10.2
Factors Affecting the
Location Decision




Strategic nature of
decision
Quantitative factors
Government incentives
Qualitative factors
Transparency 10.3
Data for Site in
Indianapolis, Indiana (Slide 1 of 2)
Variable Production Costs
Type
Labor
Material
Utilities
Transportation
Transparency 10.4a
Welding
Electrical
General assembly
Sheet metal
Threaded fasteners
Electrical wire
Natural gas
Electricity
In rail
Motor carrier
Motor carrier
Out motor carrier
Rate
Projected usage
$10.00/hr.
$12.00/hr.
$9.00/hr
$.40/lb.
$2.00/100
$.06/lineal ft.
$4.00/1,000 cu. ft.
$.06/kilowatt hr.
$.03/lb. (sheet metal)*
$.04/lb. (fasteners)
$.04/lb (wire)
$20/unit (finished)
0.5 hrs./unit
0.3 hrs./unit
1.1 hrs./unit
100 lbs./unit
20/unit
70 lineal ft./unit
500 cu. ft./unit
200 kilowatt hrs./unit
100lbs./unit
5 lbs./unit
4 lbs./unit
1
(Exhibit 10.1)
Data for Site in
Indianapolis, Indiana (Slide 2 of 2)
Variable Production Costs
Type
Rate
Projected usage
$2,100,000
$175,000,000
Facility Overhead
Initial Investment
Land acquisition costs
Building construction
Plant start-up costs
Initial employee training
$25,000,000
Special Considerations
Tax abatement
Low-interest loans
Supplementary training expenses
*Rates are given from a specific origin to a specific destination, so distance has been accounted for.
Transparency 10.4b
(Exhibit 10.1)
Pro Forma Operating Budget
for One Year (Slide 1 of 2)
Labor
Welding
Electric
Assembly
Total labor costs
($10.00/hr.)(.5 hrs./unit)(45,000 units)
($12.00/hr.)(.3 hrs./unit)(45,000 units)
($9.00/hr.)(1.1 hrs./unit)(45,000 units)
$ 225,000
162,000
445,500
$ 832,500
($.40/lb.)(100 lbs./unit)(45,000 units)
($2.00/100)(20/unit)(45,000 units)
($.06/lin.ft.)(70 lin.ft.)(45,000 units)
$1,800,000
18,000
189,000
$2,007,000
Material
Sheet metal
Fasteners
Wire
Total material costs
Utilities
Natural gas
Electricity
Total utility costs
Transparency 10.5a
($4.00/1,000 cu./ft.)(500 cu./ft/unit)(45,000 units) $ 90,000
($.06/kwh)(200 kwh/unit)(45,000 units)
540,000
$ 630,000
(Exhibit 10.2)
Pro Forma Operating Budget
for One Year (Slide 2 of 2)
Transportation
Sheet metal
Fasteners
Wire
Finished product
Total transportation costs
($.03/lb.)(100 lb./unit)(45,000 units)
($.04/lb.)(5lb./unit)(45,000 units)
($.04/lb.)(4lb./unit)(45,000 units)
($20.00/unit)(45,000)
Variable costs
Facility overhead *
$ 135,000
9,000
7,200
900,000
$1,051,200
$4,520,700
2,100,000
$6,620,700
Grand total
*Some overhead costs can be variable, but to simplify the discussion in this case, we will assume
all overhead costs are fixed.
Transparency 10.5b
(Exhibit 10.2)
Factors in Location Analysis
(Slide 1 of 2)
LOCATION
Country
Distance in miles from:
Chicago
POPULATION
City
County
MUNICIPAL SERVICES
Type of local government
Comprehensive city plan:
Los Angeles
Memphis
1990
Date completed
Under consideration
Number of full-time fire department personnel:
Number of full-time city policemen:
Percent of city streets paved:
Transparency 10.6a
1980
1970
Underway
%
Factors in Location Analysis
(Slide 2 of 2)
COMMERCIAL SERVICES
Machine shop in city:
Yes
Type of newspaper in city
Daily
Radio stations
Yes
BANKING SERVICES
TRANSPORTATION SERVICES
Train
Community served by railroad(s):
Name(s) of railroad(s):
Motor carrier
Highway bus service available
Number of highways serving city:
Barge:
City adjoins navigable river:
Barge dock available
Channel depth:
feet.
Transparency 10.6b
No
Weekly
No
Number
Number
Yes
No
Yes
Federal
No
State
Yes
Yes
No
No
Length of season:
Including the
Qualitative Factors

Integrate qualitative
factors
» Determine which
factors are relevant
to the problem
» Weigh each factor
» Rate each site for
each factor
Transparency 10.7
Examples of Indianapolis and
Lexington (Slide 1 of 2)
Recreational activities
University research
facilities
Union activities
Banking services
Available labor pool
Transparency 10.8a
Weight
Indianapolis
Raw Score
Lexington
Raw Score
20
8
7
40
40
80
60
8
4
7
7
8
7
6
5
Examples of Indianapolis and
Lexington (Slide 2 of 2)
Indianapolis
Weighted score
Recreational activities
University research
facilities
Union activities
Banking services
Available labor pool
Total
Transparency 10.8b
Lexington
Weighted score
160
140
320
160
560
420
320
280
480
300
1,620
1,520
Analyzing Spatial Relationships


Load-Distance Method
measures proximity to
customers, suppliers,
interacting facilities
Transportation Problem
relates to the cost of
transporting materials to
and from multiple
facilities
Transparency 10.9
Distance from Facility
to Customer
Transparency 10.10
(Exhibit 10.3)
Health Care Unit
Location Problem
Transparency 10.11
(Exhibit 10.4)
Locating a Health Care Center Using
the “Load-Distance Method” (Slide 1 of 3)
Population coordinates
Zip
Code
ai
10111
10112
10113
10114
10115
10116
10117
30,000
25,000
11,000
8,000
18,000
24,000
12,000
Total
128,000
Transparency 10.12a
xi
yi
3
2
1.5
3
3.5
4.5
5.25
2
4
5.5
7
5
3.5
6.25
(ai )(xi)
(ai)(yi)
90,000
50,000
16,500
24,000
63,000
108,000
63,000
60,000
100,000
60,500
56,000
90,000
84,000
75,000
414,500
525,500
Locating a Health Care Center Using
the “Load-Distance Method” (Slide 2 of 3)
n
  a i  x i 
xf  i  1
n
 (ai )
i1
n
  a i  y i 
yf  i  1
n
 (ai )
i1
where
xf = Distance along the x axis from the origin to the center of gravity
yf = Distance along the y axis from the origin to the center of gravity
ai = The activity level (load) from the i th location to the proposed facility
Xi = the coordinate on the x axis for the i th customer location
yi = the coordinate on the y axis for the i th customer location
Transparency 10.12b
Locating a Health Care Center Using
the “Load-Distance Method” (Slide 3 of 3)
The coordinates of the center of gravity are:
xf =
414,500
128,000
= 3.24
Transparency 10.12c
yf =
525,500
128,000
= 4.11
Transportation Problem



Cost of moving
materials between
multiple destinations
Vogel’s Approximation
Method
To evaluate two
locations, solve the
transportation problem
for each location
Transparency 10.13
OR
Transportation Matrix for
Proton Consulting Service
Transparency 10.14
(Exhibit 10.5)
First Assignment for
Proton Consulting Service
Transparency 10.15
(Exhibit 10.6)
Second Assignment for
Proton Consulting Service
Transparency 10.16
(Exhibit 10.7)
Third Assignment for
Proton Consulting Service
Transparency 10.17
(Exhibit 10.8)
Final Transportation Matrix for
Proton Consulting Service
Transparency 10.18
(Exhibit 10.9)
Location Decision Affects Other
Operating Decisions


Alternative to on-site
expansion
On-site expansion is
problematic
» Material handling and
storage
» Complex production flow
» Strained communication
» New technology delayed
» Use of old equipment
» Layering of expanded
responsibilities
Transparency 10.19
International Dimensions of
Location Decision

Reasons for locating in
foreign countries
» Comparative
Advantage
» Closeness to market
» Political relationships
» Availability of
resources
Transparency 10.20
Location Analysis for
Service Operations

Concepts and techniques
discussed so far apply to
service operations

Service issues:
» Minimize response time:
Emergency medical
services
» Provide minimum
coverage: Fire Protection
» Mobile location: Police or
security units
Transparency 10.21
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Facility Location