Chapter 10: Location
Week 11
August 17, 2005
Objectives

Identify the factors affecting location choices

Explain how to apply the various methods to location decisions
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Dr. Karndee Prichanont IES371 1/2005

The need to produce close to the customer due to time-based competition, trade agreements, and shipping costs.

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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Dr. Karndee Prichanont IES371 1/2005
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Proximity to Customers
Business Climate
Total Costs
Infrastructure
Quality of Labor
Suppliers
Other Facilities

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Free Trade Zones
Political Risk
Government Barriers
Trading Zones
Environmental Regulation
Host Community
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Dr. Karndee Prichanont IES371 1/2005
Plant Location Methodology:
Location Factor Rating
Procedures
1
1.
Identify factors that are important in the location decision
2 3
Scores ( 0 to 100 )
Location Factors Weight Site 1 Site 2 Site 3
Labor pool & climate
0 .
30 80 65 95
Proximity to supplies
0 .
20 100 91 75
2.
Prioritize the factor by its importance. Each factor is weighted from 0 to 1.00
Wage rates
0 .
15 60
Community environment
0 .
15 75
95
80
80
80
4
3.
Subjective score (0 to 100) is assigned to each site for each factor
Location Factors
Labor pool & climate
Scores ( 0 to 100 )
Site 1 Site 2 Site 3
24 .
00 19 .
50 28 .
50
Proximity to supplies
20 .
00 18 .
20 15 .
00
4.
Sum up the weighted score.
Wage rates
9 .
00 14 .
25 12 .
00
Community environment
11 .
25 12 .
00 12 .
00
5.
The site with highest score is the most attractive
See also Example S5.1
64 .
25 63 .
95 67 .
50
5
4

Dr. Karndee Prichanont IES371 1/2005

Plant Location Methodology:
Center-of-Gravity Technique
Used for locating single facility that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them.

Involves formulas used to compute the coordinates of the twodimensional point that meets the distance and volume criteria stated above.
 x

The coordinates for the location of the new facility are computed as follows: i n 

1 x i
W i i n 

1
W i
, y
 i n 

1 y i
W i i n 

1
W i x, y = Coordinates of the new facility at center of gravity x i
, y i
W i
= coordinate of existing facility
= Annual weight shipped from
I facility i
See also Example S5.2
5

Dr. Karndee Prichanont IES371 1/2005
Ex 1 : Center-of-Gravity Technique

Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom.
Y
D
(250,580)
Q
(790,900)
Showroom
A
D
Q
# of Z-mobiles sold per month
1250
1900
2300
A
(100,200)
(0,0)
X
Question:
What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?
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Dr. Karndee Prichanont IES371 1/2005


Plant Location Methodology:
Load-Distance Technique

Various locations are evaluated using a load-distance value.
For a single potential location, a load-distance value (ld) is computed as follows:
Select the location with lowest ld value
LD d i

 i n 

1 l i d i
 x i
 x
  y i
 y

2 x, y = coordinates of the new facility x i
, y i
= coordinate of existing facility
LD = the load-distance value l i d i
= the load expressed as weight, number of trips, or unit
= the distance between the new and existing facility
Ex 2 : From ex 1, evaluate two possible different sites of warehouse to supply to showroom A, D, and Q. Given that
Warehouse site 1: x = 420 and y =450
Warehouse site 2: x = 250 and y =980
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Dr. Karndee Prichanont IES371 1/2005
Plant Location Methodology:
Break-even analysis


1.
2.
3.
4.
Also refer to Supplement A –
Decision Making
Basic steps for break-even analysis in facility location decisions:
Determine variable costs and fixed costs
Plot the total cost lines (sum of fixed costs and variable costs) for all alternatives in a single graph
Identify the approximate ranges for sites with lowest total cost
Solve algebraically for the breakeven points over the relevant ranges
1600
1400
1200
1000
800
600
400
200
0
Break-even point
A best B best C best
2 4 6 8 10 12 14 16 18 20 22
6.25
14.3
Q (thousands of units)
8
A
(20, 1390)
(20, 1200)
(20, 1060)
(20, 980)
Break-even point
D
B
C

Dr. Karndee Prichanont IES371 1/2005
Ex 3
Ethel & Earl Griese narrowed their choice for a new oil refinery to 3 locations.
Fixed and variable costs are as follows.
Locations
Albany
Baltimore
Chattanooga
Describe the appropriate decision plan for this company.
Fixed cost per year
$350,000
$1,500,500
$1,100,000
Variable cost per unit
$980
$240
$500
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Dr. Karndee Prichanont IES371 1/2005
Plant Location Methodology:
Transportation Method



A quantitative approach based on linear programming
To determine the allocation pattern that minimizes the cost of shipping products from 2 or more plants ( source of supply ) to 2 or more warehouses ( destinations )
This method is find the best shipping pattern between plants and warehouses for a particular set of plant locations with given capacities
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Dr. Karndee Prichanont IES371 1/2005
Plants
1
W arehouses
2 3 4
Capacity
Requirements
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Dr. Karndee Prichanont IES371 1/2005
Ex 3
Fire Brand makes sauce in EL Paso and New York City. Distribution centers are located in Atlanta,
Omaha, and Seattle. The shipment costs per case are as shown in the table.
FROM /
TO Atlanta Omaha Seattle
El Paso
NYC
$ 4
$ 3
$
$
5
7
$
$
6
9
The demand for Atlanta, Omaha, and
Seattle are 8,000, 10,000, and
4,000 cases per month respectively. The plant in El Paso has production capacity of
12,000 cases / month, while the plant in New York City has production capacity of 10,000 per month.
Determine the shipping pattern that will minimize transportation costs.
What are the estimated transportation costs associated with this optimal allocation pattern?
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