Facility Location
Part 1
by
Anita Lee-Post
© Anita Lee-Post
Learning objectives
1. Define facility location decision and
its strategic impacts.
2. Describe the procedure for making
facility location decisions.
3. Identify the criteria for selecting
appropriate locations for a plant or
service facility.
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Learning objectives continued
4. Apply the center-of-gravity method to
evaluate location alternatives based on
load-distance.
5. Apply the transportation method to
evaluate the cost impact of adding new
sites to the network of existing facilities.
6. Apply the break-even analysis to evaluate
different location alternatives based on
costs.
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Facility location
• Facility Location Decision is:
determining the best geographical location
for a company’s facility (which can be an
entire organization, a division, or any form
of establishment for manufacturing and/or
service activities).
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Strategic impacts
In terms of long-term impacts,
location decision:
• Requires long-term commitments in
buildings and facilities.
• Requires sizable financial investment
in setting up a new facility.
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Strategic impacts continued
In terms of competitive imperatives,
location decision allows for:
• Time-based competition if located
near customers and/or suppliers.
• Lowering of shipping costs if located
near customers and/or suppliers.
• Lowering wage costs if located near
the appropriate labor pool.
• Adequate supply of skilled labor if
located near the appropriate labor pool.
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Procedure for making facility location decisions
• Identify dominant location criteria:
What are the distinctive location factors that have a
critical impact on the company’s strategic goal?
• Develop location alternatives:
What are the acceptable locations that satisfy the
selected factors?
• Evaluate location alternatives:
Which is the best location among the acceptable
alternatives?
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Location factors
1. Proximity to
Customers
7. Free Trade Zones
2. Market
Opportunity
9. Government
Incentives
3. Total Costs
4. Infrastructure
10. Environmental
Regulation
5. Quality of Labor
11. Community Attitude
6. Suppliers
12. Cultural Issues
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8. Political Risk
Dominating location factors
Proximity to customers at First Security
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Dominant locating factors continued
Market opportunity at Wal-Mart
• opening of first Wal-Mart in Rogers, Arkansas
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Location alternatives evaluation methods
Distance-based:
center-of-gravity method
•
Given the locations of existing facilities (distance)
and the volume of goods to be shipped between
them (load)
•
Find the location of a single facility (e.g., a
warehouse) that gives the best load-distance
score (i.e., minimizes the total amount of loads
moved weighted by the distance traveled)
•
Assuming inbound & outbound transportation
costs are equal & irrespective of load size
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Location alternatives evaluation methods
Cost-based:
transportation method
•
Given the supply availability of each factory
(or source), the demand of each warehouse
(or destination), and the costs per unit of goods
to be shipped between them
•
Find a minimum-cost shipping schedule that
satisfies demand requirements without
exceeding supply
•
Assuming no cost on excess supply
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Location alternatives evaluation methods
Cost-based:
break-even analysis
•
Given the fixed and variable costs at each
location alternatives
•
Identify ranges of ouptut for which each location
has the lowest total cost
•
Select the location that gives the lowest cost for
the design capacity of the new facility
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