Chapter: Plant Location Course Teacher: Professor Dr. Ahmed Sayem Specialization: Strategic Management, Supply Chain Management, Industrial Management, Global Manufacturing Network. Department of Industrial & Production Engineering, Shahjalal University of Science & Technology, Sylhet. Facility Location • Strategy to estimate the demand in various markets. • Strategy also consist of selecting the location from which potential markets will be served. • Location of a non-manufacturing operation helps to determine how conveniently costumers can conduct business with the company. • Location of manufacturing or non-manufacturing operations can have a great impact on • Operating cost, as well as profit • Decision about which goods or services can be offered. The Importance of Location Main reasons for care in the selection of facility locations are: 1. Competition: firm ability to compete. • Direct cost (e.g. transpiration) • Labor cost • Demand of service and the effectiveness of the entire operators. 2. Cost: failure to make good location decisions are expensive and have long-lasting consequence. 3. Hidden Effects: Opportunity cost. • Usually no checks are written for the opportunity cost; they do not show up in accounting reports. But… The Systems View: in location decisions • A broad system view is necessary, because the problem may encompass many interrelated factors. • The operations function is part of a larger system- the company. • The company in turn is part of a larger system- a logistic chain. • Manufacturing companies depend on suppliers for inputs, • and need to supply their outputs to customers. • Thus several companies or several divisions of a large company may be linked in a logistics chain. Major issues should be in the analysis. The Systems View: in location decisions Figure: The logistic chain Location Factors • Typically involve a broad array of factors that can influence revenue, cost, or both, • and consequently affect profits. In general they may grouped into three categories: 1. Market-related factors: locations of demand and of competition. 2. Tangible cost factors: transportation, labor, utilities, site costs, construction costs, taxes. 3. Intangible factors: international considerations, zoning and legal regulations, environmental factors, climate, room for growth, schools, hospitals, and so on. Market related Factors • Location of facilities considering market strategies. • A decision on the location of the facility that supplies the demand (forecasted demand of product according to market/s) . • Location of competitors: Sometimes it is necessary to be located near competitors. Alternatively, some companies wish to avoid competitors. • In case of high-volume purchases- suppliers located closer to the purchaser’s plant. • Based on production philosophy: e.g. JIT production. Tangible cost Factors (1/2) 1. Transportation: can be a major expensive in manufacturing, they can be affective by site selection. • Availability of multiple modes of transportation, • The relative weights and freight costs for inbound and outbound items may influence location decisions. • International transportation; use of consolidation services might result in significant saving when there is less than full container. 2. Labor availability and Costs: labor-intensive companies may place more emphasis on the cost of processing materials than on the cost of transportation them. Tangible cost Factors (2/2) 2. Energy Availability and Costs: When a manufacturing facility or plan needs large amounts of energy sources to operate production processes. 3. Water availability and costs: Processes that require large amounts of water are restricted to locations where abundant water resources are available. • Cost of water treatment and pollution control must be considered by operations that make extensive use of water. 4. Site and Construction costs: Cost per unit area of land varies widely form site to site in a region, and from region to region. 5. Taxes: tax concessions as incentives to attract business and industry. Intangible Factors (1/2) 1. International consideration: factors like, trade quotas, culture, government stability and cooperation, monetary system, etc. 2. Zoning and legal Regulations: Pollution control regulations may limit the location available to some companies. Zoning regulation control the types of business that may operate in certain areas. 3. Environmental Factors: Availability of suitable waste disposal sites and the cost of waste disposal are important. Obtaining permits to build and operate some facilities can be a lengthy and expensive process. Hence the process needed to begun early to achieve timely completion. Intangible Factors (2/2) 4. Community attitudes: some areas may be unfavorable to a particular type of business, even though there is no formal legislation against it. 5. Quality of life: the cost of living, high crime rates are important to all employees. 6. Expansion potential: flexibility and room for expansion. Materials-oriented location A company is said to have a materials-oriented locations: • If a company is located near its source of materials, • If it has a single source of raw material and ships its products in many directions, • If the raw material is heavy or cumbersome. • For example: paper manufacturing, quarrying and mining operations must be located Market-oriented locations Locating near the consumer. A company is said to have a market-oriented locations: • If their products are perishable, extremely heavy or bulky. • When rapid delivery is a condition of sales. • When most of a company’s product is consumed within a small region, • If raw materials come from several regions, and are inexpensively shipped. • For example: Retail and finished-goods warehousing operations. Service operations: contact with consumer is important. Location Evaluation Methods There are four models or techniques in reaching a location decision: 1. Cost-Profit-Volume or Break-Even Analysis 2. Point Rating 3. The Transportation Method of Linear Programming 4. Simulation Cost-Profit-Volume or Break-Even Analysis • Some of the costs of having a facility in a location will be fixed, and others will vary with the volume of business. • The cost structures will be different for each location being considered. • Also, the volume of sales will be different for each location. Cost-Profit-Volume or Break-Even Analysis Cost-Profit-Volume Analysis procedure: ➢ Determine fixed and variable costs ➢ Plot total costs lines ➢ Determine lowest total costs Assumptions ✓ Fixed costs are constant ✓ Variable costs are linear ✓ Output can be closely estimated ✓ Only one product involved Cost-Profit-Volume or Break-Even Analysis Example (Cost-Profit-Volume) Fixed and variable costs for four potential locations L o c a tio n A B C D F ix e d C ost $ 2 5 0 ,0 0 1 0 0 ,0 0 1 5 0 ,0 0 2 0 0 ,0 0 0 0 0 0 V a r ia b le C ost $11 30 20 35 Solution (Cost-Profit-Volume) Fixed Costs A B C D $250,000 100,000 150,000 200,000 Variable Costs $11(10,000) 30(10,000) 20(10,000) 35(10,000) Total Costs $360,000 400,000 350,000 550,000 Solution (Cost-Profit-Volume) $(000) 800 700 600 500 400 300 200 100 0 D B C A A Superior C Superior B Superior 0 2 4 6 8 10 Annual Output (000) 12 14 16 Another option: Considering Revenue Vs Total Cost Keep in mind that: • One should not conclude that the lowest-cost location will always be the maximum profit location, unless the price and volume are to be the same for all locations. • Some locations other than the one with minimum costs might result in sufficient additional volume to increase revenue more than costs. • For instance: Higher cost location can provide higher profit Another option: Considering Revenue Vs Total Cost Clarify your idea: • Location of a factory or warehouse has no effect on the volume of demand. • Instead, Location choice have a great effect on the volume of sales for retail establishment or a service operation.