Facility Location Models
Location Strategy
 One of the most important decisions
a firm makes
 Increasingly global in nature
 Long term impact and decisions are
difficult to change
 The objective is to maximize the
benefit of location to the firm
Location Decisions
 Long-term decisions
 Decisions made infrequently
 Decision greatly affects both fixed
and variable costs
 Once committed to a location,
many resource and cost issues are
difficult to change
Location Decisions
Country Decision
Critical Success Factors
1. Political risks, government rules,
attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor availability, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
risks
Location Decisions
Region/
Community
Decision
MN
WI
MI
IL
IN
OH
Critical Success Factors
1. Corporate desires
2. Attractiveness of region
3. Labor availability, costs,
attitudes towards unions
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
8. Land/construction costs
Location Decisions
Site Decision
Critical Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Nearness of services/
supplies needed
5. Environmental impact
issues
Factors That Affect
Location Decisions
 Labor productivity
 Wage rates are not the only cost
 Lower productivity may increase total cost
Labor cost per day
= cost per unit
Productivity (units per day)
A
$70
= $1.17 per unit
60 units
Z
$25
= $1.25 per unit
20 units
Factors That Affect
Location Decisions
 Exchange rates and currency risks
 Can have a significant impact on cost
structure
 Rates change over time
 Costs
 Tangible - easily measured costs such as
utilities, labor, materials, taxes
 Intangible - less easy to quantify and
include education, public transportation,
community, quality-of-life
Factors That Affect
Location Decisions
 Attitudes
 National, state, local governments toward
private and intellectual property, zoning,
pollution, employment stability
 Worker attitudes towards turnover, unions,
absenteeism
 Globally cultures have different attitudes
towards punctuality, legal, and ethical
issues
Factors That Affect
Location Decisions
 Proximity to markets
 Very important to services
 JIT systems or high transportation costs
may make it important to manufacturers
 Proximity to suppliers
 Perishable goods, high transportation
costs, bulky products
Types Of Facilities
 Heavy manufacturing
Auto plants, steel mills, chemical plants
 Light industry
Small components mfg, assembly
 Warehouse & distribution centers
 Retail & service
Factors in Heavy
Manufacturing Location
 Construction costs
 Land costs
 Raw material and finished goods
shipment modes
 Proximity to raw materials
 Utilities
 Labor availability
Factors in Light
Industry Location
 Construction costs
 Land costs
 Easily accessible
geographic region
 Education & training capabilities
Factors in
Warehouse Location
 Transportation costs
 Proximity to markets
ปัจจัยในการเลือกทาเลทีต่ ั้งคลังสินค้ า
สุทศิ า สรรพกิจไพศาล, 2550
1.
2.
3.
4.
5.
6.
7.
การขนส่ งทางบก
การขนส่ งทางรถไฟ
อยู่ใกล้ กบั ลูกค้ า
อยู่ใกล้ แหล่ งวัตถุดบิ / โรงงานผลิต
สาธารณูปโภค
การระบายน้า
การถ่ ายเทของเสีย / การจัดการของเสีย
ปัจจัยในการเลือกทาเลทีต่ ั้งคลังสินค้ า
สุทศิ า สรรพกิจไพศาล, 2550
8. การเป็ นเจ้ าของทีด่ นิ
9. แรงจูงใจจากคลังสินค้ าทีต่ ั้งอยู่ก่อน
10. แรงงานและค่ าจ้ าง
11. อัตราผลตอบแทนจากการลงทุน
12. ระยะเวลาคืนทุน
13. มูลค่ าเงินปัจจุบนั สุ ทธิ
14. การวิเคราะห์ ระยะทางกับภาระงาน (Load distance analysis)
Location Analysis
Techniques
Location rating factor
Center-of-gravity
Load-distance
Break Even
LP and Non-LP
Location Rating Factor
 Identify important factors
 Weight factors (0.00 - 1.00)
 Subjectively score each factor (0 - 100)
 Sum weighted scores
Location Factor Rating
SCORES (0 TO 100)
LOCATION FACTOR
Labor pool and climate
Proximity to suppliers
Wage rates
Community environment
Proximity to customers
Shipping modes
Air service
WEIGHT
Site 1
Site 2
Site 3
.30
.20
.15
.15
.10
.05
.05
80
100
60
75
65
85
50
65
91
95
80
90
92
65
90
75
72
80
95
65
90
Weighted Score Site 1 = (0.30)(80) = 24
Location Factor Rating
WEIGHTED
SCORES
SCORES
(0 TO 100)
LOCATION FACTOR
Labor pool and climate
Proximity to suppliers
Wage rates
Community environment
Proximity to customers
Shipping modes
Air service
WEIGHT
Site 1
Site 2
Site 3
.30
.20
.15
.15
.10
.05
.05
24.00
80
20.00
100
9.00
60
11.25
75
6.50
65
4.25
85
2.50
50
77.50
19.50
65
18.20
91
14.25
95
12.00
80
9.00
90
4.60
92
3.25
65
80.80
27.00
90
15.00
75
10.80
72
12.00
80
9.50
95
3.25
65
4.50
90
82.05
Weighted Score Site 1 = (0.30)(80) = 24
Center-of-Gravity Technique
 Locate facility at center of geographic area
 Based on weight and distance traveled
 Establish grid-map of area
 Identify coordinates
and weights shipped
for each location
Grid-Map Coordinates
y
n

x=
i=1
1 (x1, y1), W1
3 (x3, y3), W3
y3
x1
x2
x3
x
yiWi
i=1
y=
n

y1

xiWi
i=1
2 (x2, y2), W2
y2
n
Wi
n

Wi
i=1
where,
x, y = coordinates of the new
facility at center of gravity
xi, yi = coordinates of existing
facility i
Wi = annual weight shipped from
facility i
Center-of-Gravity Technique
y
x
y
Wt
700
C
600
Miles
500
(135)
B
(105)
400
300
200
D
(60)
A
(75)
100
0
100 200 300 400 500 600 700 x
Miles
A
200
200
75
B
100
500
105
C
250
600
135
D
500
300
60
Center-of-Gravity Technique
A
B
C
D
n
x
200
100
250
500
700
xiWi
C
(200)(75)
+ (100)(105)
+ (500)(60)
y + (250)(135)
200
500
600
300
i=1
600
x=
=
(135)
Wt + 135
75+ 60 105
135= 23860
75 + 105
n
B
500  Wi (105)
Miles
y
i=1
400
D
300n

yiWi
200
i=1
y=
100 n
 Wi
i=1
0
A
(60)
(200)(75)
+ (500)(105) + (600)(135) + (300)(60)
(75)
=
= 444
75 + 105 + 135 + 60
100 200 300 400 500 600 700 x
Miles
Center-of-Gravity Technique
y
700
C
600
Miles
500
(135)
B
(105)
400
300
200
A
x
y
Wt
Center of gravity (238, 444)
D
(60)
(75)
100
0
A
200
200
75
100 200 300 400 500 600 700 x
Miles
B
100
500
105
C
250
600
135
D
500
300
60
Load-Distance
Technique
• Compute Load x Distance for each
site
• Choose site with lowest
Load x Distance
• Distance can be actual
or straight-line
Load-Distance Calculations
n
LDij =
ld
ij
ij
j=1
where,
LDij=
load-distance value from site i to all existing facility j’s
lij
load expressed as a weight, number of trips or units
being shipped from proposed site i and location j
=
dij
=
distance between proposed site i and location j
dij
=
(xi - xj)2 + (yi - yj)2
where,
(xi,yi) = coordinates of proposed site i
(xi , yj) = coordinates of existing facility j
Supplemen
Load-Distance: Example
Potential Sites
Site
X
Y
1
360
180
2
420
450
3
250
400
X
Y
Wt
A
200
200
75
Suppliers
B
C
100
250
500
600
105
135
D
500
300
60
Compute distance from each site to each supplier
Site 1 d1A =
(xA - x1)2 + (yA - y1)2 =
(200-360)2 + (200-180)2 = 161.2
d1B =
(xB - x1)2 + (yB - y1)2 =
(100-360)2 + (500-180)2 = 412.3
d1C = 434.2
d1D = 184.4
Load-Distance: Example (cont.)
Site 2 d2A = 333 d2B = 323.9 d2C = 226.7 d2D = 170
Site 3 d3A = 206.2d3B = 180.4 d3C = 200 d3D = 269.3
Compute load-distance
n
lijdij
LDij =
j=1

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
* Choose site 3
Break-Even Analysis
 Method of cost-volume analysis used for
industrial locations
 Three steps in the method
1. Determine fixed and variable costs
for each location
2. Plot the cost for each location
3. Select location with lowest total
cost for expected production
volume
Break-Even Analysis
Three locations:
Fixed Variable
Total
City
Cost
Cost
Cost
Chonburi
$30,000
$75
$180,000
Lumphoon
$60,000
$45
$150,000
Songkla
$110,000
$25
$160,000
Selling price = $120
Expected volume = 2,000 units
Total Cost = Fixed Cost + Variable Cost x Volume
Annual cost
Break-Even Analysis
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
–|
0
lowest
cost
|
500
lowest
cost
lowest cost
|
1,000
|
1,500
|
2,000
Volume
|
2,500
|
3,000