Facility Location
1
Location Decisions
Long-term decisions (expand existing
facilities, add new facilities, move)
Difficult to reverse
Affect fixed & variable costs
Transportation cost
As much as 25% of product price
Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of location to firm
2
Need for Location Decisions
 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources
3
Nature of Location Decisions
 Strategic Importance of location decisions



Long term commitment/costs
Impact on investments, revenues, and operations
Supply chains
 Objectives of location decisions



Profit potential
No single location may be better than others
Identify several locations from which to choose
 Location Options



Expand existing facilities
Add new facilities
Move
4
Industrial Location Decisions
Cost focus
Revenue varies little
between locations
Location is a major
cost factor
Affects shipping &
production costs (e.g., labor)
Costs vary greatly between
locations
5
© 1995 Corel Corp.
Service Location Decisions
Revenue focus
Costs vary little between market areas
Location is a major
revenue factor
Traffic volume, good
transportation, customer
safety and convenience
most important
Affects amount of
customer contact
Affects volume of
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business
Comparison of Service and
Manufacturing Considerations
Manufacturing/Distribution
Service/Retail
Cost Focus
Revenue focus
Transportation modes/costs
Demographics: age,income,etc
Energy availability, costs
Population/drawing area
Labor cost/availability/skills
Competition
Building/leasing costs
Traffic volume/patterns
7
Customer access/parking
Organizations That Need To Be
Close to Markets
Government agencies
Police & fire departments
Post Office
Retail Sales and Service
Fast food restaurants, supermarkets, gas stations
Drug stores, shopping malls
Bakeries
Other Services
Doctors, lawyers, accountants, barbers
8
Banks, auto repair, motels
General Procedure for Making
Location Decisions
Decide on the criteria to use for evaluating
alternatives
Identify important factors
Develop location alternatives
- identify the general region for a location
- identify community alternatives
- identify site alternatives
Evaluate alternatives
and
make
a
selection
9
Factors That Affect Location Decisions
Regional Factors
Community
Considerations
Multiple Plant
Strategies
Site-related
Factors
10
Regional Factors
 Location of raw materials
 Location of markets
 Labor factors
 Climate and taxes
11
Community Considerations
 Quality of life
 Services
 Attitudes
 Taxes
 Environmental regulations
 Utilities
 Developer support
12
Site Related Factors
 Land
 Transportation
 Environmental
 Legal
13
Plant Strategies
Single Plant Strategy
Multi-Plant Strategies
* Product Plant Strategy
* Market Area Plant Strategy
* Process Plant Strategy
14
Location Decision Sequence
Region/Community
Country
Site
© 1995
Corel
Corp.
.
15
Global Location Factors
 Government stability

 Government regulations 
 Political and economic

systems
 Economic stability and

growth

 Exchange rates

 Culture

 Climate

 Export import regulations,
duties and tariffs
16
Raw material availability
Number and proximity of
suppliers
Transportation and
distribution system
Labor cost and education
Available technology
Commercial travel
Technical expertise
Cross-border trade
regulations
Group trade agreements
Regional Location Factors (1 of 2)
 Labor (availability,
education, cost and
unions)
 Proximity of customers
 Number of customers
 Construction/leasing costs
 Land costs
 Modes and quality of
transportation
 Transportation costs
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 Incentive packages
 Governmental, legal
regulations, policies and
barriers
 Environmental regulations
 Raw material availability
 Commercial travel
 Climate
 Infrastructure (cost and
availability of utilities)
 Quality of life
Regional Location Factors (2 of 2)







Community government
Local business regulations
Government services
Business climate
Community services
Taxes
Environmental impact
issues
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





Availability of sites
Financial Services
Community inducements
Proximity of suppliers
Education system
Free trade zones
Site Location Factors
 Customer base
 Construction/ leasing cost
 Site costs (land,
expansion, parking, etc.
 Quality of life issues in the
community (education,
health care, sports, cultural
activities etc.)
 Site size
 Transportation
 Traffic
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







Zoning restrictions
Safety/security
Competition
Area business climate
Income level
Host community
Competitive advantage
Utilities including gas,
electric, water and their
costs
Location Incentives
 Tax credits
 Relaxed government
regulation
 Job training
 Infrastructure improvement
 Money
20
Location Evaluation Methods
(Methods of Solving Location Problems)
1) Factor-rating method
2) Center of gravity
method
3) Load-distance method
4) Locational break-even
analysis
5) Transportation model
(a specialized linear
programming method)21
1. Factor Rating Method
22
Factor-Rating Method (1 of 4)
 Decision based on minimum distribution costs
 Most widely used location technique
 Useful for service & industrial locations
 Rates locations using factors
Tangible (quantitative) factors
Example: Short-run & long-run costs
Intangible (qualitative) factors
Example: Education quality, labor skills
23
Steps in Factor Rating Method (2 of 4)
 Identify important relevant factors
 Assign importance weight to each factor (0.00 –
1.00)
 Develop scale for each factor (such as 1 – 100)
 Score each location along each factor
 Multiply scores by weights for each factor & sum
weighted factors
 Select location with maximum total score
24
Location Factor Rating (3 of 4)
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
25
Location Factor Rating (4 of 4)
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
26
Best one
2. Centre of Gravity Method
27
2. Center of Gravity (Centroid) Method
(1 of 10)
 Decision based on minimum distribution costs
 Finds location of single distribution center serving several
destinations
 Used primarily for services
 Considers
Location of existing destinations
Example: Markets, retailers etc.
Volume to be shipped
Shipping distances (or costs)
Shipping cost/unit/mile is constant
28
Center-of-Gravity Method (2 of 10)
 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
29
Center of Gravity Method: Steps
(3 of 10)
This methodology involves formulas used to
compute the coordinates of the two-dimensional
point that meets the distance and volume criteria
Place existing locations on a coordinate grid
Grid has arbitrary origin & scale
Maintains relative distances
Calculate X & Y coordinates for ‘center of gravity’
Gives location of distribution center
Minimizes transportation cost
30
Grid-Map Coordinates (4 of 10)
n
y

2 (x2, y2), V2
y2
y1
y3
x2

xiVi
i=1
Cx =

yiVi
i=1
Cy =
n
i=1
1 (x1, y1), V1
x1
n
Vi
n

Vi
i=1
where,
3 (x3, y3), V3 Cx, Cy = coordinates of the new
facility at center of
gravity
xi, yi = coordinates of existing
facility i
Vi = annual volume shipped
31
from or to the ith
x3
x
location
Center-of-Gravity Technique (5 of 10)
Example 1
y
x
y
Vt
700
C
600
Miles
500
(135)
B
(105)
400
300
200
A
200
200
75
D
(60)
A
(75)
100
0
x
100 200 300 400 500 600
32 700
Miles
B
100
500
105
C
250
600
135
D
500
300
60
Center-of-Gravity Technique (6 of 10)
Example 1
y
n
700
xiWi
Cx =
C
(200)(75)
+ (100)(105) + (250)(135) + (500)(60)
=
= 238
(135) 75 + 105 + 135 + 60
B
i=1
600
n
500
Wi
(105)
Miles
i=1
400
D
n 300

A
yiWi
i = 1 200
Cy = n
Wi
 100
=
(60)
(200)(75)
(75)+ (500)(105) + (600)(135) + (300)(60) = 444
75 + 105 + 135 + 60
i=1
0
100 200 300 400 500 600 700 x
33
Miles
Center-of-Gravity Technique (7 of 10)
Example 1
y
700
C
600
Miles
500
(135)
B
(105)
400
300
200
A
x
y
Wt
A
200
200
75
Center of gravity (238, 444)
D
(60)
(75)
100
0
B
100
500
105
100 200 300 400 500 600 700 x
34
Miles
C
250
600
135
D
500
300
60
Centre of Gravity Method (8 of 10)
Example 2
Several automobile showrooms are located according to the following grid which
represents coordinate locations for each showroom
Y
S ho wro o m
Q
(790,900)
D
No o f Z-Mo b ile s
s o ld p e r mo nth
A
1250
D
1900
Q
2300
(250,580)
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 sold35per month?
Centroid Method (9 of 10)
Example 2
Y
To begin, you must identify the
existing facilities on a twodimensional plane or grid and
determine their coordinates.
Q
(790,900)
D
(250,580)
A
(100,200)
(0,0)
S ho wro o m
You must also have the
volume information on the
business activity at the
existing facilities.
36
X
No o f Z-Mo b ile s
s o ld p e r mo nth
A
1250
D
1900
Q
2300
Centroid Method (10 of 10)
Example 2
You then compute the new coordinates using the formulas:
Cx =
100(1250) + 250(1900) + 790(2300)
2,417,000
=
= 443.49
1250 + 1900 + 2300
5,450
Cy =
200(1250) + 580(1900) + 900(2300)
3,422,000
=
= 627.89
1250 + 1900 + 2300
5,450
You then take the coordinates and place them on the map:
Y
S ho wro o m
Q
New
location
of facility
Z about
(443,627)
37
(790,900)
D
(250,580)
Z
A
(100,200)
(0,0)
X
No o f Z-Mo b ile s
s o ld p e r mo nth
A
1250
D
1900
Q
2300
Locational Break-even Analysis
38
Locational Break-Even Analysis
 Method of cost-volume analysis used for
industrial locations
 Steps
 Determine fixed & variable costs for each
location
 Plot total cost for each location (Cost on
vertical axis, annual volume on horizontal
axis)
 Select location with lowest total cost for
expected production volume
 Must be above break-even
39
Location Break-Even Analysis
 Assumptions
Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated
 Only one product involved

40
Locational Break-Even Analysis
Example 1(1 of 2)
You’re an analyst for AC Delco. You’re
considering a new manufacturing plant in
Akron, Bowling Green, or Chicago. Fixed
costs per year are $30k, $60k, & $110k
respectively. Variable costs per case are
$75, $45, & $25 respectively. The price
per case is $120. What is the best
location for an expected volume of 2,000
cases per year?
© 1995 Corel Corp.
41
Locational Break-Even Crossover
Chart (2 of 2)
Annual Cost
200000
150000
100000
50000
Akron
lowest cost
Bowling Green
lowest cost
0
0
Chicago
lowest
cost
500 1000 1500 2000 2500 3000
Volume
42
Example 2: Cost-Volume Analysis
(1 of 3)
Fixed and variable costs for
Lfour
o c apotential
tio n
F ix e d
locations
A
B
C
D
C ost
$ 2 5 0 ,0 0
1 0 0 ,0 0
1 5 0 ,0 0
2 0 0 ,0 0
43
0
0
0
0
V a r ia b le
C ost
$11
30
20
35
Example 2: Solution (2 of 3)
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)
44
Total
Costs
$360,000
400,000
350,000
550,000
Example 2: Solution (3 of3)
$(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
12
Annual Output (000)
45
14
16
Transportation Method
46
Transportation Model
 Decision based on movement costs of raw materials or finished
goods
 Finds amount to be shipped from several sources to several
destinations
 Used primarily for industrial locations
 Seeks to minimize costs of shipping n units to m destinations
 Type of linear programming model
 Objective: Minimize total production
& shipping costs (shipping n units to m destinations)
 Constraints
Production capacity at source (factory)
Demand requirements at destinations
47
Worldwide Distribution of
Volkswagens and Parts
48
Global Locations
 Reasons for globalization
 Benefits
 Disadvantages
 Risks
 Global operations issues
49
Globalization
 Facilitating Factors


Trade agreements
Technology
 Benefits
Markets
 Cost savings
 Legal and regulatory
 Financial

50
Globalization
 Disadvantages
Transportation costs
 Security
 Unskilled labor
 Import restrictions
 Criticisms

 Risks




Political
Terrorism
Legal
Cultural
51
Foreign
Government
a. Policies on foreign ownership of production facilities
Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
Liability laws
b. Stability issues
Cultural
Differences
Living circumstances for foreign workers / dependents
Religious holidays/traditions
Customer
Preferences
Labor
Possible buy locally sentiment
Resources
Availability and quality of raw materials, energy,
transportation infrastructure
Level of training and education of workers
Work ethic
Possible regulations limiting number of foreign employees
Language differences
52
Telemarketing and Internet
Industries
Require neither face-to-face contact with
customers (or employees) nor movement of
material
Presents a whole new perspective on the
location problem
53
Final Thought
The ideal location for many
companies in the future will
be a floating factory ship
that will go from port to
port, from country to
country – wherever cost
per unit is lowest.
54