Facility Location
1
Location Options
 Expanding existing facilities
 Building a new facility (for the
beginners)
 Moving to another facility
 Addition of one or more facilities to
the existing network in order to
expand capacity
 Closing of one or more facilities in
order to shrink capacity
2
The Need for Location Decisions
Location decisions may arise for a variety of reasons:
 Addition of new facilities
 As part of a marketing strategy to expand
markets
 Growth in demand that cannot be satisfied by
expanding existing facilities
 Depletion of basic inputs requires relocation
 Shift in markets
 Cost of doing business at a particular location
makes relocation
3 attractive
Location Decisions: Strategically
Important
 Location decisions:
 Are long-term decisions
 Are closely tied to an organization’s strategies
 Low-cost
 Convenience to attract market share
 Effect capacity and flexibility
 Are difficult to reverse
 Represent a long-term commitment of resources
 Effect investment requirements,
 Effect operating costs (fixed and variable), (such as transportation costs, taxes,
wages, rent etc)
 Effect revenues,
 Effect operations
 Impact competitive advantage
4
 Important to supply chains
Location Decisions: Objectives
 Location decisions are based on:
 Cost or profit potential and customer service
 Finding a number of acceptable locations from which to
choose (no single location may be better than others)
 Position in the supply chain
End: accessibility, consumer demographics, traffic
patterns, and local customs are important
Middle: locate near suppliers or markets
Beginning: locate near the source of raw materials
 Supply chain management issues such as supply chain
configuration
5
Centralized vs. decentralized distribution
Industrial Location Decisions
Cost focus
Revenue varies little
between locations
Location is a major
cost factor
Location effects shipping &
production costs (costs vary
greatly between locations
6
© 1995 Corel Corp.
Service Location Decisions
Revenue focus
Costs vary little between market areas
Location is a major revenue factor
Factors such as Traffic volume, good
transportation, customer
safety and convenience
most important
 Location effects amount of
customer contact
 Locaiton effects volume of
business
7
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
Banks, auto repair, motels
8
General Procedure for Making
Location Decisions
 Decide on the criteria to use for evaluating location
alternatives
 Identify important factors (such as location of markets or raw
materials)
 Develop location alternatives
- identify the country or countries for location
- identify the general region for location
- identify a small number of community
alternatives
- identify site alternatives among the cummunity
alternatives
 Evaluate the alternatives and9 make a selection
Location Decision Sequence
Region/Community
Country
Site
.
.
10
Factors That Affect Location Decisions
Global Factors
Regional
Factors
Community Considerations
11
Site-related Factors
Global Location: Facilitating
Factors
Key factors that have contributed to the attractiveness of
globalization:
Trade Agreements such as
North American Free Trade Agreement (NAFTA)
General Agreement on Tarriffs and Trade (GATT)
U.S.-China Trade Relations Act
EU and WTO efforts to facilitate trade
Technology
Advances in communication and information technology
12
Global Location: Benefits
A wide range of benefits have accrued to
organizations that have globalized operations:
Markets
Cost savings
Legal and regulatory
Financial
Other
13
Global Location: Disadvantages
There are a number of disadvantages that
may arise when locating globally:
Transportation costs
Security costs
Unskilled labor
Import restrictions
Criticism for locating out-of-country
14
Global Location: Risks
Organizations locating globally should be
aware of potential risk factors related to:
Political instability and unrest
Terrorism
Economic instability
Legal regulation
Ethical considerations
Cultural differences
15
Managing Global Operations
Managerial implications for global operations:
Language and cultural differences
Risk of miscommunication
Development of trust
Different management styles
Corruption and bribery
Level of technology and resistance to
technological change
Domestic personnel may resist locating, even
temporarily
16
Location: Identifying a Country
17
Location: Identifying a Region
Primary regional factors:
Locating close to the raw materials
Necessity
Perishability
Transportation costs
Locating close to the markets
As part of a profit-oriented company’s competitive
strategy
So not-for-profits can meet the needs of their
service users
18
Distribution costs and perishability
Location: Identifying a Region
Labor factors
Cost of labor
Availability of suitably skilled workers
Wage rates in the area
Labor productivity
Attitudes toward work
Whether unions pose a serious potential
problem
Other factors
Climate and taxes may
play an important role in
19
location decisions
More on Regional Location Factors
 Labor (availability,
education, cost and
unions)
 Proximity of customers
 Number of customers
 Construction/leasing costs
 Land costs
 Modes and quality of
transportation
 Transportation costs
20
 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
More on Regional Location Factors







Community government
Local business regulations
Government services
Business climate
Community services
Taxes
Environmental impact
issues
21
 Availability of sites
 Financial Services
 Community
inducements
 Proximity of suppliers
 Education system
 Free trade zones
Geographic Information System
(GIS)
GIS
A computer-based tool for collecting, storing,
retrieving, and displaying demographic data on maps
Aids decision makers in
Targeting market segments
Identifying locations relative to their market
potential
Planning distribution networks
Portraying relevant information on a map makes it
easier for decision makers to understand
22
Location: Identifying a Community
Many communities actively attempt to attract new
businesses they perceive to be a good fit for the
community
Businesses also actively seek attractive communities
based on such factors such as:
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
23
Development support
Location: Identifying a Site
Primary site location considerations are
Land
Transportation
Environmental
Zoning
Legal
Other restrictions
24
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
25








Zoning restrictions
Safety/security
Competition
Area business climate
Income level
Host community
Competitive advantage
Utilities including gas,
electric, water and their
costs
Plant Strategies
Single Plant Strategy
Multiple Plant Strategy
- Product Plant Strategy
- Market Area Plant Strategy
- Process Plant Strategy
26
Multiple Plant Strategies
 Product plant strategy
 Entire products or product lines are produced in separate
plants, and each plant usually supplies the entire
domestic market
 Market area plant strategy
 Plants are designated to serve a particular geographic
segment of the market
 Plants produce most, if not all, of a company’s products
27
Multiple Plant Strategies

Process plant strategy
 Different plants focus on different aspects of a process
 automobile manufacturers – engine plant, body
stamping plant, etc.
 Coordination across the system becomes a significant
issue
 General-purpose plant strategy
 Plants are flexible and capable of handling a range of
products
28
Service and Retail Locations
 Nearness to raw materials is not usually a
consideration
 Customer access is a
Prime consideration for some: restaurants, hotels,
etc.
Not an important consideration for others: service
call centers, etc.
 Tend to be profit or revenue driven, and so are
Concerned with demographics, competition,
traffic/volume patterns, and convenience
29
Evaluating Location Alternatives
Common techniques for
location evaluation:
 Locational cost-volumeprofit analysis
 Factor rating method
 Load-distance method
 Center of gravity method
 Transportation model (a
specialized linear
programming method) 30
Locational Cost-Profit-Volume Analysis
31
Locational Cost-Profit-Volume
Analysis
Locational Cost-Profit-Volume (Break-even)Analysis
 A technique for evaluating location choices in
economic terms
 Steps:
1. Determine the fixed and variable costs for each
alternative
2. Plot the total-cost lines for all alternatives on the
same graph
3. Determine the location that will have the lowest total
cost (or highest profit) for the expected level of
32
output
Locational Cost-Profit-Volume
Analysis
Assumptions
1. Fixed costs are constant for the range of probable
output
2. Variable costs are linear for the range of output
3. The required level of output can be closely
estimated
4. Only one product is involved
33
Locational Cost-Profit-Volume
Analysis
For a cost analysis, compute the total cost for
each alternative location:
Total Cost  FC  v  Q
where
FC  Fixed cost
v  Variable cost per unit
Q  Quantity or volume of output
34
Example: Cost-Profit-Volume Analysis
Fixed and variable costs for four potential
plant locations are shown below:
Location
Fixed Cost
per Year
Variable Cost
per Unit
A
$250,000
$11
B
$100,000
$30
C
$150,000
$20
D
$200,000
$35
35
Example: Cost-Profit-Volume Analysis
Comparison of total costs at a production volume of 10,000
A
B
C
D
Fixed
Costs
Variable
Costs
Total
Costs
$250,000
100,000
150,000
200,000
$11(10,000)
30(10,000)
20(10,000)
35(10,000)
$360,000
400,000
350,000
550,000
36
Example: Cost-Profit-Volume Analysis
Plot of total costs
$(000)
800
700
600
500
400
300
200
100
0
D
B
C
A
0
2
4
6
8
10
Annual Output (000)
37
12
14
16
Example: Solution
$(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)
38
14
16
Example: Cost-Profit-Volume
Analysis
 Range approximations

B Superior (up to 4,999 units)
Total Cost of C  Total Cost of B
150,000  20Q  100,000  30Q
50,000  10Q
Q  5,000

C Superior (>5,000 to 11,111 units)
Total Cost of A  Total Cost of C
250,000  11Q  150,000  20Q
100,000  9Q

A superior (11,112 units and up)
39
Q  11,111.11
Factor Rating Method
40
Factor Rating Method

A general approach to evaluating locations
that includes quantitative and qualitative
inputs
 Most widely used location technique
 Useful for service and industrial locations
 Rates locations using both
 tangible (quantitative) factors
such as short-run and
long-run costs and
 intangible (qualitative) factors such as education
quality, labor skills. 41
Factor Rating
Procedure:
 Determine which factors are relevant
 Assign a weight to each factor that indicates its relative
importance compared with all other factors.
 Weights typically sum to 1.00
 Decide on a common scale for all factors (such as 1100), and set a minimum acceptable score if necessary
 Score each location alternative along each factor
 Multiply the factor weight by the score for each factor,
and sum the results for each location alternative
 Choose the alternative that has the highest composite
score, unless it fails to meet
the minimum acceptable
42
score
Example: Factor Rating
A photo-processing company intends to open a new branch
store. The following table contains information on two
potential locations. Which is better?
Scores
(Out of 100)
Factor
Weight
Alt 1
Alt 2
Proximity to
existing source
.10
100
60
Traffic volume
.05
80
80
Rental costs
.40
70
90
Size
.10
86
92
Layout
.20
40
70
Operating Cost
.15
80
90
1.0043
Example: Factor Rating
A photo-processing company intends to open a new
branch store. The following table contains information
on two potential locations. Which is better?
Scores
(Out of 100)
Factor
Weight
Alt 1
Alt 2
Weighted Scores
Alt 1
Alt 2
Proximity to
existing source
.10
100
60
.10(100) = 10.0
.10(60) = 6.0
Traffic volume
.05
80
80
.05(80) = 4.0
.05(80) = 4.0
Rental costs
.40
70
90
.40(70) = 28.0
.40(90) = 36.0
Size
.10
86
92
.10(86) = 8.6
.10(92) = 9.2
Layout
.20
40
70
.20(40) = 8.0
.20(70) = 14.0
Operating Cost
.15
80
90
44
.15(80) = 12.0
.15(90) = 13.5
70.6
82.7
1.00
Centre of Gravity Method
45
Center of Gravity Method
 A method for locating a distribution center that minimizes
distribution costs
 Finds location of a single distribution center serving several
destinations
 Used primarily for services
 Treats distribution costs as a linear function of the distance and
the quantity shipped
 The quantity to be shipped to each destination is assumed to be
fixed
 The method necessitates to identify coordinates and weights
shipped for each location and includes the use of a map that
shows the locations of destinations
 The map must be accurate and drawn to scale
46 on the map to determine relative
 A coordinate system is overlaid
locations
Center of Gravity Method
Considers
• Location of existing destinations eg. Markets, retailers etc.
• Volume to be shipped
• Shipping distances (or costs)
•Shipping cost/unit/mile is constant
47
Center of Gravity Method
If quantities to be shipped to every location are equal,
you can obtain the coordinates of the center of gravity by
finding the average of the x-coordinates and the average
of the y-coordinates
x

x
i
n
y

y
i
n
where
xi  x coordinate s of destinatio n i
yi  y coordinate s of destinatio n i
48
n  Number of destinatio
ns
Center of Gravity Method
Suppose you are attempting to find the center of gravity
for the problem .
Destination
x
y
D1
2
2
D2
3
5
D3
5
4
D4
8
5
x

x
i
n
y

y
n
18 16
i

18
 4.5
4
16
 4
4
Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure
49
Center of Gravity Method
When the quantities to be shipped to every location
are unequal, you can obtain the coordinates of the
center of gravity by finding the weighted average of
the x-coordinates and the average of the y-coordinates
Cx
xQ


Q
yQ


Q
i
i
i
Cy
i
i
i
where
Qi  Quantity t o be shipped to destinatio n i
xi  x coordinate s of destinatio n i
50 destinatio n i
yi  y coordinate s of
Grid-Map Coordinates
n
y

2 (x2, y2), Q2
y2
y1
y3
x2

xiQi
i=1
Cx =

yiQi
i=1
Cy =
n
i=1
1 (x1, y1), Q1
x1
n
Vi
n

Vi
i=1
where,
3 (x3, y3), Q3 Cx, Cy = coordinates of the new
facility at center of
gravity
xi, yi = coordinates of existing
facility i
Vi = annual volume shipped
51
from or to the ith
x3
x
location
Center of Gravity Method: Example 1
Suppose the shipments for the problem depicted in
Figure are not all equal. Determine the center of
gravity based on the following information.
Destination
x
y
Weekly
Quantity
D1
2
2
800
D2
3
5
900
D3
5
4
200
D4
8
5
100
18 16
52
1,000
Center of Gravity Method: Example 1
Cx 
xQ
Q
i
i
i
Cy 

2(800)  3(900)  5(200)  8(100) 6,100

 3.05
2,000
2,000
 y Q i  2(800)  5(900)  4(200)  5(100)  7,400  3.7
2,000
2,000
Q
i
i
i
The coordinates for the center of gravity are (3.05,
3.7). You may round the x-coordinate down to 3.0, so
the coordinates for the center of gravity are (3.0, 3.7).
This south of destination 53
D2 (3, 5).
Center of Gravity Method: Example 1
54
Center-of-Gravity Technique:
Example 2
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
55 700
Miles
B
100
500
105
C
250
600
135
D
500
300
60
Center-of-Gravity Technique:
Example 2
y
n
700
xiWi
Cx =
C
(200)(75)
+ (100)(105) + (250)(135) + (500)(60)
=
(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
= 238
100 200 300 400 500 600 700 x
56
Miles
Center-of-Gravity Technique:
Example 2
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
57
Miles
C
250
600
135
D
500
300
60
Worldwide Distribution of
Volkswagens and Parts
58
Telemarketing and Internet
Industries
Require neither face-to-face contact with
customers (or employees) nor movement of
material
Web based retail organizations are effectively
location dependent
Presents a whole new perspective on the
location problem
59
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.
60