Relevance of Facility Location Decisions.
Types & Causes of Facility Location.
General Process for Facility Location.
Trends and Future Strategies.
Methods for Facility Location Selection.

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Case 1: Ikea has not open a center in Valencia.
 Case 2: After a fire at its painting facilities in Stutgart,
Schefenacker AG, the biggest rear view mirror manufacturer in the world, decides to open a new facility in Mosonmagyorovar
(Hungary). It will be the thrid painting facility of this type after
(USA and South Korea).
 Case 3: Grupo F Segura, following the requirements of their clients (mainly VW group) opens a factory at Hungary.
 Case 4: Ford Motor Company is to decide where to assemble the next generation of Ford Focus and Ford Fiesta.
 Case 5: Zara UK is opening a new store in Canary Wharf

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Facility Location decisions are part of the company’s strategy. Infrequent but expensive.
Reasons for the importance:
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Facility Location requires large investment that can not be recovered.
Facility Location decisions affect the competitive capacity of the company.
 All areas of the company are affected by Facility Location: Operations, but also
Business Development, Human Resources, Finance, etc.
The facility location decisions affect not only costs but the company’s income:
 For a service business, market proximity is critical to determine the capacity to attract customers.
 For a manufacturing business, facility location affects product delivery time and level of customer service, which affects sales.

Regarding costs, facility location affects a great variety of them:
 Land costs.
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Labor costs.
Raw materials.
Transportation and distribution

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Importance of Facility Location.
Causes & Types of Facility Location.
Issues at Location
General Process for Facility Location.
Trends and Future Strategies.
Locating Service Facilities
Methods for Facility Location Selection.
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Centroid Methods
Factors Rating Analysis.
Economic Analysis.
Transportation (Mathematical Programming Methods).
Set Covering.

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An expanding market.
 It will require the addition of more capacity at a certain geographic point, either in an existent facility or in a new one.
Introduction of new products or services.
A contracting demand, or changes in the location of the demand.
 It may require the shut down and/or relocation of operations.
The exhaustion of raw materials in a certain area.
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
Example: Extraction companies.
Obsolescence of a manufacturing facility due to the appearance of new technologies.
It means the creation of a new modern plant somewhere else.
The pressure of the competence.
 To increase the level of service, it can force the company to increase capacity of certain plants or relocate some of them.
Change in other resources, like labor conditions or subcontracted components, or change in the political or economic environment in a certain region.
Mergers and acquisitions.
 Some facilities may appear as redundants, or bad located with respect to others.

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Expansion of an existent facility.
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Only possible if exists enough space.
Attractive alternative when the current facility location is good enough for the company.
Lower costs than other options
Start a new facility in a new area.

Sometimes is a more advantageous option than the previous one
(if there are problems related to lose of focus on the company’s objectives).
Shut down of a facility and (or not) starting of a new one somewhere else.
Moving production from one plant to other.

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Importance of Facility Location.
Causes & Types of Facility Location.
Issues at Location
General Process for Facility Location.
Trends and Future Strategies.
Locating Service Facilities
Methods for Facility Location Selection.

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.
Transportation (Mathematical Programming Methods).
Set Covering.

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Proximity to Customers
Business Climate
Total Costs
Infraestructure
Quality of Labor
Suppliers
Other Facilities
Political Risks
Government Barriers
Trading Blocks
Environmental Regulation
Host Community
Competitive Advantage

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Importance of Facility Location.
Causes & Types of Facility Location.
Issues at Location
General Process for Facility Location.
Trends and Future Strategies.
Locating Service Facilities
Methods for Facility Location Selection.
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
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
Centroid Methods
Factors Rating Analysis.
Economic Analysis.
Transportation (Mathematical Programming Methods).
Set Covering.

Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy, existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support required, flexibility
COMPETITIVE
ENVIRONMENT
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
PHASE I
Supply Chain
Strategy
PHASE II
Regional Facility
Configuration
PHASE III
Desirable Sites
PHASE IV
Location Choices
GLOBAL COMPETITION
TARIFFS AND TAX
INCENTIVES
REGIONAL DEMAND
Size, growth, homogeneity, local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory, coordination

Market Region
Subregion
Community
Sites
Market Potential
Market Share
Operating Cost
Transport Cost (RM)
Taxes
Raw material costs
Labor Cost and Availability
Access to market/materials
Material Cost
Labor Cost and Availability
Taxes
Availability of public services
Availabilty of sites
Community amenities
Access to transport Network
Site Characterics
Taxes
Availability of public services
Land and acquisition costs
Construction Costs

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Creation of a multifunctional team to perform the study.
Preliminary analysis.
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Study of the company’s strategies and the policies of the company to translate them into Facility Location requirements.
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Due to the big quantity of factors affecting Facility Location, the company should determine which is the criteria to evaluate the different alternatives
(transportation needs, land, supplies, labor, infrastructures, services, environmental conditions…).
 The multifunctional team must distinguish between: Dominant factors
(essential); Secondary factors (desirable).
Search of Location Alternatives.

Establishment of a group of location candidates.
Evaluation of Alternatives (detailed analysis).
 Information gathering from each location to be measured against each of the factors considered.
Selection of Facility Location.
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Through qualitative and quantitative analysis, the different alternatives will be compared against each other, to determine several valid locations.
Objective: Look for several acceptable locations, to let senior management to decide taking into account subjective factors.

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Importance of Facility Location.
Causes & Types of Facility Location.
Issues at Location
General Process for Facility Location.
Trends and Future Strategies.
Locating Service Facilities
Methods for Facility Location Selection.

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.
Transportation (Mathematical Programming Methods).
Set Covering.

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Most of the Facility Location factors vary with time:
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The accelerated changes in the economic environment are impacting the frequency of Facility Location decisions.
Changes in the economic environment:
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International level competition among companies.
Location in countries different than the origin of the company are a common situation for big companies.
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Appearance of new markets and unification of others.
Increase of competition pressure.
Logistics factors are more important and complex.
Companies are reviewing their facility locations in order not to loose competitiveness.

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Changes in the economic environment:
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Industry processes automation.
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Labor costs become less important: countries with lower labor costs become less attractive.
Labor qualification, flexibility and mobility become more important factors.
However, labor costs are still a main factor in some industries and in certain manufacturing processes of others: Relocation to
Mexico, Taiwan, Singapore, etc.

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Changes in the economic environment:
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Transportation and IT development.
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Helps in the internationalization of the operations: higher geographical diversity in location decisions.
Tendency to localize close to the markets: emphasis in customer service, direct customer contact, fast development of new products, fast delivery…
Due to flexible technologies, companies have the possibility of starting up more plants at a smaller size.
J.I.T. Systems.
 Some industries are forcing their suppliers and customers to locate their facilities in a close area to reduce transportation costs and supply at a higher frequency.

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Importance of Facility Location.
Causes & Types of Facility Location.
Issues at Location
General Process for Facility Location.
Trends and Future Strategies.
Locating Service Facilities
Methods for Facility Location Selection.
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Centroid Methods
Factors Rating Analysis.
Economic Analysis.
Transportation (Mathematical Programming Methods).
Set Covering.

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Because of the variety of service firms and the relatively low cost of establishing a service facility compared to one for manufacturing, new service facilities are far more common than new factories and warehouses.
Services typically have multiple sites to maintain close contact with customers. The location decision is closely tied to the market selection decision.
Market affects the number of sites to be built and the size and characteristics of the sites.
Whereas manufacturing location decisions are often made by minimizing costs, many service location decision techniques maximize the profit potential of various sites.

Hi
Cost
Low
Local FG
Mix
Regional FG
Local WIP
Central FG
Central WIP
Central Raw Material and Custom production
Low
Custom production with raw material at suppliers
Response Time
Hi

Clientes
Centro distribución

Clientes
Centro distribución

Clientes
Centro distribución

Clientes
Centro distribución

Customer
DC

Number of Facilities

Number of Facilities
Total Costs
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

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Importance of Facility Location.
Causes & Types of Facility Location.
Issues at Location
General Process for Facility Location.
Trends and Future Strategies.
Locating Service Facilities
Methods for Facility Location Selection.





Centroid Methods
Factors Rating Analysis.
Economic Analysis.
Transportation (Mathematical Programming Methods).
Set Covering.

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.
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Income independent upon location.
Income dependent upon location.
Transportation (Mathematical Programming Methods).
Set Covering.
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No limitation of facilities.
Limitation of facilities.

150
Transport cost are related to volume
120
90
60
30
2.000
1.000
1.000
2.000
90 120 150
C x
=
 d
 ix
V i
V i
C y
=

 d iy
V i
V i
E/O
C x d ix
V i
, C y
, d iy
= Gravity Center
= coordinates de la ubicación i
= Volume of goods moved from/to i

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.


Income independent upon location.
Income dependent upon location.
Transportation (Mathematical Programming Methods).
Set Covering.
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No limitation of facilities.
Limitation of facilities.

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Popular because a wide variety of factors can be included in the analysis
Six steps in the method
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Develop a list of relevant factors called critical success factors
Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
Multiply score by weights for each factor for each location
Recommend the location with the highest point score

Critical
Success
Factor
Labor availability and attitude
People-to car ratio
Per capita income
Tax structure
Education and health
Totals
Scores
(out of 100)
Weight France Denmark
.25
.05
.10
.39
.21
1.00
70
50
85
75
60
60
60
80
70
70
Weighted Scores
France Denmark
(.25)(70) = 17.5
(.05)(50) = 2.5
(.10)(85) = 8.5
(.39)(75) = 29.3
(.21)(60) = 12.6
70.4
(.25)(60) = 15.0
(.05)(60) = 3.0
(.10)(80) = 8.0
(.39)(70) = 27.3
(.21)(70) = 14.7
68.0
Table 8.3

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.


Income independent upon location.
Income dependent upon location.
Transportation (Mathematical Programming Methods).
Set Covering.
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No limitation of facilities.
Limitation of facilities.

Three locations:
City
Akron
Fixed Variable Total
Cost Cost Cost
$30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Selling price = $120
Expected volume = 2,000 units
Total Cost = Fixed Cost + Variable Cost x Volume

–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
| –
0
Akron lowest cost
|
500
Bowling Green lowest cost
Chicago lowest cost
| | | | |
1,000 1,500 2,000 2,500 3,000
Volume

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.


Income independent upon location.
Income dependent upon location.
Transportation (Mathematical Programming Methods).
Set Covering.

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No limitation of facilities.
Limitation of facilities.

 Allocating demand to production facilities
 Locating facilities and allocating capacity
Key Costs :
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Which plants to establish? How to configure the network?

Vendor
DC
Vendor
DC
Vendor
DC
Materials
DC
Finished
Goods DC
Component
Manufacturing
Plant
Warehouse
Components
DC
Final
Assembly
Finished
Goods DC
Customer
DC
Customer
Store
Customer
Store
Customer
DC
Customer
Store
Customer
Store
Customer
DC
Customer
Store

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Which market is served by which plant?
Which supply sources are used by a plant?
x ij
= Quantity shipped from plant site i to customer j
Min i n m
 
1 j 1 c ij x ij s .
t .
i n


1 x ij

D j j m


1 x ij

K i x ij

0


 y i
= 1 if plant is located at site i, 0 otherwise x ij
= Quantity shipped from plant site i to customer j
Min i n


1 f i y i
 i n m
 
1 j 1 c ij x ij s .
t .
i n


1 x ij

D j j n


1 x ij

K i y i i m


1 y i
 k ; y i

{ 0 , 1 }

National
Finished
Goods DC
Regional
Finished
Goods DC
Regional
Finished
Goods DC
Local DC
Cross-Dock
Local DC
Cross-Dock
Local DC
Cross-Dock
Customer 1
DC
Customer 2
DC
Store 1
Store 1
Store 2
Store 2
Store 3
Store 3

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Centroid Methods
Factors Rating Analysis.
Economic Analysis.


Income independent upon location.
Income dependent upon location.
Transportation (Mathematical Programming Methods).
Set Covering.


No limitation of facilities.
Limitation of facilities.

Define: c j cost of locating facility at site j a ij
=
{
1 if facility located at site j can cover customer i
0 Otherwise x j
=
{ 1 if facility located at site j
0 Otherwise
The set covering problem is to:

The set covering problem is to:
Minimize c x j n 

1 j j j n 

1 a x
, j x j


1, i

1..
n
  j

1..
n

Step 1:
Step 2:
Step 3:
Step 4
If c j
= 0, for any j = 1, 2, ..., n, set x constraints in which x j j
= 1 and remove all appears with a coefficient of +1.
If c j
> 0, for any j = 1, 2, ..., n and x j does not appear with a
+1 coefficient in any of the remaining constraints, set x j
= 0.
For each of the remaining variables, determine c j
/d j
, where d j is the number of constraints in which x j appears with a +1 coefficient. Select the variable k for which c k
/d k is minimum, set x k
= 1 and remove all constraints in which x j appears with a +1 coefficient. Examine the resulting model.
If there are no more constraints, set all the remaining variables to 0 and stop. Otherwise go to step 1.

A rural country administration wants to locate several medical emergency response units so that it can respond to calls within the county within eight minutes of the call. The county is divided into seven population zones. The distance between the centers of each pair of zones is known and is given in the matrix below.
Imagine that the one that has to make the decision does not want to place a emergency unit on B or D

[d ij
]=
1 2 3 4 5 6 7
1 0 4 12 6 15 10 8
2 8 0 15 60 7 2 3
3 50 13 0 8 6 5 9
4 9 11 8 0 9 10 3
5 50 8 4 10 0 2 27
6 30 5 7 9 3 0 27
7 8 5 9 7 25 27 0

The response units can be located in the center of population zones 1 through 7 at a cost (in hundreds of thousands of dollars) of 100, 80, 120
110, 90, 90, and 110 respectively. Assuming the average travel speed during an emergency to be 60 miles per hour, formulate an appropriate set covering model to determine where the units are to be located and how the population zones are to be covered and solve the model using the greedy heuristic.

Defining aij =
{
1 if zone i’s center can be reached from center of zone j within 8 minutes
0 otherwise and noting that d ij
> 8, d ij
<= 8 would yield a ij values of 0, 1, respectively the following [a ij
] matrix can be set up.

Minimize Subject to:
100x1+80x2+120x3+110x4+90x5+90x6+110x7 x1 + x2 + x1 + x2 + x4 + x7 =1 x5 + x6 + x7 =1 x3 + x4 + x5 + x6 =1 x3 + x4 + x2 + x3 + x2 + x3 + x5 + x6 x5 + x6 x7 =1
=1
=1 x1 + x2 + x4 + x7 =1 x1 , x2 , x3 , x4 , x5 , x6 , x7 {0,1}

Step 1: Since each c j go to step 2.
> 0, j = 1, 2, ..., 7,
Step 2: Since x j appears in each constraint with a +1 coefficient, go to step 3.

Step 3: c1 d1 c2 d2
=
=
100
3
80
5 c3 d3
=
120
5 c4 d4
=
110
4
= 33.3
= 16
= 30
= 27.5
c5 d5
=
90
4 c6 d6
=
90
4 c7 d7
=
110
4
= 22.5
= 22.5
= 27.5

Since the minimum ck/dk occurs for k = 2, set x2 = 1 and remove the first two and the last three constraints. The resulting model is shown below.
Minimize Subject to:
100x1+120x3+110x4+90x5+90x6+110x7 x3 + x3 + x4 + x4 + x5 + x6 =1 x7 =1 x1 , x3 , x4 , x5 , x6 , x7 {0,1}

Step 4: Since we have two constraints go to step 1.
Step 1: Since c
1
> 0, j = 1, 3, 4, ..., 7, go to step 2
Step 2: Since c
1
> 0 and x
1 does not appear in any of the constraints with a +1 coefficient, set x
1
= 0.

Step 3: c3 d3
=
120
2
= 60 c4 d4
=
110
2
= 55 c5 d5
=
90
1 c6 d6
=
90
1
=
=
90
90 c7 d7
=
110
1
= 110

Since the minimum c k
/d k occurs for k = 4, set x
4
= 1 and remove both constraints in the above model since x
4 has a +1 coefficient in each. The resulting model is shown below.
Minimize Subject to:
120x
3
+90x
5
+90x
6
+110x
7 x
3
, x
5
, x
6
, x
7
= 0

Step 4: Since there are no constraints in the above model, set x
3
= x
5
= x
6
= x
7
= 0 and stop.
The solution is x
2
= x
4
= 1; x
1
= x
3
= x
5
= x
6
= x
7
=
0. Cost of locating emergency response units to meet the eight minute response service level is
80 + 110 = 190.