Facility Location

Facility Location
Location Strategy
One of the most important decisions a
firm makes
Increasingly global in nature
Significant impact on fixed and variable
costs
Decisions made relatively infrequently
The objective is to maximize the benefit
of location to the firm
Factors That Affect Location Decisions
Labor Productivity
Exchange Rates and Currency Risks
Costs
Political Risk, Values, and Culture
Proximity to Markets
Proximity to Suppliers
Proximity to Competitors (Clustering)
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT
GLOBAL COMPETITION
PHASE I
Supply Chain
Strategy
PHASE II
Regional Facility
Configuration
REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
TARIFFS AND TAX

INCENTIVES
PHASE IV
Location Choices
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory, coordination
Facility Types and Their

Dominant Locational Factors
Manufacturing
Near their raw material sources
Abundant supply of utilities
Inexpensive land and construction costs
Warehousing
Proximity to transportation facilities
Incoming and outgoing transportation costs
R&D
Ability to recruit/retain scientists, engineers, etc.
Near companies with similar technology interests
Services
Near concentrations of target customers
Making Location Decisions

Analysis should follow 3 step process:
Step 1: Identify dominant location factors
Step 2: Develop location alternatives
Step 3: Evaluate locations alternatives
Some simple techniques for evaluation location

alternatives include
Factor rating method

Break even analysis
Center of gravity approach
Load-distance model
Transportation problem
Factor-Rating Method
Popular because a wide variety of factors can be
included in the analysis
Six steps in the method
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
Factor-Rating Example
Critical
Success
Factor
Labor
availability
and attitude
People-tocar ratio
Per capita
income
Tax structure
Education
and health
Totals
Weight
Scores
(out of 100)
A
B
Weighted Scores
A
B
.25
70
60
(.25)(70) = 17.5 (.25)(60) = 15.0
.05
50
60
.10
.39
85
75
80
70
(.10)(85) = 8.5 (.10)(80) = 8.0

(.39)(75) = 29.3 (.39)(70) = 27.3
.21
1.00
60
70
(.21)(60) = 12.6 (.21)(70) = 14.7

70.4
68.0
(.05)(50) = 2.5
(.05)(60) = 3.0
Center-of-Gravity
Technique
Locate facility at center of movement in
geographic area
Based on weight and distance traveled;
establishes grid-map of area
Identify coordinates and weights shipped for
each location
Grid-Map Coordinates
y
i=1
2 (x2, y2), W2
y2
x=
i=1
1 (x1, y1), W1
xiWi
i=1
y=
y1
Wi
yiWi
i=1
Wi
where,
3 (x3, y3), W3
y3
x1
x2
x3
x, y =
coordinates of 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
700
600
Miles
500
(135)
B
(105)
400
300
200
x
y
W
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
n
xW
i
i
x=
i=1
n
W
i
(200)(75) + (100)(105) + (250)(135) + (500)(60)

= 75 + 105 + 135 + 60
= 238
i=1
n
yW
i
i
y=
i=1
n
W
i
i=1
(200)(75) + (500)(105) + (600)(135) + (300)(60)

= 75 + 105 + 135 + 60
= 444
Center-of-Gravity
Technique
y
700
600
Miles
500
C
(135)
B
(105)
400
300
200
x
y
W
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
LD =
i=1
where,
LD =
ld
load-distance value
li
=
load expressed as a weight, number of trips or units
being shipped from proposed site and location i
di =
distance between proposed site and location i
di
(xi - x)2 + (yi - y)2
where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
Load-Distance
Potential Sites
SiteX Y
1 360 180
2 420 450
3 250 400
Suppliers
A B C D
X 200 100 250 500
Y 200 500 600 300
Wt 75 105 135 60
Compute distance from each site to each supplier

Site 1 dA =
(xA - x1)2 + (yA - y1)2
(200-360)2 + (200-180)2 = 161.2
dB =
(xB - x1)2 + (yB - y1)2
(100-360)2 + (500-180)2 = 412.3
dC = 434.2
dD = 184.4
Load-Distance
Site 2 dA = 333
dB = 323.9 dC = 226.7 dD = 170
Site 3 dA = 206.2 dB = 180.3 dC = 200

Compute load-distance
dD = 269.3
LD =
l i di
i=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) = 99,789
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
Transportation Model
Finds amount to be shipped from
several points of supply to several
points of demand
Solution will minimize total production
and shipping costs
A special class of linear programming
problems

Facility Location - Operations Management

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What are the main factors that affect location decisions?

What are the main factors that affect location decisions?

What techniques can be used to evaluate location alternatives?

What techniques can be used to evaluate location alternatives?

Factors That Affect Location Decisions

TARIFFS AND TAX

Facility Types and Their

Making Location Decisions

Some simple techniques for evaluation location

Factor rating method

(.25)(70) = 17.5 (.25)(60) = 15.0

(.10)(85) = 8.5 (.10)(80) = 8.0

(.21)(60) = 12.6 (.21)(70) = 14.7

100 200 300 400 500 600 700 x

(200)(75) + (100)(105) + (250)(135) + (500)(60)

(200)(75) + (500)(105) + (600)(135) + (300)(60)

Center of gravity (238,

100 200 300 400 500 600 700 x

Compute (Load x Distance) for each

(xi - x)2 + (yi - y)2

Compute distance from each site to each supplier

(xA - x1)2 + (yA - y1)2

(200-360)2 + (200-180)2 = 161.2

(xB - x1)2 + (yB - y1)2

(100-360)2 + (500-180)2 = 412.3

dB = 323.9 dC = 226.7 dD = 170

Site 3 dA = 206.2 dB = 180.3 dC = 200

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063

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