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Facility LocationFacility Location

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Location DecisionsLocation Decisions

Long-term decisions (expand existing facilities, add new facilities, move)

Difficult to reverseAffect 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

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Need for Location DecisionsNeed for Location Decisions

Marketing Strategy

Cost of Doing Business

Growth

Depletion of Resources

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Nature of Location DecisionsNature 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

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Industrial Location DecisionsIndustrial Location DecisionsCost focus

Revenue varies little between locations

Location is a major cost factorAffects shipping &

production costs (e.g., labor)Costs vary greatly between

locations

© 1995 Corel Corp.

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Service Location DecisionsService Location DecisionsRevenue focus

Costs vary little between market areasLocation is a major

revenue factorTraffic volume, good transportation, customer safety and convenience most important

Affects amount of customer contact

Affects volume ofbusiness

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Comparison of Service and Comparison of Service and Manufacturing ConsiderationsManufacturing 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

Customer access/parking

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Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets

Government agenciesPolice & fire departmentsPost Office

Retail Sales and ServiceFast food restaurants, supermarkets, gas stationsDrug stores, shopping mallsBakeries

Other ServicesDoctors, lawyers, accountants, barbersBanks, auto repair, motels

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General Procedure for Making General Procedure for Making Location DecisionsLocation Decisions

Decide on the criteria to use for evaluating alternatives

Identify important factorsDevelop location alternatives

- identify the general region for a location- identify community alternatives- identify site alternatives

Evaluate alternatives and make a selection

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FactorsFactors That Affect Location Decisions That Affect Location Decisions

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations

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Location of raw materials Location of markets Labor factors Climate and taxes

Regional FactorsRegional Factors

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Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support

Community ConsiderationsCommunity Considerations

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Land Transportation Environmental Legal

Site Related FactorsSite Related Factors

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Plant StrategiesPlant StrategiesSingle Plant StrategyMulti-Plant Strategies

* Product Plant Strategy

* Market Area Plant Strategy

* Process Plant Strategy

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Location Decision SequenceLocation Decision SequenceCountry

© 1995 Corel Corp.

Region/Community

.

Site

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Global Location FactorsGlobal Location Factors Government stabilityGovernment stability Government regulationsGovernment regulations Political and economic Political and economic

systemssystems Economic stability and growthEconomic stability and growth Exchange ratesExchange rates CultureCulture ClimateClimate Export import regulations, Export import regulations,

duties and tariffsduties and tariffs

Raw material availability Raw material availability Number and proximity of Number and proximity of

supplierssuppliers Transportation and Transportation and

distribution systemdistribution system Labor cost and educationLabor cost and education Available technologyAvailable technology Commercial travelCommercial travel Technical expertiseTechnical expertise Cross-border trade regulationsCross-border trade regulations Group trade agreementsGroup trade agreements

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Regional Location FactorsRegional Location Factors (1 of 2) (1 of 2)

Labor (availability, Labor (availability, education, cost and education, cost and unions)unions)

Proximity of customersProximity of customers Number of customersNumber of customers Construction/leasing costsConstruction/leasing costs Land costsLand costs Modes and quality of Modes and quality of

transportationtransportation Transportation costsTransportation costs

Incentive packages Incentive packages GovernmentalGovernmental, legal , legal

regulationsregulations, policies and , policies and barriersbarriers

Environmental regulationsEnvironmental regulations Raw material availabilityRaw material availability Commercial travelCommercial travel ClimateClimate InfrastructureInfrastructure (cost and (cost and

availability of utilities)availability of utilities) Quality of lifeQuality of life

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Regional Location FactorsRegional Location Factors (2 of 2) (2 of 2)

Community governmentCommunity government Local business regulationsLocal business regulations Government servicesGovernment services Business climateBusiness climate Community servicesCommunity services TaxesTaxes Environmental impact Environmental impact

issuesissues

Availability of sitesAvailability of sites Financial ServicesFinancial Services Community inducementsCommunity inducements Proximity of suppliersProximity of suppliers Education systemEducation system Free trade zonesFree trade zones

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Site Location FactorsSite Location Factors Customer baseCustomer base Construction/ leasing costConstruction/ leasing cost Site costs (land, expansion, Site costs (land, expansion,

parking, etc.parking, etc. Quality of life issues in the Quality of life issues in the

community (education, health community (education, health care, sports, cultural activities care, sports, cultural activities etc.) etc.)

Site sizeSite size TransportationTransportation TrafficTraffic

Zoning restrictionsZoning restrictions Safety/securitySafety/security CompetitionCompetition Area business climateArea business climate Income levelIncome level Host communityHost community Competitive advantageCompetitive advantage UtilitiesUtilities including gas, including gas,

electric, water and their electric, water and their costs costs

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Location IncentivesLocation Incentives

Tax creditsTax creditsRelaxed government Relaxed government

regulationregulation Job trainingJob training Infrastructure improvementInfrastructure improvementMoneyMoney

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Location Evaluation MethodsLocation Evaluation Methods(Methods of Solving Location Problems)(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)

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1. Factor Rating Method1. Factor Rating Method

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Factor-Rating MethodFactor-Rating Method (1 of 4) (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) factorsExample: Short-run & long-run costs

Intangible (qualitative) factorsExample: Education quality, labor skills

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Steps in Factor Rating MethodSteps in Factor Rating Method (2 of (2 of 4)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

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Location Factor Rating Location Factor Rating (3 of 4)(3 of 4)

Labor pool and climateLabor pool and climateProximity to suppliersProximity to suppliersWage ratesWage ratesCommunity environmentCommunity environmentProximity to customersProximity to customersShipping modesShipping modesAir serviceAir service

LOCATION FACTORLOCATION FACTOR

..3030

.20.20

.15.15

.15.15

.10.10

.05.05

.05.05

WEIGHTWEIGHT

8080100100

60607575656585855050

Site 1Site 1

6565919195958080909092926565

Site 2Site 2

9090757572728080959565659090

Site 3Site 3

SCORES (0 TO 100)SCORES (0 TO 100)

Weighted Score Site 1 = (0.30)(80) = 24Weighted Score Site 1 = (0.30)(80) = 24

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Location Factor Rating Location Factor Rating (4 of 4)(4 of 4)

Labor pool and climateLabor pool and climateProximity to suppliersProximity to suppliersWage ratesWage ratesCommunity environmentCommunity environmentProximity to customersProximity to customersShipping modesShipping modesAir serviceAir service

LOCATION FACTORLOCATION FACTOR

..3030

.20.20

.15.15

.15.15

.10.10

.05.05

.05.05

WEIGHTWEIGHT

8080100100

60607575656585855050

Site 1Site 1

6565919195958080909092926565

Site 2Site 2

9090757572728080959565659090

Site 3Site 3

SCORES (0 TO 100)SCORES (0 TO 100)

24.0020.00

9.0011.25

6.504.252.50

77.50

Site 1

19.5018.2014.2512.00

9.004.603.25

80.80

Site 2

27.0015.0010.8012.00

9.503.254.50

82.05

Site 3

WEIGHTED SCORES

Best one

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2. Centre of Gravity Method2. Centre of Gravity Method

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2. 2. Center of Gravity Center of Gravity (Centroid) (Centroid) MethodMethod (1 of 10) (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

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Locate facility at center of geographic area Based on weight and distance traveledEstablish grid-map of area Identify coordinates

and weights shipped for each location

Center-of-Gravity Center-of-Gravity Method (2 of 10)Method (2 of 10)

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Center of Gravity MethodCenter of Gravity Method:: Steps Steps (3 of 10)(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 gridGrid has arbitrary origin & scale Maintains relative distances

Calculate X & Y coordinates for ‘center of gravity’Gives location of distribution centerMinimizes transportation cost

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Grid-Map CoordinatesGrid-Map Coordinates (4 of 10) (4 of 10)

where,where,CCxx, , CCyy ==coordinates of coordinates of

the new facility at the new facility at center of gravitycenter of gravityxxii, y, yii ==coordinates of coordinates of

existing facility existing facility iiVVii = =annual annual volumevolume

shipped fromshipped from or to the or to the ith locationith location

nn

VVii

i = i = 11

xxiiVVii

i = i = 11

nn

CCxx = =

nn

VVii

i = i = 11

yyiiVVii

i = i = 11

nn

CCyy = =

xx11 xx22 xx33 xx

yy22

yy

yy11

yy33

1 (1 (xx11, , yy11), ), VV11

2 (2 (xx22, , yy22), ), VV22

3 (3 (xx33, , yy33), ), VV33

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Center-of-Gravity TechniqueCenter-of-Gravity Technique (5 of 10) (5 of 10)Example 1Example 1

AA BB CC DD

xx 200200 100100 250250 500500yy 200200 500500 600600 300300VVtt 7575 105105 135135 6060

yy

700700

500500

600600

400400

300300

200200

100100

00 xx700700500500 600600400400300300200200100100

AA

BB

CC

DD

(135)(135)

(105)(105)

(75)(75)

(60)(60)

MilesMiles

Mil

esM

iles

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Center-of-Gravity TechniqueCenter-of-Gravity Technique (6 of 10) (6 of 10)Example 1Example 1

yy

700700

500500

600600

400400

300300

200200

100100

00 xx700700500500 600600400400300300200200100100

AA

BB

CC

DD

(135)(135)

(105)(105)

(75)(75)

(60)(60)

MilesMiles

Mil

esM

iles

Cx = = = 238n

Wii = 1

xiWii = 1

n

n

Wii = 1

yiWii = 1

n

Cy = = = 444(200)(75) + (500)(105) + (600)(135) + (300)(60)

75 + 105 + 135 + 60

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

75 + 105 + 135 + 60

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Center-of-Gravity TechniqueCenter-of-Gravity Technique (7 of 10) (7 of 10)Example 1Example 1

AA BB CC DD

xx 200200 100100 250250 500500yy 200200 500500 600600 300300WtWt 7575 105105 135135 6060

yy

700700

500500

600600

400400

300300

200200

100100

00 xx700700500500 600600400400300300200200100100

AA

BB

CC

DD

(135)(135)

(105)(105)

(75)(75)

(60)(60)

MilesMiles

Mil

esM

iles

Center of gravity Center of gravity (238, 444)(238, 444)

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CentCentre of Gravity re of Gravity MethodMethod (8 of 10) (8 of 10)

Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

Example 2Example 2 Several automobile showrooms are located according to the following grid which

represents coordinate locations for each showroom

S howroom No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

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Centroid MethodCentroid Method (9 of 10) (9 of 10) Example 2Example 2

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You must also have the volume information on the business activity at the existing facilities.

You must also have the volume information on the business activity at the existing facilities.

S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300

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Centroid Method Centroid Method (10 of 10) (10 of 10) Example 2Example 2

C = 100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49C =

100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49

C = 200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89C =

200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89

S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You then compute the new coordinates using the formulas:You then compute the new coordinates using the formulas:

ZZ

New location of facility Z about (443,627)

New location of facility Z about (443,627)

You then take the coordinates and place them on the map:You then take the coordinates and place them on the map:

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Locational Break-even AnalysisLocational Break-even Analysis

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Locational Break-Even AnalysisLocational 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

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Location Location Break-EvenBreak-Even Analysis Analysis Assumptions

Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved

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Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample 1(1 of 2) 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.

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Locational Break-Even Crossover Locational Break-Even Crossover ChartChart (2 of 2) (2 of 2)

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

Ann

ual C

ost

Akron

Chicago

Bowling Green

Bowling Green lowest cost

Chicago lowest cost

Akron lowest cost

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Example Example 22: Cost-Volume Analysis: Cost-Volume Analysis (1 of 3)(1 of 3)

Fixed and variable costs for four potential locationsL o c a t i o n F i x e d

C o s tV a r i a b l e

C o s tABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 13 02 03 5

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Example Example 22: Solution: Solution (2 of 3) (2 of 3)

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0

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Example Example 22: Solution: Solution (3 of3) (3 of3)

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

B

C

B SuperiorC Superior

A Superior

D

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Transportation MethodTransportation Method

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Transportation ModelTransportation 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)

ConstraintsProduction capacity at source (factory)Demand requirements at destinations

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Worldwide Distribution of Worldwide Distribution of Volkswagens and PartsVolkswagens and Parts

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Global LocationsGlobal Locations

Reasons for globalization Benefits Disadvantages Risks Global operations issues

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GlobalizationGlobalization

Facilitating Factors Trade agreements Technology

Benefits Markets Cost savings Legal and regulatory Financial

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GlobalizationGlobalization

Disadvantages Transportation costs Security Unskilled labor Import restrictions Criticisms

Risks Political Terrorism Legal Cultural

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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

Possible buy locally sentiment

Labor Level of training and education of workers Work ethic Possible regulations limiting number of foreign employees Language differences

Resources Availability and quality of raw materials, energy, transportation infrastructure

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Telemarketing and Internet Telemarketing and Internet IndustriesIndustries

Require neither face-to-face contact with customers (or employees) nor movement of material

Presents a whole new perspective on the location problem

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Final ThoughtFinal 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.