Amrinder Kaur

Facility location

Facility location A factory or a plant is the manufacturing

facility of a company. A warehouse is the storage facility of a

manufacturing or a distribution company. The offices of the service sector company

such as courier company, a bank or an insurance company are its facilities.

Facility location decision is very important for big business houses as well as new entrepreneurs. As wrong decision will lead to failure to complete project.

Facility set up without proper location planning

Sell off the facility to other Companies(Divestment)• Finding buyer at wrong location is difficult• Prices received after sell off are less as compared to earlier.• Divestment is time-consuming

Relocation to a new location• Only machine and equipment can be relocated not human resource•Capital expenditures are blocked•More investment is required to purchase land ,construction etc.

Closing of operations and liquidating the assets

• Liquidation of assets is time consuming and painful.• The price received after sell-off are usually much less than the actual investment made.

Continue operations at the existing location• Inherent problems at the location can also lead to low profit/ less market share.•Competitors having plants at better locations always have an edge.•In the long run company has to plan location at another facility to beta competition.

Generate a list of alternative location options for the facility

Find out factors relevant to the facility being planned

Screen better location options using break-even analysis

Apply centre of gravity model for

least transportation cost

Apply transportation model

for least transportation cost

Apply ardalan heuristic to

choose best location for service operations

Best location chosen

Steps in facility location planning

Screen better location options using factor and location rating analysis

Apply simple median model for finding location with least overall transportation cost

Factors Affecting Facility Location Planning

Facility location planning

Environment and community

Proximity to subcontractors

Easy availability of cheap land

Low construction

costAvailability of cheap and

skillful labor

Residential complexes,

schools, hospitals etc.

Proximity to markets

Proximity to raw materials

Good transportation

facilities

Availability of power

supply

Basic amenities

Government policies

Location analysis Techniques

Dimensional analysisHere, relative merits of different costs such as transportationand power are considered for identifying the facility location.Its easy to select a plant site when all the costs are tangible and quantifiable in value.

IfC1

M , C2M, C3

M…..CZM are different costs associated

with a plant site, M on z different cost items.C1

N,C2N,C3

N…..CZN are different costs associated

with the plant site, N on Z different cost items.W1,W2,W3 are weight age given to cost items.

Value of relative merit of plant sites M and N is given by:

(C1M/C1

N)w1 * (C2M/C2

N)w2*………..(CzM/Cz

N)w3

If value of relative merit is >1, the plant site N is superior

Brown and Gibson method

This model considers three types of factors for analyzing the facility location

• Critical such as water for a refinery• Objective such as raw material costs• Subjective such as union activities

In the Brown and Gibson model, for each plant site ‘i’ a Loaction measure is calculated

LMi=CFMi*[D*OFMi=(1-D)*SFMi]Where,CFMi specifies the measure of critical factors for the plant site,i.Its value is either 0 or 1.

OFMi specifies the measure of objective factors for the plant site i(0<=OFMi<=1 and summation of OFMi)

SFMi specifies the measure of subjective factors for the plant site, i(0<=SFMi<=1 and summation of SFMi=1)

D specifies the objective factor decision weight (0<=D<=1).It represents the relative importance of theObjective factors to the subjective factors.

Hence, a plant site with higher value of location measure is preferred to the plant site with lower value of location measure.

Factor rating Method

• This is frequently used to evaluate locations because this method helps to figure out which location is better.

• This method enables managers to bring various locations into considerations in the evaluation process and thus it helps in identifying the most appropriate location for the plant.

How to do it???

• List down all the factors for evaluating the location• Each factor is rated from high value to low, which is usually 1 to 10,respectively.Rating hence is according to relative importance of the factor.

•Then there is the rating of location according to the characteristics and merits of each location.

• Finally the factor rating is multiplied by location rating to get the final results.

• The total of the product of factor rating and location rating specifies the most appropriate location.

For eg., for location A

Factor Factor rating

Location rating

Product of Ratings

Inter company integration 4 8 32Availability and cost of labor 3 2 6

Availability and cost of services

3 6 18

Availability and cost of materials

5 2 10

Availability of transport 1 3 3Availability of car parking space

5 4 20

Expansion potential 4 1 4

Zoning and legal regulations 3 10 30Cost of land 2 7 14New development areas 2 6 12Living conditions 2 5 10

Total 159

Point rating Method

•This method involves an inspection of the importance of each factor in the location selection process. Each location factor is assigned a relative weight out of a maximum number of possible points, which is usually 100.

•Then a potential location is evaluated according to every factor considered by the management.

•A number of points are assigned to each factor.

•The location having the highest score is selected as the most suitable location.

Factor Unfavorable (0-33)

Average (34-66)

Favorable (67-100)

Total Points

A B A B A B A BInter company integration 20 80 20 80Availability and cost of labor

30 50 30 50

Availability and cost of services

50 70 50 70

Availability and cost of materials

20 60 40 60 40

Availability of transport 40 40 20Availability of car parking space

30 80 30 80

Expansion potential 40 90 40 90

Zoning and legal regulations

60 80 60 80

Cost of land 40 90 40 90New development areas 50 80 50 80Living conditions 90 90 20

Break Even Analysis

Break even pointAt this point the cost of operations equals its revenues.

Break even analysis specifies the level of output that must be reached in order to recover all the cost of operations through revenues.

And the break-even point depends on the selling price of the product and the operating cost structure.

Cost is divided into two categoriesFixed cost: Doesn't vary with volume of production. For eg., salaries of staff, insurance.Variable cost: shipping handling cost etc.

Cost and revenue increases with increase in the volume of the output.

Fixed Cost (FC)

0 500 1000

Cost (Rs)

Volume of Production (units)

Volume of Production vs Cost

Fixed Cost (FC)

0 500 1000

Cost (Rs)

Volume of Production (units)

Total cost as a sum of fixed and variable costs

Total Cost (TC)

Variable cost (VC)

Fixed Cost (FC)

0 500 1000

Cost (Rs)

Volume of Production (units)

Graph showing TR,TC and the break even volume VBE

Total Cost (TC)

Variable cost (VC)

Total revenue (TR)Profit region

VBE

Fixed Cost (Low)

0 500 1000

Cost /Revenue(Rs)

Volume of Production (units)

Total Cost (TC)

Variable cost (High)

Total revenue (TR)

VBE

A) Location-1

Fixed Cost (High)

0 500 1000

Cost /Revenue(Rs)

Volume of Production (units)

Total Cost (TC)

Variable cost (High)

Total revenue (TR)

VBE

B) Location-2

Fixed Cost (High)

0 500 1000

Cost /Revenue(Rs)

Volume of Production (units)

Total Cost (TC)

Variable cost (low)

Total revenue (TR)

VBE

C) Location-3

Fixed Cost (Low)

0 500 1000

Cost /Revenue(Rs)

Volume of Production (units)

Total Cost (TC)

Variable cost (low)

Total revenue (TR)

VBE

D) Location-4

Best location option is location-4, with visibly the least value of VBE