Facility Location

Facility LocationClass 2 and/or 31ObjectivesIdentify some of the main reasons organizations need to make location decisions Explain why location decisions are important Discuss the options that are available for location decisions Give examples of the major factors that affect location decisions Outline the decision process for making these kinds of decisions Use the techniques presented to solve typical problems

2Facility Location ProblemIt is difficult to find a single location with all required characteristics at the desired levelFor example:A location in Besiktas may offer a highly skilled labor pool and proximity to customers but land costs may be too high.Similarly, another location may offer low tax rates and minimal government regulations but may be too far from raw materials source or customer base.Thus, facility location problem becomes one of selecting site (among several available alternatives) that optimizes a weighted set of objectives.

3Logistics ManagementLogistics management is the management of a series of macro-level transportation and distribution activities with the main objective of delivering the right amount of material (goods) at the right place at the right time at the right cost using the right methods.Goods:Raw materialsSubassemblies obtained from suppliersProducts shipped from plants to warehouses or customersLogistics management problems can be classified into three categories:4What are these Categories:Location Problems:Location Problems involve determining the location of one or more new facilities in one or more of several potential sites. The cost of locating each new facility at each of the potential sites is assumed to be unknown + operating and transportation cost of serving customers from this facility-site combination.Allocation Problems:Allocation Problems assume that the number and location of facilities are known and attempt to determine how each customer is to be served. That is, given demand for goods at each customer center, the production or supplycapacities at each facility, andthe cost of serving each customer from each facility, the allocation problem determined how much each facility is to supply to each customer center.Location Allocation Problems:Location Allocation Problems involve determining not only how much each customer is to receive from each facility but also the number of facilities along with their locations and capacities.5

ClientesCentro distribucinResponse Time 1 week-> 1 Distribution Center66

ClientesCentro distribucinResponse Time 5 days-> 2 Distribution Center77

ClientesCentro distribucinResponse Time 3 days-> 5 Distribution Center88

ClientesCentro distribucinResponse Time 1 day-> 13 Distribution Center99

CustomerDCSame Day Response --> 26 Distribution Centers1010Response time vs. Number of facilitiesNumber of FacilitiesResponseTime1111Notes:1st Classification of Facility Location ProblemsSingle-Facility Location ProblemsSingle-Facility location problems deal with the optimal determination of the location of a single facility.Multi-facility Location ProblemsMulti-facility location problems deal with the simultaneous location determination for more than one facility.Generally, single-facility location problems are location problems, but Multi-facility location problems can be location as well as location-allocation problems. 2nd Classification of Facility Location ProblemsThis classification of location problems is based on whether the set of possible locations for a facility is finite or infinite:Continuous Space Location ProblemIf a facility can be located anywhere within the confines of a geographic area, then the number of possible locations is infinite.Discrete Space Location ProblemDiscrete Space Location Problems have a finite feasible set of sites in which to locate a facility.12Single-Facility Location ProblemsSingle-Facility location problems deal with the optimal determination of the location of a single facility.Multi-facility Location ProblemsMulti-facility location problems deal with the simultaneous location determination for more than one facility.Generally, single-facility location problems are location problems, but Multi-facility location problems can be location as well as location-allocation problems. 2nd Classification of Facility Location ProblemsThis classification of location problems is based on whether the set of possible locations for a facility is finite or infinite:Continuous Space Location ProblemIf a facility can be located anywhere within the confines of a geographic area, then the number of possible locations is infinite.Discrete Space Location ProblemDiscrete Space Location Problems have a finite feasible set of sites in which to locate a facility.1st Classification of Facility Location ProblemsBecause facilities can be located anywhere in a two-dimensional space, sometimes the optimal location provided by the continuous space model may be infeasible. For example, a continuous space model may locate a manufacturing facility on a lake!133rd Classification of Facility Location ProblemsSolution Technique:MinimizationTotal cost of setting up and operating the new facilities (and serving the users)The sum of distances to be traveled by the itemsThe number of facilitiesMaximization:Maximize the number of customers to be servedMaximize the revenue of a facilityMinimax:Minimize the maximum distance travelled (eg. emergency facilities

14Histogram Method15Weighted Factor Rating MethodStep 1: List all the factors that are important, i.e. have an impact on the location decision.

Step 2: Assign appropriate weights (typically between 0 and 1) to each factor based on the relative importance of each.

Step 3: Assign a score (typically between 0 and 100) for each location with respect to each factor identified in Step 1.

Step 4: Compute the weighted score for each factor for each location by multiplying its weight with the corresponding score (which were assigned Steps 2 and 3, respectively).

Step 5: Compute the sum of the weighted scores for each location and choose a location based on these scores.16Example 1: Weighted Factor MethodA payroll processing company has recently won several major contracts in the Midwest region of the United States and Central Canada and wants to open a new, large facility to serve these areas.

Because customer service is so important, the company wants to be as near its customers as possible. A preliminary investigation has shown that Minneapolis, Winnipeg, and Springfield, Illinois are the three most desirable locations, and the payroll company has to select one of these.

A subsequent thorough investigation of each location with respect to eight important factors generated the raw scores and weights. Using the location scoring method, determine the best location for the new payroll processing facility.

17Weight0.250.150.150.100.100.100.080.07FactorProximity to customerLand and construction pricesWage ratesProperty taxesBusiness taxesCommercial travelInsurance costsOffice servicesMinneapolis9560707080807090Winnipeg9060459090659590Springfield6590607085756080Score

Factors and weights for three locationsSteps 1, 2 and 3.18Steps 4 and 5.FactorProximity to customerLand and construction pricesWage ratesProperty taxesBusiness taxesCommercial travelInsurance costsOffice servicesSum of weighted scoresMinneapolis23.759.0010.507.008.008.005.606.3078.15Winnipeg22.509.006.759.009.006.507.606.30?Springfield16.2513.509.007.008.507.504.805.60? Weighted ScoreWeighted scores for three locations19Example 2: Weighted Factor MethodSupplement 7-20Labor pool and climateProximity to suppliersWage ratesCommunity environmentProximity to customersShipping modesAir serviceLOCATION FACTOR.30.20.15.15.10.05.05WEIGHT801006075658550Site 165919580909265Site 290757280956590Site 3SCORES (0 TO 100)20Location Factor RatingSupplement 7-2124.0020.009.0011.256.504.252.5077.50Site 119.5018.2014.2512.009.004.603.2580.80Site 227.0015.0010.8012.009.503.254.5082.05Site 3WEIGHTED SCORESSite 3 has the highest factor rating21Break-Even AnalysisTotal cost = fixed costs + variable costs (quantity):

Revenue = selling price (quantity)

Break-even point is where total costs = revenue:

Example 1: Break-Even AnalysisA firm estimates that the fixed cost of producing a line of footwear is $52,000 with a $9 variable cost for each pair produced. They want to know:If each pair sells for $25, how many pairs must they sell to break-even?If they sell 4000 pairs at $25 each, how much money will they make?23Example 1: Break-Even Analysis cont`dBreak-even point:

Profit = total revenue total costs

24Break-Even Analysis Outsourcing

25Example: Break-Even Analysis OutsourcingBill & Nancy plan to open a small bagel shop.The local baker has offered to sell them bagels at 40 cents each. However, they will need to invest $1,000 in bread racks to transport the bagels back & forth from the bakery to their store. Alternatively, they can bake the bagels at their store for 15 cents each if they invest $15,000 in kitchen equipment. They expect to sell 60,000 bagels each year.

What should they do?26Interpretation: They anticipate selling 60,000 bagels (greater than the indifference point of 56,000).Therefore, make the bagels in-house.

Example: Break-Even Analysis Outsourcing27Cost-Profit-Volume AnalysisSteps: 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 output Assumptions 1.Fixed costs are constant for the range of probable output 2.Variable costs are linear for the range of probably output 3.The required level of output can be closely estimated 4.Only one product is involved 28Cost-Profit-Volume Analysis, cont`dFor a cost analysis, compute the total cost for each alternative location:

29Example: Cost-Profit-Volume AnalysisFixed and variable costs for four potential plant locations are shown below:

30Example: Cost-Profit-Volume Analysis, cont`d

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Example: Cost-Profit-Volume Analysis, cont`d32Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON11812200ADANA1079400KONYA847400CAPACITY400300300100033Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON11812200ADANA1079400KONYA843007400CAPACITY400300300100034Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON118x12200ADANA107x9400KONYA843007400CAPACITY400300300100035Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON118x12200ADANA107x9400KONYA843007100400CAPACITY400300300100036Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON118x12200ADANA107x9400KONYA8x43007100400CAPACITY400300300100037Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON118x12200ADANA107x9200400KONYA8x43007100400CAPACITY400300300100038Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON118x12x200ADANA107x9200400KONYA8x43007100400CAPACITY400300300100039Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON118x12x200ADANA102007x9200400KONYA8x43007100400CAPACITY400300300100040Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON112008x12x200ADANA102007x9200400KONYA8x43007100400CAPACITY4003003001000TCBURSA =11*200+10*200+4*300+9*200+7*100=790041Minimum Cost MethodSTANBULANKARAMERSNDEMANDTRABZON11810200ADANA1071400KONYA846400CAPACITY400300300100042Minimum Cost MethodSTANBULANKARAMERSNDEMANDTRABZON11810x200ADANA1071300400KONYA846x400CAPACITY400300300100043Minimum Cost MethodSTANBULANKARAMERSNDEMANDTRABZON118x10x200ADANA107x1300400KONYA843006x400CAPACITY400300300100044Minimum Cost MethodSTANBULANKARAMERSNDEMANDTRABZON112008x10x200ADANA101007x1300400KONYA810043006x400CAPACITY4003003001000TCMERSN =11*200+10*100+8*100+4*300+1*300=550045Minimum Cost MethodSTANBULANKARABURSADEMANDTRABZON112008x12x200ADANA102007x9200400KONYA8x43007100400CAPACITY4003003001000STANBULANKARAMERSNDEMANDTRABZON112008x10x200ADANA101007x1300400KONYA810043006x400CAPACITY4003003001000TCBURSA =11*200+10*200+4*300+9*200+7*300=7900TCMERSN =11*200+10*100+8*200+4*300+1*300=550046Hybrid AnalysisA disadvantage of the Qualitative method discussed earlier is that location decision is made based entirely on a subjective evaluation. Although Quantitative method overcomes this disadvantage, it does not allow us to incorporate unquantifiable factors that have a major impact on the location decision.Example:The Quantitative techniques can easily consider:transportation cost, andoperational costs,but intangible factors such as;the attitude of a community toward businesses,potential labor unrest,reliability of auxiliary service providers are difficult to capture though these are important in choosing a location decision.Therefore, we need a method that incorporates subjective as well as quantifiable cost and other factors.47Hybrid AnalysisA multi-attribute, single-facility location model based on the ones presented by Brown and Gibson (1972) and Buffa and Sarin (1987).This model classifies the objective and subjective factors important to the specific location problem being addressed as: critical, objective, and subjective.The meaning of objective and subjective factors is obvious. The meaning of critical factors needs some discussion.48Hybrid AnalysisIn every location decision, usually at least one factor determines whether or not a location will be considered for further evaluation.For instance, if water is used extensively in a manufacturing process (e.g. a brewery), then a site that does not have an adequate water supply now or in the future is automatically removed from consideration. This is an example of a critical factor.49Hybrid AnalysisAfter the factors are classified, they are assigned numeric values:

50Hybrid AnalysisAssume that we have m candidate locations and p critical, q objective and r subjective factors. We can determine overall critical factor measure (CFMi), objective factor measure (OFMi), and Subjective Factor Measure (SFMi) for each location i with these equations.51

Hybrid AnalysisAfter LMi is determined for each candidate location, the next step is to select the one with the greatest LMi value52

Example: Hybrid AnalysisMole-Sun Brewing Company is evaluating six candidate location; Montreal, Plattsburgh, Ottawa, Albany, Rochester, and Kingston for a new brewery. The two critical, three objective and four subjective factors that management wishes to incorporate in its decision making are summarized in the table (next slide). The weights of the subjective factors are also provided in the table. Determine the best location if the subjective factors are to be weighted 50% more than the objective factors.53Questions?54