facility location operations management. location decisions long-term decisions difficult to reverse...
TRANSCRIPT
Facility Location
Operations Management
Location Decisions
Long-term decisions Difficult to reverse Affect fixed & variable costs
Transportation costs (25% of price)Other costs: taxes, wages, rent
Objective: maximize benefit of location to firm
What factors should we consider?
Skilled workforce Environmental laws / cost of compliance Cost of utilities, labor, taxes Suppliers close by – fast & cheap access Customers close by Competitors close by? Skilled labor pool International - control issues?
Service Facilities – Traffic focus Revenue changes a huge amount, depending on the
location. Old Navy in Stead because of cheap land? Location, location, location: you need traffic Make it convenient! vitamins: need enough, but it has to be the right kind people who would want to buy your products when they are
there. Cost probably doesn’t change nearly as much, by
location All malls have high rent
Cost Focus
Revenue does not vary much, depending on the location.Customers don’t care if your warehouse is in
Sparks or Sacramento Location is a major cost driver
Impacts shipping, labor, production costsVaries greatly by location
Cost Minimization
Identify the costs that will vary most with the location you choose. Transportation, taxes, labor, Facility construction cost, utilities
Other considerationsProximity of services, suppliersQuality of lifeGovernment incentives
Cost Focus Process Overview
1. Identify general region to locate in Usually based on mostly on transp. costs
2. Identify a list of candidate cities Choose cities with good transp. Access Estimate labor cost & availability, facilities costs
3. Select metro area, identify candidate properties.
Find cost of building or leasing individual properties
Distribution Center Location
Minimize demand-weighted distance: distance to each customer times the volume of shipments to the customer
How many to build? Where to build?
Location Methods
Minimize demand-weighted distance Center of Gravity – minimizing demand-weighted
distances of one facility Ardalan – minimize transportation of multiple facilities,
but must locate by customers
Factor Weighting – consider qualitative factors Break-even – Consider fixed & variable costs
Center of Gravity
Compute X and Y coordinates separately
dix is the X coordinate of location i.
diy is the Y coordinate of i.
Wi is the X demand at i.
CX and CY are the coordinates of the DC.
ii
iiix
X W
WdC
ii
iiiy
Y W
WdC
Center of Gravity Example 1
You need to decide where to build a new DC for Motorola.
It needs to serve wholesalers in Reno, Dallas, and Chicago.
Locate these cities on an unscientific, rectangular grid.
Grid must maintain relative distances, but X and Y grids could be different.
0 20 40 60 80 100 120 140 160
80
20
40
60
0
100
Center of Gravity Method
City Demand Reno is at 17, 55 100 Fort Worth is at 78, 20 90 Chicago is at 110, 65. 120
Demand is TL/month
Center of Gravity
7.70310
920,21
310
200,13020,7700,1
12090100
120*11090*78100*17
X
ii
iiix
X
C
W
WdC
7.48310
100,15
310
800,7800,1500,5
12090100
120*6590*20100*55
Y
ii
iiiy
Y
C
W
WdC
0 20 40 60 80 100 120 140 160
80
20
40
60
0
100
Center of Gravity Example 2
You need to decide where to locate a DC in South Dakota
X Y Demand Pierre 78 47 50 Watertown 150 65 8 Sioux Falls 160 25 90 Rapid 12 42 60
0 20 40 60 80 100 120 140 160
80
20
40
60
0
100
Center of Gravity
2.97208
220,20
208
720400,14200,1900,3
6090850
60*1290*1608*15050*78
X
ii
iiix
X
C
W
WdC
7.36310
640,7
208
520,2250,2520350,2
6090850
60*4290*258*6550*47
Y
ii
iiiy
Y
C
W
WdC
0 20 40 60 80 100 120 140 160
80
20
40
60
0
100
Ardalan Heuristic
Need a matrix of distances or costs from each customer location to every other location
Demand at each location Weight – give higher weight to more important
customers – their pain of traveling a longer distance is worth more.
Only consider locating where customers are Identify the one best place to locate at, then the
second one to add, then the third, etc.
Ardalan Heuristic Minimize weighted distance traveled
To
FromA B C D Dem.Weight
A 0 11 8 12 10 1.1
B 11 0 10 7 8 1.4
C 8 10 0 9 20 0.7
D 9.5 7 9 0 12 1.0
Ardalan Method Expected demand at each location. Weight represents importance of serving
location (bigger = more important) Step 1: Multiply distances * weights *
demand A to B: 11 * 1.1 * 10 = 121
Ardalan MethodStep 2. Add up values in columns
FromA B C D
A 0 121 88 132
B 123.2 0 112 78.4
C 112 140 0 126
D 114 84 108 0
349.2 345 308 336.4
Ardalan MethodChoose smallest value as first site.
FromA B C D
A 0 121 88 132
B 123.2 0 112 78.4
C 112 140 0 126
D 114 84 108 0
349.2 345 308 336.4
Ardalan Method3. If larger, set each cost equal to cost in same row
in the chosen column
FromA B C DA 0 88 88 88B 112 0 112 78.4C 0 0 0 0D 108 84 108 0
220 172 308 166.4
Ardalan Method
Get rid of previously chosen column.Sum, choose smallest sum.FromA B D
A 0 88 88B 112 0 78.4C 0 0 0D 108 84 0
220 172 166.4
Ardalan Method
Repeat 3 & 4 until enough sites chosen.
FromA B D
A 0 88 88
B 78.4 0 78.4
C 0 0 0
D 0 0 0
78.4 88 166.4
Ardalan Method
Repeat 3 & 4 until enough sites chosen.
From A B
A 0 88
B 78.4 0
C 0 0
D 0 0
78.4 88
Ardalan Summary
What we decided is that if we only want to build one location, it should be in C.
If we want to build two, they should be in C and D. If we add a third one, it should be in A.
Ardalan Summary
Assumes that we have to locate in the same city as one of our customers, which is not always the case.
However, it can be used to find more than one location. Center of Gravity does not try to locate in the same city
as one of the customers, but can only set one site. If we choose the same sites as customers A and X, we
obviously don’t really have to put the warehouses in those exact cities.
Factor Rating Example
We need to decide where to build a new coffee roasting plant. There are two possible locations: Dallas, and Denver.
We consider the following factors Transp: annual trucking costs in $k Lease: annual costs in $k Labor availability: scale 1-10, unemployment, related
industries Quality of life: scale 1-10: outdoor activities, cultural,
sports, education
Factor Rating Example
Using a scoring system we developed, we have the following.
Factor Weight TX CO
Transportation 0.5 900 1,023
Plant Lease Cost 0.3 45 39
Labor availability 0.2 10 8
Quality of Life 0.1 7 9.5
Normalizing Scores
All factors must be scored on the same scale, like 1-10, or 0-1.0, etc.
Costs need to be re-scaledLowest cost site gets a 10.More expensive site gets less than 10
Factor Rating Example
TX CO
Factor Wt Raw Wtd Raw Wtd
Tr 0.4 10 4.00 8.80 3.52
Plant 0.3 8.7 2.61 10 3.00
Labor 0.2 10 2.00 8 1.60
Q Life 0.1 7 0.70 9.5 0.95
TOTAL 9.31 9.07
TX is best
Possible Approach Use Ardalan to find out which general
regions to locate in (state / county). Use factor weighting to choose city. Ardalan has disadvantage of choosing
weights -- difficult to set levels.
Break-Even Analysis
Determine fixed and variable costs for each location
Fixed cost: how much it would cost to open a facility there
Variable cost: how much total costs would increase as production increases: Transportation costs Labor costs Taxes Increased construction costs
Locating Service FacilitiesUsing Linear Regression Collect data about your current facilities Use regression to determine which
variables have a significant impact on profits
Choose new facilities which have these characteristics
Method Comparison Center of gravity minimizes average distance
for one facility only. Ardalan Minimizes weighted distances for
more than one facility. Breakeven: fixed & variable costs. Factor weighting considers many other
important aspects of location, but does not minimize distance.
Transportation Method
You have 3 DCs, and need to deliver product to 4 customers.
Find cheapest way to satisfy all demand
A 10
B 10
C 10
D 2
E 4
F 12
G 11
Solving Transportation Problems
Trial and Error Linear Programming
– ooh, what’s that?! Tell me more!
D E F G
A 10 9 8 7
B 10 11 4 5
C 8 7 4 8