Facility Location

Adapted from: Facilities Planning, Tompkins, White, Bozer, Frazelle, Tanchoco, Trevino, Wiley, New York, 1996

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Importance of Location
Up to 25% of the products selling cost Once a company commits to a location, many costs are fixed and difficult to change Energy Labor Location depends on the type of business Manufacturing minimizing cost Retail and professional services maximizing revenue Warehouse cost and speed of delivery
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In General - Location Decisions

Long-term decisions Difficult to reverse Affect 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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Location Options
Expand the existing facility instead of moving Maintain current sites while adding another facility Closing the existing facility and moving to another

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Factors The Affect Location Decisions

Country Decisions Government rules, attitudes, stability, incentives Cultural and economic issues Location of markets Labor availability, attitudes, productivity, costs Availability of supplies, communications, energy Exchange rates
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Factors The Affect Location Decisions

Region/Community Decisions Corporate desires Attractiveness of region (culture, taxes, climate, etc) Labor availability, costs, attitudes towards unions Cost and availability of utilities Environmental regulations of state and town Government incentives Proximity to raw materials and customers Land/construction costs Lamar University
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Factors The Affect Location Decisions

Site Decisions Site size and cost Air, rail, waterway systems Zoning restrictions Nearness of services/supplies needed Environmental impact issues

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Location Decision Example - BMW

In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

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Location Decision Example BMW

Country Decision Factors
Market location U.S. is worlds largest luxury car market Growing (baby boomers) Labor Lower manufacturing labor costs
$17/hr. (U.S.) vs. $27 (Germany)

Higher labor productivity

11 holidays (U.S.) vs. 31 (Germany)

Other Lower shipping cost ($2,500/car less) New plant & equipment would increase productivity (lower cost/car $2,000-3000)

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Location Decision Example BMW

Region/Community Decision Factors
Labor Lower wages in South Carolina (SC)
About $17,000/yr (SC) vs. $27,051/yr (US)
Based on 1993 metropolitan averages for all workers

Government incentives $135 million in state & local tax breaks Free-trade zone from airport to plant
No duties on imported components or on exported cars

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Organizations That Need To Be Close to Markets

Government agencies Police & fire departments Post Office Retail Sales and Service Fast food restaurants, supermarkets, gas stations Drug stores, shopping malls Bakeries Services Doctors, lawyers, accountants, barbers Banks, auto repair, motels

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Ranking of the Business Environment in 20 Countries, 1997 - 2001

1 Netherlands 2 Britain 3 Canada 4 Singapore 5 U.S. 6 Denmark 7 Germany 8 France 9 Switzerland 10 Sweden 11 Finland 12 Belgium 13 New Zealand 14 Hong Kong 15 Austria 16 Australia 17 Norway 18 Ireland 19 Italy 20 Chile

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Labor Productivity
Low wage rates often heavily influence location choices What about productivity? Example: Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day: Labor cost per day/Productivity (units per day) = Cost per unit

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Labor Productivity - Example:

Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day: Labor cost per day/Productivity (units per day) = Cost per unit

Case 1: Texas Plant $70 per day/60 units per day = $70/60 = $1.17 per unit Case 2: Mexican Plant $25 per day/20 units per day = $25/20 = $1.25 per unit Lesson: Employees with poor training, poor education, or poor work habits may not be a good buy even at low wages. Lamar University
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Costs: Tangible Vs. Intangible

Tangible costs those that are readily identifiable and precisely measured
Utilities Labor Material Taxes Depreciation Other costs that accounting can easily identify

Intangible costs not easily quantifiable

Quality of education Public transportation facilities Community attitudes toward the industry and the company Quality and attitude of prospective employees Climate

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Proximity To Markets
Service organizations (drug stores, restaurants, post offices) find proximity to market is the primary location factor Manufacturing useful to be close to customers when transporting finished goods is expensive or difficult

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Proximity To Suppliers
Firms locate near their raw materials and suppliers because: Perishability Transportation costs Bulk

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Proximity To Competitors
Clustering the location of competing companies near each other, often because of a critical mass of information, talent, ventire capital, or natural resources

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Location Evaluation Methods

Factor-rating method Locational break-even analysis Center of gravity method Transportation model

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Factor-Rating Method
Most widely used location technique Useful for service & industrial locations Rates locations using factors
Intangible (qualitative) factors
Example: Education quality, labor skills

Tangible (quantitative) factors

Example: Short-run & long-run costs

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Factors Affecting Location Selection

Labor costs (including wages, unionization, productivity) Labor availability (including attitudes, age, distribution, and skills) Proximity to raw materials and suppliers Proximity to markets State and local government fiscal policies (including incentives, taxes, unemployment compensation) Utilities (including gas, electric, water, and their costs) Lamar University
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Factors Affecting Location Selection - continued

Site costs (including land, expansion, parking, drainage) Transportation availability (including rail, air, water, and interstate roads) Quality-of-life issues (including all levels of education, cost of living, health care, sports, cultural activities, transportation, housing, entertainment, religious facilities) Foreign exchange Including rates and stability Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local) Lamar University
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Steps in Factor Rating Method

State relevant factors in terms of max or min Assign weights to each factor (should add to 100%) Assign rating to each factor (1-5) (1=poor, 5=excellent) Multiply scores by weights for each factor & total Calculate percent of total Compare top 2 alternatives (using percent as a basis of comparison)

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Steps in Factor Rating Method

Alternative A Factor Min. Operating Cost Max. Flexibility Max. Space utilization Min. Payback period Total Percent Weight 20 Rating 4 Score 80 Alternative B Rating 3 Score 60

30 10 40

3 3 1

90 30 40 240 240/330 = .7272

2 5 4

60 50 160 330 330/330 = 1.00

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Locational 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 Select location with lowest total cost for expected production volume
Must be above break-even

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Locational Break-Even Analysis Example

Youre an analyst for AC Delco. Youre 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?

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Locational Break-Even Analysis Example

Akron: Total cost = $30,000 + $75(2000) = $180,000 Bowling Green: Total Cost = $60,000 + $45(2000) = $150,000 Chicago: Total Cost = $110,000 + $25(2000) = $160,000 With an expected volume of 2000 units per year, Bowling Green provides the lowest cost location. The expected profit is: Total Revenue Total Cost = $120(2000) - $150,000 = $90,000 per year

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Locational Break-Even Analysis Example

The crossover point for Akron and Bowling Green: 30,000 + 75(x) = 60,000 + 45(x) 30(x) = 30,000 X = 1,000 And the crossover point or Bowling Green and Chicago: 60,000 + 45(x) = 110,000 + 25(x) 20(x) = 50,000 X = 2,500 Thus, for a volume o less than 1,000, Akron would be preferred, and for a volume greater than 2,500, Chicago would yield the greatest profit.

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Locational Break-Even Analysis Example

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Center of Gravity Method

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 distance (or cost)

Shipping cost/unit/mile is constant

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Center of Gravity Method Steps

Place existing locations on a coordinate grid
Grid has arbitrary origin & scale Maintains relative distances

Calculate X & Y coordinates for center of gravity

Gives location of distribution center Minimizes transportation cost

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Center of Gravity Method Steps

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Center of Gravity Method - Example

Consider the case of Ryans discount Department stores, a chain o four large K-Mart type outlets. The firms store locations are in Chicago, Pittsburgh, New York, and Atlanta; they are currently being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the chains first store.
Store Location Chicago Pittsburgh New York Atlanta Number of containers shipped pre month 2000 1000 1000 2000

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Center of Gravity Method - Example

Chicago (30,120)

120
Pittsburgh (90,110)

New York (130,130)

90
Center of gravity (66.7, 93.3)

60

30 30

Atlanta (60,40)

60

90

120

150

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Center of Gravity Method - Example

X-coordinate of the center of gravity: = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) 2000 + 1000 + 1000 + 2000 = 400,000/6000 =66.7 Y-coordinate of the center of gravity: = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) 2000 + 1000 + 1000 + 2000 = 560,000/6000 =93.3
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Transportation Model
Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Type of linear programming model
Objective: Minimize total production & shipping costs Constraints
Production capacity at source (factory) Demand requirement at destination

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Components of Volume and Revenue for a Service Firm 1. Purchasing power of customer drawing area 2. Service and image compatibility with demographics of the customer drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firms and competitors locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management Lamar University
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Location Strategies Service vs. Industrial

Service/Retail/Professional Revenue Focus Volume/revenue
Drawing area, purchasing power Competition; advertising/pricing

Physical quality
Parking/access; security/ lighting; appearance/image

Cost determinants
Rent Management caliber Operations policies (hours, wage rates)

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Location Strategies Service vs. Industrial

Industrial Revenue Focus Tangible costs
Transportation cost of raw materials Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, etc.

Intangible and future costs

Attitude toward union Quality of life Education expenditures by state Quality of state and local government

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Location Strategies Service vs. Industrial

Service/Retail/Professional Techniques
Correlation analysis to determine importance of factors for a particular type of operation Traffic counts Demographic analysis of drawing area Purchasing power analysis of drawing area Assumptions Location is a major determinate of revenue Issues manifesting from high customer contact dominate Costs are relatively constant for a given area; therefore, revenue function is critical

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Location Strategies Service vs. Industrial

Industrial Techniques
Linear Programming (Transportation method) Weighted approach to intangibles Breakeven analysis Crossover charts Assumptions Location is a major determinate of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on costs Intangible costs can be objectively evaluated

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Major Methods of Solving Location Problems

Weighted methods which:
Assign weights and points to various factors Determine tangible costs Investigate intangible costs

Center of Gravity Method

Find best distribution center location

Location breakeven methods

Special case of breakeven analysis

Transportation method
A specialized linear programming method

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Telemarketing and Internet Industries

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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Telemarketing and Internet Industries

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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