Facility Location Decisions

Experience teaches that men are so much governed by what they are accustomed to see and practice, that the simplest and most obvious improvements in the most ordinary occupations are adopted with hesitation, reluctance, and by slow graduations. Alexander Hamilton, 1791

Chapter 13
CR (2004) Prentice Hall, Inc.

13-1

Facility Location in Location Strategy

Inventory Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisions Transport Strategy Transport fundamentals Transport decisions

Location Strategy Location decisions The network planning process

PLANNING

Customer service goals The product Logistics service Ord. proc. & info. sys.

CR (2004) Prentice Hall, Inc.

13-2

CONTROLLING

ORGANIZING

Location Overview
What's located? Sourcing points Plants Vendors Ports Intermediate points Warehouses Terminals Public facilities (fire, police, and ambulance stations) Service centers Sink points Retail outlets Customers/Users
CR (2004) Prentice Hall, Inc.

13-3

Location Overview (Contd)

Key Questions

How many facilities should there be? Where should they be located? What size should they be?
Why Location is Important Gives structure to the network Significantly affects inventory and transportation costs Impacts on the level of customer service to be achieved
CR (2004) Prentice Hall, Inc.

13-4

Location Overview (Contd)

Methods of Solution Single warehouse location Grid, or center-of-gravity approach Multiple warehouse location Optimization Heuristics

CR (2004) Prentice Hall, Inc.

13-5

Nature of Location Analysis

Manufacturing (plants & warehouses) Decisions are driven by economics. Relevant costs such as transportation, inventory carrying, labor, and taxes are traded off against each other to find good locations. Retail Decisions are driven by revenue. Traffic flow and resulting revenue are primary location factors, cost is considered after revenue. Service Decisions are driven by service factors. Response time, accessibility, and availability are key dimensions for locating in the service industry.
CR (2004) Prentice Hall, Inc.

13-6

Some Location Theory/Practice

Early economic analysis Bid rent curves Webers isodapanes Webers classification of industries Hoovers tapered transport rates Agglomeration
Mathematical approaches Continuous location methods Mathematical programming

CR (2004) Prentice Hall, Inc.

13-7

Bid Rent Curve

CR (2004) Prentice Hall, Inc.

13-8

Variable spacing can mean nonlinear transportation costs

CR CR (2004) (2004) Prentice Prentice Hall, Hall, Inc. Inc.

Webers Isodapanes
13-9

Webers Classification of Industries

CR (2004) Prentice Hall, Inc.

13-10

Hoovers Transport Curves

CR (2004) Prentice Hall, Inc.

13-11

Agglomeration
Based on the observation that the output of one industry is the input of another. Customers for an industrys products are the workers of those industries. Hence, suppliers, manufacturers, and customers group together, especially where transportation costs are high. Historically, the growth of the auto industry showed this pattern. Today, the electronics industry (silicon valley) has a similar pattern although it is less obvious since the product value is high and transportation costs are a small portion of total product price.

CR (2004) Prentice Hall, Inc.

13-12

Single Facility Location

Where should the facility be located (, ) given the source points, i the demand points, i the volumes to be moved to or from facility, Vi their associated transportation rates, Ri their coordinates Xi, Yi

where
=

13-13

COG Method (Contd)

Optimal locations can be found by solving the equations below:
X V R X /d = V R /d
i i i i i i i i i

,Y

V R Y /d = V R /d
i i i i i i i i

where
d i = (X i X ) 2 + (Yi Y )2

CR (2004) Prentice Hall, Inc.

13-14

COG Method
Method appraisal A continuous location method Locates on the basis of transportation costs alone The COG method involves Determining the volumes by source and destination point Determining the transportation costs based on $/unit/mi. Overlaying a grid to determine the coordinates of source and/or destination points Finding the weighted center of gravity for the graph
CR (2004) Prentice Hall, Inc.

13-15

COG Method (Contd)

X =

VR X VR
i i i i i i

,Y =

VR Y VR
i i i i i i

where Vi = volume flowing from (to) point i Ri = transportation rate to ship Vi from (to) point i Xi,Yi = coordinate points for point i X , Y = coordinate points for facility to be located

CR (2004) Prentice Hall, Inc.

13-16

COG Method (Contd)

Example Suppose a regional medical warehouse is to be established to serve several Veterans Administration hospitals throughout the country. The supplies originate at S1 and S2 and are destined for hospitals at H1 through H4. The relative locations are shown on the map grid. Other data are: Note rate is a per mile cost Annual Rate,
Point i 1 S1 2 S2 3 H1 Location Seattle Atlanta Los Angeles 4 H 2 A & B Dallas 5 H 3 A & B Chicago 6 H 4 A & B New York Products A B A&B volume, $/cwt/ cwt. mi. 8,000 0.02 10,000 0.02 5,000 0.05 3,000 4,000 6,000 0.05 0.05 0.05 Xi 0.6 8.6 2.0 5.5 7.9 10.6 Yi 7.3 3.0 3.0 2.4 5.5 5.2

CR (2004) Prentice Hall, Inc.

13-17

COG Method (Contd)

Map scaling factor, K

CR (2004) Prentice Hall, Inc.

13-18

COG Method (Contd)

Solve the COG equations in table form i 1 2 3 4 5 6 Xi 0.6 8.6 2.0 5.5 7.9 10.6 Yi Vi Ri 7.3 8,000 0.02 3.0 10,000 0.02 3.0 5,000 0.05 2.4 3,000 0.05 5.5 4,000 0.05 5.2 6,000 0.05 V iR i 160 200 250 150 200 300 1,260 V iR i X i 96 1,720 500 825 1,580 3,180 7,901 ViRiYi 1,168 600 750 360 1,100 1,560 5,538

CR (2004) Prentice Hall, Inc.

13-19

COG Method (Contd)

Now,
X = 7,901/1,260 = 6.27

Y = 5,538/1,260 = 4.40

This is approximately Columbia, MO. The total cost for this location is found by:
TC =

ViR iK

(X

X)

+ (Y i Y )

where K is the map scaling factor to convert coordinates into miles.

CR (2004) Prentice Hall, Inc.

13-20

COG Method (Contd)

COG

CR (2004) Prentice Hall, Inc.

13-21

COG Method (Contd)

TC
1

= 8,000(0.02

)(500)

(0.6 6.27)

+ (7.3 4.40)

Calculate total cost at COG

Xi

Yi

Vi

Ri

TC

1
2

0.6
8.6

7.3
3.0

8,000
10,000

0.02
0.02

509,482
271,825

3
4 5 6

2.0
5.5 7.9 10.6

3.0
2.4 5.5 5.2

5,000
3,000 4,000 6,000

0.05
0.05 0.05 0.05

561,706
160,733 196,644 660,492
13-22

Total 2,360,882
CR (2004) Prentice Hall, Inc.

COG Method (Contd)

Note The center-of-gravity method does not necessarily give optimal answers, but will give good answers if there are a large numbers of points in the problem (>30) and the volume for any one point is not a high proportion of the total volume. However, optimal locations can be found by the exact center of gravity method.
X =
n

V R X /d V R /d
i i i i i i

,Y =

V R Y /d V R /d
i i i i i i

where
d i = (X i X ) 2 + (Yi Y ) 2
n n

and n is the iteration number.

CR (2004) Prentice Hall, Inc.

13-23

COG Method (Contd)

Solution procedure for exact COG 1) 2) 3) 4) 5) Solve for COG Using X ,Y find di Re-solve for X ,Y using exact formulation Use revised X ,Y to find revised di Repeat steps 3 through 5 until there is no change in X ,Y 6) Calculate total costs using final coordinates

CR (2004) Prentice Hall, Inc.

13-24

Example
Y Q
(790,900)

Showroom

No of items sold per month 1250 1900 2300

D
(250,580)

A D

A
(100,200) (0,0)

Q
X

Question: What is the best location for a warehouse or temporary storage facility considering only distances and quantities sold per month?