Facility Location and Facility

Layout

Strategic Importance
Supply-chain management is critical
Facility locationintrinsically related to SCM
Examples:
FedEx: While opening a hub for Asia in Philippines
1995
it had to evaluate several sites
Linking its American (Memphis) and European (Paris) Hubs
BTW, the facility was closed and the new hub since 2009 is
in Guangzhou, Southern China

Mercedes first overseas plant in Vance, Alabama

Evaluated 170 sites in 30 states and 2 countries

Hard Rock Caf location in Moscow in 2002

Took 3 years of advance planning
Russian Food Supply Chain

Facility Location
Global Nature of Location Decision
Objective: Maximize the benefit of location
to a firm
Marketing Strategy: New Markets
Global Growth: New Markets and supply chain
considerations
Cost of Doing Business: Attractive alternatives to
relocate business elsewhere

Location Options
Expand existing facility
Add new location while retaining existing
location
Close existing operation and move to a
new location

Location Decision Factors

Country Factors

Regional Factors

Community Considerations

Site-related Factors

Site Selection Factors (Country and

Region)
Country

Government stability
Government regulations
Political and economic systems
Economic stability
Exchange rates
Culture
Climate
Export and import regulations,
duties and fees

Raw material availability

Number and proximity of suppliers
Transportation system
Labor pool and cost
Available technology
Commercial travel
Technical expertise

Region

Labor (availability, cost and unions)

Proximity of customers
Number of customers
Construction/leasing costs
Land costs
Modes and quality of transportation
Transportation costs

Government regulations
Environmental regulations
Raw material availability
Commercial travel
Climate
Utilities

Site Selection Factors -(Community and

Site)
Community

Community government
Local business regulations
Environmental regulations
Government services
Business climate
Community services
Transportation system
Proximity of customers
Concentration of customers

Taxes
Construction/leasing costs
Land cost
Availability of sites
Financial Services
Labor pool
Community inducements
Proximity of suppliers

Site

Customer base
Construction/leasing cost
Land cost
Site size
Transportation
Utilities

Zoning restrictions
Traffic
Safety/security
Competition
Area business climate
Income level

Some Facts: Location Decisions

Globalization: A two way street for Americans

Labor costs and productivity issues
Worker skills: e.g. call centers and CPA jobs to India.
Government Incentives: Alabama gave $169K per job in
tax incentives to Mercedes in 1993
Sunbelt is growing
Attitudes with respect to: pollution, zoning, intellectual
property, unionism, turnover, absenteeism, punctuality,
bribe, ethics, etc.
Proximity
Markets
Suppliers
Competition (clustering)

Evaluating Locations
Factor Rating (The Scoring Model)
Decision based on quantitative and qualitative
inputs

Center of Gravity Method

Decision based on minimum distribution costs

Transportation Model
Decision based on movement costs of raw
materials or finished goods

Location Factor Rating

Scores (0 to 100)
Location Factor
Weight
Labor pool and climate
.30
Proximity to suppliers
.20
Wage rates
.15
Community environment .15
Proximity to customers .10
Shipping modes
.05
Air service
.05
More

Site 1
80
100
60
75
65
85
50

Site 2
65
91
95
80
90
92
65

Site 3
90
75
72
80
95
65
90

Location Factor Rating

(Weighted Scores)
Weighted Scores
Location Factor
Labor pool and climate
Proximity to suppliers
Wage rates
Community environment
Proximity to customers
Shipping modes
Air service

Site 1
24.00
20.00
9.00
11.25
6.50
4.25
2.50

Site 2
19.50
18.20
14.25
12.00
9.00
4.60
3.25

Site 3
27.00
15.00
10.80
12.00
9.50
3.25
4.50

Total Score

77.50

80.80

82.05

Center of Gravity Technique

n

xiWi

i=1

y2

y1

2 (x2, y2), W2

x=

1 (x1, y1), W1

i=1

y3

x2

x3

y=
Wi

Wi

i=1

where,
x, y = coordinates of the new facility
at center of gravity
xi, yi = coordinates of existing facility i
Wi = annual weight shipped from
facility i

3 (x3, y3), W3

x1

i=1

yiWi

Ex: Locate a warehouse to serve the

following four cities with given demand

Location
`

Demand
(Millions)

_______________________________
Dallas
1
LA
3
New York
3
Chicago
2

Ex: Locate a warehouse to serve the

following four cities with given demand

Location

Demand (Millions) Coordinates

(Weights)

___________________________________
__
Dallas
1
(8,3)
LA
3
(0,4)
New York
3
(14,8)
Chicago
2
(10,7)

Center of Gravity Location

Cx = (1*8+3*0+3*14+2*10)/(1+3+3+2)
= (8+0+42+20)/9 = 70/9 = 7.78
Cy = (1*3+3*4+3*8+2*7)/(1+3+3+2)
= (3+12+24+14)/9 = 53/9 = 5.89
Location Coordinate = (7.78, 5.89)

Transportation Method
Ex: W.A.T., Inc - Currently maintains
plants in Atlanta and Tulsa to supply to
major distribution centers in Los Angeles
and New York City. Because of an
expanding demand, WAT Inc. has decided
to open a new plant and has narrowed the
choice to one of the two cities--New
Orleans and Houston. Use the following
to arrive at a solution.

Production & Shipping Cost/Unit

--------------------------------------------

Capacity

From\To
LA
NY
---------------------------------------------------------------------------------Atlanta
14
11
600
Tulsa
9
12
900
Houston*
10
7
500*
New Orleans*
9
11
500*
---------------------------------------------------------------------------------Demand
800
1200
* Proposed sites

Least Cost Cell Allocation

Quick and dirty way to find a reasonably

good (but not necessarily an optimal)
solution.

For cost minimization problems,

1. Identify least cost cell and allocated the
maximum feasible quantity to that cell.
2. Cross out rows and columns that have
exhausted demand/capacity.
3. In case of tie between cells with least
cost, select the cell that can
accommodate the maximum quantity.

Transportation Table
From/To->

Demand

Capacity

Transportation Table
From/To->

Demand

Capacity

Demand Centers are LA & NYC

From/To->

LA

NYC

Demand

800

1200

Capacity

Decision?
Based on the cost locate the facility in
HOUSTON