Mapua Institute of Technology School of Industrial Engineering

Facility Location

Adapted from: Facilities Planning 3rd Ed. by Tompkins, White, Bozer, Tanchoco Operations Management by William Stevenson

What is a facility location?

Refers to the placement of facility with which it interfaces It includes placement and orientation on a specific plot of land

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Factors involved with location decisions

Demand growth Market shifts Depletion of raw materials Introduction of new products and services

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Importance of Location Decisions

they entail a long term commitment which makes mistakes difficult to overcome location decisions often have an impact on operating cost both fixed and variable ( e.g. transportation costs, taxes, wages, rent etc.) and revenues as well as on operation.

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Objectives of location decisions

Maximize benefit of location to a firm Depend on the type of business - Manufacturing minimizing cost - Retail and professional services maximizing revenue - Warehouse cost and speed of dlivery

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Location Options

Expand an existing facility Add new location while retaining the existing ones Shut down one location and move to another Do nothing maintain the status quo

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General procedure for making location decision

Determine the criteria that will be used to evaluate location alternatives. Identify factors that are important, such as location of raw materials. Develop location alternatives. - identify the region for a location -identify a small number of community- site alternatives Evaluate the alternatives and make a selection
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Factors that affect location decisions:

Country Considerations Regional Factor Community Considerations Sire-related factor

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Factors that affect location decisions

Country Decisions Government rules, attitudes, stability, incentives Culture Economic/ political issues Location of markets Labor availability, attitudes, productivity, costs Availability of supplies, communications, energy etc. Exchange rates

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Factors that affect location decisions

Region/ Community Decisions Attractiveness of region ( culture, taxes, climate, etc) Labor availability, costs, attitudes towards unions Cost and availability of utilities Environmental regulations Government incentives Proximity to raw materials and customers Land/ Construction costs Size of community Community resistance to industrial operations
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Factors that affect location decisions

Site-Related Factors Site size and cost Air, rail, waterway system Zoning restrictions Nearness of services/supplies needed Environmental impact issues

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Location Evaluation Methods

Locational-cost-profit volume analysis Factor-rating method Center of gravity method Transportation model

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Location Evaluation Method:

Locational cost-profit-volume analysis

Locational cost-profit-volume analysis a technique for evaluating location choices in economic terms. Steps: 1. Determine the fixed and variable costs associated with each location alternative 2. Plot the total cost lines for all location alternatives on the same graph 3. Determine which location will have the lowest total cost for the expected level of output. Alternatively which location will have the highest profit.
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Location Evaluation Method:

Locational cost-profit-volume analysis

Assumptions: 1. Fixed costs are constant for the range of probable output. 2. Variable costs are linear for the range of probable output 3. The required level of output can be closely estimated 4. One one product is involved

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Location Evaluation Method:

Locational cost-profit-volume analysis

Example 1: Four location options are being considered for a new facility with a minimum target output of 10,000 unit/ year. The cost data are given as: Location Fixed cost /year Variable cost/unit A $250,000 $11 B $100,000 $30 C $150,000 $20 D $200,000 $35 a. Identify the range of output for which each alternative is superior ( I.e. has the lowest total costs). b. Which location is best for an output of 8,000? , 10,000?
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Location Evaluation Method:

Solution: TC = FC + VC X Q Where: TC = Total Costs FC = Fixed Costs

Locational cost-profit-volume analysis

VC = Variable Costs Q = Output ( volume) level

Location A B C D

FC 250,000 100,000 150,000 200,000

VC 11 30 20 35
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TC ( Q = 0) TC ( Q = 10,000) 250,000 360,000 100,000 400,000 150,000 350,000 200,000 550,000

Location Evaluation Method:

Cost-Volume Graph
1,000,000 900,000

Locational cost-profit-volume analysis

D B C A

TotalCosts Total Costs

800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 1 0

C
Level Of Output
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A
2

5,000 l of Output ( Q) Le ve 10,000 11,111

( Q)

Location Evaluation Method:

Locational cost-profit-volume analysis

Example 2: Four location options are being considered for a new facility with an estimate annual output of 100,000 units. Using Profitvolume analysis, find the range of output for which each alternative is best. Location Fixed cost /year A $100,000 B $150,000 C $200,000 D $250,000 Variable cost/unit Revenue/Unit $10 $15 $6 $12 $6 $12 $4 $10

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Location Evaluation Method:

Solution: P = TR TC = RQ (FC + VCQ) = (R VC)Q FC where: TR = total revenue R = revenue/unit P = profit

Locational cost-profit-volume analysis

Location A B C D

FC 100,000 150,000 200,000 250,000

Rev 15 12 12 10

VC 10 6 6 4
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P (Q=0) P( Q=100,000) (100,000) 400,000 (150,000) 450,000 (200,000) 400,000 (250,000) 350,000

Location Evaluation Method:

Profit-Volume Chart
500,000 400,000
A B B A D C

Locational cost-profit-volume analysis

Profit

300,000 200,000 100,000 (100,000) 1 (200,000) (300,000)

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Level of Output (Q)

Location Evaluation Method:

Factor Rating
Factor Rating general approach to evaluating locations that includes quantitative and qualitative inputs. Steps:
1. 2.

3. 4. 5.

6.

Determine which factors are relevant. Assign weight to each factor that indicates its relative importance compared with all other factor. Typically weights sum to 1.00 Decide common scale for all factors ( e.g. 0 to 100) Score each location alternative Multiply the factor weight by the score for each factor and sum the results for each location alternative. Choose the alternative with the highest composite score.
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Location Evaluation Method:

Factor Rating
Example: A photo processing company intends to open a new branch store. The table below contains information on two important locations. Determine which of the location is a better alternative.
FACTOR Proximity to existing store Trafic Volume WEIGHT SCORES ( 0 TO 100 ) WEIGHTED SCORES Alternative 1 Alternative 2 Alternative 1 Alternative 2

Rental Cost

Size

Layout

Operating Costs Total

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Location Evaluation Method:

Center of gravity method
Center off gravity method is a method to determine the location of a distribution center that will minimize distribution costs. Assumptions:
1.

2.

3.

Distribution costs is assumed to be a linear function of the distance and quantity shipped. The quantity to be shipped will not changed ( will not change overtime) An acceptable variation is that quantities are allowed to change, as long as their relative amounts remain the same ( e.g. seasonal variation)
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Location Evaluation Method:

Center of gravity method
Steps:
1.

2.

3.

Map the locations of the destinations ( should be accurate and drawn to scale) Coordinate system is overlaid on the map to determine relative locations Find the coordinates of the the center of gravity ( x, y) Case 1: The quantities to be shipped to every locations are equal

x = xi / n
i=1
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y = yi / n
i=1

Location Evaluation Method:

Center of gravity method
Where: xi = x coordinate of destination i yi = y coordinate of destination i n = number of destination
Case 2: Quantities to be shipped are not equal

x = xiQi/Qi
i=1 i=1
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y = yiQi/Qi
i=1 i=1

Location Evaluation Method:

Center of gravity method
Example 1: A centralized warehouse is to be built to supply raw materials to four manufacturing plants. Determine the coordinate location of the warehouse that will minimize transportation costs. a. Assume that the quantities to be shipped from the warehouse to the four plants are equal. b. Assume that the quantities to shipped are Plant Shipment / Day A 2 tons B 1 ton C 3 tons D 4 tons MGB

Location Evaluation Method:

Center of gravity method
12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7
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A D

C
8 9 10 11