Facility Location

Facility Location
Krishan Batra
PSM Advisors LLP. 1
Individual Assignments
• Career Prospects in OM
• What do OM do?
• Explain the Transformation Process
• How to link OM with Business Strategy?
• Who & what drives ops strategy & technological innovation?
• Explain Product –Process Matrix
• Impact of Product Life Cycle on Profit and initial cost.
• Product Design Process
• Explain how goods and service design concepts are integrated
• Building House of Quality
PSM Advisors LLP. India 2

Exhibit Extra
The House of
Quality for
Building a Better
Pizza
OM, Ch. 6 Goods and Service Design

PSM Advisors
©2009 South-Western, LLP. India
a part of Cengage Learning
33
Operations Strategy Model
Business strategy
Operations Strategy
Mission
Distinctive Functional strategies:

Internal & Competence marketing, finance,
external engineering, staff &
Objectives
analysis cost, quality, flexibility, deliveryinformation systems
Policies:
process, quality systems,
capacity,& inventory
Consistent decisions Results

Peters & Waterman - In Search of Excellence
Core business, stick to the knitting, lean organisation
• Sept 1996 British Airways consider selling off BA Engineering,

concentrate on transporting passengers & cargo. Out-sourcing to
save £1 billion
• baggage handling & ticket processing
• aircraft engineering maintenance
• in-flight catering • Ops Mgr. involv’t
• computer services in strategic
decisions?
Profitable market leader anticipating
• Can vertically
• deregulation of air travel
integrated firm
• lower fares & new competition become too lean?
• Undermining
quality/flexibility
by zealous out-
sourcing?

Ops Mgt Decision Framework
1. 2. 3. Product/operations
strategy
Winning orders
Corporate Marketing in the 4. Process 5. Infrastructure
objectives strategy marketplace? choice
• Growth • Product/service • price • choice • function
• Survival markets & • quality • trade-offs support
• profit segments • delivery speed • positioning • ops planning &
• ROI • Range + reliability • capacity: info systems
• other £ • Mix • responsiveness size, timing, • QA & control
measures • Volumes to demand location • systems
• Standardisation • design features • role of engineering
vs. customisation & leadership inventory in • clerical
• Level of • product/service process procedures
innovation range • wage systems
• Leader vs. • technical • work &
follower support organisational
structures
Source: Hill T, Manufacturing Strategy, Macmillan, 1993
PSM Advisors LLP. India

Service encounter design focuses on
the interaction, directly or indirectly,
between the service provider and the
customer.
The Principal dimensions include:
 Customer contact behavior and
skills
 Service provider selection,
development, and empowerment
 Recognition and reward
77
PSM Advisors
PSM Advisors
88
PSM Advisors
99
PSM Advisors
1010
Chapter 6 Goods and Service Design
Servicescape:
• All of the physical evidence a
customer might use to form an
impression.
• The servicescape provides the

behavioral setting where service
encounters take place.
• Standardization of servicescape and
service processes enhances
efficiency,
PSM Advisors LLP. India especially for multiple site1111
©2009 South-Western, a part of Cengage Learning
PSM Advisors
1212
Chapter 6 Goods and Service Design
Servicescape: 3 dimensions
 Ambient conditions – manifest by sight, sound, smell, touch, and
temperature; five human senses; e.g., leather chairs in the lobby,
cartoon characters in children’s hospital, music at a coffee shop.
 Spatial layout and functionality – how furniture, equipment, and
office spaces are arranged; also streets, parking lots, stadiums,
etc.
 Signs, symbols, and artifacts – explicit signals that communicate
an image of the firm; e.g., diplomas hanging on the wall in a
medical clinic, company logos and uniforms, artwork, mission
statements.

PSM Advisors
1313
Product-Process Matrix
1. Low vol. & 4. High vol. and

2. Multiple products, 3. Few major products
standardization, standardization,
low volume higher volume
one of a kind commodity products
Product Structure
1 Jobbing Commercial
Printer
Process Structure
2 Batch
None
Heavy
Equipment
3 Line flow Refridgerator

(assembly) assembly
4 Continuous Refinery
Flow process None

Learning Objectives
• Plant Location Method Factor Rating

• Transportation Method
• Centroid Method
• Locating Service Facilities

Objective of Location Strategy
Maximize the benefit of location to the firm

FACILITY LOCATION
Once a firm has decided to open a new

facility OR relocate an existing facility, It
must decide where that facility should be
located.

Factors Affecting Country
♦ Government rules,
attitudes, stability,
incentives
♦ Culture & economy
♦ Market location
♦ Labor availability,
attitudes, productivity, and
cost
♦ Availability of supplies,
communications, energy
♦ Exchange rate
© 1995 Corel Corp.

Region Location Decisions
• Corporate desires
• Attractiveness of region (culture,
taxes, climate, etc.)
• Labor, availability, costs, attitudes
towards unions
• Costs and availability of utilities
• Environmental regulations of state
and town
• Government incentives
• Proximity to customers & suppliers
• Land/construction $$$
© 1995 Corel Corp.

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

Site Selection Considerations
1. Access: 4. Parking:
Convenient to freeway exit and Adequate off-street parking
entrance ramps 5. Expansion:
Served by public transportation Room for expansion
2. Visibility: 6. Environment:
Set back from street Immediate surroundings
Surrounding clutter should complement the
Sign placement service
3. Traffic: 7. Competition:
Traffic volume on street that may Location of competitors
Indicate potential impulse buying 8. Government:
Traffic congestion that could be a Zoning restrictions
hindrance (e.g.., fire stations) Taxes

Industrial Location Decisions
♦Cost focus
♦ Revenue varies little
between locations
♦ Location is a major
cost factor
♦ Affects shipping &
production costs (e.g., labor) © 1995 Corel Corp.
♦ Costs vary greatly between

locations

Facility Location: Service Businesses
Old school (still true for many service
businesses):
• “He with the greatest number of
convenient locations wins.”
New school (works for some service
businesses):
• Fewer, but close to freeway exits
• Inside other businesses (co-location)

Location Analysis
• Three most important factors in real estate:
1. Location
2. Location
3. Location
• Facility location is the process of identifying the best
geographic location for a service or production facility

FACILITY LOCATION
• Facility location problem involves the evaluation of
various sites for a new facility.
• There are several factors that influence the Facility

Location Decision:

Factors Related to Resources
• Labor availability, Labor cost, Labor Skills;
• Materials Availability, Material cost, material
quality;
• Equipment availability, Equipment Cost;
• Land availability, Land suitability, Land cost;
• Energy availability, energy cost;
• Water availability, water quality, water cost.

Factors Related to the Market
Proximity to the firm’s

market, size of the
market, potential needs
of the market.

Factors Related to the
Infrastructure
• Availability of Financial Institutions, Strength of
Financial Institutions
• Government Stability, Government taxes, Import
and Export restrictions.
• Quality of life, Cultural issues,
• Environmental regulations, Transportation
availability, Transportation cost
• And finally, Competitors’ size, strength and
attitude in that region.

Factors Affecting Location
Decisions
• Proximity to source of supply:
• Reduce transportation costs of perishable or bulky
raw materials
• Proximity to customers:
• E.g.: high population areas, close to JIT partners
• Proximity to labor:
• Local wage rates, attitude toward unions, availability
of special skills (e.g.: silicon valley)

More Location Factors
• Community considerations:
• Local community’s attitude toward the facility (e.g.:
prisons, utility plants, etc.)
• Site considerations:
• Local zoning & taxes, access to utilities, etc.
• Quality-of-life issues:
• Climate, cultural attractions, commuting time, etc.
• Other considerations:
• Options for future expansion, local competition, etc.

Globalization - Should Firm Go
Global?
• Globalization is the process of locating facilities around

the world
• Potential advantages:
• Inside track to foreign markets, avoid trade barriers, gain access to
cheaper labor
• Potential disadvantages:
• Political risks may increase, loss of control of proprietary technology,
local infrastructure (roads & utilities) may be inadequate, high inflation
• Other issues:
• Language barriers, different laws & regulations, different business
cultures

Location Evaluation Methods
♦ Factor-rating
method
♦ Locational break-
even analysis
♦ Center of gravity
method
♦ Transportation
model
© 1995 Corel Corp.

Making Location Decisions
• Analysis should follow 3 step process:
• Step 1: Identify dominant location factors
• Step 2: Develop location alternatives
• Step 3: Evaluate locations alternatives
• Procedures for evaluation location alternatives
include
• Factor rating method
• Load-distance model
• Center of gravity approach
• Break-even analysis
• Transportation method

Method of Factor Rating
• In factor rating method, first we must identify the Most
Important Factors in evaluating alternative sites for the
new facility.
• Then we should assign a weight between 0 and 100 to
each of these factors.

Method of Factor Rating
Each alternative location will then be rated based on

these factor weights.
The most weighted alternative is selected as the best
alternative.

Example
• Samson Ltd. is considering three alternative
sites for its new facility.
• After evaluating the firm’s Needs, the Managers
have Narrowed the list of Important Selection
Criteria down into three major Factors.
- Availability of skilled labor
- Availability of Raw materials, and
- Proximity to the firm’s markets.

Example
• Weights reflecting the relative importance

of each factor have been assigned as
follows:

Example
• Based on these criteria, the three

Alternative sites were scored
between 0 and 100 points:

Example
• What happens if we change the factor weights. Lets
use the following factor weights:
• Skilled labor: 0.45; Raw Materials: 0.40; and
Market: 0.15
• Then the following results are obtained:

Example
• From these results, the largest total weight is for Site A.
It appears to be the best location.

Example
• In this case, Site C appears to be the best choice with
largest weight score.
• Therefore, factor rating method is very sensitive to the
weights assigned to each factor.

Example
• Since factor weights, selected factors, and assigned
scores are all determined subjectively, the managers
should be very careful in selecting these items and
numbers.

Example
• Now we will multiply each score by its

corresponding factor weight:
• Weighted scores are calculated as: (Site
Score)x(Factor Weight)

Example

Factor Rating Example

Calculating the Load-Distance Score
for Springfield vs. Mansfield
•
C om putingtheLoad-D istanceS
C ity Load
C leveland 15
C olum bus 10
C incinnati 12
•
D ay towarehouse
n should be located in Springfield. 4
The load-distance score for Mansfield is higher than for
Springfield. The
PSM Advisors LLP. India

Total 46
Center of Gravity Method
• The center of gravity method is used to
find a location that Minimizes the Sum of
Transportation Cost in between new
facility and old facilities.
• Transportation cost is assumed to be a

linear function of the Number of Units
Shipped AND the Traveling Distance.

• The location of the firm’s existing
facilities are converted into x and y
coordinates.
• The following center of gravity
equations are Then used for
calculating the x and y coordinates for
the new facility:

• Here, Cx : x coordinate for new location
• Cy : y coordinate for new location
• i: index for existing locations
• n: total number of existing locations
• xi: x coordinate of existing ith location , and
• yi: y coordinate of existing ith location.

The Center of Gravity Approach
• This approach requires that the analyst find the center of
gravity of the geographic area being considered
Computing the Center o

Coordinates
Location (X,Y)
(11,22)
• Computing the Center of Gravity for Matrix Manufacturing
Cleveland
X =
∑ lX 325
=
i i
= 7 .9 ; Y =
c .g .
∑ lY 436
=
i i
= 1 0 .6
c .g .
∑ l 41 ∑ l
(10,7) 41
Columbus
i i
• Is there another possible warehouse location closer to the C.G. that

should be considered?? Why?
Example

Break-Even Analysis
• Break-even analysis computes the amount of goods required to
be sold to just cover costs
• Break-even analysis includes fixed and variable costs
• Break-even analysis can be used for location analysis especially

when the costs of each location are known
• Step 1: For each location, determine the fixed and

variable costs
• Step 2: Plot the total costs for each location on one graph
• Step 3: Identify ranges of output for which each location
has the lowest total cost
• Step 4: Solve algebraically for the break-even points
over the identified ranges

Break-Even Analysis
• Remember the break even equations used for

calculation total cost of each location and for
calculating the breakeven quantity Q.
•
• Total cost = F + cQ
• Total revenue = pQ
• Break-even is where Total Revenue = Total Cost
Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost

Example using Break-even Analysis: Clean-Clothes
Cleaners is considering four possible sites for its new
operation. They expect to clean 10,000 garments. The table
and graph below are used for the analysis.
E x a m p le 9 .6 U
L o c Fa ti xi o e nVd a Cr i oa sTb t
A $ 3 5 0 $ , 0 5 0 ( 01 $0
• From the graph you can see that the two lowest cost intersections occur
between C & B (4667 units) and B & A (9000 units)
• The best alternative up to 4667 units is C, between 4667 and 9000 units
the best is B, and above 9000 units the best site is A
Example

Example
Total Production Cost = (Fixed Cost) + (variable unit cost) x
(annual production volume)
• Assume that The expected annual production volume is

250.000 units.
• And further assume that:
• (x: production volume = 250.000)

Example
• At a production volume of 250.000 units, site B
has the lowest cost, because
• For Site A: Prod. Cost = 10.000.000 + 250
(250.000) = 72.500.000
• For Site B: Prod. Cost = 25.000.000 + 150
(250.000) = 62.500.000
• For Site C: Prod. Cost = 60.000.000 + 50
(250.000) = 72.500.000

Cost-Profit-Volume Analysis
When the fixed and

variable costs for
each site differ,
Cost-profit-volume
analysis can be
used to identify the
location with the
lowest cost.

The Transportation Method
• The transportation method of linear programming

can be used to solve specific location problems
• It could be used to evaluate the cost impact of

adding potential location sites to the network of
existing facilities
• It could also be used to evaluate adding multiple
new sites or completely redesigning the network

Example
• Foster Paper Ltd. is considering three alternative sites
for its new production facility.
• The Annual Production Cost associated with each
alternative is a linear function of the production volume.
That is:

Example
For Site A: Prod. Cost = 10.000.000 + 250 x

For Site B: Prod. Cost = 25.000.000 + 150 x
For Site C: Prod. Cost = 60.000.000 + 50 x
• Based on these information, Which site has the lowest

cost?

Example
• This graphic shows that annual production cost
changes with different production volumes.
• -If the expected annual production volume is
below 150.000 units, then choose site A.
between 150.000 and 350.000 units, then
choose site B.
over 350.000 units, then choose site C.

Example
• Aldrich Manufacturing Company plans to build a
Warehouse to serve its Distribution Centers in Columbus
(Ohio), Frankfort (Kentucky), Nashville (Tennessee), and
Richmond (Virginia).

Example
• The number of units to be shipped monthly from
Harrisburg to the Distribution Centers are shown in the
following table:
• (Weighted Coordinates are calculated as: (Annual
Shipping Volume) (x or y coordinate))

Example

Example
• Using the equations of center of gravity:
• Cx = 2,040,000 / 10,000 = 204 (x coordinate for new
facility)
• Cy = 1,185,000 / 10,000 = 118.5 (y coordinate for new
facility)
• The nearest city to (204, 118.5) Charleston at West
Virgina.

Example
• This method only considers the distances traveled. It
does not consider the other factors such as the
availability of roads on the selected location. Therefore,
applying solely this method may not be applicable in
every cases.

Transportation Model
A special form of linear

programming, that is
Transportation Model,
can be used to
compare the total
transportation cost
associated with each
alternative site.

• The transportation model technique can be used to
determine how many units should be shipped from each
plant to each warehouse To Minimize Total
Transportation Cost.

Example
• Straub Ltd. has three plants running at full capacity in
Des Moines, Racine, and Gary.
• These plants supply four Distribution warehouses in St.
Paul, Milwaukee, Chicago, and Detroit.

Example
• Straub plans to build a new plant. It has
narrowed down the choice of sites to two
possibilities: Kalamazoo and Duluth.
• We will now determine which site results in the
lowest transportation Cost by using the unit
transportation costs, warehouse demands, and
plant capacities shown in the following:

Example

Example

Example
• We will approach this problem in the following manner:
• We will first assume that the selected plant is the
Kalamazoo plant, and calculate the total transportation
cost.

Example
• Later, we will assume the selected plant is Duluth. Then
we will compare the transportation costs for both plants.
• Now, the first step is to find the Optimal number of units
to ship between each plant-warehouse combination. This
also gives the optimal transportation cost for the
problem.

Example
• We can use any of the computerized LP tools for finding
the optimum values for this problem.
• Some of these include WINQSB, Lindo, OM Expert, and
Excel.
• We use WINQSB to solve this transportation model. The
result is as follows:

Example
• The total transportation cost will be $10,225 if
the new plant is built in Kalamazoo.
• (This can be calculated simply by multiplying the
shipment in each cell by its unit cost)
• On the other hand, The optimal number of units
to ship between each plant and Duluth
Warehouse is found as follows:

Example

Example

Example
• The total transportation cost will be $13,825 if the new
plant is built in Duluth.
• Therefore, the Kalamazoo plant will incur the lowest
transportation cost.

Simulation Models
Firms often Consider many variables and

Factors when they choose a facility location.

Simulation Models
These variables are often difficult to estimate and they also
change in time.
In these kinds of Dynamic Situations, Simulation may be
the best modeling technique.

Simulation Models
Simulation models allow managers to examine a range of
Scenarios AND are well suited to open-ended problems.
However, the determination of the parameters in a
simulation is also a challenging task.
Also, developing a simulation model may take considerable
time and effort.

Topics for Discussion
• Pick a particular service, and identify
shortcomings in its site selection.
• How would you proceed to estimate empirically
the parameter λ in the Huff retail location model
for a branch bank?
• Why do you think set covering is an attractive
approach to public sector facility location?
• What are the benefits of using intermediaries in
the service distribution channel?

Interactive Exercise
The class breaks into small groups and each group comes
up with examples of service facility locations that seem
to defy the analytical models discussed in the chapter.

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

• 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

• 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

Location Strategies – Service
vs. Industrial
• Service/Retail/Professional • Industrial Revenue Focus
Revenue Focus ❏ Tangible costs
❏ Volume/revenue ❏ Transportation cost of raw
❏ Drawing area, purchasing power materials
❏ Competition; advertising/pricing ❏ Shipment cost of finished goods
❏ Physical quality ❏ Energy and utility cost; labor;
raw material; taxes, etc.
❏ Parking/access; security/
lighting; appearance/image ❏ Intangible and future costs
❏ Cost determinants ❏ Attitude toward union
❏ Rent ❏ Quality of life
❏ Education expenditures by state
❏ Management caliber
❏ Quality of state and local
❏ Operations policies (hours, government
wage rates)

Location Strategies –
Service vs.
Service/Retail/Professional
Industrial
Techniques Industrial Techniques
❏ Correlation analysis to determine ❏ Linear Programming
importance of factors for a particular (Transportation method)
type of operation ❏ Weighted approach to intangibles
❏ Traffic counts ❏ Breakeven analysis
❏ Demographic analysis of drawing area ❏ Crossover charts
❏ Purchasing power analysis of drawing Assumptions
area ❏ Location is a major determinate of
Assumptions cost
❏ Location is a major determinate of ❏ Most major costs can be identified
revenue explicitly for each site
❏ Issues manifesting from high customer ❏ Low customer contact allows
contact dominate focus on costs
❏ Costs are relatively constant for a ❏ Intangible costs can be objectively
given area; therefore, revenue function evaluated
is critical

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

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

Final Thought
The ideal location

for many
companies in the
future will be a
floating factory
ship that will go
from port to port,
from country to © 1995 Corel Corp.
country – wherever
cost
Thank You!
Krishan Batra
Executive Director
PSMADVISORS.COM
Phone: (91) 124-4300059

Mobile: (91)9650745582
Email: krishan.batra@gmail.com

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Facility Location

PSM Advisors LLP. India 2

OM, Ch. 6 Goods and Service Design

Distinctive Functional strategies:

Consistent decisions Results

PSM Advisors LLP. India 4

• Sept 1996 British Airways consider selling off BA Engineering,

PSM Advisors LLP. India 5

Source: Hill T, Manufacturing Strategy, Macmillan, 1993

PSM Advisors LLP. India

• The servicescape provides the

OM, Ch. 6 Goods and Service Design

1. Low vol. & 4. High vol. and

3 Line flow Refridgerator

PSM Advisors LLP. India 14

• Plant Location Method Factor Rating

PSM Advisors LLP. India 15

Maximize the benefit of location to the firm

PSM Advisors LLP. India 16

Once a firm has decided to open a new

PSM Advisors LLP. India 17

© 1995 Corel Corp.

PSM Advisors LLP. India 18

© 1995 Corel Corp.

PSM Advisors LLP. India 19

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PSM Advisors LLP. India 21

♦ Costs vary greatly between

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• There are several factors that influence the Facility

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Proximity to the firm’s

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• Globalization is the process of locating facilities around

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© 1995 Corel Corp.

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Each alternative location will then be rated based on

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• Weights reflecting the relative importance

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• Based on these criteria, the three

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• Now we will multiply each score by its

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• Transportation cost is assumed to be a

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