Facility Location

Objective of Location Strategy

Maximize the benefit of

location to the firm
 Industrial Location Decisions

Cost focus

-Cost of construction, land cost

-Modes of transport, cost of transport
-Proximity to raw materials, labor availability
-Distribution centers
 Retail and Service Location Decisions
Revenue focus
-Proximity to customers
-Affects volume of business

Warehouse Location Decisions

-Combination of cost and speed of delivery.
 In General- Location Decisions Are
• Long-term decisions
• Difficult to reverse
• Affect fixed & variable cost

Sequence of Location decisions

Selecta country in which to operate
Focus on a region of the chosen country
Chose a specific site within a region
Location Decision Sequence

Country Region/Community
Country Region/Community

Site
Site
© 1995
Corel
© 1995 © 1995 Corel Corp.
Corp.
Corel © 1995 Corel Corp.
Corp.

©©1995
1995
Corel
Corel
Corp.
Corp.
 Factors Affecting Choice of Country
Government rules, attitudes, political risk, incentives,
stability of government.
Economics issues.
Potential Market
Availability of supplies, communications, energy.
Exchange rates and currency risks
Climate
Export/import regulations
Factors Affecting Regional Location Decisions
Attractiveness of region (culture, taxes, climate, etc.)
Labor availability, costs, attitudes towards unions
Availability of site
Environmental regulations of state & town.
Proximity to raw materials & customers
Land/construction costs
Costs and availability of utilities
Business climate
 Factors Affecting Site Decisions

Site size and cost

Air, Rail, Highway, and Waterway systems
Nearness of services/supplies needed
Environmental impact issues
 Factors Affecting Location Decision
Market Related Issues-
Market for products and Services
Raw material availability
Number and proximity of suppliers
Availability of skilled labor

Cost related issues-

Wage rates
Transportation costs
Taxes and other tariff issues
Land cost, Labor cost, Raw material cost
Regulatory & Policy Issues
Government & economic stability
Quality of legal and other institutions
Trading blocs and trading agreements.

Other issues-
Culture
Climate
Quality of Life
 Location Evaluation Methods
Factor-rating method
Locational break-even
Analysis
Center of gravity method
Load distance method
Transportation model
 Factor Rating Method
Assessing the attractiveness of each potential location.
Steps-
1. Identify & list all relevant factors called critical success
factors
2. Establish the relative importance of each factor in final
decision by assigning weights.
3. Develop a scale for each factor ( 1 to 10, or 1 to 100)
4. Have management score each location for each factor,
using scale as in step 3.
5. Multiply the score by weights for each factor and total
the score for each location.
6. Make recommendation based on maximum point score
Illustration

A manufacturer of garments is actively considering 5

alternative locations for setting up his factory. The locations
vary in terms of their advantages to the firm. Based on a
survey, the firm had arrived at 6 factors to be considered for
the final location selection. The ratings of each factor on a
scale of 1 to 100. Using this information obtain a ranking of
the alternative solutions and suggest the best alternative.
 Factor Ratings
Factors Rating
1. Availability of infrastructure 90
2.Size of the Market 60
3.Industrial Relations Climate 50
4.Tax Benefits & Concessions 30
5.Availability of cheap labor 30
6.Nearness to port 65
Rating of each location against each
factor
Factors Loc.1 Loc.2 Loc.3 Loc.4 Loc.5
1 20 40 60 35 55
2 30 30 40 60 80
3 80 30 50 60 50
4 80 20 10 20 20
5 70 70 45 50 50
6 20 40 90 50 60
Solution
Establishing the relative importance through Normalization

Factors Rating Relative weights

1 90 90/325 = 0.28
2 60 60/325 = 0.18
3 50 0.15
4 30 0.09
5 30 0.09
6 65 0.20
Sum of all factor 325 1.00
ratings
Computing the performance of each location
Overall Rating for location 1
= 20*0.28 +30*0.18+ 80*0.15 + 80*0.09
+ 70*0.09 + 20*0.20
= 41.23

Similarly for Loc. 3

=60*0.28 + 40*0.18 + 50*0.15 + 10*0.09 + 45*0.09 +
90*0.20
= 54.45
Factors Wt Loc 1 Loc 2 Loc 3 Loc 4 Loc 5
1 .28 20 40 60 35 55
2 .18 30 30 40 60 80
3 .15 80 30 50 60 50
4 .09 80 20 10 20 20
5 .09 70 70 45 50 50
6 .20 20 40 90 50 60
Overall 41.23 37.54 54.77 46.46 56.15
Score
Ranking 4 5 2 3 1
 Illustration
Critical scores (out of 100)
Factor weight France Denmark
F1 .25 70 60
F2 .05 50 60
F3 .10 85 80
F4 .39 75 70
F5 .21 60 70
 Locational Break-Even Analysis
Method of cost-volume analysis to make an economic
comparison.

Steps
Determine fixed & variable costs for each location
Plot total cost for each location (Cost on vertical axis,
Annual Volume on horizontal axis)
Select location with lowest total cost for expected
production volume
 Locational Break-Even Analysis

You’re an analyst 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 selling price per case is $120. What is the best
location for an expected volume of 2,000 cases per year?
 Solution
For Akron,
Total cost = $30,000 + $75* 2000
= $180,000

For Bowling Green,

Total cost = $60,000+ $45*2000
= $150,000

For Chicago,
Total cost = $160,000
 Location Break-Even Crossover
Chart
200000
n
k ro
A
150000
go
Chica
Annual Cost

100000 n
Gree
ling
Bow

50000 Akron lowest Bowling Green Chicago

cost lowest cost lowest cost

0 500 1000 1500 2000 2500 3000

Volume
With an expected volume of 2000 units per year,
Bowling green provides the lowest cost location.

Expected Profit=Total Revenue – Total

Cost
= $120 * 2000 - $150,000
=$90,000/year.

 Crossover points are 1000 & 2500 units.

Center of Gravity/Centroid Method
X Coordinate
dix = x
∑d ix Wi
Cx = i coordinate of
∑Wi location i
i
Wi = Volume
Y Coordinate
of goods moved
∑d iy Wi to or from
Cy = i location i
∑Wi
i diy = y
Given locations of showrooms on grid
Showroom No. of z-mobiles sold per month
A (100,200) A 1250
D (250,580) D 1900
Q (790,900) Q 2300

What is the best location for a new Z-mobile warehouse

Q
D

A
 100(1250)+ 250(1900)+ 790(2300) 2,417,000
Cx = = = 443.49
1250 + 1900 + 2300 5,450
200(1250)+ 580(1900)+ 900(2300) 3,422,000
Cy = = = 627.89
1250 + 1900 + 2300 5,450
Illustration: The Burger Doodle restaurant chain purchases
ingredients from four different food suppliers. The company
Wants to construct a new central distribution center to process
and package ingredients before shipping them to their various
Restaurants. The suppliers transport ingredient items in truck
trailers. The locations of the four suppliers, A, B, C and D, and
the annual number of trailer loads that will be transported to
the distribution center are given below. Using center-of-gravity
Determine a possible location for the distribution center.
Number of Trailers
A (200,200) 75
B(100,500) 105
C(250,600) 135
D(500,300) 60
 Load Distance Method
Enables a location planner to evaluate two or more
potential candidates for locating a proposed facility
vis-à-vis the demand (or supply) points .

Provides an objective measure of total load-

distance for each candidate.
The distance measure for the Cartesian coordinates between
an existing demand point i and a candidate j for the proposed
facility

Dij = ( x i − X j ) 2 + ( y i − Y j ) 2
The load distance for a candidate j for the proposed facility

n
LD j = ∑D
i =1
ij * Wi
Suppose the manufacturer came to
know that there are constraints in
locating the new facility.
Based on an initial survey of possible
sites for the proposed facility, the
manufacturer identified four candidates.
The figure has the location coordinates
of the four candidates (numbered 1 to
4).
What is the best location for the
proposed new facility?
 Solution
Grid Map Candidate for proposed facility

Existing Demand (or supply) point

600
A (125,550), 200
Distance in Kilometers

500
1 (300,500)
B (350,400), 450
400
2 (200,500) 3 (500,350)
300
D (700,300), 150
200
4 (400,200)
C (450,125), 175
100

100 200 300 400 500 600 700

Distance in Kilometers
 Existing SupplyPoints C andidates for proposed facil
xi yi Wi Xj Yj
A 125 550 200 1 300 500
B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200

D A1 = ( x A − X 1 ) 2 + ( y A − Y1 ) 2 = (125 − 300) 2 + (550 − 500) 2 = (1752 + (50) 2 = 182.00

D ij v a lu e s
1 2 3 4
A 1 8 2 .0 0 9 0 .1 4 4 2 5 .0 0 4 4 5 .1 1
B 1 1 1 .8 0 1 8 0 .2 8 1 5 8 .1 1 2 0 6 .1 6
C 4 0 3 .8 9 4 5 0 .6 9 2 3 0 .4 9 9 0 .1 4
D 4 4 7 .2 1 5 3 8 .5 2 2 0 6 .1 6 3 1 6 .2 3

LDj values
1 2 3 4
224474.41 258801.57 227410.05 245000.8
 Transportation Model
Finds amount to be shipped from several sources
to several destinations

Type of linear programming model

Objective: Minimize total production & shipping
costs
Constraints
Production capacity at source (factory)
Demand requirement at destination