Location Planning

Learning Objectives
1.

Explain location decisions

2.

Describe the factors affecting location decisions

3.

Decision hierarchy: regional, local & site location

decisions

4.

Tools/methods of evaluating location alternatives

Classification of location models

Some discrete and continuous location models

considering qualitative and quantitative objectives

Need for Locational Changes/ Decisions

New Facilities/Business, Merger
Shift in demand of goods and services (e.g., shift
in geography of demand, demand increase
requires extra capacity which can not be provided
from the existing location)
Changes in Supply of inputs to the operations
(changes in cost, e.g., land cost, availability of the
input to the operations)
Political and economic conditions may change

Location Decisions
Long-term decisions
Difficult to reverse
Affect fixed & variable costs

Transportation cost
As much as 25% of product price
Other costs: taxes, wages, rent etc.

Affect revenue and services

Objective: Maximize benefit of location to firm

Types of Location Problems (problems differ)

Type of Location Problem

Dominant Factors

Heavy manufacturing
(e.g., auto plants, steel mills,
chemical plants)

construction costs
land costs
raw material & finished goods shipment modes
proximity to raw materials
utilities
labor availability

Light industry (e.g., small

components mfgr., assembly)

construction costs
land costs
easily accessible geographic region
education & training capabilities

Warehouse & distribution

centers

transportation costs
proximity to markets

Retail/competitive service
facilities

location is everything
complementary businesses
access
exposure

Public Service Facilities (e.g.,

Hospital, train station)

proximity or access to users

also consider negative aspects (noise, toxicity)

Locating Facilities Globally

Foreign Customer Preferences

Differences in skill & cultural aspects of employees
Foreign government policies
Foreign resources, market
Cost advantages

Hierarchy of Location Decisions

Location decision may involve geographic and
informational hierarchy.
I. Regional (choosing the region/country in
which to locate the operation)
II. Local (choosing the area of the
region/country)
III. Site (choosing the specific site within the
area)

Hierarchy of Location Decisions

1. Regional Decision

2. Local Decision

3. Site Decision

1.
2.
3.
4.
5.

1.
2.
3.

1.

Market proximity
Proximity to raw materials
Availability of utilities
Labor supply & unionization
International locations may
also include
legal restrictions
national taxes

4.
5.
6.
7.

Taxes
Economic incentives
Attractiveness of
community
Compatible industry
Transportation network
Government policy &
attitude
Environmental regulations

2.

Space for
expansion
Proximity of
other industry

Decision Process at each level may involve

a) Identifying a set of alternatives
b) Reducing the options using evaluation procedures
(to be discussed later)

Types of Analytical Models

(i) Discrete/continuous location problem:
a) Discrete space: There is a list of specific sites under consideration
b) Continuous space: Facilities can be placed anywhere within an area

(ii) Single/multiple facility location problem:

a) Single facility location problem (SFLP): Determining the location site for only
one new facility
b) Multiple facilities location problem (MFLP): Simultaneous determination of
locations for several new facilities

(iii) Objectives considered

a) Qualitative Factors: Example, attitude of labor, government
b) Quantitative Factors: Such as, Distance, transportation cost, establishment
cost
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Analytical Models for Location

Discrete Space

Continuous Space

A) Models Using QUALITATIVE criteria

Single Facility/Multiple Facility

Scoring, AHP

B) Models Using QUANTITATIVE criteria

B1)Single Facility (Location Decision)

Revenue + Fixed Cost + Variable cost

Transportation/distance based cost

(special cases)

Establishment + transportation costs

Transportation/distance based cost

Establishment + transportation costs

B3) Multiple Facilities (Location,

Allocation & Capacity Decisions)

B2) Multiple Facilities (Location &

Allocation Decisions)

Single facility, discrete space, revenue + variable +

fixed costs
Facility location decision and revenue/cost implications
Revenue

Variable cost

Fixed cost

May get affected by

Sales tax, closeness to
customer (specially for
services that are
consumed, such as,
movie theatre, bank,
restaurant)

Wages, transportation
and shipping cost, raw
material cost

Land acquisition,
construction cost, rental
cost, govt. tax

One can use Break-Even [Cross-Over] Analysis to

make choice (this may consider cost or profit).
10

Locational Break-Even Analysis

Cost-volume analysis used for industrial locations
Steps

Determine fixed & variable costs for each location

Plot total cost for each location
Select location with lowest total cost for expected production
volume
Must be above break-even

11

Locational Break-Even Analysis Example

Considering Ahmedabad, Bengaluru and Kolkata
cities for setting up a new manufacturing plant in.
Fixed costs per year are Rs. 30k, Rs. 60k, & Rs.
110k respectively.
Variable costs per case are Rs. 75, Rs. 45, & Rs. 25
respectively.
Selling price per case is Rs.120.
What is the best location for an expected volume of
2,000 cases per year?
12

Locational Break-Even Crossover Chart

Annual Cost

200000
150000
100000

Lowest cost envelope

50000

A
lowest cost

B
lowest cost

0
0

1000

2000

C
lowest
cost

3000

Volume
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Single facility, discrete space, transportation cost

Assumption: Each facility is sufficiently large that it can serve all customers.
(Mathematically, a special case of previous section: Qty. and Revenue same in all)
Example: A new copying machine is to be installed in an office-building complex. The machine can be set at one
of the five potential locations. Six offices will use this facility. The demand from each office (i.e., expected
number of trips made daily) and cost (measured in terms of time that a person spends in walking to and from each
location) are as follows:

Office
(customer), i

Time (tij) for potential location, j

Demand,
di

j=1

15

20

10

12

10

10

7
14

Single facility, discrete space, transportation cost

Solution: Compute transportation cost, cj (cij =tij*di)

Office (customer), i

Transportation cost (cij) to location (assuming that the facility is placed

at that location)
j =1

45

75

60

15

90

100

40

80

80

40

30

60

30

40

50

60

36

96

60

72

30

90

50

20

80

63

70

49

63

14

Total, Cj =i cij

326

371

365

278*

346

Select location 4 with minimum transportation cost = 278.

15

Single facility, discrete space, transportation cost

Mathematical Model:
1) Decision Variable:
yj = 1 if facility is located at location j, otherwise it is 0.

2) Parameter:
cij = transportation cost from customer i to location j.

Minimize
Subject to:

Z = j i cij.yj
jyj = 1 (1)
yj (0, 1)

(2)

Solution: Rank the variable yj by calculating Cj and pick the one with
smallest Cj.
16

Single facility, discrete space, establishment + transportation costs

Mathematical Model:
1) Decision Variable:
yj = 1 if facility is located at location j, otherwise it is 0.
2) Parameter:
Cij = transportation cost from customer i to location j.
Fj = fixed cost of establishing facility, j

Minimize z = (j (i cij) + Fj ) yj = j Cj yj ;
(where, Cj= i cij + Fj)
Subject to:
j yj = 1
(1)
yj (0, 1)
(2)

Solution: Rank the variable yj by calculating Cj and pick the one with smallest Cj.
17

Single facility, discrete space, transportation & Fixed costs

Office (customer), i

Transportation cost (cij) to location (assuming that the facility is

placed at that location)
j =1

45

75

60

15

90

100

40

80

80

40

30

60

30

40

50

60

36

96

60

72

30

90

50

20

80

63

70

49

63

14

Transportation cost, Cj =i cij

326

371

365

278

346

Fixed cost, Fj

100

150

160

200

140

Total Cost, Cj =Fj+i cij

426*

521

525

478

486

Select location 1
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Multiple facilities, discrete space, Establishment + transportation costs with

unlimited Capacity
Problem: Locate one or more facilities to serve a number of customers so that the total cost is
minimized.

Two decisions are to be made:

1) Determining the locations (location decision), and
2) Customer assignments to facilities (allocation decision).
Mathematical Model:
1) Decision Variables:
yj = 1 if a facility is located at site j, 0 otherwise.
xij = 1 if customer i is served from facility located at site j, 0 otherwise

2) Parameter:
Fj = Fixed cost of establishing a facility at location j
cij = Transportation cost for customer i if served from location j
Minimize j i cij xij + j Fj yj
Subject to: j xij = 1 for each customer i
i xij <= M yj for each site j (M = number of customers)
yj {0, 1} for each site j
xij {0, 1} for each (i, j)
Note: 1) The trade off between transportation cost (indicator of service level) and establishment cost
(investment cost)
2) There are various combinations possible for location decisions, so it is combinatorial

19

Multiple facility, discrete space, Establishment +

Transportation costs with unlimited Capacity

Is this model suitable for locating public service

facility such as hospital? Why?

20

Special Cases: Location of Public Facilities

a) Set Covering Model
Define an acceptable service level (maximum allowable distance, d, of customer from facility)
and minimize the investment (i.e., No. of facilities).

Two decisions are to be made:

1) Determining the locations (location decision), and
2) Customer assignments to facilities (allocation decision).
Mathematical Model:
1) Decision Variables:
yj = 1, if there is a facility located at site j, 0 otherwise.
xij = if customer i is served from facility located at site j, 0, otherwise
2) Parameter:
dij = Distance for customer i if served from location j
Aij = 1 if dij < d, 0 otherwise
Minimize j yj
Subject to:
j Aij xij = 1 for each customer i
i Aij xij < M yj for each site j (M = no of customers)
yj {0, 1} for each site j
xij {0, 1} for each valid ij(customer-site) pair
21

Special Cases: Location of Public Facilities

b) p-center Model
Problem: For a given number of facilities, p (i.e., given amount of investment) maximize the service
level defined as the minimization of distance of the farthest customer from the facility.

Two decisions are to be made:

1) Determining the locations (location decision), and
2) Customer assignments to facilities (allocation decision).
Mathematical Model:
1) Decision Variables:
yj = 1 if there is a facility located at site j, 0 otherwise.
xij = if customer i is served from facility located at site j, 0 otherwise
dmax = max. distance any of the customer will have to travel for service

2) Parameter:
dij = Distance for customer i if served from location j
Minimize dmax
Subject to:
j xij = 1 for each customer i
i xij < M yj for each site j (M = number of customers)
j yj < p
j dij. xij < dmax for each customer i
yj {0, 1} for each j
xij {0, 1} for each (i,j)
22

Multiple facility, discrete space, establishment +transportation

costs with limited Capacity
Decisions: Location Decision + Allocation Decision
Example: ABC Limited has decided to introduce a new line of products. The company wants to
open one or more production facilities to serve six customers (six geographic markets).
Customers, i

Demand, di (in 000)

Transportation Cost, cij for Potential Sites, j

S1

S2

S3

S4

S5

C1

11

25

26

70

C2

12

19

15

120

C3

12

11

19

80

C4

18

20

27

150

C5

10

12

16

13

100

C6

21

20

130

Two types of plants (facilities) can be established:

Plant type

Capacity (000 Units/yr)

Fixed Cost (000

$/yr)

Unit Prod Cost ($/Unit)

Small

150

1,500

20

Large

300

2,800

19

23

Multiple facility, discrete space, establishment +transportation

costs with limited Capacity

Sj = 1, if a small plant is opened at location j, 0 otherwise

Lj = 1, if a large plant is opened at location j, 0 otherwise
XSij (XLij) = No. of units (in 000) produced at small (large) plant j is
supplied to customer i
Minimize
1500(S1+S2+S3+S4+S5) + 2,800(L1+..+L5) +XS11(11+20)
++XL11(11+19)+..
Subject to:
i XSij <= 150Sj for each j
i XLij <= 300Lj for each j
j XSij + j XLij = Di for each i
Sj + Lj <= 1 for each j
All variables are non-negative.
24

Continuous single facility location problem

Cost as a function of location of new facility (x,y). Distance based cost
A) Computing Distances (there are many distances)
Consider two cities located at- A (50, 185) and B (175, 100)
1. Square Euclidean distance
SEdAB = ( xA - xB )2 + ( yA - yB )2
SEdAB = (50 - 175 )2 + (185 - 100 )2 = 22850 (square) miles
2. Euclidean distance
EdAB = SQRT [ ( xA - xB )2 + ( yA - yB )2]
EdAB = SQRT [ (50 - 175 )2 + (185 - 100 )2] = 151.2 miles
3. Rectilinear distance
RdAB = | xA - xB | + | yA - yB |
RdAB = | 50 - 175 | + | 185 100| = 210 miles
(Locating facilities in a grid, e.g., city planning, industrial situation)

25

Continuous single facility location problem with Square

Euclidean Distance
(Centre of Gravity Solution)
Minimize f(x,y) = i wi [ (x-ai)2 + (y-bi)2]

(ai, bi) = x and y co-ordinates of existing customer (or facility) i

wi = weight (importance) of existing facility i
(x, y) = co-ordinates of the new facility to be located
Note: f is a strictly convex function, thus the local minimum is a
global minimum.
Differentiating with respect to x and y gives:
f/x =0 => 2i wi (x-ai) = 0 or x* = i wi ai/i wi
f/y =0=> 2i wi (y-bi) = 0 or y* = i wi bi/i wi
26

Example of Centre of Gravity Method

Centroid method example
Several automobile showrooms are located according to
the following grid which represents coordinate locations
for each showroom

Showroom

No of cars sold
per month

(790,900)

1250

1900

2300

(250,580)

A
(100,200)
(0,0)

Question: What is the best location for a new warehouse/temporary

storage facility considering only distances and quantities sold per
month?

Example of Centroid Method (Continued)

You then compute the new coordinates using the formulae:
x* =

100(1250) + 250(1900) + 790(2300)

2,417,000
=
= 443.49
1250 + 1900 + 2300
5,450

y* =

200(1250) + 580(1900) + 900(2300)

3,422,000
=
= 627.89
1250 + 1900 + 2300
5,450
S howroom

Location of new
facility Z
(443.49, 627.89)

Q
(790,900)

(250,580)

No of Z-Mobile s
s old pe r month

1250

1900

2300

(100,200)
(0,0)

Scoring (or Factor-Rating) Method (Multiple

Subjective Criteria)

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

29

Scoring Method
1. Identify important screening factors
2. Assign weights to factors
3. Rate each alternative on each factor
4. Overall rating = Sum of factor weight x Rating

30

A Scoring Model
Example: Suppose a company wants to evaluate three alternatives, A, B,
and C, and will use a 0-10 scale to rate each alternative against each
factor. The following data is available.
Evaluation Factors

Factor
weight

Location Alternatives
A

Space for expansion

0.2

10

Proximity to customers

0.3

10

Access to highways

0.1

10

Proximity to compatible
industries

0.2

10

Local taxes

0.1

10

Local labor supply

0.1

10

7.1

7.8

7.5

Weighted total

Select B with the highest score.

31

Analytic Hierarchy Process or AHP

(Qualitative Multiple Objectives)

Hierarchy of the decision criteria

Aids objectivity, systematic analysis and
group involvement in the decision process

32

Three options for honeymoon

One week in Paris (breakfast included)
One week in Rome (breakfast included)
One week in Rome (breakfast charged
extra)
What would you choose, ceteris paribus?
Decoy effect and Rank Reversal

33

Automotive Industry: India

One of the larger markets in the
world and the second-fastest
growing automobile market in
the world
Existence of complementary
and competitive industries
India has advantage of lower
minimum wage level
34

Source : http://www.asiabriefing.com/news/2013/07/comparison-minimum-wages-in-china-and-india/

35

Major hubs in India for Automotive industry

Three clusters in the south, west and north
Car buyers are scattered across the map - Having a plant in one corner of
the country increases logistics costs

Time involved in transportation from one part to other part of the country
Availability of skilled labour at reasonable cost De-risking strategy
Attractive incentives offered by various state governments

Infrastructure constraints

36

37

Location Decision Sequence

Region : Gujarat

Country : India

Site: Sanand

38

Gujarat
The state-owned GIDC has acquired 5000 acres of land in and around
Sanand for future use by industries

Proximity to the Product Market : Sanand is part of the Delhi-Mumbai

Industrial Corridor, a multi-billion-dollar mega-infrastructure project.
Quicker and easier access to markets in west and north India, both of
which are highly important regions for auto sales.
Ensures a regular and adequate supply of power and fuel for the
business (Gujarat now produces about 14,000 MW power of which
about 2,000 MW is surplus -The Times of India report, 2013)
39

Sanand
Sanand - The automobile hub of Gujarat
Sanand is part of a special investment region, which allows companies
that invest there to benefit from a range of tax incentives, as well a
fast-track approval process.
Acquired at least 5,000 acres of land from farmers in villages around
Sanand to give to automobile companies interested in expanding or
launching operations there.
Land has also been set aside for supplier operations.

40

Proximity to the Product Market : competing means of air, ocean and

road logistics, both within India and to global markets

Air -Sanand is about 35 kilometers from the new Sardar Vallabhbhai

Patel international Airport, Ahmedabad.
Road - It is linked to India's National Highway 8, part of the recently
completed 4-lane Golden Quadrilateral highway
Ports - It is connected by a modern highway to Mudra Port (250 km),
a fully operational and one of the fastest growing, recently expanded
sea ports in southeast Asia. Sanand is also close to the proposed
Dholera port and international airport.

41

Government Regulations and Policies

Income Tax Incentives
10 year corporate tax holiday on export profit 100% for initial 5 years
and 50% for the next 5 years
Exemption from dividend distribution tax
Indirect Tax Incentives
Zero customs duty
Zero excise duty
Exemption from central sales tax
Existence of complementary and competitive industries

42

Location Decision Examples

Tata Motors
October 3, 2008, when Ratan Tata decided to pull the Nano project out of
Singur in West Bengal.
Land was readily available, and the state's proactive governance, strong
infrastructure credentials, coupled with the trust Ratan Tata had in CM
Modi , swung the project our way," says M. Sahu, Principal Secretary in
the state's industries and mines department, Gujarat.
Supply of Labor - As part of the negotiation with the Tatas, Gujarat
underwrote a commitment that 1,000 shop floor workers would be trained
before the plant started production

43

Ford Motors
On 28 July 2011, Ford announced a deal to invest Rs 40 billion
(U$906m) to build a plant in Sanand. The plant, spread over 460 acres,
will have a capacity to make 240,000 cars/year and 270,000
engines/year.

Supply of Power : Ford chose Gujarat over Tamil Nadu because

Tamil Nadu no longer has a surplus of electricity as it did in 1996
when Ford built their plant in Chennai.
Government Regulations and Policies : The 460 acres was leased to
Ford for Rs 1100/sqm while the prevailing market rate in the area is Rs
4000/sqm. (Wikipedia, 2013)
Proximity to the Product Market
44

Tool box
Types of Facility Location Problems
Factors Affecting Facility Location Decisions
Application of Break Even Analysis in Facility Location
Scoring Model

Centre of Gravity Solution

Linear & Integer

Programming
Models for Facility
Location

Models for Public

facility location

45