Facility Location

Introduction
• Location as competitive advantage
• Manufacturing organization – near source
of raw material eg. Thermal organization
near source of coal
• Service organization – easy for customers
to reach that area. Eg bank - where many
can reach the area easily
 The Need for Location Decisions
• Location decisions arise for a variety of
reasons:
– Addition of new facilities
– As part of a marketing strategy to expand
markets
– Growth in demand that cannot be satisfied by
existing facilities
– Depletion of basic inputs requires relocation
– Cost of doing business at a particular location
makes relocation attractive
 Location Consideration/factors
affecting the choice of location
• Transportation facilities
• Materials
• Markets
• Labor
• Energy
• Land
• Environment and
• Government policy
 Evaluating Location Alternatives

• Common techniques:
– Location cost-volume analysis by graph
– Factor rating
– Center of gravity method
– Transportation model
 Location Cost-Profit-Volume Analysis 1/2
• Assumptions
1.Fixed costs are constant for the range of
output
2.Variable costs are linear for the range of output
3.The required level of output can be estimated
4.Only one product is involved
Location Cost-Profit-Volume Analysis 2/2

– Steps to be followed when using this technique:

1.Determine the fixed and variable costs for each
alternative
2.Plot the total-cost lines for all alternatives on the same
graph
3.Determine the location that have the lowest total cost
(or highest profit) for the expected level of output
 Factor Rating
• General approach to evaluating locations that includes
quantitative and qualitative inputs
• Procedure:
1. Identify which factors are relevant
2. Assign a weight to each factor that indicates its relative
importance compared with all other factors (Weights
typically sum to 1.00, (if expressed in decimals))
3. Score each location alternative
4. Multiply the factor weight by the score for each factor, and
sum the results for each location alternative
5. Choose the alternative that has the highest composite score,
unless it fails to meet the minimum acceptable score
 Center of Gravity Method 1/4
– Method for locating a distribution center that
minimizes distribution costs
– Assumptions
• Treats distribution costs as a linear function of
the distance and the quantity shipped
• The quantity to be shipped to each destination is
assumed to be fixed
• There is only one source
• The method includes the use of a map that
shows the locations of destinations
Center of Gravity Method 2/4
 Center of Gravity Method 3/4

• If quantities to be shipped to every location are equal,

you can obtain the coordinates of the center of gravity by
finding the average of the x-coordinates and the average
of the y-coordinates

x 
x i

y 
 yi
n
where
xi  x coordinates of destination i
yi  y coordinates of destination i
n  Number of destinations
 Center of Gravity Method 4/4

• When the quantities to

be shipped to every x
 xQ i i

location are unequal, Q i

you can obtain the y

 yQ i i

coordinates of the Q i

center of gravity by where

finding the weighted Qi  Quantity t o be shipped to destination i
average of the x- xi  x coordinates of destination i
coordinates and the yi  y coordinates of destination i
average of the y-
coordinates
 Transportation Problem

• Involves finding the lowest-cost plan for

distributing stocks of goods or supplies from
multiple origins to multiple destinations that
demand the goods.
 Transportation Modeling 1/2

• An interactive procedure that finds the least

costly means of moving products from a series
of sources to a series of destinations
• Can be used to help resolve distribution and
location decisions
 Transportation Modeling 2/2
• What to be known in order to use the technique?
– The origin points and their capacity or supply
per period
– The destination points and their demand per
period
– The cost of shipping one unit from each origin
to each destination
• Techniques in the model:-
1. Northwest-Corner Rule
2. Intuitive Lowest-Cost Method
3. Stepping-Stone Method
 Northwest-Corner Rule

• Start in the upper left-hand cell (or northwest

corner) of the table and allocate units to shipping
routes as follows:
– Exhaust the supply (factory capacity) of each row
before moving down to the next row
– Exhaust the (warehouse) requirements of each
column before moving to the next column
– Check to ensure that all supplies and demands are
met
 Intuitive Lowest-Cost Method
1. Identify the cell with the lowest cost
2. Allocate as many units as possible at that cell
without exceeding supply or demand; then cross
out the row or column (or both) that is exhausted by
this assignment
3. Find the cell with the lowest cost from the
remaining cells
4. Repeat steps 2 and 3 until all units have been
allocated
 Stepping-Stone Method 1/3

1. Select any unused square to evaluate

2. Begin at this square, trace a closed path
back to the original square via squares
that are currently being used
3. Begin with a plus (+) sign at the unused
corner, place alternate minus and plus
signs at each corner of the path just
traced
 Stepping-Stone Method 2/3

4. Calculate an improvement index by first adding

the unit-cost figures found in each square
containing a plus sign and subtracting the unit
costs in each square containing a minus sign
5. Repeat steps 1 through 4 until you have
calculated an improvement index for all unused
squares. If all indices are ≥ 0, you have reached
an optimal solution.
 Stepping-Stone Method 3/3

6. If an improvement is possible, choose the

route (unused square) with the largest
negative improvement index (in magnitude)
7. On the closed path for that route, select the
smallest number found in the squares
containing minus signs
8. Add this number to all squares on the closed
path with plus signs and subtract it from all
squares with a minus sign
 Special Issues in Modeling 1/2

 Demand not equal to supply

 Called an unbalanced problem
 Common situation in the real world
 Resolved by introducing dummy sources or
dummy destinations as necessary with cost
coefficients of zero
 Special Issues in Modeling 2/2

 Degeneracy
 To use the stepping-stone methodology,
the number of occupied squares in any
solution must be equal to the number of
rows in the table plus the number of
columns minus 1 (M+N-1)
 If a solution does not satisfy this rule it is
called degenerate