Facilities Location

Growing importance
• Factors promoting globalisation of operations
– Regulatory & economic reforms
– Factor Cost Advantages
– Expanding markets in developing countries

• Location issues have become more prominent in recent years

due to globalisation

• Location decision pertains to the choice of appropriate

geographical site for locating manufacturing & service
facilities of an organisation

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Location Decision
Relevant Factors

Market related issues Cost related issues

Market for products and services Wage rates
Raw Material availability Transportation costs
Number and proximity of suppliers Taxes and other tariff issues
Availability of skilled labour
Quality of Infrastructure
Regulatory & Policy issues Other issues
Government & Economic stability Culture
Quality of legal and other institutions Climate
Trading blocks and trading agreements Quality of Life

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Location Planning Methods
• One facility – Multiple Candidates
– Location factor rating
– Centre of Gravity Method
– Load Distance Method
• Multiple Facility – Multiple Candidates
– Transportation Model

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
Method 1. Location factor rating – To access the attractiveness of
each location
Four steps process

1. Identify and list down all the relevant factors for the location decision
2. Establish the relative importance of each factor in the final decision
3. Rate the performance of each candidate location using a rating
mechanism
4. Compute a total score for each location based on its performance
against each factor and rank them in the decreasing order of the score

• Drawback: Cost based analysis should be made to decide on a location.

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Example 1
A manufacturer of garments is actively considering five alternative locations for setting up its factory.
The locations vary in terms of the advantages that it provides to the firm. Hence the firm requires a
method of identifying the most appropriate location. Based on a survey of its senior executives the
firm has arrived at six factors to be considered for final site selection. The ratings of each factor on a
scale of 1 to 100 provide this information. This rating indicates the IMPORTANCE or WEIGHTAGE of
the factor for the ORGANIZATION/SECTOR UNDER STUDY.

(Transportation network is IMPORTANT for STEEL Co. But, NOT so important for IT Sector. Internet
is Very IMP for IT, but not so for STEEL)

Further, based some detailed analysis of both the qualitative and quantitative data available for each
of the location, the rating for the locations against each factor has also been arrived at (on a scale of
0 to 100). THIS RATING REMAINS SAME FOR A LOCATION for a given time for select INDUSTRY.

Using this information obtain a ranking of the alternative locations.

Factor Ratings Rating of each locations/ IMPORTANCE against the factors

Factors Rating
Availability of infrastructure 90 Factors Location 1 Location 2 Location 3 Location 4 Location 5
Availability of infrastructure 20 40 60 35 55
Size of the market 60
Size of the market 30 30 40 60 80
Industrial relations climate 50
Industrial relations climate 80 30 50 60 50
Tax benefits and concessions 30 Tax benefits and concessions 80 20 10 20 20
Availability of cheap labour 30 Availability of cheap labour 70 70 45 50 50
Nearness to port 65 Nearness to port 20 40 90 50 60

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Solution to Example 1
Relative
Factors Rating weights Relative weight ( Infrastructure) = 90/325 = 0.28
Availability of infrastructure 90 0.28
Size of the market 60 0.18
Industrial relations climate 50 0.15 Overall rating for location 3 =
Tax benefits and concessions 30 0.09
60*0.28 + 40*0.18 + 50*0.15 +
Availability of cheap labour 30 0.09
Nearness to port 65 0.20
10*0.09 + 45*0.09 + 90*0.20 = 54.77

Sum of all factor ratings 325 1.00

Relative
Factors weights Location 1 Location 2 Location 3 Location 4 Location 5
Availability of infrastructure 0.28 20 40 60 35 55
Size of the market 0.18 30 30 40 60 80
Industrial relations climate 0.15 80 30 50 60 50
Tax benefits and concessions 0.09 80 20 10 20 20
Availability of cheap labour 0.09 70 70 45 50 50
Nearness to port 0.20 20 40 90 50 60

Overall score for the locations 41.23 37.54 54.77 46.46 56.15
Ranking of the locations 4 5 2 3 1

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Method 2. Centre of Gravity Method
• All the demand points (or the supply points, if raw material is supplied from
several locations) are represented in a Cartesian coordinate system
• Each demand (or the supply point) will also have weight indicating the quantum of
shipment
• Therefore it is possible to identify the centre of gravity of the various demand (or
supply) points
• Notations:
– The number of demand (or supply) points in the grip map: n
– Co-ordinates of location i in the grid map: (xi,yi)
– Quantum of shipment between existing demand (or supply) point i and
proposed facility: Wi
– Co-ordinates of the center of gravity in the grip map: (XC,YC)
n n

 ( x ) *W
i 1
i i  ( y ) *W i i
i 1
XC  n
YC  n

W
i 1
i W i
i 1

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Example 2
• A manufacturer of certain industrial component is interested in locating a new facility in a
target market and would like to know the most appropriate place in the target market to
locate the proposed facility. The manufacturer feels that there are no location constraints in
the target market (i.e. any point in the target market is good enough).

• There are four supply points A, B, C and D in the locality that will provide key inputs to the
new facility. A two-dimensional grid map of the target market in which we would like to
locate a new facility with distance coordinates of the four supply points is available.

• The annual supply from these four points to the proposed facility is 200, 450, 175 and 150
tonnes respectively.

• The situation is graphically shown in the two-dimensional plot in the figure. While the
coordinates in the parentheses show the distance from the origin of the target map of each
of the supply point, the number that follows is the annual shipment (in tonnes) from these
points to the proposed facility.

• Identify the most appropriate point in the grid map to locate the new facility.

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education
 Solution to Example 2

600 n

 ( x ) *W
Distance in Kilometres

A (125,550), 200 i i
500 i 1
XC  n
400
B (350,400), 450
W
i 1
i

300
D (700,300), 150 n

200  ( y ) *W
i 1
i i

C (450,125), 175 YC  n
100
W
i 1
i

100 200 300 400 500 600 700

ANSWER:
Distance in Kilometres Centre of Gravity works out to
A,B,C,D : (X and Y Co-ordinates), TONNES (376,366)

Mahadevan (2015), “Operations Management: Theory & Practice”, 3rd Edition © Pearson Education