Facility Location

FACILITY LOCATION
A factory or a
plant is the
manufacturing
facility of a
company

Once a firm has decided to open a new facility OR

relocate an existing facility, It must decide where
that facility should be located.
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 Need for Location Decisions

 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources

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 Operations Strategies for Multiple facilities

 Separate facilities for Different products /

Services
 Separate facilities for different Geographical
areas
 Separate facilities for Different processes

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Cargo trucks carry containers in and out of the Port of Singapore. The
terminal is the world’s second busiest (now surpassed by the Port of
Shanghai), handling about onefifth of the world’s total container
transshipments. It connects with 200 shipping lines with connections to 600
ports in 123 countries. This includes daily sailings to every major port in the
world.

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 Nature of Location Decisions
 Strategic Importance of location decisions
 Long term commitment/costs
 Impact on investments, revenues, and operations
 Supply chains
 Objectives of location decisions
 Profit potential
 No single location may be better than others
 Identify several locations from which to choose
 Location Options
 Expand existing facilities
 Add new facilities
 Move
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 Making Location Decisions

 Decide on the criteria

 Identify the important factors
 Develop location alternatives
 Evaluate the alternatives
 Identify general region
 Identify a small number of community
alternatives
 Identify site alternatives
 Evaluate and make selection
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Location Decision Factors
Community
Regional Factors Considerations

Multiple Plant Site-related

Strategies Factors

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Factors Affecting Facility Location
Planning

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 Proximity
Proximity to raw
to material Transpor
customers tation
/ Markets facilities

Residential Availabili
complexes, ty of
School, power
hospitals supply
club

Facility Basic
Availabili Location Ameniti
ty of Planning es
Labour

Low Govern
constru ment
ction policies
cost
Environ
Land Proximit ment
y to and
subcontr
actors policies
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 Locating Foreign Operations
facilities
 Trade barriers
 International customers
 International Competition
 Regulations
 Additional Resources
 Lower costs
 Incentives
 Exploitation of firm specific advantages
 Economies of scale
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Service and Retail Locations
 Manufacturers – cost focused
 Service and retail – revenue focused
 Traffic volume and convenience most important
 Demographics
 Age
 Income
 Education
 Location, location, location
 Good transportation
 Customer safety
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 Comparison of Service and
Manufacturing Considerations

Manufacturing/Distribution Service/Retail

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking
Global Locations

 Reasons for globalization

 Benefits
 Disadvantages
 Risks
 Global operations issues

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Foreign a. Policies on foreign ownership of production facilities
Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
Liability laws
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions
Customer Possible buy locally sentiment
Preferences
Labor Level of training and education of workers
Work ethic
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation infrastructure
 Factor Rating
 General approach to evaluating locations that includes quantitative
and qualitative inputs
 Procedure:
1. Determine 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
3. Decide on a common scale for all factors, and set a minimum acceptable
score if necessary
4. Score each location alternative
5. Multiply the factor weight by the score for each factor, and sum the results
for each location alternative
6. Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score

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 A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which is
better?
Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to
.10 100 60
existing source
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00
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 A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which is
better?
Scores
(Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2
Proximity to
.10 100 60 .10(100) = 10.0 .10(60) = 6.0
existing source
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00 70.6 82.7
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 A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which is
better?
Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to existing
source .30 100 60
Traffic volume
.05 80 80
Rental costs
.15 70 90
Size
.05 86 92
Layout
.10 40 70
Operating Cost
.35 80 90
1.00
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 Location Cost-Volume Analysis
 Assumptions
 Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated
 Only one product involved

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 For a cost analysis, compute the total cost for each
alternative location:

Total Cost  FC  v  Q
where
FC  Fixed cost
v  Variable cost per unit
Q  Quantity or volume of output

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 Fixed and variable costs for four potential plant
locations are shown below: For producing 3500 units
which location is the best option.
Fixed Cost Variable Cost
Location per Year per Unit
A 250,000 11
B 100,000 30
C 150,000 20
D 200,000 35
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 Location A = FC + VC
 250000 + (11x 3500) = 288500
 Location B = 100000 + (30x 3500) = 205000
 Location C = 150000 + ( 20x 3500) = 2,20,000
 Location D = 200000+(35x3500) = 3,22,500

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Plot of Location Total Costs

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 Range approximations
 B Superior (up to 4,999 units)
 C Superior (>5,000 to 11,111 units)
 A superior (11,112 units and up)
Total Cost of C  Total Cost of B
150,000  20Q  100,000  30Q
50,000  10Q
Q  5,000
Total Cost of A  Total Cost of C
250,000  11Q  150,000  20Q
100,000  9Q
Q  11,111.11

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 Example : Solution

(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

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Practice Example

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Variable cost

A B C

TC 10 20 9

COM 120 110 100

LC 26 21 23

Total VC 156 151 132

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Fixed cost (4000000 X 0.15)

A B C

TAXES 40000 35000 45000

INTEREST 750000 600000 705000

ELECTRICITY 22000 15000 25000

TOTAL FC 812000 650000 775000

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 A=812000 + 156 (Q) =
 B= 650000 +151(Q)=
 C= 775000 + 132 (Q)=

 650000 +151(Q)= 775000 + 132 (Q)

 151Q-132Q = 125000
 19Q = 125000
 Q= 6579 35
 A B C
0 812000 650000 775000
5000 1592000 1405000 1435000
10000 2372000 2160000 2095000

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 Practice Example: 2
 From the given data which location is suitable with respect
to scores

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