FACILITY LOCATION

LOCATION
ANALYSIS

Three most important factors in real estate:

1. Location
2. Location
3. Location
Facility location is the process of identifying the best
geographic location for a service or production facility
FACTORS AFFECTING LOCATION
DECISIONS
 Proximity to source of supply:
Reduce transportation costs of perishable or
bulky raw materials
 Proximity to customers:
High population areas, close to JIT partners
 Proximity to labor:
Local wage rates, attitude toward unions,
availability of special skills (silicon valley)
MORE LOCATION
FACTORS

 Community considerations:
Local community’s attitude toward the facility (prisons,
utility plants, etc.)
 Site considerations:
Local zoning & taxes, access to utilities, etc.
 Quality-of-life issues:
Climate, cultural attractions, commuting time, etc.
 Other considerations:
Options for future expansion, local competition, etc.
GLOBALIZATION –
SHOULD FIRM GO
GLOBAL?

Globalization is the process of locating facilities aroun d

the world
 Potential advantages:
Inside track to foreign markets, avoid trade barriers, gain access
to cheaper labor
 Potential disadvantages:
Political risks may increase, loss of control of proprietary
technology, local infrastructure (roads & utilities) may be
inadequate, high inflation
 Other issues to consider:
Language barriers, different laws & regulations, different business
cultures
MAKING LOCATION
DECISIONS

Analysis should follow 3 step process:

1. Identify dominant location factors
2. Develop location alternatives
3. Evaluate locations alternatives
Procedures for evaluation location alternatives
include
Factor rating method
Load-distance model
Center of gravity approach
Break-even analysis
Transportation method
FACTOR RATING
EXAMPLE
 A Load-Distance Model Example: Matrix Manufacturing is considering
where to locate its warehouse in order to service its four Ohio stores located
in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered;
Mansfield and Springfield, Ohio. Use the load-distance model to make the
decision.

 Calculate the rectilinear distance: d A B  30  10  40  15  45 miles

 Multiply by the number of loads between each site and the four cities
 CALCULATING THE LOAD-DISTANCE
SCORE FOR SPRINGFIELD VS.
MANSFIELD
C o m p u t i n g the Load-Distance Sc o r e for Springfield

City Load Distance ld
Cleveland 15 20.5 307.5
C olumbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
To t a l Load-Distance Score(456.5)

C o m p u t i n g the Load-Distance Sc or e for Mansfield

City Load Distance ld
Cleveland 15 8 120
C olumbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
To t a l Load-Distance Score(504)

 The load-distance score for Mansfield is higher than for

Springfield. The warehouse should be located in Springfield.
 This approach requires that the analyst find the center of gravity
of the geographic area being considered
Computing the Center of Gravity for Matrix Manufacturing
Coordinates Load
Location (X,Y) (l i ) lixi liyi
Cleveland (11,22) 15 165 330
Columbus (10,7) 10 165 70
Cincinnati (4,1) 12 165 12
Dayton (3,6) 4 165 24
Total 41 325 436

THE CENTER OF

G RAVITY
Computing the Center of Gravity for Matrix Manufacturing
 l X  325  7.9 ; Y   l Y  436  10.6
AIsPPROACH
i i i i
X 
 l 41  l 41
c.g. c.g.
i i
 there another possible warehouse location closer to the C.G. that
should be considered?? Why?
BREAK-EVEN
ANALYSIS
 Break-even analysis computes the amount of goods
required to be sold to just cover costs
 Break-even analysis includes fixed and variable costs
 Break-even analysis can be used for location analysis
especially when the costs of each location are known

Step 1: For each location, determine the fixed and

variable costs
Step 2: Plot the total costs for each location on one
graph
Step 3: Identify ranges of output for which each location
has the lowest total cost
Step 4: Solve algebraically for the break-even points
over the identified ranges
BREAK-EVEN
ANALYSIS

 Remember the break even equations used for calculation

total cost of each location and for calculating the
breakeven quantity Q.
Total cost = F + cQ
Total revenue = pQ
Break-even is where Total Revenue = Total Cost

Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
EXAMPLE USING BREAK-EVEN ANALYSIS: CLEAN-CLOTHES
CLEANERS IS CONSIDERING FOUR POSSIBLE SITES FOR
ITS NEW OPERATION. THEY EXPECT TO CLEAN 10,000
GARMENTS. THE TABLE AND GRAPH BELOW ARE USED
FOR THE ANALYSIS.

Example9.6UsingBreak-EvenAnalysis
LocationFixedCost Variabe l TotalCost
Cost
A $350,000 $5(10,000) $40
0,0
00
B $170,000 $25( $42
10,0 0,0
THE TRANSPORTATION
METHOD

 Can be used to solve specific location problems

 Is discussed in detail in “Management Science”

 Could be used to evaluate the cost impact of

adding potential location sites to the network of
existing facilities
 Could also be used to evaluate adding multiple
new sites or completely redesigning the network