5.

1 Facility Location

Facility Location is the process of identifying the

best geographic location for a service or production
facility.
 Long-term decisions
 Decisions made infrequently
 Decisions that greatly affect both fixed and variable
costs
 Once committed to a location, many resource and cost
issues are difficult to change
 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
expanding existing facilities
 Depletion/reduction of basic inputs/resources (e.g.
mining & fishing)
 Cost advantages
Location decisions are strategically important:
◦ Are closely tied to an organization’s
strategies
◦ Effect capacity and flexibility
◦ Represent a long-term commitment of
resources/costs
◦ Impact competitive advantage
◦ Importance to supply chains
◦ Impact on investments, revenues, and
operations
Location and Costs
Location decisions based on low cost require careful
consideration
Once in place, location-related costs are fixed in place and
difficult to reduce
Determining optimal facility location is a good investment

Location and Innovation

Cost is not always the most important aspect of a strategic
decision
Four key attributes when strategy is based on innovation

 High-quality and specialized inputs

 An environment that encourages investment and local
rivalry
 A sophisticated local market
 Local presence of related and supporting industries
 One of the most important decisions
a firm makes
 Increasingly global in nature
 Significant impact on fixed and
variable costs
 Decisions made relatively
infrequently
 The objective is to maximize the
benefit of location to the firm
Location decisions are based on:
 Profit potential or cost and customer
service.
 Finding a number of acceptable
locations from which to choose
 Position in the supply chain.
 Web-based retail organizations are
effectively location independent.
 Supply chain management issues such
as supply chain configuration.
 No single location may be better than
others
 Expand existing facilities.
 Add new facilities
 Move
Step1. Decide on the criteria to use for evaluating
location alternatives
Step2. Identify important factors, such as
location of markets or raw materials
Step 3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community
alternatives
Step4. Evaluate the alternatives and make a
decision/selection
 Community
Regional Factors Considerations
MN
WI
MI

IL IN OH

Multiple Plant Site-related

Strategies Factors
 Labor productivity
 Exchange rates and currency risks

 Costs-Tangible

 Political risk, values, and culture

 Proximity to markets

 Proximity to suppliers (reduce transportation costs of perishable

or bulky raw material)

 Proximity to competitors

Primary regional/country factors:

◦ Locating near the raw materials
◦ Locating near to markets
◦ Distribution costs and perishability
◦ Labor factors
◦ Other factors: Climate and taxes may play an important role in
location decisions
 Many communities actively attempt to attract new
businesses they perceive to be a good fit for the
community
 Businesses also actively seek attractive communities
based on such factors such as: Quality of life, services,
attitudes, taxes, environmental regulations, utilities,
development support.
 Primary site location considerations are:
◦ Land/size & cost
◦ Transportation
◦ Proximity of services/supplies needed
◦ Zoning restrictions
◦ Environmental impact issues
◦ Legal
◦ Other restrictions
 Product plant strategy
 Market area plant strategy
 Process plant strategy
 General-purpose plant strategy
 Labor productivity
Wage rates are not the only cost
Lower production may increase
total cost

Labor cost per day = Cost per unit

Production (units per day)
 Exchange rates and currency risks
 Can have a significant impact on cost structure
 Rates change over time
 Costs
 Tangible - easily measured costs such as utilities, labor,
materials, taxes
 Intangible - less easy to quantify and include education,
public transportation, community, quality-of-life
 Political risk, values, and culture
 National, state, local governments attitudes toward
private and intellectual property, zoning, pollution,
employment stability may be in flux/change
 Worker attitudes towards turnover, unions, absenteeism
 Globally, cultures have different attitudes towards
punctuality, legal, and ethical issues
 Proximity to markets
 Very important to services
 JIT systems or high transportation costs may
make it important to manufacturers
 Proximity to suppliers
 Perishable goods, high transportation costs,
bulky products
 Proximity to competitors
 Called clustering
 Often driven by resources such as natural,
information, capital, talent
 Found in both manufacturing and service
industries
 Considerations:
◦ Nearness to raw materials is not usually a
consideration
◦ Customer access is
 A prime consideration for some: restaurants,
hotels, etc.
 Not an important consideration for others: service
call centers, etc.
◦ Tend to be profit or revenue driven, and so are
concerned with demographics, competition,
traffic/volume patterns, and convenience
1. Purchasing power of customer-drawing area
2. Service and image compatibility with
demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’
locations
6. Physical qualities of facilities and
neighboring businesses
7. Operating policies of the firm
8. Quality of management
 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
Common techniques:
 Locational Break-Even Analysis
(Locational cost-volume-profit
analysis)
 Factor rating
 Center of gravity method
 Transportation model
 Load-distance model
 Location Cost-Volume Analysis
 Method of cost-volume analysis used for industrial
locations
 Three steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the cost for each location
3. Select location with lowest total cost for expected
production volume
 Assumptions
 Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated

Fixed and variable costs for
four potential locations

L o c a tio n F ix e d V a r ia b le
C o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5
 Fixed Variable Total
Costs Costs Costs

A $250,000 $11(10,000) $360,000

B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000
$(000)
800 D
700
600 B
500 A
400 C
300 C Superior
200 A Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

From the graph you can see that the two lowest cost intersections occur between B & A and C and A
The best alternative up to the intersection point of B & A is B; Between the intersection point of the fi
and the second joint is A and the beyond the intersection of C & A is C.
 Locational Break-Even
Analysis Example 2
Three locations:

Selling price = $120

Expected volume = 2,000 units

Fixed Variable Total

City Cost Cost Cost

Hawassa $30,000 $75 $180,000

Dredawa $60,000 $45 $150,000
Addis Ababa $110,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

 Solution
–
$180,000 –
–
$160,000 –
$150,000 –
–
s t c ur v e
$130,000 – is co
Add
Annual cost

–
$110,000 – n
r ee
–
w a Grve
a
– ed t cu
r s
$80,000 – D co
– s sa e
$60,000 –
a wa urv
– H st c
– co
Hawassa Addis
$30,000 – Dredawa Green
lowest lowest cost
– lowest cost
cost
$10,000 –
| | | | | | |
–
Figure 2 0 500 1,000 1,500 2,000 2,500 3,000
Volume
• General approach to evaluating locations that includes
quantitative and qualitative inputs
◦ Popular because a wide variety of factors can be included in
the analysis
◦ Procedure:
1. Determine (develop a list of ) which factors are relevant-
called critical success factors
2. Assign a weight to each factor that indicates its relative
importance compared with all other factors.
3. Decide on a common scale (develop a scale) for all
factors
4. Score each location alternative
5. Multiply score by weights for each factor for each
location
6. Choose the alternative that has the highest composite
score and Recommend the location with the highest
point score
.
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to-
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0
France (70.4) is selected as an appropriate location site
◦ Method for locating a distribution center that
minimizes distribution costs/based on
minimum distribution costs
 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
 The method includes the use of a map that shows the
locations of destinations
 The map must be accurate and drawn to
scale
 A coordinate system is overlaid on the map to determine
relative locations
 Considers
 Location of markets
 Volume of goods shipped to those markets
 Shipping cost (or distance)
 Place existing locations on a coordinate grid
 Grid origin and scale is arbitrary
 Maintain relative distances
 Calculate X and Y coordinates for ‘center of
gravity’
 Assumes cost is directly proportional to
distance and volume shipped
 ∑dixQi
i
x - coordinate =
∑i Qi

∑diyQi
i
where dix y -
= coordinate =
x-coordinate of
location/destination i ∑i Qi
diy = y-coordinate of location/destination
i
Qi = Quantity of goods moved to or from
location/destination i
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 –

60 –

30 – Atlanta (60, 40)

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin
 Number of Containers
Store Location Shipped per Month

Chicago (30, 120) 2,000

Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7

(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 –
+ Center of gravity (66.7, 93.3)

60 –

30 – Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
 The Center of Gravity Approach Example 2
Assumes cost is directly proportional to distance and
volume shipped
• 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) (li) 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

• Computing the Center of Gravity for Matrix Manufacturing

Xc.g. 
 lX
i i

325
 7.9 ; Yc.g. 
l Y
i i

436
 10.6
l i 41 l i 41

36
 ◦ Decision based on movement costs of
raw materials or finished goods
 Finds amount to be shipped from several points
of supply to several points of demand
 Solution will minimize total production and
shipping costs
 A special class of linear programming problems
Reading Assignment: Transportation Model from
your OR course.
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: dAB  30  10  40  15  45 miles

• Multiply by the number of loads between each site and the four cities
38
 Calculating the Load-Distance Score
for Springfield vs.
Mansfield
Computing the Load-Distance Score for Springfield
• City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)

Computing the Load-Distance Score for Mansfield

City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

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

Springfield. The warehouse should be located in Springfield.
39
 Facilitating Factors Disadvantages
Trade Agreements Transportation Costs
Technology Security Costs

Benefits Unskilled Labor

Markets Import Restrictions
Cost Savings Criticisms
Legal and Regulatory Risks
Financial Political
Others Terrorism
Economic
Legal, Ethical, Cultural