Facility Location

• Determining where the plant should be located for

maximum operating economy & effectiveness
• An ideal location, by itself, may not guarantee
success. But it certainly contributes to the efficient
working of the organization
• A bad location, on the other hand, is very likely to
bankrupt the organization
• The location should be either closer to raw material
sources or to the market.
 Need for selection of location
1. Starting a new business
2. Expansion not possible in existing location
3. Volume of business or extent of market
necessitates more branches
4. Expiry of the lease & renewal not possible
5. Other social or economic reasons
 Alfred Weber Location Theory
• Two categories of locational factors:
Primary & Secondary
• Materials & labor constitute primary factors
• Materials oriented if cost of transportation of materials to the
units is high
• Market oriented if cost of transportation of finished goods to
the market is high
• Where cheap & skilled labor available, industries are pulled
there
• Banking credit, insurance, communication, rent etc constitute
the secondary factors
• Some of the above secondary factors either attract industries
to or disperse from certain regions
 Recent developments that has made site
selection easier
1. Improvements in transportation & communication
2. Reduction in wage differentials between regions
3. Mobility of workers & management staff
4. Improvements in construction designs and
methods
5. Government policy to remove regional imbalances
6. Availability of air-conditioning equipment to
counteract climatic conditions both for processes &
people.
7. Expansion of markets for most goods.
 Errors in selection
1. Lack of thorough investigation of all factors
2. Personal likes & dislikes of owners or key
executives
3. Moving to congested areas
4. Preference for acquiring an existing structure
5. Community with low cultural & educational
standards
 Steps in location
1. Domestic or International location
2. Selection of the region
3. Selection of the locality or community
4. Selection of the exact site
 Domestic or International
• Whether inside the country or a foreign location
• Many countries are competing with each other to attract
foreign investments
• Depends on factors such as:
1. Political stability
2. Export & Import regulations
3. Currency & exchange rate
4. Cultural factors
5. Economic peculiarities
6. Natural conditions
 Selection of region
1. Availability of raw materials – some examples of
industries are steel, sugar etc. Advantages are
reduced cost of transpiration, uninterrupted supply
of raw materials, reduced storage cost etc. Raw
materials classified as weight losing and non-weight
losing. First category cost of transportation of raw
materials is more than the cost of transporting the
finished products. Example Iron ore, sugarcane etc.
Second category do not lose weight during
processing. Cost of transporting finished product is
higher compared to that of raw material. Example
cotton, wool etc. Which have little influence on plant
location.
 Selection of region
2. Nearness to the market
• Reduction in the cost of transportation of finished
goods to the market
• Possible to adjust the production schedule to suit the
likes and dislikes of the consumers
• Possible to render prompt service to the consumers
• Possible to execute replacement orders without
delay
• More applicable for non-weight losing materials,
bulky products, perishable products, auto servicing
units, distilled water etc.
 Selection of region
3. Availability of power
• Electrical power, coal, natural gas, oil etc
• Aluminium extraction – electricity is a raw material
• Huge oil & gas pipelines keep up supplies to
industries located in different regions.

4. Transport facilities
• Essential for bringing men and materials to the
factory
• Also for carrying finished products to the market
• Connectivity by rail, road, sea & air.
 Selection of region
5. Suitability of climate
• Nature of production may require specific climatic conditions.
Humid climate for cotton textiles & jute. Non-humid for plastic
injection moulding
• Possible to provide artificial conditions but will cost more.
• Climate may affect labor efficiency

6. Government policy
The Government of India has been influencing plant location in
the following ways:
Licensing policy
Freight rate policy
Tax holidays
Institutional finance
Other subsidies
 Selection of Community
1. Availability of labor
• Adequate supply at reasonable wage rates
• Availability of skilled labor more important
• Example: Lock industry at Aligarh
2. Civic amenities for workers
• Recreation facilities like, clubs, parks etc
• Schooling facilities
 Selection of Community
3. Existence of complementary & competing industries
• Concentration of similar industries at one place improves
the labor market, both for the employer & the employee.
• Banks become familiar with requirements of the industry
and granting loans become easier.
• Group of plants will attract ancillary units
• Competing industries working together can tackle problems
relating to the procurement of raw materials, labor
troubles, government restrictions etc.
 Selection of Community
4. Finance & research facilities
• Facilities for raising capital
• Lookout for new technology

5. Availability of water & fire fighting facilities

• Availability of canals, rivers or lakes nearby specially for
industries such as Fertilizers, Tanneries, Bleaching units etc.
• Existence of proper fire fighting facilities will also enhance
the suitability of a location.

6. Local taxes & restrictions

Area where taxes on supply of water, electricity etc and
other restrictions are least irksome are preferred.
 Selection of the site
1. Soil, Size & Topography
• For agro based industries a fertile soil is necessary.
• Size should offer scope for future expansion.
• Topography: Hilly, rocky & rough terrain unsuitable for most
industries.
2. Waste Disposal
• Enough vacant land nearby for dumping waste
• Satisfactory sewage & drainage
3. Good Environment
• The selected site in the midst of a good environment
 Warehouse Design

• Cross-docking is an approach used in these

consolidation warehouses, where, rather than
making larger shipments, large shipments are
broken down into small shipments for local
delivery in an area. This often can be done in a
coordinated manner so the goods are never
stored in inventory.
Warehouse Design
 Warehouse Design

• Hub-and-spoke systems combine the idea of

consolidation and that of cross-docking.
• Here, the warehouse is referred to as a “hub”
and its sole purpose is sorting goods.
Warehouse Design
 LOCATING LOGISTICS FACILITIES
• The problem of facility location is faced by both
new and existing businesses, and its solution is
critical to a company’s eventual success. An
important element in designing a company’s
supply chain is the location of its facilities.
 LOCATING LOGISTICS FACILITIES

Proximity to Customers Free Trade Zones

Business Climate Political Risk
Total Costs Government Barriers
Infrastructure Trading Blocs
Quality of Labour Environmental
Regulation
Suppliers Host Community
Other Facilities Competitive Advantage
 Plant Location Methods
• The process required to narrow the decision down to a
particular area can vary significantly depending on the
type of business and the competitive pressures that
must be considered.
1.The factor-rating system that allows us to consider many
different types of criteria using simple point-rating
scales.
2.The centroid method, a technique often used by
communications companies (cell phone providers) to
locate their transmission towers.
• 3.The method of linear programming, a powerful
technique for estimating the cost of using a network of
plants and warehouses.
 Factor-Rating Systems
• An approach for selecting a facility location by
combining a diverse set of factors. Point scales are
developed for each criterion. Each potential site is
then evaluated on each criterion and the points are
combined to calculate a rating for the site.
• Major problem with simple point-rating schemes is
that they do not account for the wide range of costs
that may occur within each factor
1.Develop a list of relevant factors.
2.Assign a weight to each factor reflecting its relative
importance to the firm.
 Factor-Rating Systems

3.Develop a rating scale for the factors.

4.Score each location on each factor based on
the scale.
5.Multiply the scores by the weights for each
factor and total the weighted scores for each
location.
6.Make a recommendation based on the
maximum point score, considering other factors
 Factor-Rating Systems
Factor Score Weighted Score

Factors Weight Loc A Loc B Loc C Loc A Loc B Loc C

Cost of 10 5 2 4 50 20 40
living

Infrastru 20 4 2 3 80 40 60
cture
Climate3 30 3 5 3 80 150 90

Transpor 10 5 3 2 50 30 20
tation
system
Labour 30 2 5 2 60 150 60
Cost

Total 100 330 390 270

 Centroid Method
• The centroid method is a technique for locating single
facility that considers the existing facilities, the distances
between them, and the volumes of goods to be shipped.
• The technique is often used to locate intermediate or
distribution warehouses. In its simplest form, this method
assumes that inbound and outbound transportation costs
are equal, and it does not include special shipping costs
for less than full loads.
• Another major application of the centroid method today is
the location of communication towers in urban areas.
Examples include radio, TV, and cell phone towers.
 Centroid Method

• The centroid is found by calculating the X and Y

coordinates that result in the minimal
transportation cost. We use the formulas
• Cx= X coordinate of the centroid
• Cy = Y coordinate of the centroid
• dix = X coordinate of the ith location
• diy= Y coordinate of the ith location
• Vi= Volume of goods moved to or from the ith
location
 Centroid Method

• Hi-Octane Refining Company needs to locate

an intermediate holding facility between its
refining plant in Long Beach and its major
distributors. Figure shows the coordinate map
and the amount of gasoline shipped to or from
the plant and distributors.
Centroid Method
 Centroid Method
Locations Gallons of Gasoline per Month

Long Beach 1500

Anaheim 250

La Habra 450

Glendale 350

Thousand Oaks 450

 Centroid Method
Locations Gallons of dix diy Vi * dix Vi * diy
Gasoline
per Month
Vi
Long Beach 1500
325 75 4,87,500 1,12,500

Anaheim 250
400 150 1,00,000 37,500
La Habra 450
450 350 2,02,500 1,57,500
Glendale 350
350 400 1,22,500 1,40,000
Thousand 450
Oaks
25 450 11,250 2,02,500

3000 1550 1425 923750 650000

Centroid Method
Centroid Method
Transportation Method of Linear Programming

• Suppose the U.S. Pharmaceutical Company

has four factories supplying the warehouses of
four major customers and its management
wants to determine the minimum-cost
shipping schedule for its monthly output to
these customers.
Transportation Method of Linear Programming
Transportation Method of Linear Programming