Lecture

Facility location
 Introduction

 Facility constitutes the physical resources such

as land, plant, machinery, and equipment that are
drew together at one geographic location for the
purpose of bringing out particular goods and/or
services.

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 The Need for Location Decisions
 Location decisions arise for a variety of
reasons:
 As part of a marketing strategy to expand markets
 Growth in demand that cannot be satisfied by expanding
existing facilities
 Cost of doing business at a particular location makes
relocation attractive
 Start new business

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 Key questions

 Where to locate the organization’s

production facilities?
 How big each one should be?
 What goods or services should be formed at
each location? and
 What markets each facility should provide
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 GLOBAL LEVEL

At the Global Level, Facility Planning is concerned in the selection of the site
location which involves factors such as freight cost, labour cost, skill availability
and site focus.

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 Cont’
Country Decision Critical Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
currency risks 6
 Cont’
Region/ Critical Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
3. Labor availability, costs,
MN
attitudes towards unions
WI
4. Costs and availability of utilities
MI
5. Environmental regulations
IL IN
OH 6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
8. Land/construction costs 7
Cont’
Site Decision Critical Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

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 Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus

Volume/revenue Tangible costs

Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw material;
Physical quality taxes, and so on
Parking/access; security/lighting;
appearance/image Intangible and future costs
Attitude toward union
Cost determinants Quality of life
Rent Education expenditures by state
Management caliber Quality of state and local government
Operations policies (hours, wage rates)

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 Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques

Regression models to determine importance of Transportation methods

various factors Factor-rating method
Factor-rating method Locational break-even analysis
Traffic counts Crossover charts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems

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 Location Strategies
Service/Retail/Professional Location
Assumptions
Location is a major determinant of revenue
High customer-contact issues are critical
Costs are relatively constant for a given area;
therefore, the revenue function is critical
Goods-Producing Location
Assumptions
Location is a major determinant of cost
Most major costs can be identified explicitly
for each site
Low customer contact allows focus on the
identifiable costs
Intangible costs can be evaluated
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 Service Location Strategy
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

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 Facility location techniques
 Factor rating method
 Locational Break-even Analysis
 Centre of gravity method
 Transportation methods.

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 1. Factor Rating Analysis

Factor Rating Analysis method is a very simple

method to relate the factors and their salience to the
facility location decision. Factors that the company
considers most important in making the correct
decision are rated and scored. The highest score
provides the best option.

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 Cont’

 Popular because a wide variety of factors can

be included in the analysis
 Six steps in the method
1. Develop a list of relevant factors called critical
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score based on the scale for each factor
5. Multiply score by weights for each factor for each
location
6. Recommend the location with the highest point 15
score
Mtibwa Sugar Co. ltd is considering three
alternative sites for its new facility.
After evaluating the firm’s Needs, the Managers
have Narrowed the list of Important Selection
Criteria down into three major Factors.
- Availability of skilled labor
- Availability of Raw materials, and
- Proximity to the firm’s markets.

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 Weights reflecting the relative importance
of each factor have been assigned as
follows:

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 Basedon these criteria, the three
Alternative sites were scored
between 0 and 100 points:

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 Now we will multiply each score by its
corresponding factor weight:
 Weighted scores are calculated as: (Site
Score)x(Factor Weight)

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From these results, the largest total weight is
for Site A. It appears to be the best location.

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Let us assume that a new medical facility, Health-care, is to be located in Delhi. The
location factors, factor rating and scores for two potential sites are shown in the
following table. Which is the best location based on factor rating method?
Weighted Factor Rating Method
In this method to merge quantitative and qualitative factors, factors are assigned
weights based on relative importance and weightage score for each site using a
preference matrix is calculated. The site with the highest weighted score is selected
as the best choice.
NB: USE THE PREVIOUS EXAMPLE

 
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 Locational Break-even Methods

Break even analysis for localization is used for assessing

different location options by taking into consideration the
fixed and variable costs for each option and choose the
one with the lowest total cost at the expected volume.

Break even analysis for localization is a method that

comprises making a zero-point analysis of varied location
alternatives. The alternative selected for a factory,
warehouse, office or business depends on the expected
volume and the lowest total cost at this volume.

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 cont

 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

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2. Locational Break-Even
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Mbeya $30,000 $75 $180,000
Arusha $60,000 $45 $150,000
Mwanza $110,000 $25 $160,000

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

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Locational Break-Even Analysis
Example
–
$180,000 –
–
$160,000 –
$150,000 –
e
–
s t c ur v
c o
$130,000 –
w a nza
Annual cost

– M
$110,000 – t
– cos
ha
– rus urve
A c
$80,000 –
– o st
c
$60,000 – a
ey ve
– Mb cur
–
Mbeya Mwanza
$30,000 – Arusha lowest
lowest lowest
– cost
cost cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000 26
Volume
 3. Center of Gravity Method
•The center of gravity method is used to agree on the
location of a single distribution center that will reduce
distribution costs.
•It considers distribution cost as a linear function of
the distance and the quantity shipped, which is
assumed to be fixed, even though an acceptable
variation is that quantities are permitted to change
as long as their relative amounts stay same.

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Center of gravity cont’
 Finds location of distribution
center that minimizes distribution
costs
 Considers
 Location of markets
 Volume of goods shipped to those
markets
 Shipping cost (or distance)
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Center-of-Gravity Method
 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 29
Center-of-Gravity Method
∑dixQi
i
x - coordinate =
∑i Qi

∑diyQi
i
y - coordinate =
∑i Qi

where dix = x-coordinate of

location i
diy = y-coordinate of
location i 30
Center-of-Gravity Method
North-South
Mbeya (130, 130)
DSM (30, 120)
120 –
Ruvuma (90, 110)

90 –

60 –

30 – Iringa (60, 40)

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin 31
 Center-of-Gravity Method
Number of Containers
Store Location Shipped per Month
DSM (30, 120) 2,000
Ruvuma (90, 110) 1,000
Mbeya(130, 130) 1,000
Iringa (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 32
Center-of-Gravity Method
North-South
Mbeya (130, 130)
DSM (30, 120)
120 –
Ruvuma(90, 110)

90 – + Center of gravity (66.7, 93.3)

60 –

30 – Iringa (60, 40)

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin 33