FACILITY

LOCATION
 OVERVIEW

 Involves the long-term commitment of large amount of

capital under conditions of considerable uncertainty.
 Determines a permanent framework of operating
constraints.

 Significant impact on investment requirements,

operating costs, revenues and operations.

 Has significant consequences on the competitive

position of the firm.
 Need For Location Decision
 Significant changes in the level of demand.
 Significant changes in the geographical distribution of
demand.

 Changes in the costs or quality requirement of critical

production inputs.

 Significant changes in the real-estate value of existing or

adjacent sites.

 Depletion of resources.
Strategic Importance Of Location
Decision

To become the low cost producer of final products.

 To increase profits by planning to capture the

increased market share.
 To base location of the facilities based on customer
convenience.

 To base location of a facility based on where it fits in

the entire supply chain. (Beginning, Middle or end
of the chain)
Location Options

 Expand existing facilities

 Add new facilities while retaining the
existing ones.
 Move to a new location
Making Location Decisions
 Decide on the criteria

 Identify the important ones

 Develop location alternatives

 Evaluate the alternatives

 Make selection
Factors Influencing Location
Decision
Community
Regional Factors
Considerations

Multiple Plant Site-related

Strategies Factors
Regional Factors
 Location of raw materials
 Location of markets
 Labor factors
 Infrastructure
 Climate and taxes
Community Considerations
 Quality of life
 Services (Medical, police, fire services etc.)
 Attitude of the people
 Taxes
 Environmental regulations
 Utilities (cost and availability)
 FactorsSite Related
 Land (cost, degree of development required,
soil characteristics etc.)
 Transportation
 Environmental
 Legal
Multiple Plant Strategies
 Product plant strategy
 Market area plant strategy
 Process plant strategy
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
GlobalIssues In
Locations
1. Trading Blocs
2. Political Risk
3. Foreign Government
-Policies on foreign ownership of production facilities
-Import restrictions
-Currency restrictions
-Local product standards
-Environmental Regulations
5. Cultural Differences
6.Resources
7. Labour
-Possible regulation limiting no. of foreign employees
-Language differences
Evaluating Locations

1. Transportation Model
• Decision based on movement costs of raw materials or
finished goods
2. Cost-Profit-Volume Analysis
• Decision based on fixed cost, variable cost and the
level of output produced at a particular location.
3. Center of Gravity (or Centroid) Method
• Decision based on minimum distribution costs

4. Factor Rating
• Decision based on quantitative and qualitative inputs
Evaluating Locations
 Cost-Profit-Volume Analysis
• Determine fixed and variable costs at each location
alternative
• Plot total cost lines for all location alternatives on the
same graph
• Determine the lowest total costs for the expected
level of output.
LOCATION COST-
VOLUME ANALYSIS
 Assumptions
• Fixed costs are constant for the range of probable
output
• Variable costs are linear for the range of probable
output
• Output can be closely estimated Only one product
is involved
EXAMPLE 1: COST-
VOLUME ANALYSIS

Fixed and variable costs for

four potential locations (for 10,000 units)

Loca t i on Fixed Variable

cost cost
A 0 0 0 , 0 5 2$ 1 1$
B 0 00,001 03
C 0 00,051 02
D 0 00,002 53
EXAMPLE 1:
SOLUTION

Fixed Variable
cost cost Total cost
A 0,052$ 0 , 0 1( 1 1 $ 0 , 0 6 3 $
00 )00 00
B 00,001 0 0 , 0 1( 0 3 0 0 , 0 0 4
0 )0 0
C 00,051 0 0 , 0 1( 0 2 0 0 , 0 5 3
0 )0 0