Facility Location

Unit 3: Factors to be considered in plant and facility locations

Agenda

After this presentation, we should be able to…

• Explain what facility location.

• Describe the concepts of facility location.

What Is Facility Location?
Facility location is determining the best geographic location for a company’s facility. Facility
location decisions are particularly important for two reasons.
• First, they require long-term commitments in buildings and facilities, which means that mistakes
can be difficult to correct.
• Second, these decisions require sizable financial investment and can have a large impact on
operating costs and revenues.

Poor location can result in high transportation costs, inadequate supplies of raw materials and
labour, loss of competitive advantage, and financial loss.
Factors Affecting Location Decisions
Many factors can affect location decisions, including proximity to customers, transportation, source
of labour, community attitude, proximity to suppliers, and many other factors. The nature of the
firm’s business will determine which factors should dominate the location decision. The Factors are:

• Proximity to Sources of Supply

• Quality-of-Life
• Proximity to Customers
• Site Considerations
• Proximity to Source of Labour
• Community Considerations
Factor 1: Proximity to Source of Supply
Many firms need to locate close to sources of supply. The reasons for this can vary.
• Reason 1: The firm has no choice, such as in farming, forestry, or mining operations, where
proximity to natural resources is necessary. In other cases, the location may be determined by the
perishable nature of goods, such as in preparing and processing perishable food items. Example:
Tropicana has its processing plant in Florida, near the orange-growing orchards.
• Reason 2: Reason to locate close to sources of supply is to avoid high transportation costs—for
example, if a firm’s raw materials are much bulkier and costlier to move than the finished product.
Transporting the finished product outbound is less costly than transporting the raw materials
inbound, and the firm should locate closer to the source of supply. A paper mill is an example.
Transporting lumber would be much more costly than transporting the paper produced.
Factor 2: Proximity to Customers
Locating near the market they serve is often critical for many organizations, particularly service
firms.
• Reason 1: To capture their share of the business, service firms need to be accessible to their
customers. For this reason, service firms typically locate in high-population areas that offer
convenient access. Examples include retail stores, fast-food restaurants, gas stations, grocery
stores, dry cleaners, and flower shops. Large retail firms often locate in a central area of the
market they serve.
• Reason 2: Other reasons for locating close to customers may include the perishable nature of the
company’s products or high costs of transportation to the customer site. Example: Food items such
as groceries and baked goods, fresh flowers, and medications are perishable and need to be
offered close to the market. Also, items such as heavy metal sheets, pipes, and cement need to be
produced close to the market because the costs of transporting these materials are high.
Factor 3: Proximity to Source of Labor
Proximity to an ample supply of qualified labour is important in many businesses, especially those
that are labour intensive.
• Reason 1: The company needs to consider the availability of a particular type of labour and
whether special skills are required. Some companies, such as those looking for assembly-line
workers, want to be near a supply of blue-collar labour. Example: IT companies are concentrated
in Bangalore since the place has high concentration of engineers
• Reason 2: Local wage rates, the presence of local unions, and attitudes of local workers. Work
ethics and attitudes toward work can vary greatly in different parts of the country and between
urban and rural workers. Attitudes toward factors such as absenteeism, tardiness, and turnover can
greatly affect a company’s productivity.
Factor 4: Community Considerations
The success of a company at a particular location can be affected by the extent to which it is
accepted by the local community. Many communities welcome new businesses, viewing them as
providing sources of tax revenues and opportunities for jobs, and as contributing to the overall well-
being of the community. However, communities do not want businesses that bring pollution, noise,
and traffic and that lower the quality of life. Extreme examples are a nuclear facility, a trash dump
site, and an airport. Less extreme examples are companies like Wal-Mart, which often are not
accepted by smaller communities, which may view such large merchants as a threat to their way of
life.
Factor 5 & 6: Site Considerations & Quality-of-Life Issues
Factor 5: Site considerations for a particular location include factors such as utility costs, taxes, zoning
restrictions, soil conditions, and even climate. These factors are not too different from those one would
consider when purchasing a home or a lot to build on. Just as most homeowners consider their purchase
to be an investment, so does a business. Example: Factories cannot be made on fertile farmland.
Factor 6: Another important factor in location decisions is the quality of life a particular location offers
the company’s employees. This factor can also become important in the future when the business is
recruiting high-caliber employees. Quality of life includes factors such as climate, a desirable lifestyle,
good schools, and a low crime rate. Certainly, quality of life would not be considered the most critical
factor in selecting a location. Example: Pune/ Bengaluru/ San Fransisco all are Tech Hubs with
excellent climate and high standard of living with Diverse culture hence well established companies
have their head quarters in these location
Conclusion
So what is an ideal location?
An ideal location is one where the cost of the product is kept to minimum, with a large market share,
the least risk and the maximum social gain. It is the place of maximum net advantage or which gives
lowest unit cost of production and distribution. For achieving this objective, small-scale entrepreneur
can make use of locational analysis for this purpose.
Facility Location
Unit 4: Various models in the selection of plant layout.
Agenda

After this presentation, we should be able to…

• Identify the various factors to be considered for selection of facility location.

• Understand the various factors.

Models of Plant Location.
Various models are available, which help us identify the ideal location. They are:

• Factor rating method

• Weighted factor rating method

• Load-distance method

• Centre of gravity method

• Break even analysis

Models 1: Factor Rating Method
The process of selecting a new facility location involves a series of following steps:

1. Identify the important location factors.

2. Rate each factor according to its relative importance, i.e., higher the ratings is indicative of
prominent factor.

3. Assign each location according to the merits of the location for each factor.

4. Calculate the rating for each location by multiplying factor assigned to each location with
basic factors considered.

5. Find the sum of product calculated for each factor and select best location having highest
total score.
Models 1: Factor Rating Method (Example)
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?

Rating
SL
Location Factor Factor
No.
Rating Location 1 Location 2
1 Facility Utilization 8 3 5
2 Total patient per month 5 4 3
3 Average time per emergency trip 6 4 5
4 Land and construction costs 3 1 2
5 Employee preference 5 5 3
 Models 1: Factor Rating Method (Example)
Solution:
Location 1 Location 1
SL Factor
Location Factor Rating Total Rating Total
No. Rating (1)
(2) (1*2) (3) (1*3)
1 Facility Utilization 8 3 24 5 40
2 Total patient per month 5 4 20 3 15
3 6 4 24 5 30
Average time per emergency trip
4 Land and construction costs 3 1 3 2 6
5 Employee preference 5 5 25 3 15
  Total=     96   106
The total score for location 2 is higher than that of location 1. Hence location 2, is the best
choice.
Models 2: 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.
Models 2: Weighted Factor Rating Method (Example)
A new medical facility, Health-care, is to be located in Delhi. The location factors, weights, and scores (1 =
poor, 5 = excellent) for two potential sites are shown in the following table. What is the weighted score for these
sites? Which is the best location?

Rating
Factor
SL No. Location Factor
Rating Location 1 Location 2

1 Facility Utilization 25 3 5
2 Total patient per month 25 4 3
3 Average time per emergency 25 3 3
trip
4 15 1 2
Land and construction costs
5 Employee preference 10 5 3
Models 2: Weighted Factor Rating Method (Example)
SOLUTION:

The weighted score for this particular site is calculated by multiplying each factor’s weight by its score and
adding the results:

Weighed score Location 1 = (25 × 3) + (25 × 4) + (25 × 3) + (15 × 1) + (10 × 5)

= 75 + 100 + 75 + 15 + 50
= 315
Weighed score location 2 = (25 × 5) + (25 × 3) + (25 × 3) + (15× 2) + (10 × 3)
= 125 + 75 + 75 + 30 + 30
= 335

Location 2 is the best site based on total weighted scores.

Models 3: Load Distance Method
The load-distance method is a mathematical model used to evaluate locations based on proximity factors. The
objective is to select a location that minimizes the total weighted loads moving into and out of the facility. The
distance between two points is expressed by assigning the points to grid coordinates on a map. An alternative
approach is to use time rather than distance.

The point A on the grid represents the supplier’s location and the point B represents the possible warehouse
location. The distance between points A and B is the length of the hypotenuse of a right triangle, or

dAB = SqRoot((XA–XB)2+(YA– YB)2)

where dAB = distance between points A and B

XA = x-coordinate of point A
YA = y-coordinate of point A
XB = x-coordinate of point B
YB = y-coordinate of point B
Models 3: Load Distance Method
…..Cont

Rectilinear distance measures distance between two points with a series of 90° turns as city blocks. Essentially,
this distance is the sum of the two dashed lines representing the base and side of the triangle . The distance
travelled in the x -direction is the absolute value of the difference in x-coordinates. Adding this result to the
absolute value of the difference in the y -coordinates gives:

dAB = |XA– XB| + |YA– YB|

CALCULATING A LOAD-DISTANCE SCORE

To calculate a load-distance for any potential location, we use either of the distance measures and simply
multiply the loads flowing to and from the facility by the distances travelled. These loads may be expressed as
tones or number of trips per week.
Models 3: Load Distance Method (Example)
The new Health-care facility is targeted to serve seven census tracts in Delhi. The table given below shows the
coordinates for the centre of each census tract, along with the projected populations, measured in thousands.
Customers will travel from the seven census tract centers to the new facility when they need health-care. Two
locations being considered for the new facility are at (5.5, 4.5) and (7, 2), which are the centers of census tracts C
and F. Details of seven census tract centers, co-ordinate distances along with the population for each centre are given
below. If we use the population as the loads and use rectilinear distance, which location is better in terms of its total
load- distance score?

SL No. Census tract (x,y) Rating

1 A (2.5, 4.5) 2
2 B (2.5, 2.5) 5
3 C (5.5, 4.5) 10
4 D (5, 2) 7
5 E (8, 5) 10
6 F (7, 2) 20
7 G (9, 2.5) 14
Models 3: Load Distance Method (Example)
SOLUTION:

Calculate the load-distance score for each location. Using the coordinates from the above table calculate the
load-distance score for each tract.
Using the formula dAB = |XA– XB| + |YA– YB|
Locate at (5.5, 4.5) Locate at (7, 2) Summing the scores for all
Census tracts gives a total load-
(x, y) Load
Tract distance score of 239
Distance Distance Load Distance
Population (i) (d) (d*i) Distance (d) (d*i) when the facility is located
A (2.5, 4.5) 2 3+0=3 6 4.5+2.5=7 14 at versus a load-distance
B (2.5, 2.5) 5 3+2=5 25 4.5+0.5=5 25 score of 168 at location (7,
C (5.5, 4.5) 10 0+0=0 0 1.5+2.5=4 40 2). Therefore, the location
D (5, 2) 7 0.5+2.5=3 21 2+0=2 14 in census tract F is a better
E (8, 5) 10 2.5+0.5=3 30 1+3=4 40 location.
F (7, 2) 20 1.5+2.5=4 80 0+0=0 0
G (9, 2.5) 14 3.5+2=5.5 77 2+0.5=2.5 35
Models 4: Centre of Gravity
It is based primarily on cost considerations. This method can be used to assist managers in balancing cost and
service objectives. The centre of gravity method takes into account the locations of plants and markets, the
volume of goods moved, and transportation costs in arriving at the best location for a single intermediate
warehouse.

The centre of gravity is defined to be the location that minimizes the weighted distance between the warehouse
and its supply and distribution points, where the distance is weighted by the number of tones supplied or
consumed. The first step in this procedure is to place the locations on a coordinate system. The origin of the
coordinate system and scale used are arbitrary, just as long as the relative distances are correctly represented.
This can be easily done by placing a grid over an ordinary map. The centre of gravity is determined by the
formula.

CX = ∑Dix.Wi/∑Wi and CY = ∑Diy.Wi/∑Wi

where Cx = x-coordinate of the centre of gravity
Cy = y-coordinate of the centre of gravity
Dix = x-coordinate of location i
Diy = y-coordinate of location i
Models 4: Centre of Gravity (Example)
The new Health-care facility is targeted to serve seven census tracts in Delhi. The table given below shows the
coordinates for the centre of each census tract, along with the projected populations, measured in thousands.
Customers will travel from the seven census tract centre s to the new facility when they need health- care. Two
locations being considered for the new facility are at (5.5, 4.5) and (7, 2), which are the centers of census tracts
C and F. Details of seven census tract centres, coordinate distances along with the population for each centre are
given below. Find the target area’s centre of gravity for the Health-care medical facility.

SL No. Census Tract (x, y) Population (i)

1 A (2.5, 4.5) 2
2 B (2.5, 2.5) 5
3 C (5.5, 4.5) 10
4 D (5, 2) 7
5 E (8, 5) 10
6 F (7, 2) 20
7 G (9, 2.5) 14
 Models 4: Centre of Gravity (Example)
SOLUTION:

To calculate the centre of gravity, start with the following information, where population is given in thousands.

Next we find Cx and Cy

SL No. Census Tract (x, y) Population (i) Lx Ly
Cx= 453.5/68 = 6.67
1 A (2.5, 4.5) 2 5 9
Cy= 205.5/68 = 3.02
2 B (2.5, 2.5) 5 12.5 12.5
3 C (5.5, 4.5) 10 55 45 The centre of gravity is (6.67,
4 D (5, 2) 7 35 14 3.02). Using the centre of
5 E (8, 5) 10 80 50 gravity as starting point,
6 F (7, 2) 20 140 40 managers can now search in its
7 G (9, 2.5) 14 126 35 vicinity for the optimal
    Total= 68 453.5 205.5 location.
Models 5: Break Even Analysis
Break-even analysis is a technique used to compute the amount of goods that must be sold just to cover costs.
The break-even point is precisely the quantity of goods a company needs to sell to break even. Whatever is sold
above that point will bring a profit. Below that point the company will incur a loss.The Break Even Point (BEP)
in units can be calculated by using the relation:

Total cost= At the break-even point, total

Total revenue= cost and total revenue are
equal. We can use those
Where, F= Fixed Cost
equations to solve for Q, which
c= Variable cost per unit
is the break-even quantity:
Q= number of unit sold
p= price per unit
Models 5: Break Even Analysis (Example)
Potential locations X, Y and Z have the cost structures shown below. The ABC company has a demand of
1,30,000 units of a new product. Three potential locations X, Y and Z having following cost structures shown
are available. Select which location is to be selected and also identify the volume ranges where each location is
suited?

  Location X Location Y Location Z

Fixed Costs Rs 150000 Rs 350000 Rs 950000

Variable Costs Rs 15 Rs 8 Rs 6
Models 5: Break Even Analysis (Example)
SOLUTION:
Solve for the crossover between X and Y:
10X+ 150,000 = 8X + 350,000
2X = 200,000
X = 100,000 units
8X + 350,000 Solve for the crossover between Y
and Z:
= 6X + 950,000
2X = 600,000
X = 300,000 units
Therefore, at a volume of 1,30,000 units, Y is the
appropriate strategy. From the graph we can
interpret that location X is suitable up to 100,000
units, location Y is suitable up to between 100,000
to 300,000 units and location Z is suitable if the
demand is more than 300,000 units.
 THANK YOU

A AYA U S H S H A R M A SHREERAJ DIXIT

A L A N K R I TA S A I K I A VISHAL MULCHANDANI

H A R S H PAT E L TA N M O Y B A L