Facilities Location

By

Dr. Debadyuti Das, Professor

Faculty of Management Studies
University of Delhi
 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.
Facilities Location
Integral part of Supply Chain

 Location decision pertains to the choice of an

appropriate geographical site for locating various
manufacturing and/or service facilities of an organization
 At one extreme, is a single location in which all the

facilities could be located (Aerospace manufacturers

such as Boeing and Airbus are examples of this
category)
 At the other extreme, many facilities are located in

many markets (Automobile manufacturers such as

Ford and Toyota are examples of this category)
Facilities Location
Integral part of Supply Chain

 Location Decisions are important

 Recent controversy surrounding the Tata Nano project

in Singur Special Economic Zone (SEZ) in West

Bengal
 Location decisions integral part of a supply chain
 It determines the flow of materials from raw material

suppliers to the factories and finally to the customers

 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)
Facilities Location
Growing importance

 Factors promoting globalization of operations

 Regulatory & economic reforms
 Factor Cost Advantages
 Expanding markets in developing countries

 Location issues have become more prominent in

recent years due to globalization

 Location decision pertains to the choice of

appropriate geographical site for locating
manufacturing & service facilities of an organization
Impact of Globalization on location decision
in an Organization

Saturation of High Cost Input

Developed Economies Legacy Cost Burden

Economic
Reforms Impact on Location
Choice for Organizations
High Growth of Huge Capabilities in
Newly Emerging Economies NEE constantly discovered
(NEE) & Exploited by the West

Multi-location (Globalized) Operations

Competitiveness of a location
Three tier model

Country Competitiveness
Govt. budget & regulation Quality of judicial &
political institutions

Labour Sector Competitiveness Qlty of

Mkt. Flexibility Infrastructure Openness to
Quality Intl. trade &
Company Competitiveness of Tech. finance
Ability to design, produce, & mkt products
superior to competitors, Qlty. of business mgmt.

Extent to which a business sector offers potential for growth

and attractive return on investment

Development
of financial Mkt. Extent to which a national environment is
Conducive or detrimental to business
Making Location Decisions

 Decide on the criteria

 Identify the important ones

 Develop location alternatives

 Evaluate the alternatives

 Make selection
Location Decision
Relevant Factors

Market related issues Cost related issues

Market for products and services Wage rates
Raw Material availability Transportation costs
Number and proximity of suppliers Taxes and other tariff issues
Availability of skilled labour
Quality of Infrastructure
Regulatory & Policy issues Other issues
Government & Economic stability Culture
Quality of legal and other institutions Climate
Trading blocks and trading agreements Quality of Life
 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
 Evaluating Locations
 Transportation Model
 Decision based on movement costs of raw materials or
finished goods
 Cost-Profit-Volume Analysis
- Decision based on fixed cost, variable cost and the level of
output produced at a particular location.
 Center of Gravity (or Centroid) Method
 Decision based on minimum distribution costs
 Factor Rating
 Decision based on quantitative and qualitative inputs
 Analytic Hierarchy Process
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 involved
Example 1: Cost-Volume Analysis
Fixed and variable costs for
four potential locations (for 10,000 units)

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
Example 1: Solution

F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts

A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0
Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

Plant Location Methodology: Centroid
Method

 The centroid method is used for locating

single facilities that considers existing
facilities, the distances between them, and the
volumes of goods to be shipped between
them.
 This methodology involves formulas used to
compute the coordinates of the two-
dimensional point that meets the distance and
volume criteria stated above
Plant Location Methodology: Centroid
Method Formulas

C

dd VV
ix ii 
dd VV
iy ii
Cxx == ix
C
Cyy ==
iy

VV ii 
VV ii

Where:
Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
Plant Location Methodology: Example of
Centroid Method
 Centroid method example
 Several mobile phone showrooms are located according to the
following grid which represents coordinate locations for each
showroom.
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X

Question:
Question:What
Whatis
isthe
thebest
bestlocation
locationfor
foraanew
newZ-Mobile
Z-Mobile
warehouse/temporary
warehouse/temporarystorage
storagefacility
facilityconsidering
consideringonly
only
distances
distancesand
andquantities
quantitiessold
soldper
permonth?
month?
Plant Location Methodology: Example of Centroid Method (Continued):
Determining Existing Facility Coordinates

Y
To
Tobegin,
begin,you
youmust
mustidentify
identifythe
the Q
existing
existingfacilities
facilitieson
onaatwo-
two- (790,900)

dimensional
dimensionalplane
planeor
orgrid
gridand
and D
(250,580)
determine
determinetheir
theircoordinates.
coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You
Youmust
mustalso
alsohave
havethethe s o ld p e r mo nth
volume
volumeinformation
informationon onthe
the
business A 1250
businessactivity
activityatatthe
the
existing
existingfacilities.
facilities. D 1900

Q 2300
Plant Location Methodology: Example of Centroid Method (Continued):
Determining the Coordinates of the New Facility
You
Youthen
thencompute
computethe
thenew
newcoordinates
coordinatesusing
usingthe
theformulas:
formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000
CCx == 100(1250) + 250(1900) + 790(2300) == 2,417,000 == 443.49
443.49
x 1250
1250 ++ 1900
1900 ++ 2300
2300 5,450
5,450
200(1250) + 580(1900) + 900(2300) 3,422,000
CCy == 200(1250) + 580(1900) + 900(2300) == 3,422,000 == 627.89
627.89
y 1250
1250 ++ 1900
1900 ++ 2300
2300 5,450
5,450

You
Youthen
thentake
takethe
thecoordinates
coordinatesand
andplace
placethem
themon
onthe
themap:
map:
Y
S ho wro o m No o f Z-Mo b ile s
Q New
New s o ld p e r mo nth
(790,900)
location
location
ZZ
D
(250,580) of
offacility
facility A 1250
ZZabout
about
A D 1900
(100,200) (443,627)
(443,627)
(0,0) X Q 2300
Load Distance Method
 Enables a location planner to evaluate two or more potential candidates for locating a
proposed facility vis-à-vis the demand (or supply) points
 Provides an objective measure of total load-distance for each candidate
 Notations
 Number of demand (or supply) points in the grid map: n
 Index used for demand (or supply) points: i

Co-ordinates of demand (or supply) point i in the grid map: (xi,yi)
 Quantum of shipment between demand (or supply) point i and proposed facility:
Wi
 Number of candidates for the proposed facility: m
 Index used for the candidates for the proposed facility: j
 Co-ordinates of candidate j in the grid map: (Xj,Yj)
 Distance measure for Cartesian coordinates between demand (or supply) point i
and a candidate j for the proposed facility: Dij
Dij  ( x i  X j ) 2  ( y i  Y j ) 2

 The load – distance for candidate j for the proposed facility: LDj
n
LD j  D
i 1
ij * Wi
Example
 A manufacturer of certain industrial component is interested in
locating a new facility in a target market and would like to know the
most appropriate place in the target market to locate the proposed
facility. The manufacturer feels that there are no location constraints
in the target market (i.e. any point in the target market is good
enough).
 There are four supply points A, B, C and D in the locality that will
provide key inputs to the new facility. A two-dimensional grid map of
the target market in which we would like to locate a new facility with
distance coordinates of the four supply points is available.
 The annual supply from these four points to the proposed facility is
200, 450, 175 and 150 tonnes respectively.
 The situation is graphically shown in the two-dimensional plot in the
figure. While the coordinates in the parentheses show the distance
from the origin of the target map of each of the supply point, the
number that follows is the annual shipment (in tonnes) from these
points to the proposed facility.
 Identify the most appropriate point in the grid map to locate the new
facility.
Example
 Consider the same example
 Suppose the manufacturer came to know that there are constraints in
locating the new facility.
 Based on an initial survey of possible sites for the proposed facility, the
manufacturer identified four candidates.
 The figure has the location coordinates of the four candidates (numbered 1
to 4).
 What is the best location for the proposed new facility?

Existing Supply Points Candidates for proposed facility

xi yi Wi Xj Yj
A 125 550 200 1 300 500
B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200
 Solution to Example

D A1  ( x A  X 1 ) 2  ( y A  Y1 ) 2  (125  300) 2  (550  500) 2  (175 2  (50) 2  182.00

Dij values
1 2 3 4
A 182.00 90.14 425.00 445.11
B 111.80 180.28 158.11 206.16
C 403.89 450.69 230.49 90.14
D 447.21 538.52 206.16 316.23

LDj values
1 2 3 4
224474.41 258801.57 227410.05 245000.8
Solution to Example
Grid Map
Candidate for proposed facility

Existing Demand (or supply) point

600
A (125,550), 200
Distance in Kilometres

500
1 (300,500)
B (350,400), 450
400
2 (200,500) 3 (500,350)
300
D (700,300), 150
200
4 (400,200)
C (450,125), 175
100

100 200 300 400 500 600 700

Distance in Kilometres
Solution to Example Grid Map

600
A (125,550), 200
Distance in Kilometres

500
B (350,400), 450
400

vi ty
300
G r a
of D (700,300), 150
t r e
200 Cen 6,376)
(36 C (450,125), 175
100

100 200 300 400 500 600 700

Distance in Kilometres
Factor rating method
Steps
 Identify and list down all the relevant factors for the
location decision
 Establish the relative importance of each factor in
the final decision
 Rate the performance of each candidate location
using a rating mechanism
 Compute a total score for each location based on
its performance against each factor and rank them
in the decreasing order of the score
Example
 A manufacturer of garments is actively considering five alternative
locations for setting up its factory. The locations vary in terms of the
advantages that it provides to the firm. Hence the firm requires a
method of identifying the most appropriate location. Based on a
survey of its senior executives the firm has arrived at six factors to
be considered for final site selection. The importance ratings of each
factor on a scale of 1 to 100 provide this information. Further, based
on some detailed analysis of both the qualitative and quantitative
data available for each of the location, the rating for the locations
against each factor has also been arrived at (on a scale of 0 to 100).
Using this information obtain a ranking of the alternative locations.

Factor Ratings Rating of each locations against the factors

Factors Rating
Availability of infrastructure 90 Factors Location 1 Location 2 Location 3 Location 4 Location 5
Size of the market 60 Availability of infrastructure 20 40 60 35 55
Size of the market 30 30 40 60 80
Industrial relations climate 50
Industrial relations climate 80 30 50 60 50
Tax benefits and concessions 30 Tax benefits and concessions 80 20 10 20 20
Availability of cheap labour 30 Availability of cheap labour 70 70 45 50 50
Nearness to port 65 Nearness to port 20 40 90 50 60
Solution to Example

Relative
Factors Rating weights
Availability of infrastructure 90 0.28
Overall rating for location 3 = 60*0.28 + 40*0.18
Size of the market 60 0.18
Industrial relations climate 50 0.15
+ 50*0.15 + 10*0.09 + 45*0.09 + 90*0.20 =
Tax benefits and concessions 30 0.09 54.77
Availability of cheap labour 30 0.09
Nearness to port 65 0.20

Sum of all factor ratings 325 1.00

Relative
Factors weights Location 1 Location 2 Location 3 Location 4 Location 5
Availability of infrastructure 0.28 20 40 60 35 55
Size of the market 0.18 30 30 40 60 80
Industrial relations climate 0.15 80 30 50 60 50
Tax benefits and concessions 0.09 80 20 10 20 20
Availability of cheap labour 0.09 70 70 45 50 50
Nearness to port 0.20 20 40 90 50 60

Overall score for the locations 41.23 37.54 54.77 46.46 56.15
Ranking of the locations 4 5 2 3 1