Facility Location Decisions

Experience teaches that men are so much governed by what they are accustomed to see and practice, that the simplest and most obvious improvements in the most ordinary occupations are adopted with hesitation, reluctance, and by slow graduations. Alexander Hamilton, 1791

Facility Location in Location Strategy

Inventory Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisions Transport Strategy Transport fundamentals Transport decisions

Location Strategy Location decisions The network planning process

PLANNING

Customer service goals The product Logistics service Ord. proc. & info. sys.

CONTROLLING

ORGANIZING

Location Overview
What's located? Sourcing points Plants Vendors Ports Intermediate points Warehouses Terminals Public facilities (fire, police, and ambulance stations) Service centers Sink points Retail outlets Customers/Users

Location Overview (Contd)

Key Questions

How many facilities should there be? Where should they be located? What size should they be?
Why Location is Important Gives structure to the network Significantly affects inventory and transportation costs Impacts on the level of customer service to be achieved

Location Overview (Contd) The objective is to deliver the firms products to its customers from a location or locations that meet certain criteria such as low shipping costs, least damaged goods and/or low manufacturing costs.

Nature of Location Analysis

Manufacturing (plants & warehouses) Decisions are driven by economics. Relevant costs such as transportation, inventory carrying, labor, and taxes are traded off against each other to find good locations. Retail Decisions are driven by revenue. Traffic flow and resulting revenue are primary location factors, cost is considered after revenue. Service Decisions are driven by service factors. Response time, accessibility, and availability are key dimensions for locating in the service industry.

Types Of Facilities
Heavy manufacturing
Auto plants, steel mills, chemical plants

Light industry
Small components mfg, assembly

Warehouse & distribution centers Retail & service

Factors in Heavy Manufacturing Location

Construction costs Land costs Raw material and finished goods shipment modes Proximity to raw materials Utilities Labor availability

Factors in Light Industry Location

Construction costs Land costs Easily accessible geographic region Education & training capabilities

Factors in Warehouse Location

Transportation costs Proximity to markets

Factors in Retail Location

Proximity to customers Location is everything

Some Location Theory/Practice

Early economic analysis Bid rent curves Webers isodapanes Webers classification of industries Hoovers tapered transport rates Agglomeration Mathematical approaches Light analysis -Chart, compass, ruler techniques -Spreadsheets -Checklists Continuous location methods Mathematical programming

Bid Rent Curve

Bid Rent Curve

Thunen recognized that the maximum rent, or profit, that any economic development could pay for land was the difference between the price for the goods in the marketplace and cost of transporting the goods to the marketplace.

Variable spacing can mean nonlinear transportation costs

CR (2004) Prentice Hall, Inc.

Webers Isodapanes

Webers Classification of Industries

steelmaking

soft drink bottling

assembly operations

Hoovers Transport Curves

facility should be located at Y

Agglomeration
Based on the observation that the output of one industry is the input of another. Customers for an industrys products are the workers of those industries. Hence, suppliers, manufacturers, and customers group together, especially where transportation costs are high. Historically, the growth of the auto industry showed this pattern. Today, the electronics industry (silicon valley) has a similar pattern although it is less obvious since the product value is high and transportation costs are a small portion of total product price.