Facility Location

By

Dr. Debadyuti Das, ReaderFaculty of Management StudiesUniversity 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.

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

Doing nothing

Making Location Decisions

Decide on the criteria

Identify the important ones

Develop location alternatives

Evaluate the alternatives

Make selection

Factors influencing Location Decision

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations

Location of raw materials Location of markets Labor factors Infrastructure Climate and taxes

Regional Factors

Quality of life Services (Medical, police, fire services etc.) Attitude of the people Taxes Environmental regulations Utilities (cost and availability)

Community Considerations

Land (cost, degree of development required, soil characteristics etc.)

Transportation Environmental Legal

Site Related Factors

Product plant strategy Market area plant strategy Process plant strategy

Multiple Plant Strategies

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

Issues in global locations

Trading Blocs Political Risk Foreign Government

-Policies on foreign ownership of production facilities-Import restrictions-Currency restrictions-Local product standards-Environmental Regulations Cultural differences Resources Labour -Possible regulation limiting no. of foreign employees-Language differences

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 is involved

Example 1: Cost-Volume Analysis

Fixed and variable costs for four potential locations (for 10,000 units)

L o c a t i o n F i x e dC o s t

V a r i a b l eC o s t

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 13 02 03 5

Example 1: Solution

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0

Example 1: Solution

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

BC

B SuperiorC Superior

A Superior

D

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 = d V

V x

ix i

i

C = d V

V x

ix i

i

Where:Cx = X coordinate of centroidCy = Y coordinate of centroiddix = X coordinate of the ith locationdiy = Y coordinate of the ith locationVi = volume of goods moved to or from ith location

C = d V

Vy

iy i

i

C = d V

Vy

iy i

i

Plant Location Methodology: Example of Centroid Method

Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

Centroid method example Several mobile phone showrooms are located according to the

following grid which represents coordinate locations for each showroom

S howroom No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

Plant Location Methodology: Example of Centroid Method (Continued): Determining Existing Facility Coordinates

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You must also have the volume information on the business activity at the existing facilities.

You must also have the volume information on the business activity at the existing facilities.

S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300

Plant Location Methodology: Example of Centroid Method (Continued): Determining the Coordinates of the New Facility

C = 100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49C =

100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49

C = 200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89C =

200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89

S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You then compute the new coordinates using the formulas:You then compute the new coordinates using the formulas:

ZZ

New location of facility Z about (443,627)

New location of facility Z about (443,627)

You then take the coordinates and place them on the map:You then take the coordinates and place them on the map: