FACILITY LOCATION

Why it is required ????

•When the business is newly started

•Existing business unit has outgrown
•The volume of business or the extent of market
necessitates……….
•Expiry of lease
•Legal constraints
•Other social or economic reasons
FACILITY LOCATION
Once a firm has decided to open a new facility
OR relocate an existing facility, It must
decide where that facility should be located.

Facility location problem involves the evaluation

of various sites for a new facility.
Steps in Location
 Within the country or outside

 Selection of Region

 Selection of the community or locality

 Selection of the exact site

Deciding on Domestic or International
Location

 Motive and Objective

Globalization
Company’s profile

 Deciding factors:

Political Stability
Export Import quotas
Currency and Exchange rates
Cultural and Economic peculiarities
Natural or Physical conditions
Selection of the Region
 Availability of Raw Materials
Reduced cost of Transportation
Regular and proper supply of materials
savings in the cost of storage
 Proximity to the Market
 Availability of Power
 Transport facilities
 Suitability of Climate
 Government Policy
 Competition between States
Selection of Community
 Availability of Labour
 Civic amenities for workers
 Existence of competing industries
 Finance and Research facilities
 Availability of water and fire fighting facilities
 Local taxes and restrictions
 Personal factors
Selection of the site
 Soil, Size and Topography

 Disposal of Waste
Location selection Models
 There are many analytical techniques that can be used in
facility location decision.
Some of these are:
1) Factor Rating
2) Cost-Profit-Volume analysis
3) Center of Gravity Method
Method of Factor Rating
 In factor rating method, first we must identify the Most
Important Factors in evaluating alternative sites for the
new facility.
 Then we should assign a weight between 0 and 100 to
each of these factors.
Each alternative location will then be rated based on these
factor weights.
The most weighted alternative is selected as the best
alternative.
Example
 Samson Ltd. is considering three alternative sites for its
new facility.

After evaluating the firm’s Needs, the Managers have

Narrowed the list of Important Selection Criteria down
into three major Factors.
- Availability of skilled labor
- Availability of Raw materials, and
- Proximity to the firm’s markets.
Example
 Weights reflecting the relative importance of
each factor have been assigned as follows:
Example
 Based on these criteria, the three
Alternative sites were scored between 0
and 100 points:
Example
 Now we will multiply each score by its
corresponding factor weight:
 Weighted scores are calculated as: (Site
Score)x(Factor Weight)
Cost-Profit-Volume Analysis

When the fixed and

variable costs for each
site differ, Cost-profit-
volume analysis can be
used to identify the
location with the
lowest cost.
Example
Total Production Cost = (Fixed Cost) + (variable unit cost) x
(annual production volume)

 Assume that The expected annual production volume is

250.000 units.
 And further assume that:
 (x: production volume = 250.000)
Example

For Site A: Prod. Cost = 10.000.000 + 250 x

For Site B: Prod. Cost = 25.000.000 + 150 x
For Site C: Prod. Cost = 60.000.000 + 50 x

 Based on these information, Which site has the lowest cost?

Example
Center of Gravity Method
 The center of gravity method is used to find a location that
Minimizes the Sum of Transportation Cost in between
new facility and old facilities.
 Transportation cost is assumed to be a linear function of
the Number of Units Shipped AND the Traveling
Distance.
 The location of the firm’s existing facilities are converted
into x and y coordinates.
Center of Gravity Method
Center of Gravity Method
 Here, Cx : x coordinate for new location
 Cy : y coordinate for new location
 i: index for existing locations
 n: total number of existing locations
 xi: x coordinate of existing ith location , and
 yi: y coordinate of existing ith location.