Facility location

Amrinder Kaur
Facility location
 A factory or a plant is the manufacturing
facility of a company.
 A warehouse is the storage facility of a
manufacturing or a distribution company.
 The offices of the service sector company
such as courier company, a bank or an
insurance company are its facilities.

Facility location decision is very important

for big business houses as well as new
entrepreneurs. As wrong decision will lead
to failure to complete project.
 Sell off the facility to other Companies
(Divestment)
• Finding buyer at wrong location is difficult
• Prices received after sell off are less
as compared to earlier.
• Divestment is time-consuming

Relocation to a new location Closing of operations and

• Only machine and liquidating the assets
equipment can be relocated • Liquidation of assets is
not human resource Facility set up without time consuming and painful.
•Capital expenditures are proper location planning • The price received after
blocked sell-off are usually much
less than the actual
•More investment is required investment made.
to purchase land ,construction
etc.
Continue operations at the
existing location
• Inherent problems at the location can
also lead to low profit/ less market share.
•Competitors having plants at better
locations always have an edge.
•In the long run company has to plan
location at another facility to beta
competition.
 Steps in facility location planning

Generate a list of alternative

location options for the facility

Find out factors relevant to

the facility being planned

Screen better location options

using factor and location Screen better location options
rating analysis using break-even analysis

Apply simple
median model Apply centre of Apply transportation Apply ardalan
for finding location gravity model for model heuristic to
with least least for least choose best location
overall transportation transportation cost transportation cost for service operations
cost

Best location chosen

 Factors Affecting Facility Location Planning
Availability
of power Basic
Good amenities
transportation supply Government
facilities policies

Environment
Proximity to and community
raw materials
Facility location
planning
Proximity Proximity to
to markets subcontractors

Residential Easy availability

complexes, of cheap land
schools,
Low
hospitals etc.
Availability of construction
cheap and cost
skillful labor
 Location analysis Techniques
Dimensional analysis
Here, relative merits of different costs such as transportation
and power are considered for identifying the facility location.
Its easy to select a plant site when all the costs are tangible
and quantifiable in value.

If
C1M , C2M, C3M…..CZM are different costs associated
with a plant site, M on z different cost items.
C1N,C2N,C3N…..CZN are different costs associated
with the plant site, N on Z different cost items.
W1,W2,W3 are weight age given to cost items.
Value of relative merit of plant sites M and N is given by:
(C1M/C1N)w1 * (C2M/C2N)w2*………..(CzM/CzN)w3

If value of relative merit is >1, the plant site N is superior

Brown and Gibson method

This model considers three types of factors for analyzing

the facility location

• Critical such as water for a refinery

• Objective such as raw material costs
• Subjective such as union activities

In the Brown and Gibson model, for each plant site ‘i’ a
Loaction measure is calculated

LMi=CFMi*[D*OFMi=(1-D)*SFMi]
Where,
CFMi specifies the measure of critical factors for the plant
site,i.Its value is either 0 or 1.
OFMi specifies the measure of objective factors for the
plant site i(0<=OFMi<=1 and summation of OFMi)

SFMi specifies the measure of subjective factors for the

plant site, i(0<=SFMi<=1 and summation of SFMi=1)

D specifies the objective factor decision weight

(0<=D<=1).It represents the relative importance of the
Objective factors to the subjective factors.

Hence, a plant site with higher value of location measure

is preferred to the plant site with lower value of location
measure.
 Factor rating Method

• This is frequently used to evaluate locations because this

method helps to figure out which location is better.

• This method enables managers to bring various locations

into considerations in the evaluation process and thus it
helps in identifying the most appropriate location for the
plant.

How to do it???

• List down all the factors for evaluating the location

• Each factor is rated from high value to low, which is
usually 1 to 10,respectively.Rating hence is according to
relative importance of the factor.
•Then there is the rating of location according to the
characteristics and merits of each location.

• Finally the factor rating is multiplied by location rating to

get the final results.

• The total of the product of factor rating and location

rating specifies the most appropriate location.

For eg., for location A

Factor Factor Location Product of
rating rating Ratings
Inter company integration 4 8 32
Availability and cost of labor 3 2 6
Availability and cost of 3 6 18
services
Availability and cost of 5 2 10
materials
Availability of transport 1 3 3
Availability of car parking 5 4 20
space
Expansion potential 4 1 4
Zoning and legal regulations 3 10 30
Cost of land 2 7 14
New development areas 2 6 12
Living conditions 2 5 10
159
 Point rating Method

•This method involves an inspection of the importance

of each factor in the location selection process. Each
location factor is assigned a relative weight out of a
maximum number of possible points, which is usually 100.

•Then a potential location is evaluated according to every

factor considered by the management.

•A number of points are assigned to each factor.

•The location having the highest score is selected as the

most suitable location.
Factor Unfavorable Average Favorable Total
(0-33) (34-66) (67-100) Points
A B A B A B A B
Inter company integration 20 80 20 80
Availability and cost of 30 50 30 50
labor
Availability and cost of 50 70 50 70
services
Availability and cost of 20 60 40 60 40
materials
Availability of transport 40 40 20
Availability of car parking 30 80 30 80
space
Expansion potential 40 90 40 90
Zoning and legal 60 80 60 80
regulations
Cost of land 40 90 40 90
New development areas 50 80 50 80
Living conditions 90 90 20
 Break Even Analysis

Break even point

At this point the cost of operations equals its revenues.

Break even analysis specifies the level of output that must

be reached in order to recover all the cost of operations
through revenues.

And the break-even point depends on the selling price of

the product and the operating cost structure.

Cost is divided into two categories

Fixed cost: Doesn't vary with volume of production. For eg.,
salaries of staff, insurance.
Variable cost: shipping handling cost etc.
Cost and revenue increases with increase in the volume of
the output.

Cost (Rs)
Fixed Cost (FC)

0 500 1000

Volume of Production (units)

Volume of Production vs Cost

 Total Cost (TC)

Variable cost (VC)

Cost (Rs)
Fixed Cost (FC)

0 500 1000

Volume of Production (units)

Total cost as a sum of fixed and variable costs

 Total revenue (TR)
Profit region

Total Cost (TC)

Variable cost (VC)

Cost (Rs)
Fixed Cost (FC)

0 VBE500 1000

Volume of Production (units)

Graph showing TR,TC and the break even volume VBE

 A) Location-1

Total revenue (TR)

Total Cost (TC)

Variable cost (High)

Cost /Revenue(Rs)
Fixed Cost (Low)
0 500 1000
VBE
Volume of Production (units)
 B) Location-2

Total revenue (TR)

Total Cost (TC)

Variable cost (High)

Cost /Revenue(Rs)
Fixed Cost (High)
0 500 VBE 1000

Volume of Production (units)

 C) Location-3

Total revenue (TR)

Total Cost (TC)

Variable cost (low)

Cost /Revenue(Rs)
Fixed Cost (High)
0 VBE500 1000

Volume of Production (units)

 D) Location-4

Total revenue (TR)

Total Cost (TC)

Cost /Revenue(Rs) Variable cost (low)

Fixed Cost (Low)

0 VBE 500 1000

Volume of Production (units)

Best location option is location-4, with visibly the

least value of VBE