Facility Location Planning

Most Facility location decisions have their own unique characteristics. For manufacturing
facilities, the location of raw materials, labor and markets are clearly important. For example a
Mall and theater closeness to the dwelling units are a must whereas for a chemical industry or
nuclear power station , by force it has to be outside the city limits and there will be no swelling
dwelling units nearby. For manufacturing units , being near competitors may be desirable,
where as for others such as service facilities like hospitals, call centers etc it may not be
desirable.

Because of the wide variety of facilities and their unique characteristics, it is often necessary to
utilize a variety of analytical evaluation methods. Most location decisions are made in stages .
Although it is sometimes difficult to categorize precisely, there are several general types of
facilities that have different features and require different analysis: like manufacturing,
warehouse or distribution, retail, public facilities and administrative offices. We shall study in
general the decision process and identify those aspects of location decision making that are
common to most facilities.

The Location Decision Stages and Factors Affecting Facility Location :

Facility location decision are made in three stages. At each stage a set of location alternatives
are identified, and then an evaluation procedure is used to reduce the options.

First Stage: Location alternative represent the Regional and the

geographical decision matrix.

Second Stage: Local decision are done. This follows after the first stage.

Third Stage: Specific facility site is homed into.

REGIONAL DECISION (First Stage): The first stage of the decision process is usually to make a
regional decision. Depending upon the facility, a region may be a country, a part of the country,
a state or a province within a country. AT this stage, economic market and legal factors tend to
dominate. The following are specific factors of potential importance.

a. Market Proximity: Manufacturing facilities can usually be located away from

ultimate consumers although close proximity allows shorter and more
predictable lead time for customers. This is true when the manufacturing follows
the principle of JIT.
 b. Proximity to Raw materials: For manufacturing units, the raw material supply is
an important and critical criteria. If the ancillary units are located near to an
automobile units, lot of lead time and transportation cost will reduce. Proximity
to raw materials source tends to be relatively less important for service facilities
because they are usually less material intensive.
c. Availability of Utilities: In our country or to be specific, Karnataka state at
present is in deficient of power. Hence any huge manufacturing unit which needs
lot of uninterrupted power, would base its decision on establishing the industry.
Whereas a residential apartments are not subjected to this criteria much
because of dependency on alternate mode of supply available and also some
sort of acceptance of living with the minimal resource availability.
d. Labor Supply and Unionization: Companies need to know whether sufficient
manpower suiting to the requirement is available. If skilled workers are not that
available or it is very costly to employ, the company will always think and will
base their decision. Similarly if the environment of the area has the history of
union dominance, the company will seriously think of these terms.
e. National Taxes: The tax structure varies from country to country and from state
to state. The various forms of Taxation rule tends to bias the setting up of
industry in a particular geographical area.
f. Legal Restrictions: Some companies opened facilities abroad assuming that they
could import production inputs, but were later confronted with import
restrictions or home content laws that prevented from doing so. Some countries
also have restriction on withdrawing profits or withdrawing them in currency. It
is difficult to move the capital out of the country ,due to the various legislation
imposed from time to time by the recipient country.

Once a general decision has been arrived at the geographical criteria, the focus shifts
next to the local decisions.

LOCAL DECISION ( SECOND STAGE): Now the location factors come into play. For example after
due decision of the country or the state, now comes which district etc that will be better to set
up the manufacturing unit. The most important factors that come into play are:

Taxes: Within the state , few place attract more taxes and few have less tax. There may
be some tax benefit to any particular region.

Economic Incentives: The Govt in order to develop some region, attract big
manufacturing unit to set up big industries in that region. In order to attract them, Govt gives
lot of incentives like ensuring availability of land, low cost of land, tax holiday etc.
 Attractiveness of the community: The quality of life assured, housing facility availability,
many recreational facility etc availability, will force the company to set up their manufacturing
base in such areas.

Compatible Industry: There are good reasons why certain parts of the country have high
concentrations of facilities in the same industry. This is because manpower is readily available
and only some better carrots have to be shown to attract. Moreover Govt encourages since the
concentration of similar infrastructure facility can be planned for all in a uniformed unbiased
manner.

Transportation Network. If material and products must be shipped using a specific

mode, one locale may be preferred to the other. For example for heavy steel plants making coil
and sheet, if a railway siding is available, many such units can be seen around such areas.

Govt Policy and Attitude: Local and State governments can either help or hinder the
construction of facilities. Most companies do not want to set up such manufacturing facilities in
areas where Govt interference is minimal.

Environmental Regulations: Although most of the environmental laws are made at the
national level, local restrictions have their say. These days of “Green Environment”, polluting
industry do have to plan properly and take all the siting consideration.

SITE LOCATION(FINAL STAGE): The final stage in the decision process is to identify and select
facility sites. Recently, it has become for the second and third stages to be merged, especially
when locating large facilities, because in many cases there is only one suitable site with specific
locale. The important factors at the site level are often described by very detailed information
that can be expansive and time consuming to obtain. For example , availability of electric
generating capacity may be an important at stage 1 and 2, whereas access to the electric power
grid may be important at stage 3. Similarly an area may have a generally good transportation
system, but a specific site may require substantial investment to connect with the highway or
railway network. In addition to access to the utility and transport networks, the following
factors are often important.

a. Space for Expansion: Companies always look forward for expansion. Initially the
company go on for a minimum level of output and always look for increasing the
productivity. If there is some constraint in this regard, it will force the company
to think.
b. Proximity to other industry: One big benefit of having conglomeration of various
supporting industry is that the resource can be shared. For example a big unit
having a good hotel in the vicinity would save the company from all logistic
liabilities.
 Location Models:

Various models are available which help identify a near ideal location. The most popular
of them are:

1. Factor Rating Method.

2. Point Rating Method.
3. Brake even Analysis .
4. Quantitative Factor Analysis.

FACTOR RATING METHOD:

In this method, factor rating are used to evaluate alternative location. The steps involved are:

o List the most relevant factors in the location decision.

o Rate each factor ( 1 to 5, 1 for very low and 5 for very high. Higher the rating
more important is the consideration).
o Rate each location according to its merits( 1 to 10, 1 for very low and 10 for very
high).
o Compute the product of ratings by multiplying the factor rating and location
rating.
o Compute the sum of the product rating
o Take decision by selecting the site which has scored the maximum rating.

Example: Table below, gives the various factors and the ratings. Let us calculate the product
rating and then arrive at the decision.

Factors Factor Location Location Product Product

Rating ratting A Rating B Rating A Rating B
Tax Advantage 4 8 6 32 24
Suitability of manpower 3 2 3 6 9
Proximity to customers 3 6 5 18 15
Proximity to Suppliers 5 2 4 10 20
Water Available 1 3 3 3 3
Receptivity of 5 4 3 20 15
Community
Quality of Educational 4 1 2 4 8
system
Access to rail & air 3 10 8 30 24
transportation
Suitability of Climate 2 7 9 14 18
Availability of Power 2 6 4 12 8
 Total Score 149 144

Hence the total score for Location A is higher than that of . Hence location A is the
choice.

POINT RATING METHOD:

In selecting a site or location, companies have several objectives, but all of not equal
importance. The relative, weight a company assigns to each objective or to each location factor
may be represented by the number of points a perfect site would receive in each category. The
site with highest total number of points is considered superior to other sites. The draw back of
this system is that high factor in one may compensate the low factor of some other objective,
thereby leading to a wrong decision. What is significant in the point system is the relative
importance of tangible cost factor compared to intangible factors.

Example:

After evaluating two potential sites A and B by comparing cost and finding them approximately
equal from cost point of view, a manufacturer decided to evaluate the intangible factors for
these two locations by point rating. Comparative rating assigned to major intangible location
factors to determine the relative importance for each factor and the points assigned to each
location alternative for each of the factors are given in the table below:

Factors Rated Max possible Points Points for Loc A Points for Loc B
Future availability of fuel 300 200 250
Transportation Flexibility and Growth 200 150 150
Adequate Water Supply 100 100 100
Labor Availability 250 220 200
Pollution regulation 30 20 20
Site topography 50 40 30
Living conditions 150 100 125
Total 830 875

From the above we see Location B scores higher point as compared to Location A.

LOCATION BREAK EVEN ANALYSIS:

In comparing several potential locations on an economic basis, only revenue and cost that need
to be considered are the ones that vary from one location to another. If revenue per unit is the
same, regardless of where the good are manufactured, the total revenues can be eliminated
from the consideration.

Example:

Potential locations A, B and C have the cost structure shown for producing a product expected
to sell at Rs 100 per unit. Find the most economic location for an expected volume of
production for which, each of the locations A, B and C would be most economical.

Location Fixed cost per year Variable cost per unit

A Rs 25,000 Rs 50
B Rs 50,000 Rs 25
C Rs 80,000 Rs 15

a) To determine the most economical location for an expected annual volume of

production of 2000 units, calculate the total cost of production.

Total Cost = FC+ Q*VC

Total cost for Loc A = 25000+ 2000*50= 1,25,000.00

Total cost for Loc B= 50000+ 2000*25= 1,00,000.00

Total cost for Loc C= 80,000+ 2000*15= 1,10,000.00

The inference is LOC B seems to be most economical unit.

B) To determine the range of annual volumes of production at which each of three locations
would become most economical , it is necessary to determine the break even volumes:

Let Q be break even between Location A and B

25000+ Q(AB)*50= 50000+ Q(AB)*25

Hence Q(AB)= 1000 units

To determine the break even qty between Loc B and C

50000 + Q(BC)* 25 = 80000 + Q(BC)*15

Q( BC) = 3000 units.

QUALITATIVE FACTOR ANALYSIS:

If economic criteria are not sufficiently influential to decide the location alternative, a system of
weighting the criteria might be useful in making a plant location decision. The steps are:

 Develop a list of relevant factors.

 Assign a weight to each factor to indicate its relative importance ( weights may be from
1-10).
 Assign a common scale to each factor( 1-100) and designate any minimum points to be
scored by any factor
 Score each potential location according to the designated scale and multiply the scores
by the weights to arrive at the weighted scores.
 Total the points for each location and choose the location with maximum points.

Example:

XYZ company is evaluating four locations for a new plant and has weighted the relevant scores
as given below. Scores have been assigned with higher values indicative of preferred conditions.
Using these, develop a qualitative factor comparison for the four locations.

Relevant Factors Assigned Loc A Loc B Loc C Loc D

Weights
Production Cost 0.35 50 40 60 30
Raw Material 0.25 70 80 80 60
Supply
Labor Availability 0.20 60 70 60 50
Cost of living 0.05 80 70 40 80
Environment 0.05 50 60 70 90
Markets 0.10 70 90 80 50
Total 1.00

Solution:

Relevant Factors Weighted Score Weighted Score Weighted Score Weighted Score
A A C D
Production Cost 17.5 14.0 21.0 10.5
Raw Material 17.5 20.0 20.0 15.0
Supply
Labor Availability 12 14.0 12.0 10.0
Cost of living 4 3.5 2.0 4.0
Environment 2.5 3.0 3.5 4.5
Markets 7.0 9.0 8.0 5.0
Total 60.5 63.5 66.5 49.0
Location C is preferred because of the highest weighted score.

Example:

A company is to decide on the location of a new plant. It has narrowed down the choice to 3
locations A, B and C: Data in respect of which is furnished below:

DATA Loc A Loc B Loc C

Wages & Salaries 20,000 20,000 20,000
Power & water 20,000 23,000 25,000
Expense
Raw Material & other 80,000 75,000 60,000
supplies
Total initial 2.0 Lacs 3.0 Lacs 2.5 Lacs
investment
Distribution Expense 50,000 40,000 60,000
Misc Expense 40,000 25,000 30,000
Expected Sales/year 2,25,000 2,50,000 2,25,000
in Rs

Use a suitable criterion and advise the company on the best choice;

Inference Loc A Loc B Loc C

Sales Revenue 2,25,000 2,50,000 2,25,000
Total Expense 2,10,000 1,90,000 1,95,000
Profit(sales-Exp) 15,000 60,000 30,000
Initial Investment =7.5%(15000/200000 20% 12%
)
Best ROI Loc B

Example

A company has to select one location out of the five alternatives considered for a new plant .
The annual operating costs and other intangible factors are given below for these five locations.

Factors Loc A Loc B Loc C Loc D Loc E

ECONOMIC
 FACTORS
Labor cost 1,20,000 1,10,000 1,60,000 85,000 75,000
Tptn Cost 10,000 8,000 7,000 12,000 14,000
Local Taxes 17,000 20,000 25,000 19,000 17,000
Power Cost 21,000 29,000 25,000 18,000 23,000
Other Cost 16,000 11,000 12,000 16,000 18,000
INTANGIBLE
FACTORS
Community Very Good Fair Good Fair Very Good
attitude
Labor Good Very Good Fair Outstanding Acceptable
Availability
Quality of Fair Acceptable Outstanding Acceptable Fair
Tptn
Quality of Life Acceptable Fair Good Very Good Outstanding

1) On the basis of annual operating costs, which site would you choose?
2) Devise a method of quantifying the intangible cost and integrate them with the cost
data into the overall evaluation. Which is best now?

On the basis of annual operating cost:

A B C D E
Total 1,84,000 1,78,000 2,29,000 1,50,000 1,47,000
operating
cost
Rank 4 3 5 2 1

Inference: Since the total annual operating cost is least at Location E, loc E is the best choice.

On the basis of overall evaluation:

To quantify the intangible factors , the qualitative factors are converted into quantitative
factors using a 5 point scale.

Grade Point
Outstandin 5
g
Very Good 4
Good 3
Fair 2
Acceptable 1
Quantifying the intangible factors, we have

Intangible A B C D E
Factors
Community 4 2 3 2 4
attitude
Labor 3 4 2 5 1
Availability
Quality of 2 1 5 1 2
Tptn
Quality of Life 1 2 3 4 5
Total Rating 10 9 13 12 12
Rank 3 4 1 2 2

To combine the economic factor with intangible factor rating, let us allot highest rating of say
10 for the location which has the lowest annual operating cost, hence for Location E= 10, and
for other location

Loc A = 10* 1, 47,000/1,84,000= 7.98

Loc B= 10* 1,47,000/1,78,000= 8.25

Loc C= 10*1,47,000/2,29,000= 6.41

Loc D= 10*1,47,000/1,50,000 = 9.80

Total Factor rating = Economic Rating + Intangible factor rating

Loc A= 7.98 + 10 = 17.98

Loc B= 8.25 + 9 = 17.25

Loc C= 6.41 + 13 = 19.41

Loc D= 9.80 + 12= 21.80

Loc E= 10.00+12= 22.00

Inference: Total factor rating of Location E being the highest, Location E is the
best choice.