Facility Location

Adapted from: Facilities Planning, Tompkins, White, Bozer, Frazelle, Tanchoco, Trevino, Wiley, New York, 1996

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Importance of Location
‡ Up to 25% of the product¶s selling cost ‡ Once a company commits to a location, many costs are fixed and difficult to change ‡ Energy ‡ Labor ‡ Location depends on the type of business ‡ Manufacturing ± minimizing cost ‡ Retail and professional services ± maximizing revenue ‡ Warehouse ± cost and speed of delivery
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In General - Location Decisions
‡ Long-term decisions ‡ Difficult to reverse ‡ Affect fixed & variable costs ‡ Transportation cost ‡ As much as 25% of product price ‡ Other costs: Taxes, wages, rent etc. ‡ Objective: Maximize benefit of location to firm

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Location Options
‡ Expand the existing facility instead of moving ‡ Maintain current sites while adding another facility ‡ Closing the existing facility and moving to another

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stability. energy ‡ Exchange rates Lamar University 5 . incentives ‡ Cultural and economic issues ‡ Location of markets ‡ Labor availability. costs ‡ Availability of supplies. communications. productivity. attitudes. attitudes.Factors The Affect Location Decisions Country Decisions ‡ Government rules.

climate. costs. taxes.Factors The Affect Location Decisions Region/Community Decisions ‡ Corporate desires ‡ Attractiveness of region (culture. etc«) ‡ Labor availability. attitudes towards unions ‡ Cost and availability of utilities ‡ Environmental regulations of state and town ‡ Government incentives ‡ Proximity to raw materials and customers ‡ Land/construction costs Lamar University 6 .

Factors The Affect Location Decisions Site Decisions ‡ Site size and cost ‡ Air. waterway systems ‡ Zoning restrictions ‡ Nearness of services/supplies needed ‡ Environmental impact issues Lamar University 7 . rail.

Location Decision Example . Lamar University 8 . BMW decided to build its first major manufacturing plant outside Germany in Spartanburg.BMW In 1992. South Carolina.

000-3000) Lamar University 9 .) vs. 31 (Germany) Other ‡ Lower shipping cost ($2. (U. $27 (Germany) ‡ Higher labor productivity ± 11 holidays (U.S.S.S.Location Decision Example ± BMW Country Decision Factors Market location ‡ U.) vs. is world¶s largest luxury car market ‡ Growing (baby boomers) Labor ‡ Lower manufacturing labor costs ± $17/hr.500/car less) ‡ New plant & equipment would increase productivity (lower cost/car $2.

000/yr (SC) vs.Location Decision Example ± BMW Region/Community Decision Factors Labor ‡ Lower wages in South Carolina (SC) ± About $17.051/yr (US) ‡ Based on 1993 metropolitan averages for all workers Government incentives ‡ $135 million in state & local tax breaks ‡ Free-trade zone from airport to plant ± No duties on imported components or on exported cars Lamar University 10 . $27.

accountants. lawyers. shopping malls ‡ Bakeries Services ‡ Doctors. barbers ‡ Banks. auto repair. supermarkets.Organizations That Need To Be Close to Markets Government agencies ‡ Police & fire departments ‡ Post Office Retail Sales and Service ‡ Fast food restaurants. gas stations ‡ Drug stores. motels Lamar University 11 .

S. 1997 .2001 1 Netherlands 2 Britain 3 Canada 4 Singapore 5 U.Ranking of the Business Environment in 20 Countries. 6 Denmark 7 Germany 8 France 9 Switzerland 10 Sweden 11 Finland 12 Belgium 13 New Zealand 14 Hong Kong 15 Austria 16 Australia 17 Norway 18 Ireland 19 Italy 20 Chile Lamar University 12 .

The Mexican plant pays $25 per day with a productivity of 20 units per day: ‡ Labor cost per day/Productivity (units per day) = Cost per unit Lamar University 13 .Labor Productivity ‡ Low wage rates often heavily influence location choices ‡ What about productivity? ‡ Example: ‡ Company Q pays $70 per day with 60 units produced per day in Texas.

or poor work habits may not be a good buy even at low wages. poor education.Labor Productivity .17 per unit ‡ Case 2: Mexican Plant ‡ $25 per day/20 units per day = $25/20 = $1.25 per unit ‡ Lesson: Employees with poor training. The Mexican plant pays $25 per day with a productivity of 20 units per day: ‡ Labor cost per day/Productivity (units per day) = Cost per unit ‡ Case 1: Texas Plant ‡ $70 per day/60 units per day = $70/60 = $1. Lamar University 14 .Example: ‡ Company Q pays $70 per day with 60 units produced per day in Texas.

Intangible ‡ Tangible costs ± those that are readily identifiable and precisely measured ± Utilities ± Labor ± Material ± Taxes ± Depreciation ± Other costs that accounting can easily identify ‡ Intangible costs ± not easily quantifiable ± Quality of education ± Public transportation facilities ± Community attitudes toward the industry and the company ± Quality and attitude of prospective employees ± Climate Lamar University 15 .Costs: Tangible Vs.

Proximity To Markets ‡ Service organizations (drug stores. post offices) find proximity to market is the primary location factor ‡ Manufacturing ± useful to be close to customers when transporting finished goods is expensive or difficult Lamar University 16 . restaurants.

Proximity To Suppliers Firms locate near their raw materials and suppliers because: ‡ Perishability ‡ Transportation costs ‡ Bulk Lamar University 17 .

often because of a critical mass of information. ventire capital. or natural resources Lamar University 18 .Proximity To Competitors Clustering ± the location of competing companies near each other. talent.

Location Evaluation Methods ‡ Factor-rating method ‡ Locational break-even analysis ‡ Center of gravity method ‡ Transportation model Lamar University 19 .

labor skills ± Tangible (quantitative) factors ‡ Example: Short-run & long-run costs Lamar University 20 .Factor-Rating Method ‡ Most widely used location technique ‡ Useful for service & industrial locations ‡ Rates locations using factors ± Intangible (qualitative) factors ‡ Example: Education quality.

taxes. electric. water. productivity) ‡ Labor availability (including attitudes. and their costs) Lamar University 21 . unemployment compensation) ‡ Utilities (including gas. and skills) ‡ Proximity to raw materials and suppliers ‡ Proximity to markets ‡ State and local government fiscal policies (including incentives. distribution. age. unionization.Factors Affecting Location Selection ‡ Labor costs (including wages.

religious facilities) ‡ Foreign exchange Including rates and stability ‡ Quality of government (including stability. sports. cost of living. water.continued ‡ Site costs (including land. cultural activities. expansion.Factors Affecting Location Selection . health care. attitudes toward new business . housing. parking. entertainment. transportation. honesty. air.whether overseas or local) Lamar University 22 . and interstate roads) ‡ Quality-of-life issues (including all levels of education. drainage) ‡ Transportation availability (including rail.

Steps in Factor Rating Method ‡ State relevant factors in terms of ³max´ or ³min´ ‡ Assign weights to each factor (should add to 100%) ‡ Assign rating to each factor (1-5) (1=poor. 5=excellent) ‡ Multiply scores by weights for each factor & total ‡ Calculate percent of total ‡ Compare top 2 alternatives (using percent as a basis of comparison) Lamar University 23 .

Steps in Factor Rating Method Alternative A Factor Min. Payback period Total Percent Weight 20 Rating 4 Score 80 Alternative B Rating 3 Score 60 30 10 40 3 3 1 90 30 40 240 240/330 = .7272 2 5 4 60 50 160 330 330/330 = 1. Operating Cost Max. Flexibility Max. Space utilization Min.00 Lamar University 24 .

Locational Break-Even Analysis ‡ Method of cost-volume analysis used for industrial locations ‡ Steps ± Determine fixed & variable costs for each location ± Plot total cost for each location ± Select location with lowest total cost for expected production volume ‡ Must be above break-even Lamar University 25 .

‡ Fixed costs per year are $30k. $45. Bowling Green. $60k. ‡ Variable costs per case are $75. or Chicago. & $110k respectively.Locational Break-Even Analysis Example ‡ You¶re an analyst for AC Delco. You¶re considering a new manufacturing plant in Akron. & $25 respectively. ‡ What is the best location for an expected volume of 2. ‡ The price per case is $120.000 cases per year? Lamar University 26 .

000 ‡ With an expected volume of 2000 units per year.$150.000 + $25(2000) = $160.000 per year Lamar University 27 .000 + $75(2000) = $180.000 + $45(2000) = $150. The expected profit is: ‡ Total Revenue ± Total Cost = $120(2000) . Bowling Green provides the lowest cost location.000 Bowling Green: ‡ Total Cost = $60.000 Chicago: ‡ Total Cost = $110.000 = $90.Locational Break-Even Analysis Example Akron: ‡ Total cost = $30.

000 + 45(x) 30(x) = 30.Locational Break-Even Analysis Example The crossover point for Akron and Bowling Green: 30.500 Thus.000 X = 2.000 + 25(x) 20(x) = 50. Akron would be preferred.000.500.000 + 75(x) = 60. Lamar University 28 .000 + 45(x) = 110.000 And the crossover point or Bowling Green and Chicago: 60. Chicago would yield the greatest profit. for a volume o less than 1.000 X = 1. and for a volume greater than 2.

Locational Break-Even Analysis Example Lamar University 29 .

± Volume to be shipped ± Shipping distance (or cost) ‡ Shipping cost/unit/mile is constant Lamar University 30 . retailers etc.Center of Gravity Method ‡ Finds location of single distribution center serving several destinations ‡ Used primarily for services ‡ Considers ± Location of existing destinations ‡ Example: Markets.

Center of Gravity Method Steps ‡ Place existing locations on a coordinate grid ± Grid has arbitrary origin & scale ± Maintains relative distances ‡ Calculate X & Y coordinates for µcenter of gravity¶ ± Gives location of distribution center ± Minimizes transportation cost Lamar University 31 .

Center of Gravity Method Steps Lamar University 32 .

The firm¶s store locations are in Chicago. New York. they are currently being supplied out of an old and inadequate warehouse in Pittsburgh. Pittsburgh. and Atlanta. Store Location Chicago Pittsburgh New York Atlanta Number of containers shipped pre month 2000 1000 1000 2000 Lamar University 33 . the site of the chain¶s first store.Center of Gravity Method . a chain o four large K-Mart type outlets.Example ‡ Consider the case of Ryan¶s discount Department stores.

110) New York (130. 93.Example Chicago (30.Center of Gravity Method .130) 90 Center of gravity (66.3) 60 30 30 Atlanta (60.7.40) 60 90 120 150 Lamar University 34 .120) 120 Pittsburgh (90.

3 35 Lamar University .Example X-coordinate of the center of gravity: = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) 2000 + 1000 + 1000 + 2000 = 400.000/6000 =66.000/6000 =93.7 Y-coordinate of the center of gravity: = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) 2000 + 1000 + 1000 + 2000 = 560.Center of Gravity Method .

Transportation Model ‡ Finds amount to be shipped from several sources to several destinations ‡ Used primarily for industrial locations ‡ Type of linear programming model ± Objective: Minimize total production & shipping costs ± Constraints ‡ Production capacity at source (factory) ‡ Demand requirement at destination Lamar University 36 .

Purchasing power of customer drawing area 2. Uniqueness of the firm¶s and competitor¶s locations 6. Quality of the competition 5. Quality of management Lamar University 37 . Competition in the area 4. Operating policies of the firm 8. Physical qualities of facilities and neighboring businesses 7. Service and image compatibility with demographics of the customer drawing area 3.Components of Volume and Revenue for a Service Firm 1.

security/ lighting. advertising/pricing ‡ Physical quality ± Parking/access. wage rates) Lamar University 38 .Location Strategies ± Service vs. Industrial Service/Retail/Professional Revenue Focus ‡ Volume/revenue ± Drawing area. appearance/image ‡ Cost determinants ± Rent ± Management caliber ± Operations policies (hours. purchasing power ± Competition.

raw material. Industrial Industrial Revenue Focus ‡ Tangible costs ± Transportation cost of raw materials ± Shipment cost of finished goods ± Energy and utility cost. etc.Location Strategies ± Service vs. taxes. ‡ Intangible and future costs ± Attitude toward union ± Quality of life ± Education expenditures by state ± Quality of state and local government Lamar University 39 . labor.

therefore.Location Strategies ± Service vs. revenue function is critical Lamar University 40 . Industrial Service/Retail/Professional Techniques ‡ Correlation analysis to determine importance of factors for a particular type of operation ‡ Traffic counts ‡ Demographic analysis of drawing area ‡ Purchasing power analysis of drawing area Assumptions ‡ Location is a major determinate of revenue ‡ Issues manifesting from high customer contact dominate ‡ Costs are relatively constant for a given area.

Industrial Industrial Techniques ‡ Linear Programming (Transportation method) ‡ Weighted approach to intangibles ‡ Breakeven analysis ‡ Crossover charts Assumptions ‡ Location is a major determinate of cost ‡ Most major costs can be identified explicitly for each site ‡ Low customer contact allows focus on costs ‡ Intangible costs can be objectively evaluated Lamar University 41 .Location Strategies ± Service vs.

Major Methods of Solving Location Problems ‡ Weighted methods which: ± Assign weights and points to various factors ± Determine tangible costs ± Investigate intangible costs ‡ Center of Gravity Method ± Find best distribution center location ‡ Location breakeven methods ± Special case of breakeven analysis ‡ Transportation method ± A specialized linear programming method Lamar University 42 .

Telemarketing and Internet Industries ‡ Require neither face-to-face contact with customers (or employees) nor movement of material ‡ Presents a whole new perspective on the location problem Lamar University 43 .

Telemarketing and Internet Industries ‡ Require neither face-to-face contact with customers (or employees) nor movement of material ‡ Presents a whole new perspective on the location problem Lamar University 44 .

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