Facility Location

Learning Objectives
U shd. be able to Identify or Define: Objective of location strategy
International location issues
Clustering Geographic information systems

3 methods of solving the location problem

Factor-rating method Locational breakeven analysis Center-of-gravity method

Problems

Problems

Facility set up without proper location planning

Problems

Problems

Relocate facility to a new location

Continue operations at the existing location

Sell off the facility to other companies (Divestment)

Close down the operations completely and liquidate the assets

Operations Strategies with Multiple Facilities

1. Separate facilities for different products/ services 2. Separate facilities geographical areas to serve different

3. Separate facilities for different processes in the manufacture of a product or in providing a service

REASONS FOR LOCATION CHANGES

Different situations for location change could be (i) a new plant is just being

started, (ii) a new branch of an existing plant is to be located, or (iii) a new location for an existing plant is being sought.
In addition to the need for greater capacity, there are other reasons for changing or adding locations: Changes in resources may occur. The cost or availability of labor, raw materials, and supporting resources (such as subcontractors) may change. The geography of demand may shift. As product markets change, it may be desirable to change facility location to provide better service to customers. Some companies may merge, making facilities location redundant.

New products may be introduced, changing the availability of resources and markets. Political and economic conditions may change.

GENERAL PROCEDURES FOR FACILITY LOCATION

Preliminary Screening --Sources of Information (Chambers of commerce) --Detailed Analysis Selection of exact site Transportation facilities ---Availability of water, power, gas and sewerage ---Soil characteristics----Drainage----Parking space Space for expansion----Accessibility by workers Cost of land----Existing buildings

Location Decision Process

Facility Location is typically conducted hierarchically and involves the following basic decisions where appropriate .
1)Global Location 2)Regional Location 3)District or community Location 4)Local Site Selection

Behavioral impact in facility Location

Cultural Differences Job Satisfaction Consumer Considerations

GENERAL FACTORS INFLUENCING LOCATION

Proximity to Good Highways Abundant Labor Supply Proximity to Markets Availability of Suitable Land and Land Cost Adequate Water Supply Nearness to Raw Materials and Suppliers Nearness to an Existing Plant Transportation Power SupplyClimate Water Disposal and Pollution---Taxes

Factors that Affect Location Decisions

Regional Factors Location of Raw Materials (necessity, perishability, and transportation costs) Location of Markets (locate near the markets, distribution costs, the perishability of a finished product, GIS) Labor Factors (cost and availability of labor, wage rates in an area, labor productivity and attitudes toward work, and unions) Climate and Taxes

Factors in Facility Location Planning

Availability of power supply

Good transportation facilities

Basic amenitie s

Close Proximity to the raw material

Government policies

Close Proximit y to Markets

Facility Locatio n Plannin g

Environment and community

Residential complexes, schools, hospitals, clubs, etc. Availability of cheap & skillful labor Easy availability of cheap land

Proximity to subcontractors

Less construction costs

Your plant / facility may be .

Near the Raw Material sources (Steel, Cement Plants ) Volume Compression Ratio (Higher the ratio, nearer to RM source)

Near to Market / Customers

(FMCG, Perishables Goods, Services) Better facilities & infrastructure

(MIDC, Union Territories, SEZs, FTZs)

Country Factors
1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor availability, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks

Region / Community Factors

1. Corporate desires 2. Attractiveness of region
MN WI MI IL IN OH

3. Labor availability, costs, attitudes towards unions

4. Costs and availability of utilities 5. Environmental regulations 6. Government incentives and fiscal policies 7. Proximity to raw materials and customers 8. Land/construction costs

Site Factors
1. Site size and cost 2. Air, rail, highway, and waterway systems 3. Zoning restrictions

4. Nearness of services/
supplies needed 5. Environmental impact

issues

Factors in International Location Planning

Trade barriers
International customers

Offensive in competitors home country

Power & prestige

International competition

Synergy

International Facility Location Planning

Regulations

Economies of scale

Additional resources

Exploitation of firm specific advantages

Low costs Incentives

Approach to Location
Profit maximization (Service industry)

Cost minimization (Manufacturing)

Approach to Location
Service/Retail Location Revenue Focus
Volume/revenue
Drawing area; purchasing power Competition; advertising/pricing

Goods Mfg. Location Cost Focus

Tangible costs
Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; Raw material; taxes, and so on

Physical quality
Parking, Access; Security, Lighting; Appearance, Image

Intangible and future costs

Attitude toward union Quality of life Education expenditures by state Quality of state and local government

Cost determinants
Rent, Management calibre Operations policies (hours, wage rates)

Approach to Location
Service/Retail/Prof. Locn. Goods-mfg. Location

Techniques
Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of area

Techniques
Transportation methods

Factor-rating method
Locational break-even
analysis Crossover charts

Center-of-gravity method
Geographic information systems

Clustering
Industry
Wine makers Software firms

Locations
Napa Valley (US); Bordeaux region (France) Silicon Valley, Boston, Bangalore (India) Northern Mexico Singapore, Taiwan

Reason for clustering

Natural resources Land, Climate Talent resources of bright grads. in Sc./tech. areas, venture capitalists nearby Duty free export zones High tech penetration rate, Skilled/educated workforce with large pool of engineers

Electronic firms Computer hardware manufacturers

Location Decision Process

Facility Location is typically conducted hierarchically and involves the following basic decisions where appropriate .
1)Global Location 2)Regional Location 3)District or community Location 4)Local Site Selection

Cost Volume Break even Analysis of Location

Revenues and costs are affected by facility location .Break even analysis helps relate costs and revenues to facility location .Revenue minus total cost at each location . 1)Estimate the fixed and variable cost associated with each location 2)Graph them for a representative volume 3)If revenues vary from one location to another ,the comparison should be made on the basis of total Revenue minus total cost at each location

Different breakeven volumes for four location options for different FC and VC values

TC

Cost/ Revenue (Rs)

VC (High)

Cost/ Revenue (Rs)

FC (Low) VBE Volume of Production (units) VBE Volume of Production (units)

Location 1
TR

Location 2

TC Cost/ Revenue (Rs)

VC (Low)

Cost/ Revenue (Rs)

FC (High)

VBE Volume of Production (units)

VBE Volume of Production (units)

Location 3

Location 4

TC[(X) DS, EXP+ (Y)DS]

TR

TC[(X) DS, EXP + (Y)]

FC (Y)

TCDS, EXP (X)

Cost/ Revenue (Rs)

FC (X)EXP TCDS (X)

Break-even analysis for a facility experiencing very high demand increasing at a high rate

TC (X)

FC (X)

VBE (X)

VMAX (X)

VMAX (X)DS

VMAX (X)DS,
EXP

VBE [(X)DS, EXP+(Y)]

VMAX [(X)DS, EXP+(Y)] VMAX [(X)DS, EXP+(Y)DS]

Volume of Production (units)

Fixed Costs and Variable costs

In economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. In management accounting, fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period. For example, a retailer must pay rent and utility bills irrespective of sales.

The Effect of Location on Fixed Costs

New or additional facilities entail fixed Costs . Normally Fixed costs are incurred only once . To be recovered from revenues over a period of Time New facilities involve costs for new construction ,purchase ,renovation . Once acquired more money is spent on fixtures and equipments . The magnitude of these costs depend on the Location .

The Effect of Location on Revenues

In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Facilities location affects the revenue in both Goods and Services industry . Delivery Time and distance plays a crucial role in revenue Generation

Reasons for Location Changes

Changes in resources may occur .The cost or availability of labor ,raw materials and supporting resources (Such as sub contractors)may change . The geography of demand may change Companies may merge ,making facilities redundant New products may be introduced ,changing the availability of resources and markets Political and economic conditions may change

Labour and Demand factors

Labor supply Labor management Relations Ability to retain Labor force Availability of adequate labor skills Labor rates Location of competitors

Volume of traffic around location .

Climate and Environment factors

Climate and Living conditions School facilities Universities and research facilities Community attitudes Health care facilities Property costs Cost of Living

State and Local Legal and Political Factors

Taxation climate and Policies Local and Tax structures Opportunity for highway advertising Tax incentives and Abatements Health and safety laws

Regulatory agencies and policies .

Utilities Factor
Adequate water supply Waste Disposal Power supply Fuel Availability Communications Capability Price/Cost

Utility Regulatory Laws and Practices .

Transportation Factors

Closeness to sources of supply Closeness to markets Adequacy of transportation modes (Air,truck,train ,water) Costs of transportation Visibility of the facility from the highway Parking Capability Response time for emergency services .

Methods Of Evaluating Location Alternatives

1. 2. 3. 4.

The Factor-Rating Method Locational Break-Even Analysis Center-of-Gravity Method The Transportation Method

Factors Ratings
Factor ratings are used to evaluate location alternatives because (i) their simplicity helps decide why one site is better than another; (ii) they enable managers to bring diverse locational considerations into the evaluation process; and (iii) they foster consistency of judgement about location alternatives. The following steps are involved in factor rating: Develop a list of relevant factors. Assign a weight to each factor to indicate its relative importance (weights may total 1.00). Assign a common scale to each factor (e.g., 0 to 100 points), and designate any minimums. Score each potential location according to the designated scale, and multiply the scores by the weights.

Example
A Automobile manufacturing company intends to open a new facility . The following table contains information on two potential locations. Which is the better alternative?

Factor-Rating Example
Critical Success Factor
Labor availability and attitude People-to car ratio Per capita income Tax structure Education and health Totals

Weight

Scores (out of 100) Sanand Singur

Weighted Scores Sanand Singur

.25
.05 .10 .39 .21 1.00

70
50 85 75 60

60
60 80 70 70

Factor-Rating Example
Critical Success Factor
Labor availability and attitude People-to car ratio Per capita income Tax structure Education and health Totals

Weight

Scores (out of 100) Sanand Singur

Weighted Scores Sanand Singur

.25
.05 .10 .39 .21 1.00

70
50 85 75 60

60
60 80 70 70

(.25)(70) = 17.5
(.05)(50) = 2.5 (.10)(85) = 8.5 (.39)(75) = 29.3 (.21)(60) = 12.6 70.4

(.25)(60) = 15.0
(.05)(60) = 3.0 (.10)(80) = 8.0 (.39)(70) = 27.3 (.21)(70) = 14.7 68.0

Center-of-Gravity Method Place existing locations on a coordinate grid

Grid origin and scale is arbitrary Maintain relative distances

Calculate X and Y coordinates for center of gravity

Assumes cost is directly proportional to distance and volume shipped

Centre of Gravity Method

The Center of gravity Method determines X and Y Coordinates (Location ) for a single facility . 1. 2. Place the locations to be supported on a coordinate system (like a graph). Calculate the center of gravity:

Cx = Xi Wi / Wi

& Cy = Yi Wi / Wi

Where: Cx =x coordinate of the center of Gravity Cy=y coordinate of the center of Gravity

xi = x-coordinate of location i. yi = y-coordinate of location i. Wi= quantity (load) of goods moved to/from location i.

Centre of Gravity Method Problem

Retail Outlets
A B C D E F G Total Demand

Expected Demand
80 100 120 130 100 150 90 770

Q. : Where should we set up a centralized warehousing facility?

Centre of Gravity Method

16 14 12 10
Y-Distance (KM)

B G

A Center-of-gravity C F

8 6 4

2
0 4 8

12

16

20

X- Distance (KM)

Centre of Gravity Method

Retail Outlet
A B C D E

Xi Yi Dist Volume Dist (Vi) QTY

4 3.5 4 10 16 10 15 6 2 6 80 100 120 130 100

Vi Xi
320 350 480 1300 1600

Vi Yi
800 1500 720 260 600

F
G

8
14

5
13

150
90

1200
1260

750
1170

Vi = 770

Vi Xi = 6510 Xc=6510/770 = 8.45

Vi Yi = 5800 Yc = 5800 /770 = 7.53

Break Even method

Cost-volume analysis method used for industrial locations 3 Steps in the method 1. Determine fixed and variable costs for each location

2. Plot the cost for each location

3. Select location with lowest total cost for expected production volume

Cost-Volume-Profit (or Br. Even Analysis)

Revenue

TCA

FCA

Cost

VCA

Vo Volume of Sales

Break Even Analysis Method

Location A : Annual fixed costs of Rs.3 L, Variable Costs - Rs. 63 / unit, Revenues Rs. 68 per unit. Location B : Annual fixed costs Rs. 8 L Variable costs Rs. 32 per unit, Revenues are Rs. 68 per unit. Exp. Sales volume 25000 units per year. Which location is more attractive?

Answer -Break Even Analysis Method

B E Volume = Fixed cost / (Contribution / unit) VBE (A) = Rs 3 L / 68-63 = 60,000 units VBE (B) = Rs 8 L / 68-32 = 22,222 units At the expected demand of 25000 units, A B Revenue 17,00,000 17,00,000 Variable Cost Fixed Cost Total Cost Profit (Loss) 15,75,000 3,00,000 18,75,000 (1,75,000) 8,00,000 8,00,000 16,00,000 1,00,000

Location B is more attractive, even if annual fixed cost is higher

Service Location Strategy

1. Purchasing power of customer-drawing area 2. Service and image compatibility with demographics of the customer-drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firms and competitors locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management