Facility Planning

Facility Location is the right location for the manufacturing facility, it will have
sufficient access to the customers, workers, transportation, etc. For commercial
success, and competitive advantage following are the critical factors:

Customer Proximity: Facility locations are selected closer to the customer as to

reduce transportation cost and decrease time in reaching the customer.

Business Area: Presence of other similar manufacturing units around makes

business area conducive for facility establishment.

Availability of Skill Labor: Education, experience and skill of available labor are
another important, which determines facility location.

Free Trade Zone/Agreement: Free-trade zones promote the establishment of

manufacturing facility by providing incentives in custom duties and levies. On
another hand free trade agreement is among countries providing an incentive to
establish business, in particular, country.

Suppliers: Continuous and quality supply of the raw materials is another critical
factor in determining the location of manufacturing facility.

Environmental Policy: In current globalized world pollution, control is very

important, therefore understanding of environmental policy for the facility location
is another critical factor.

Cost-Profit Volume Analysis

The economic comparison of location alternative is facilitated by the use of cost-
profit volume analysis. The analysis can be done numerical or graphically. The
process for location cost-volume analysis involves following steps:
(i) Determine the fixed and variable costs associated with location
alternatives.
(ii) Plot the total-cost lines for all location alternatives on the same graph.
(iii) Determine which location will have the lowest cost for expected level of
output. Alternatively, determine which location will have the highest
profit.
For a cost analysis, compute the total cost for each location:
 Total cost = Fixed cost + variable cost per unit x quantity (or volume)
The Center of Gravity Method
The center of gravity is a method to determine the location of a facility that will
minimize shipping cost or travel time to various destinations. For example,
community planners use the method to determine the location of fire and the public
safety centers, school, community centers, and such taking into consideration
location of hospitals, population density, high ways, airports and retail businesses.
The center of gravity method is also used for distribution centers, where the goal is
to minimize the distribution cost. The formula is as follows:
∑ x i Qi
x c=
∑ Qi
yc=
∑ y i Qi
∑ Qi Where xc and yc are co=ordinates for center of gravity. Qi
quantity to be shipped, xi and yi are x and y co-ordinates for destination i.
Examples Cost-profit Volume Analysis
Example 1
A manufacturer of automobile carburetors is considering three locations A, B and
C for a new plant. Cost studies indicate that fixed costs per year at the sites are
$30,000, $60,000 and $110,000 respectively; and variable costs are $75 per unit,
$45 per unit and $25 respectively. The expected selling price of the carburetors
produced is $120. The company wishes to find the most economical location for an
expected volume of 2,000 units. Also find the profit at each location.
Solution
Revenue = Units price x units produced = 120x2000= $240,000
Locatio Fixed cost Variable Variable cost ($) Total cost Profit ($)
n ($) Unit ($)
cost($)
A 30,000 75 150,000 180,000 60,000
B 60,000 45 90,000 150,000 90,000
C 110,000 25 50,000 160,000 80,000

Note: ‘B’ is the best location,

Example 2
A newly formed firm must decide on a plant location. There are two alternatives
under consideration; locate near the major raw material or locate the major
customers. Locating near the raw materials will result in lowers fixed cost and
variable costs than locating the near the market, but the owner believes there will
be a loss in sales volume because customers tend favor local suppliers. Revenue
per unit will be $185 in either case. Using the following information, determine
which location would produce the greater profit.
Solution
A B
Annual fixed costs ($M) 1.2 1.4
Variable costs per unit 36 47
($)
Expected annual demand 8,000 12,000
(units)

Total cost location ‘A’= 1.2x 100000+36x8000= $1,488,000

Total cost location ‘B’ = 1.4x100000 + 47x12000=$1,964,000
Revenue location ‘A’ -185x8000 = $1,480,000
Revenue location ‘B’ = 185x12000= $2,220,000
Profit or loss location ‘A’ = 1,488,000-14880000=$(8,000) ……. Loss
Profit location ‘B’ = 2,220,000-1,964,000=$256,0000
Examples location planning (Center of gravity method)
Example 1
A clothing manufacturer produces women’s clothes at 4 firms in Mexico. Relative
locations have been determined, as shown in the table. The location of a central
shipping point is to be determined.
 Location Co-ordinates Quantity
A 5,7 15
B 6,9 20
C 3,9 25
D 9,4 30

Solution

x c=
∑ x i Qi
∑ Qi
5 x 15+6 x 20+3 x 25+9 x 30
=
15+20+25+30 =6

yc =
∑ y i Qi = 7 x 15+9 x 20+9 x 25+ 4 x 30 =7
∑ Qi 90

Example1
10
9
8
7
6
5
4
3
2
1
0
2 3 4 5 6 7 8 9 10
Example 2
The co-ordinate and loads of 3 locations are given in the table. Determine the
center of gravity,
Location Co-ordinate Load (W)
A 14,37 54
B 49,26 32
C 21,23 17

Solution
14 x 54+49 x 32+21 x 17 2681
x c= = =26
54 +32+17 103
37 x 54+26 x 32+23 x 17 3221
yc = = =31 . 27
103 103

Example 2 (cg)
40

35

30

25

20

15

10

0
10 15 20 25 30 35 40 45 50 55
Example 3
The co-ordinate and loads of 3 locations are given in the table. Determine the
center of gravity,
Location Co-ordinate Load
A 11,22 15
B 10,7 10
C 4,1 12
D 3,6 4

Solution
11 x 15+10 x 10+4 x 12+3 x 4 325
x c= = =7 . 9
15+10+12+4 41

22 x 15+7 x 10+1 x 12+6 x 4 436

yc = = =10 . 36
41 41

Example 3 (cg)
25

20

15

10

0
2 3 4 5 6 7 8 9 10 11 12