Operation Management

Facilities Location

Prepared By: Dr. Solomon Getachew

 Facilities Location
It is the process of determining the best geographic sites for the firm’s operations.

Expense due to transport: Transport cost  25% revenue

• Can reduce up to 50% expense

Reduce operating cost and capital investment

Effective plant layout
Coordinating with government policies
Employee Security, welfare and public needs
Time based competitiveness due to closeness, trade agreement and shipping cost.

• Fulfilling our resource demand

Need for selecting a suitable site or location
While starting a new factory

During expansion

During relocation due to changes demand and supply, for example shifts in
demographics.

Expiry of lease and the non renewal

• In general, an operation should only change its location if the benefits of moving
outweigh the costs of operating in the new location plus the cost of moving.
 Location Decisions features
 Long-term decisions and made infrequently.

 Once committed to a location, many resource and cost issues are difficult to change

 Decision greatly affects both fixed and variable costs??

 The objective is to maximize the benefit of location to the firm

 Location has a major impact on the overall risk and profit of the company.
 Location and Costs
 Once in place, location-related costs are fixed in place and difficult
to reduce

 Determining optimal facility location is a good investment

 Location decisions based on low cost require careful consideration

 Cost is not always the most important aspect of a strategic

decision. Why?
 Location and Innovation
Four key attributes when strategy is based on innovation

 High-quality and specialized inputs

 An environment that encourages investment and local rivalry

 A sophisticated local market

 Local presence of related and supporting industries

 Steps in Location Decisions
In /out of country  Regional Community Exact Site decision.
 2. Location Decisions: Country Decision: CSF
1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues Ethiopia, China and US

3. Location of markets

4. Labor talent, attitudes, productivity, costs

5. Availability of supplies, communications, energy

6. Exchange rates and currency risks

 Location Decisions: Region CSF
1. Corporate desires

2. Attractiveness of the region

3. Labor availability, costs, attitudes towards unions

4. Costs and availability of utilities, Land/construction costs

5. Environmental regulations:

6. Government incentives and fiscal policies: Industry zone

7. Proximity to raw materials and customers

 Location Decisions: Site Decision CSF

1. Site size and cost

2. Air, rail, highway, and waterway systems

3. Zoning restrictions

4. Proximity of services/ supplies needed

5. Environmental impact issues

3. Factors That Affect Location Decisions

 Labor productivity
 Wage rates are not the only cost
 Lower production may increase total cost

Labor cost per day

= Cost per unit
Production (units per day)

Country A Country B

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units
 Factors That Affect Location Decisions
 Exchange rates and currency risks
 Can have a significant impact on cost structure

 Rates change over time

 Costs
 Tangible - easily measured costs such as utilities, labor, materials, taxes

 Intangible - less easy to quantify and include education, public

transportation, community, quality-of-life
 Factors That Affect Location Decisions

 Political risk, values, and culture

 National, state, local governments attitudes toward private

and intellectual property, zoning, pollution…

 Worker attitudes towards turnover, unions, absenteeism

 Globally cultures have different attitudes towards

punctuality, legal, and ethical issues
 Factors That Affect Location Decisions
 Proximity to markets

 Very important to services: why this is so?

 JIT systems or high transportation costs may make it important to manufacturers

 Good responsiveness for the need of customers and fast delivery

 Proximity to suppliers

 Perishable goods, high transportation costs, bulky products

 Proximity to competitors???

 Often driven by resources such as natural, information, capital, talent

 Factors That Affect Location Decisions
The location decision often depends on the type of business. ???

 Heavy manufacturing facilities: Large, require space, expensive

 Light industry facilities: Smaller , cleaner plants , less costly

 Retail and service facilities: Smallest and least costly

Methods of Evaluating Location Alternatives

1. Factor Rating
2. Load Distance Method
3. Breakeven Analysis
4. Load Distance Method
5. Transportation Model
 4. Methods of Evaluating Location Alternatives
Factor-Rating Method
1. Identify the important location factors called critical success factors

2. Assign a weight to each factor according to relative importance

3. Assign each location according to the merits of the location for each factor.

4. Calculate the rating for each location by multiplying factor assigned to each
location with basic factors considered.

5. Find the sum of product calculated for each factor and select best location having
highest total score.
Dessie, AA and Diredawa
 4. Methods of Evaluating Location Alternatives
Example: Let us assume that a new medical facility, Health-care, is to be located in
Oromia. The location factors, factor rating and scores for two potential sites are shown in
the following table. Which is the best location based on factor rating method?
 4. Methods of Evaluating Location Alternatives

The total score for location 2 is higher than that of location 1. Hence location 2, is the best
choice.
 Factor-Rating Example
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark

Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to-
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7

Totals 1.00 70.4 68.0

Factor-Rating Example
 Load Distance Method
The load-distance method is a mathematical model used to evaluate locations based on
proximity factors. The objective is to select a location that minimizes the total weighted loads
moving into and out of the facility.
 Locational Break-Even Analysis

 Method of cost-volume analysis used for industrial locations

 Three 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
 Locational Break-Even Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units

Fixed Variable Total

City Cost Cost Cost

Jimma $30,000 $75 $180,000

Dessie $60,000 $45 $150,000
AA $110,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

 Locational Break-Even Analysis Example
Total Cost = Fixed Cost + (Variable Cost x Volume)
 Center-of-Gravity Method
 Finds location of distribution center that minimizes distribution/
transportation costs

 Considers

 Location of markets

 Volume of goods shipped to those markets

 Shipping cost (or distance)

 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
 Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –

60 –

30 –
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
 Center-of-Gravity Method
Number of Containers
Store Location Shipped per Month
Chicago (30, 120) 2,000
Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7

(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
 Center-of-Gravity Method

North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Example
Return on Investment
 Transportation Model
It is a special type of LPP where the objective is to minimize the cost of distributing a product
from a number of sources or origins to a number of destinations.

The problem of finding the minimum-cost distribution of a given commodity

Solving TP has two phases

Phase I- obtains the initial basic feasible solution Phase II-obtains the optimal basic solution
• U-V method
• Northwest corner cell method
• Least cost cell method
• Vam
 Example

Example: Find the initial basic feasible solution of the following transportation problem
by northwest –corner cell method and then optimize the solutions using U.V method.

Supply Demand D1 D2 D3 D4 Capacity

200 S1 3 1 7 4 250
250
S2 2 6 5 9 350
300
350 S3 8 3 3 2 400
350
Demand 200 300 350 150 1000
400

150
Using northwest –corner cell method that is min( D1, S1)= min (200, 250)=200 & * is the northwest corner cell.
D1 D2 D3 D4 Capacity D1 D2 D3 D4 C D1 D2 D3 D4 C
S1 * 250 S1 200 50 S1 200 * 50
S2 350 S2 350 S2 350
S3 400 S3 400 S3 400
Demand 200 300 350 150 1000 D 0 300 350 150 1000 D 0 300 350 150 1000

D1 D2 D3 D4 C D1 D2 D3 D4 C D1 D2 D3 D4 C
S1 200 50 0 S1 200 50 0 S1 200 50 0
S2 * 350 S2 250 * 100 S2 250 100 0
S3 400 S3 400 S3 * 400
D 0 250 350 150 1000 D 0 0 350 150 1000 D 0 0 250 150 1000

D1 D2 D3 D4 C D1 D2 D3 D4 C The final initial basic feasible solutions

S1 200 50 0 S1 200 50 0
T. cost=200X3+50X1+250X6+100X5+250X3+150X2
S2 250 100 0 S2 250 100 0
Total cost = 3700
S3 250 * 150 S3 250 150 0
D 0 0 0 150 1000 D 0 0 0 0 1000
 5. Service Location Strategy
Not that much difficult to establish service compared to manufacturing??.

1. Purchasing power of customer area

2. Service and image compatibility with demographics of the customer area

3. Competition in the area

4. Quality of the competition

5. Uniqueness of the firm’s and competitors’ locations

6. Physical qualities of facilities and neighboring businesses

7. Operating policies of the firm

 Location Strategies
Service/Retail/Professional Location
Revenue Focus
Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/lighting;
appearance/image
Goods-Producing 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
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local government
 Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques

Models to determine importance of various factors

Transportation method
Factor-rating method
Factor-rating method
Traffic counts
Locational break-even analysis
Demographic analysis of drawing area

Purchasing power analysis of area

Retail stores often attract
Center-of-gravity method
more shoppers when
Geographic information systems
competitors are close.
Geographic Information Systems (GIS)
 Important tool to help in location analysis

 Enables more complex demographic analysis

 Available data bases include

 Detailed census data

 Utilities

 Geographic features and Detailed maps

 Locations of major services

 Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Assumptions Assumptions

Location is a major determinant of Location is a major determinant of cost

revenue Most major costs can be identified

High customer-contact issues are critical explicitly for each site

Costs are relatively constant for a given Low customer contact allows focus on the

area; therefore, the revenue function is identifiable costs

critical Intangible costs can be evaluated