Facility Location

Compiled by Dr. Rinki Rola

 Facility Location Analysis
• Facility location analysis is the process of identifying the
best geographic location for a service or production
facility.
• Location decision has direct implication on Cost, Quality
other competitive dimensions.
• Facility Location decisions are part of the company’s
strategy. Infrequent but expensive.
 When do you have to face this
decision?
• When business is newly started.
• The existing business unit has outgrown its original facilities
and expansion is not possible.
• The volume of business or the extent of market require the
establishment of branches.
• A lease expires and cannot be renewed.
• Other social or economic reasons like inadequate labor supply,
shifting of the market place, etc.
• Cost of doing business at a particular location makes
relocation attractive.
• Depletion of basic inputs requires relocation.
 Errors in Selection
• Lack of thorough investigation and consideration of
factors involved.
• Personal likes and bias of key executives or owners.
• Reluctance of key executives to move from traditional
home ground to new and better locations.
• Preference for acquiring an existing structure that is
improperly located or not designed for the most
efficient production.
• Choice of community with low cultural and
educational standards so that key personnel eventually
accept employment elsewhere.
 Importance of Facility Location
• Reasons for the importance:
– It’s a Strategic decision for any organization and has long term strategic
implications.
– Facility Location requires large investment that can not be recovered.
– Facility Location decisions affect the competitive capacity of the
company.
• All areas of the company are affected by Facility Location:
Operations, Business Development, Human Resources, Finance, etc.
– The facility location decisions affect not only costs but the company’s
income:
• For a service business, market proximity is critical to determine the
capacity to attract customers.
• For a manufacturing business, facility location affects product
delivery time and level of customer service, which affects sales.
– Regarding costs, facility location affects a great variety of them:
• Land costs.
• Labor costs.
• Raw materials.
• Transportation and distribution
 Problems

Facility set up without Problems

Problems proper location
planning

Problems

Relocate facility to Sell off the Close down the Continue operations
a new location facility to other operations completely at the existing
companies and liquidate the location
(Divestment) assets
 Selection of Poor Facility Location
Relocate facility to a new
location:
1)Only machines &
equipments can be
relocated, not the human
resources
2)Capital expenditures such
as land, building, etc. have
to be sold, which may
take long time,
investment is blocked
3)More investment is
required to locate at the
new site
Facility Set up without proper location planning
Close down the
Sell off the facilities to operations completely &
other companies liquidate the assets:
(Divestment):
1)Liquidation of assets is
1)Finding buyer companies most painful for any
for a facility at a wrong organization
location is difficult 2)Finding buyers &
2)The prices received for negotiating with them for
sell-off are usually much different assets is tedious
less than the actual & time consuming
investment made 3)The prices received for sell
3)Divestment is time off are usually much less
consuming process than the actual
investment made
Continue operations at
the existing location:
1)Inherent problems at the
location become
disadvantageous leading
to low profit/less market
share
2)Competitors having plants
at better locations always
have an edge
 Steps in Selection of location
I. Within the Country or Outside?
II. Selection of the Region
III. Selection of the Locality or Community
IV. Selection of the exact Site
Factors That Affect Location Decisions
Global Factors Regional Factors

Community Considerations Site-related Factors

9
 Deciding on Domestic or
International Location
• Here factors to be considered are :-
– Political Stability
– Legal regulation
– Ethical Considerations
– Terrorism
– Export and Import Quotas
– Currency and Exchange rates
– Cultural and Economic peculiarities
– Natural and Physical conditions
– Labour talent, attitudes, productivity and cost
– Incentives, Government Rules etc.
 Selection of Region
• Here factors to be considered are :-
– Availability of Raw Materials
– Nearness to market
– Availability of Power
– Transport Facilities
– Suitability of Climate
– Government Policy
– Competition between states
– Environment Regulations
– Government Incentives
– Land / Construction Cost
 Selection of Locality
• Here factors to be considered are :-
– Availability of labor
– Cost of labor
– Whether unions pose a serious potential problem
– Civic amenities for workers
– Existence of complementary and competing
industries
– Finance and Research facilities
– Availability of water and fire-fighting facilities
– local taxes and restrictions
 Selection of the site
• Here factors to be considered are :-
– Soil, size
– Disposal of waste
– Site Size and Cost
– Air, Railway, etc.
– Zoning Restrictions
– Environmental Impact
Village, Suburban or City
Site
 Village Site - Advantages
• Land available at cheaper rates
• Taxes are negligible
• Spacious layout and open space
• Low wages for unskilled labour
• Fewer labour troubles
• Avoidance of danger from fire and other hazards
resulting from operations of neighboring units
• Absence of restrictions on smoke and disposal of
waste
 Village site - Drawbacks
• Lack of supply of skilled labor
• Higher wages for skilled labor as they are to
mobilized from elsewhere
• Lack of civic amenities for employees
• Lack of transport facilities
 City Site - Advantages
• Transport facilities are not a problem
• Labor of all types is available in plenty
• Municipal services for water, sewage disposal, public
health and education are available
• All type of technical and commercial institutions and
universities for the training of the staff and workers
are available
• Facilities for contracting out a portion of work are
available
• Availability of banking, repair and related services
• A large local market
 City Site - Drawbacks
• Exorbitant cost of land
• House taxes, water taxes, etc are very high
• Labor unions are strong and labor unrest is frequent
• High cost of labor
• Because of limited space, factory buildings are
awkwardly shaped, ill-lighted and ill-ventilated
• Several restrictions have been imposed in regard to
smoke and the disposal of effluents
 Suburban Site
• They offer advantages of both village and city site
• They are less costly
• All rail and road facilities are available
• Labor can be drawn from nearby city or villages
 Location Strategies for Service Facilities
Strategy Implications Examples
Spatial Provider is the lone service •Retail Outlets for Amul, local dairy, Vegetable
Monopoly provider in the region. shops , all basic service providers for basic needs,
repairing shops
Agglomeration Provider locates itself near to its •Normally this strategy is followed by a strong
Strategy competitors. Brand.
•They normally do not take risk involve in Spatial
Monopoly Strategy.
Complementar When customer come for one •Restaurants near to movie Theater, Pharmacy
y Services service, they also access some Shops and Path labs near Doctors.
other service. •Without losing customers to each other
complementing each others business.
Accessibility Customer are able to reach and •Design of roads and pathways make some
leave the site easily. locations more accessible to customers.
•Patrol Stations and Restaurants with drive thru
windows are majorly on left side of the highway.
Visibility Site is visible from a distance. •Gift shop at the end of an escalator, Xerox shops
or cyber café in front of college entrance .
Public service They are grouped together so •Local government service facilities are normally
facilities that customer can visit many of located near their customers and most often in
the in one trip. groups.
Location Methods
 Factor Rating Method
Factor Factor Rating Location Rating Product of Rating
(Rate on 1 to 5) (Rate on 1 to 10)
Location A Location B Location A Location B
1 4 8 6 32 24
2 3 2 3 6 9
3 3 6 5 18 15
4 5 2 4 10 20
5 1 3 3 3 3
6 5 4 3 20 15
7 4 1 2 4 8
8 3 10 8 30 24
9 2 7 9 14 18
10 2 6 4 12 8
Total Score 149 144
 Point Rating Method Example
Two refineries sites (A and B) are assigned the following
range of point values and respective points, where the
more points the better for the site location.
Sites
Major factors for site location Pt. Range A B
123 156
150 100
54 63
24 96
45 50
4 5
8 4
5 50
5 20 Best Site
is B
Total pts. 418 544
Qualitative factor Analysis- Weighted Average

1) Develop a list of relevant factors

2) Assign a weight to each factor to indicate its relative
importance
3) Assign a common scale to each factor (say 0 to 100) and
designate any minimum point to be scored by any location
4) Score each potential location according to the designated scale
and multiply the scores by the weights to arrive at the
weighted scores
5) Total the points for each location and choose the location with
the maximum points
Qualitative Factor Analysis
Method - Example
Qualitative Factor Analysis
Method - Example
• Botrol Ltd. is evaluating two sites for a new manufacturing
plant. It has collected data on these two sites. Help them to
make choice.

Factor Weight Site X Site Y

Labor Cost 0.20 80 70
Transportation 0.10 60 70
Cost
Community Factors 0.15 95 90

Tax 0.35 85 80
Suppliers 0.20 70 80
Total Wt. 1.0
 Centroid Method
• The centroid method is used for locating single
facilities that considers existing facilities, the
distances between them, and the volumes of
goods to be shipped between them
• This methodology involves formulas used to
compute the coordinates of the
two-dimensional point that meets the distance
and volume criteria stated above
 Centroid Method Formulas

Where:
Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
 Example of Centroid Method
Several electronics showrooms are located
according to the following grid which represents
coordinate locations for each showroom
Y
Q
(790,900)

D
(250,580)

A
(100,200)

(0,0) X

Question: What is the best location for a new Z-Mobile

warehouse/temporary storage facility considering only distances
and quantities sold per month?
 Example of Centroid Method (Continued):
Determining Existing Facility Coordinates
Y
To begin, you must identify Q
(790,900)
the existing facilities on a
D
two-dimensional plane or (250,580)

grid and determine their A

(100,200)
coordinates. (0,0) X

You must also have

the volume
information on the
business activity at the
existing facilities.
 Example of Centroid Method (Continued):
Determining the Coordinates of the New Facility
You then compute the new coordinates using the formulas:

You then take the coordinates and place them on the map:
Y
Q
(790,900)

D
(250,580)

A
(100,200)

(0,0) X
• A retail chain wants to construct a warehouse to serve four retail stores.
The location of retail stores and the amount that will be moved to them
are given below in table. Use Centroid (Centre of Gravity Method) to
determine the location of the warehouse.

Retail Store A Retail Store B Retail Store C Retail Store D

X Coordinate 210 110 260 510

Y Coordinate 205 505 605 305

Weight of 80 110 140 65
Material

• ( 249,447)
 Load Distance Technique
• Load Distance Technique is a variation of the
center-of-gravity for determining the coordinates
of a facility location.
• In this method, a single set of location coordinate
is not identified, instead, various location are
evaluated using a load-distance value that is a
measure of weight and distance
 Load Distance Technique
• A retail chain wants to construct a warehouse to serve four retail stores.
The location of retail stores and the amount that will be moved to them
are given below in table.
Retail Store A Retail Store B Retail Store C Retail Store D

X Coordinate 210 110 260 510

Y Coordinate 205 505 605 305

Weight of 80 110 140 65

Material
• It wants to evaluate the following three different sites:

Site 1 Site 2 Site 3

X Coordinate 365 425 255
Y Coordinate 185 455 405
 Break-Even Analysis
• Break-even analysis computes the amount of goods required to
be sold to just cover costs
• Break-even analysis includes fixed and variable costs

• Break-even analysis can be used for location analysis especially

when the costs of each location are known
– Step 1: For each location, determine the fixed and
variable costs
– Step 2: Plot the total costs for each location on one graph
– Step 3: Identify ranges of output for which each location
has the lowest total cost
– Step 4: Solve algebraically for the break-even points
over the identified ranges
Break – even Analysis for Facility Location
(1/3)
Total Cost

Fixed Cost Variable Cost

▪ Capital expenditures (Long term

▪ Cost of labor & raw materials
investments in fixed assets)
directly involved in production
▪ Fixed cost remains constant
▪ Variable cost increases as the
irrespective of the volume of
production increases
production
▪ People, Metal, Energy, etc.
▪ Machines, Land, Building, etc.
Break – even Analysis for Facility Location
(2/3)

Breakeven Point
Total Cost = Total Revenue

Sales price of an item decides the revenue line slope

Break even point represents the volume of output at which there is

no profit and no loss
Organizations wants to have a low break even volume so that
investments can be completely recovered soon
 Example using Break-even Analysis: Clean-Clothes Cleaners is
considering four possible sites for its new operation. They expect
to clean 10,000 garments. The table and graph below are used for
the analysis.

• From the graph you can see that the two lowest cost intersections occur between C
& B (4667 units) and B & A (9000 units)
• The best alternative up to 4667 units is C, between 4667 and 9000 units the best is
B, and above 9000 units the best site is A
An operations Manager narrowed the search for a new facility location to four
sites. The annual fixed costs and the variable costs are as follows:

Location Fixed Cost / Year (Rs.) Variable Cost per Unit (Rs.)
A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

Plot the total cost curves for all the communities on a single graph. Identify on
the graph the approximate volume range over which each site provide the
lowest cost.
Using break even analysis, calculate the break even quantities over the
relevant ranges. If the expected demand is 15000 units per year, which is the
best location?

Total Cost = (Fixed Cost per annum) + (Variable Cost per Unit) X (Quantity Produced)
 Find the most economical location for an expected
volume of 2,000 units/year.
Location Fixed Cost / Year (Rs.) Variable Cost per Unit (Rs.)
A 25000 50
B 50000 25
C 80000 15

Total Cost = (Fixed Cost per annum) + (Variable Cost per Unit) X (Quantity Produced)
 Find the most economical location for an expected
volume of 2,00,000 units/year.
Location Fixed Cost / Year (Rs.) Variable Cost per Unit (Rs.)
A 300000 10
B 1600000 17
C 1800000 14

Total Cost = (Fixed Cost per annum) + (Variable Cost per Unit) X (Quantity Produced)
Tata Motors Limited, Sanand Plant
• Tata Motors Limited, formerly known as TELCO (TATA Engineering and
Locomotive Company), is a multinational corporation headquartered in
Mumbai, India. It is India's largest passenger automobile and commercial
vehicle manufacturing company. Part of the Tata Group, and one of the
world's largest manufacturers of commercial vehicles.

• The Tata Nano was introduced at the 9th auto expo by Tata Motors in New
Delhi, India on Jan. 10, 2008.
• Tata Nano is made for medium class family it is Small, affordable and great
Stylish Car.
• The car itself is expected to boost the Indian Economy as well as expand
the Indian car market by 65%, according to rating agency CRISIL.
• Tata Motors has its manufacturing base in Jamshedpur, Pantnagar,
Lucknow, Pune.
 FACTORS AFFECTING PLANT LOCATION OF TATA NANO AT
SANAND
• Nearness to Markets - A plant being near to the market can catch a big share of the market and
can also provide quick service to the customers.
• Setting up the Nano plant in Gujarat is advantageous for the group because nearly 50 % of the car
parts are produced in Rajkot
• The extensive coastline of the state could be beneficial for imports and exports.
• And proximity of Mundra port will allow them to export cars to the markets easily.
• Mundra Port would allow them to import steel and other raw materials at very low cost even
from overseas. Transporting the same over land would cost thrice as much.
• The strategic location of Sanand,
– some 30 km from Ahmedabad and
– its proximity to the Ahmedabad-Rajkot highway made the new site attractive
– close to the Charodi railway station
• Located near the city of Ahmedabad, Sanand is about 70 kilometers (40 miles) from a recently
rebuilt international airport. Sanand is linked to Ahmedabad and Kutch by state highway 17.
• Sanand is connected by a modern highway to Mundra Port, a fully operational and one of the
fastest growing, recently expanded sea ports in southeast Asia.
• In addition to modern highways, Sanand-Viramgam has an operational broad gauge railway
network connecting it to major industrial centers located in Gujarat.
 FACTORS AFFECTING PLANT LOCATION OF TATA NANO AT
SANAND
• Labour should be easily available. TATA has got skilled and unskilled labour very easily at sanand.
As Sanand is going to be next industrial hub labour availability will be much easier.
• The location was near to Ahmedabad, where the best engineering workforce can be found.
• Tata has plan a ultra mega power project of 4,000 mw that the Tatas are setting up at Mundra
port . The Tatas could draw on power from their own plant in Mundra
• It is essential that the electricity should be remain available continuously 24/7, in proper quantity
and at reasonable rates. Gujarat is a power sufficient state well connected with the GEB Grids.
• With the success of Narmada project ion Gujarat , water has been sufficiently available in Gujarat.
• The overall climate in Gujarat has been extremely favorable to industry
• Tata paid Rs 900/sqm (US$ 81,000 per acre) to Gujarat Government for the land in Sanand. Which
is much lesser then the market price.
• The general population of the state is in favour of industrialization. This play a huge role in setting
up the factory. As people in Gujarat are very optimistic towards the industrialization it
contributed a lot to its success.
• When the Tata Motors team visited Andhra Pradesh, they were confronted by agitated farmers
who did not want to part with their land. That was scary for the Tata folk. Maharashtra
automatically became the choice, but the Tatas got mixed signals from several quarters. And they
finally selected sanand.
• Gujarat has also agreed to match all the incentives offered by West Bengal government.
 FACTORS AFFECTING PLANT LOCATION OF TATA NANO AT
SANAND
• Special advantage of sanand location:-
• Sanand offers the following incentives to TATA
• Income Tax Incentives
• 10 year corporate tax holiday on export profit – 100% for initial 5 years and 50% for the next 5
years
• Exemption from dividend distribution tax
• Indirect Tax Incentives
• Zero customs duty
• Zero excise duty
• Exemption from central sales tax
• Exemption from service tax