Facility Location

Learning objectives
 Define facility location and state its importance.

 Define facility location decision.

 State the reasons that give rise to facility location decisions.

 Describe the procedure for making facility location decisions.

 State the strategic impact of location decision.

 Identify the criteria for selecting appropriate locations for a

plant or service facility.

 State the types of facilities and the factors in each type.

 Learning objectives cont.
 State location analysis techniques or methods.

 Apply the factor-rating method to evaluate location alternatives.

 Apply the centre-of-gravity method to evaluate location

alternatives based on load-distance.

 Apply the load-distance method to evaluate location alternatives

based on load-distance.

 Apply the break-even analysis to evaluate different location

alternatives based on costs.

 Apply the transportation method to evaluate the cost impact of

adding new sites to the network of existing facilities.
 Definition of Facility Location
Facility Location is the process of identifying the best geographical
location for a service or production facility.
 Importance of Facility Location
• Facility Location decisions are part of the company’s strategy.
Infrequent but expensive.
• Reasons for the importance:
• 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, but also Business Development,
Human Resources, Finance, etc.
• Regarding costs, facility location affects a great variety
of them:
• Land costs.
• Labor costs.
• Raw materials.
• Transportation and distribution
 Importance of Facility Location Cont.
• Reasons for the importance:
• 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.
 Selection Criteria
The important considerations for selecting a suitable location
are given as follows:

Natural or climatic conditions.

Availability and nearness to the sources of raw material.
Transport
Access to market
Availability of Infrastructural facilities
Availability of skilled and non-skilled
Banking and financial institutions are located nearby
Locations with links
Strategic considerations of safety and security
Government influences
 Facility location decisions
• Location
• Size of facilities
• Facilities
• Plants, ports, vendors, warehouses, retail outlets, service
centres; etc.
• Decisions
• Number of facilities
• Location of facilities
• Size of facilities

8
 Classifying location decisions
• Driving force (critical factor : traffic, labour rate, transport
cost, ….etc. )
• Number of facilities
• Discrete vs. Continuous choices
• Data aggregation
• Time horizon.
Location Decisions: Strategically Important
Location decisions:
 Are closely tied to an organization’s strategies
• Low-cost
• Convenience to attract market share
 Effect capacity and flexibility
 Represent a long-term commitment of resources
 Effect investment requirements, operating costs,
revenues, and operations
 Impact competitive advantage
 Importance to supply chains
 Strategic impacts of Location Decisions
In terms of long-term impacts, location decision:
• Requires long-term commitments in buildings and facilities.
• Requires sizable financial investment
in setting up a new facility.

In terms of competitive imperatives, location decision allows for:

• Time-based competition if located near customers and/or
suppliers.
• Lowering of shipping costs if located near customers and/or
suppliers.
• Lowering wage costs if located near the appropriate labor pool.
• Adequate supply of skilled labor if located near the appropriate
labour pool.
Industrial Location Decisions
 Cost focus
• Revenue varies little between locations
 Location is a major cost factor
• Affects shipping and production costs (e.g., labour)
• Costs vary greatly between locations

Service Location Decisions

 Revenue focus
• Costs vary little between market areas
 Location is a major revenue factor
• Affects amount of customer contact
• Affects volume of business
Causes that originate Location decision
problems
• Obsolescence of a manufacturing facility due to the
appearance of new technologies.
• It means the creation of a new modern plant somewhere
else.
• The pressure of the competence.
• To increase the level of service, it can force the company
to increase capacity of certain plants or relocate some of
them.
• Change in other resources, like labor conditions or
subcontracted components, or change in the political or
economic environment in a certain region.
• Mergers and acquisitions.
• Some facilities may appear as redundant, or bad located
with respect to others.
Causes that originate Location decision
problems Cont.
• An expanding market.
• It will require the addition of more capacity at a certain
geographic point, either in an existent facility or in a new
one.
• Introduction of new products or services.
• A contracting demand, or changes in the location of the
demand.
• It may require the shut down and/or relocation of
operations.
• The exhaustion of raw materials in a certain area.
• Example: Extraction companies.
 Location Alternatives
• Expansion of an existent facility.
• Only possible if exists enough space.
• Attractive alternative when the current facility location is
good enough for the company.
• Lower costs than other options
• Start a new facility in a new area.
• Sometimes is a more advantageous option than the previous
one (if there are problems related to lose of focus on the
company’s objectives).
• Shut down of a facility and (or not) starting of a new one
somewhere else.
• Moving production from one plant to other.
 Types of Facilities
• Heavy-manufacturing facilities
• large, require a lot of space, and are expensive
• Light-industry facilities
• smaller and usually less costly
• Retail and service facilities
• smallest and least costly
 Factors in Heavy Manufacturing Location
• Construction costs
• Land costs
• Raw material & finished goods shipment modes
• Proximity to raw materials
• Utilities
• Means of waste disposal
• Labor availability
 Factors in Retail Location
• Land costs
• Transportation costs
• Proximity to markets
• depending on delivery requirements including frequency of
delivery required by customer

Factors in Light Industry Location

• Proximity to customers
• Location is everything
 Site Selection: Where to Locate
• Infrequent but important
• being “in the right place at
the right time”
• Must consider other factors,
especially financial
considerations
• Location decisions made more
often for service operations
than manufacturing facilities
• Location criteria for service
• access to customers
• Location criteria for
manufacturing facility
• nature of labor force
• labor costs
• proximity to suppliers and
markets
• distribution and
transportation costs
• energy availability and cost
• community infrastructure
• quality of life in community
• government regulations and
taxes
 Global Supply Chain Factors
• Government stability
• Government regulations
• Political & economic systems
• Economic stability & growth
• Exchange rates
• Culture
• Export/import regulations,
duties & tariffs
• Raw material availability
• Climate
• Number & proximity of
suppliers
• Transportation & distribution
system
• Labor cost & education
• Available technology
• Commercial travel
• Technical expertise
• Cross-border trade regulations
• Group trade agreements
 Regional and Community Location Factors

• Labor (availability, education, • Modes and quality of

cost, and unions)
• Proximity of customers
• Number of customers
• Construction/leasing costs
• Land cost
transportation
• Transportation costs
• Community government Local
business regulations
• Government services (e.g.,
Chamber of Commerce)
 Regional and Community Location Factors
• Business climate • Infrastructure (road & utilities)
• Community services • Quality of life
• Incentive packages • Taxes
• Government regulations • Availability of sites
• Environmental regulations • Financial services
• Raw material availability • Community inducements
• Commercial travel • Proximity of suppliers
• Climate • Education system
 Location Incentives
• Tax credits
• Relaxed government regulation
• Job training
• Infrastructure improvement
• Money
Location Analysis Techniques
Analysis should follow 3 step process:

Step 1: Identify dominant location factors

Step 2: Develop location alternatives

Step 3: Evaluate locations alternatives

 Location Analysis Techniques
Procedures for evaluation location alternatives include:

• Factor rating method

• Centre of gravity approach

• Load-distance model

• Break-even analysis

• Transportation method

• Geographic Information Systems (GIS)

Factor-Rating Method
 Factor-Rating Method
• Popular because a wide variety of factors can be included in the
analysis
• Six steps in the method
• Develop a list of relevant factors called critical success factors
• Assign a weight to each factor (0.00 - 1.00)
• Develop a scale for each factor (e.g. 0 - 100)
• Subjectively score each location for each factor (0 - 100)
• Multiply score by weights for each factor for each location
• Recommend the location with the highest point score
 Location Factor Rating: Exp.1

2 3
Procedures: 1 Scores(0 to100)
1. Identify factors that are LocationFactors Weight Site 1 Site 2 Site 3
important in the location Labor pool &climate 0.30 80 65 95
decision Proximitytosupplies 0.20 100 91 75
2. Prioritize the factor by its Wage rates 0.15 60 95 80
importance. Each factor is Communityenvironment 0.15 75 80 80
weighted from 0 to 1.00
3. Subjective score (0 to 100) 4 Scores(0 to100)
is assigned to each site for LocationFactors Site 1 Site 2 Site 3
each factor Labor pool &climate 24.00 19.50 28.50
4. Sum up the weighted Proximitytosupplies 20.00 18.20 15.00
score. Wage rates 9.00 14.25 12.00
5. The site with highest score Communityenvironment 11.25 12.00 12.00
is the most attractive 64.25 63.95 67.50
5
 Location Factor Rating: Exp.2
A photo-processing company intends to open a new branch store.
The following table contains information on two potential locations.
Which is better?
Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to
.10 100 60
existing source
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00
 Location Factor Rating: Exp.3

SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3
Labor pool and climate .30 80 65 90
Proximity to suppliers .20 100 91 75
Wage rates .15 60 95 72
Community environment .15 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
Air service .05 50 65 90
Location Factor Rating: Exp. 3 Cont.
Weighted Score for “Labor pool and climate” for
Site 1 = (0.30)(80) = 24

WEIGHTED SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
20.00 18.20 15.00
Site 3 has the highest
9.00 14.25 10.80
factor rating
11.25 12.00 12.00
6.50 9.00 9.50
4.25 4.60 3.25
2.50 3.25 4.50
77.50 80.80 82.05
Location Factor Rating: Exp.3 With Excel
Centre of Gravity Method
 Centre of Gravity Method
 A method for locating a distribution center that minimizes
distribution costs
 Finds location of a single distribution center serving several
destinations
 Used primarily for services
 Treats distribution costs as a linear function of the distance and
the quantity shipped
 The quantity to be shipped to each destination is assumed to be
fixed
 The method necessitates to identify coordinates and weights
shipped for each location and includes the use of a map that shows
the locations of destinations
 The map must be accurate and drawn to scale
 A coordinate system is overlaid on the map to determine relative
locations
 Centre of Gravity Method

This method considers:

 Location of existing destinations eg. Markets, retailers etc.
 Volume to be shipped
 Shipping distances (or costs)
• Shipping cost/unit/mile is constant
 Centre of Gravity Method
If quantities to be shipped to every location are equal, then
the coordinates of the centre of gravity can obtain by finding
the average of the x-coordinates and the average of the y-
coordinates, respectively.

x
 x i

y
 y i

n
where
xi  x coordinates of destination i
yi  y coordinates of destination i
n  Number of destinations
 Centre of Gravity Method: Exp. 1
Suppose you are attempting to find the centre of gravity for the
problem .
Destination x y Solution:
D1 2 2
x
 x i 18
  4 .5
D2 3 5 n 4
D3 5 4
D4 8 5
y
 y i 16
 4
1 1 n 4
8 6
Here, the center of gravity is
(4.5,4). This is slightly west
of D3 from the Figure.
 Centre of Gravity Method: Exp. 1 Cont.

a) Map showing destinations b) Coordinate system added c) Center of gravity

Figure Exp. 1
 Centre of Gravity Method
When the quantities to be shipped to every location are unequal,
you can obtain the coordinates of the center of gravity by finding
the weighted average of the x-coordinates and the average of the
y-coordinates.

Cx 
 xQ
i i

Q i

Cy 
 yQ
i i

Q i

where
Qi  Quantity t o be shipped to destination i
xi  x coordinates of destination i
yi  y coordinates of destination i
 Grid-Map Coordinates
y
n n

2 (x2, y2), Q2
 xiQi  yiQi
y2 i=1 i=1
Cx = n Cy = n

1 (x1, y1), Q1
 Vi  Vi
y1 i=1 i=1

where,
3 (x3, y3), Q3 Cx, Cy = coordinates of the new
y3 facility at center of gravity
xi, yi = coordinates of existing
facility i
Vi = annual volume shipped
from or to the ith location
x1 x2 x3 x
 Centre of Gravity Method: Exp. 2
Suppose the shipments for the problem in Exp. 1 are not all equal.
Determine the center of gravity based on the following
information.

Weekly
Destination x y Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 1,000
 Centre of Gravity Method: Exp. 2 Cont.

Solution:
Cx 
 xQ
i i

2(800)  3(900)  5(200)  8(100) 6,100
  3.05
Q i 2,000 2,000

Cy 
 yQ
i
i
2(800)  5(900)  4(200)  5(100) 7,400
i
  3.7
Q i 2,000 2,000

The coordinates for the center of gravity are (3.05, 3.7). You
may round the x-coordinate down to 3.0, so the coordinates for
the center of gravity are (3.0, 3.7). This south of destination D2
(3, 5).
Centre of Gravity Method: Exp. 2 Cont.
 Centre-of-Gravity Technique: Exp. 3

y
A B C D
700
C x 200 100 250 500
600 (135) y 200 500 600 300
B Vt 75 105 135 60
500 (105)
Miles

400
D
300 (60)
A
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles
Centre-of-Gravity Technique: Exp. 3 Cont.
Solution:

n

i = 1xiWi (200)(75) + (100)(105) + (250)(135) + (500)(60)
Cx = = = 238
n 75 + 105 + 135 + 60
 Wi
i=1

n
 yiWi
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
Cy = n = 75 + 105 + 135 + 60 = 444
 Wi
i=1
Centre-of-Gravity Technique: Exp. 3 Cont.
Solution:
A B C D
y x 200 100 250 500
700 y 200 500 600 300
C Wt 75 105 135 60
600 (135)
B
500 (105)
Center of gravity (238, 444)
Miles

400
D
300 (60)
A
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles
Load-Distance Method
 Load-Distance (ld) Method Cont.
• Identify and compare candidate locations
• Like weighted-distance method
• Select a location that minimizes the sum of the loads
multiplied by the distance the load travels
• Time may be used instead of distance
 Load-Distance (ld) Method Cont.
• Calculating a load-distance score
• Varies by industry
• Use the actual distance to calculate ld score
• Use rectangular or Euclidean distances
• Different measures for distance
• Find one acceptable facility location that minimizes the ld
score
• Formula for the ld score
ld = i lidi
• Compute (Load x Distance) for each site
• Choose site with lowest (Load x Distance)
• Distance can be actual or straight-line
 Load-Distance Formulae

n
LD =  ld i i
i=1
where,
LD = load-distance value
li = load expressed as a weight, number of trips or units
being shipped from proposed site and location i
di = distance between proposed site and location i
di = (xi - x)2 + (yi - y)2
where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
 Load-Distance (ld) Method Exp.1
Harrison Corporation Inc., proposes three sites (i.e. Site 1, 2 or 3) to locate
a warehouse in order to supply goods to the distributors at location A, B, C
and D. Determine the suitable location to site the warehouse.

Potential Sites Distributors

Site X Y A B C D
1 360 180 X 200 100 250 500
2 420 450 Y 200 500 600 300
3 250 400 Wt 75 105 135 60
Solution:
Compute distance from each site to each supplier

Site 1 dA = (xA - x1)2 + (yA - y1)2 = (200-360)2 + (200-180)2 = 161.2

dB = (xB - x1)2 + (yB - y1)2 = (100-360)2 + (500-180)2 = 412.3

dC = 434.2 dD = 184.4
 Load-Distance (ld) Method Exp.1 Cont.

Site 2 dA = 333 dB = 323.9 dC = 226.7 dD = 170

Site 3 dA = 206.2 dB = 180.3 dC = 200 dD = 269.3

Compute load-distance
n
LD =  ld i i
i=1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(184.4) = 125,063
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
Site 3 is selected since it has the lowest LD value 0f 77, 555
Break-Even Analysis Method
 Break-Even Analysis Method
• 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 Method
• Total cost = F + cQ

• Total revenue = pQ

• Break-even is where Total Revenue = Total Cost

Q = F/(p-c)

Where
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
 Break-even Analysis Method: Exp.1
Clean-Clothes Cleaners is considering four possible sites for its new
operation. They expect to clean 10,000 garments. Using the table
and graph below; select the best site to locate the new office.
Solution:
Example 9.6 Using Break-Even Analysis
Location Fixed Cost Variable Cost Total Cost
A $350,000 $ 5(10,000) $400,000
B $170,000 $25(10,000) $420,000
C $100,000 $40(10,000) $500,000
D $250,000 $20(10,000) $450,000

From the graph it can be seen 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.
 Break-even Analysis Method: Exp.2
Fixed and variable costs for four potential plant locations are
shown below. Compar total cost of each location at a production
volume of 10,000.

Location Fixed Cost Variable Cost

per Year per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35
Break-even Analysis Method: Exp.2 Cont.
Solution:
Fixed Variable Total
Costs Costs Costs
A $250,000 $11(10,000) $360,000
B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000
$(000)
800 D
700 B
600 C
500 A
400 A Superior
300 C Superior
B Superior
200
100 0 2 4 6 8 10 12 14 16
0 Annual Output (000)
Break-even Analysis Method: Exp.2 Cont.

• Range approximations
Total Cost of C  Total Cost of B
– B Superior (up to 4,999 units)
150,000  20Q  100,000  30Q
50,000  10Q
Q  5,000

– C Superior (>5,000 to 11,111 units) Total Cost of A  Total Cost of C

250,000  11Q  150,000  20Q
100,000  9Q
– A superior (11,112 units and up) Q  11,111.11
 Break-even Analysis Method: Exp.3
A glass company can produce a certain insulator on any three
machines which have the following charges shown below. The firm
has an opportunity to accept an order for either 50 units at $20/unit
or 150 units at $12/unit.
(i) Which machine should be used if 50 units order is accepted and
how much profit will result?
(ii) Which machine should be used if the 150 units order is accepted
and what will be the resultant profit?
(iii) What is the break-even volume for the selected machine in (ii)?

Machine Fixed Cost ($) Variable Cost ($)

A 50 4/unit
B 200 2/unit
C 400 1/unit
Break-even Analysis Method: Exp.3 Cont.
Solution:
(i) For 50 unit order at $20/unit.
Costs for various machines:
Machine Total cost ($) Profit ($)
A 50 + 50 x 4 = 250 (50 x 20) – 250 = 750
B 200 + 50 x 2 = 300 (50 x 20) – 300 = 700
C 400 + 50 x 1 = 450 (50 x 20) – 450 = 550

Since Machine A gives the highest profit of $750 it is to be preferred

Break-even Analysis Method: Exp.3 Cont.
(ii) For 150 unit order at $12/unit.
Costs for various machines:

Machine Fixed Cost ($) Profit ($)

A 50 + 150 x 4 = 650 (150 x 12) – 650 = 1150
B 200 + 150 x 2 = 500 (150 x 12) – 500 = 1330
C 400 + 150 x 1 = 550 (150 x 12) – 550 = 1250

Since Machine B gives the highest profit of $1330 it is to be

preferred.
Break-even Analysis Method: Exp.3 Cont.
(iii) Breakeven volume for Machine B at $12/unit is given as:

Let x be the number of units to be produced.

Total costs at ‘x’ units = 200 + 2x
Total revenue at x units = 12x
At breakeven point, we get:
200 + 2x = 12x
i.e. x = 20
Hence 20 units is the breakeven volume.
Transportation Method
 The Transportation Problem
• The “transportation problem” refers to a special class of linear
programming problems dealing with the distribution of single
commodity from various sources of supply to various points of
demand in such a manner that the total transportation costs are
minimized.
• Transportation models play an important role in logistics and
supply chains.
• The problem basically deals with the determination of a cost
plan for transporting a single commodity from a number of
sources to a number of destinations.
• The purpose is to minimize the cost of shipping goods from one
location to another so that the needs of each arrival area are
met and every shipping location.
 Transportation Problem Cont.
For example; a manufacturer has three plants P1, P2, P3 producing
same products. From these plants, the product is transported to
three warehouses W1, W2 and W3. Each plant has a limited
capacity, and each warehouse has specific demand. Each plant
transport to each warehouse, but transportation cost vary for
different combinations.
 Transportation Problem Classification

The Transportation Problem can be classified into balanced TP or

unbalanced TP:

 Balanced transportation problem: If the sum of the supplies of

all the sources is equal to the sum of the demands of all the
destinations , then the problem is termed as a balanced TP.

 Unbalanced transportation problem: If the sum of the

supplies of all the sources is not equal to the sum of the
demands of all the destinations, then the problem is termed
as a unbalanced TP.
 Transportation Problem Cont.
Finding initial basic feasible solutions methods:
There are mainly three types of method for finding initial basis
feasible solutions. The methods are:

 North-West Corner Rule(NWCR)

 Least Cost Method or Matrix Minima Method(LCM)
 Vogel’s Approximation Method(VAM)

Methods of Optimality Test:

There are two methods for optimality test. The methods are:

 Modified Distribution Method or Modi Method

 Stepping Stone Method or SSM.
 Steps to solve a transportation Problem

 Formulate the problem and setup in the matrix form.

 Obtain the initial basic feasible solution.
 Test the solution for optimality.
 Updating the solution if required.
 For example:
 North West Corner Method (NWCM)
The simplest of the procedures used to generate an initial feasible
solution is NWCM. It is so called because we begin with the North
West or upper left corner cell of transportation table.
Various steps are given:
Step 1
Select the North West (upper left-hand) corner cell of the
transportation table and allocate as many units as possible equal to
the minimum between available supply and demand requirement
i.e., min (S1, D1).
Step 2
Adjust the supply and demand numbers in the respective rows and
columns allocation.
 North-west Corner Rule (NWCR) Cont.
Step 3
(a) If the supply for the first row is exhausted, then move down to the
first cell in t he second row and first column and go to step 2.
(b) If the demand for the first column is satisfied, then move
horizontally to the next cell in the second column and first row and go
to step 2.
Step 4
If for any cell, supply equals demand, then the next allocation can be
made in cell either in the next row or column.
Step 5
Continue the procedure until the total available quantity is fully
allocated to the cells as required.
Remark 1: The quantities so allocated are circled to indicated, the
value of the corresponding variable.
Remark 2: Empty cells indicate the value of the corresponding variable
as zero, i.e., no unit is shipped to this cell.
 North-west Corner Rule (NWCR): Exp.
As stated in this method, we start with the cell (P1 W1) and allocate
the min (S1, D1) = min (20, 21)=20. Therefore we allocate 20 Units
this cell which completely exhausts the supply of Plant P1 and leaves
a balance of (21 - 20) =1 unit of demand at warehouse W1.

Initial transportation cost =20(7) + 1(5) + 25(7) + 2(3) + 17(8)= 462units

 Least Cost Method
The allocation according to this method is very useful as it takes into
consideration the lowest cost and therefore, reduce the computation
as well as the amount of time necessary to arrive at the optimal
solution.
Step 1
(a) Select the cell with the lowest transportation cost among all the
rows or columns of the transportation table.
(b) If the minimum cost is not unique, then select arbitrarily any cell
with this minimum cost.
Step 2
Allocate as many units as possible to the cell determined in Step 1 and
eliminate that row (column) in which either supply is exhausted or
demand is satisfied. Repeat Steps 1 and 2 for the reduced table until
the entire supply at different plants is exhausted to satisfied the
demand at different warehouses.
 Least Cost Method: Exp.

Initial transportation cost=20(6)+4(5)+5(7)+19(3)+17(4) =300 Units

 Vogel's Approximation Method (VAM)
This method also takes costs into account in allocation. Five steps
are involved in applying this heuristic:

Step 1: Determine the difference between the lowest two cells in

all rows and columns, including dummies.

Step 2: Identify the row or column with the largest difference. Ties
may be broken arbitrarily.

Step 3: Allocate as much as possible to the lowest-cost cell in the

row or column with the highest difference. If two or more
differences are equal, allocate as much as possible to the lowest-
cost cell in these rows or columns.
 Vogel's Approximation Method Cont.
Step 4: Stop the process if all row and column requirements are met.
If not, go to the next step.

Step 5: Recalculate the differences between the two lowest cells

remaining in all rows and columns. Any row and column with zero
supply or demand should not be used in calculating further
differences. Then go to Step 2.
The Vogel's approximation method (VAM) usually produces an
optimal or near- optimal starting solution. One study found that
VAM yields an optimum solution in 80 percent of the sample
problems tested.
Vogel’s Approximation Method (VAM): Exp.

Initial transportation cost =20(6)+9(5)+19(3)+12(4)+5(5)= 295units

Further Example of VAM Application:
D1 D2 D3 D4 Supply
S1 19 30 50 10 7
S2 70 30 40 60 9
S3 40 8 70 20 18
Demand 5 8 7 14

Solution:
Total number of supply constraints : 3
Total number of demand constraints : 4
Problem Table is:
D1 D2 D3 D4 Supply
S1 19 30 50 10 7
S2 70 30 40 60 9
S3 40 8 70 20 18
Demand 5 8 7 14
 Table-1

The maximum penalty, 22, occurs in column D2.

The minimum cij in this column is c32 = 8.

The maximum allocation in this cell is min (18, 8) = 8.

It satisfy demand of D2 and adjust the supply of S3 from 18 to 10
(18 - 8 = 10).
Table-2

The maximum penalty, 21, occurs in column D1.

The minimum cij in this column is c11 = 19.

The maximum allocation in this cell is min (7, 5) = 5.

It satisfy demand of D1 and adjust the supply of S1 from 7 to 2
(7 - 5 = 2).
 Table-3

The maximum penalty, 50, occurs in row S3.

The minimum cij in this row is c34 = 20.

The maximum allocation in this cell is min (10, 14) = 10.

It satisfy supply of S3 and adjust the demand of D4 from 14 to 4
(14 - 10 = 4).
Table-4

The maximum penalty, 50, occurs in column D4.

The minimum cij in this column is c14 = 10.

The maximum allocation in this cell is min (2, 4) = 2.

It satisfy supply of S1 and adjust the demand of D4 from 4 to 2
(4 - 2 = 2).
Table-5

The maximum penalty, 60, occurs in column D4.

The minimum cij in this column is c24 = 60.

The maximum allocation in this cell is min (9, 2) = 2.

It satisfy demand of D4 and adjust the supply of S2 from 9 to 7
(9 - 2 = 7).
Table-6

The maximum penalty, 40, occurs in row S2.

The minimum cij in this row is c23 = 40.

The maximum allocation in this cell is min (7, 7) = 7.

It satisfy supply of S2 and demand of D3.
Initial feasible solution is

The minimum total transportation cost

=19×5+10×2+40×7+60×2+8×8+20×10=779

Here, the number of allocated cells = 6 is equal to m + n - 1 = 3 + 4 -

1=6
Therefore, this solution is non-degenerate.
 Find the optimal solution
Once an initial solution has been found, the next step is to test that
solution for optimality.
The following two methods are widely used for testing the
solutions:

 Stepping Stone Method

 Modified Distribution Method

Necessary conditions:
1. Make sure that the number of occupied cells is exactly equal to
m + n - 1, where m = number of rows and n = number of columns.
2. Each occupied cell will be at independent position.
 Modified Distribution Method (MODI)
Step-1: Determine an initial basic feasible solution using any one
of the three methods given below:
 North West Corner Rule
 Matrix Minimum Method
 Vogel Approximation Method

Step-2: Determine the values of dual variables, ui and vj, using

ui + vj = cij

Step-3: Compute the opportunity cost using cij – ( ui + vj).

Step-4: Check the sign of each opportunity cost. If the opportunity

costs of all the unoccupied cells are either positive or zero, the
given solution is the optimal solution. On the other hand, if one or
more unoccupied cell has negative opportunity cost, the given
solution is not an optimal solution and further savings in
transportation cost are possible.
Modified Distribution Method (MODI) Cont.
Step-5: Select the unoccupied cell with the smallest negative
opportunity cost as the cell to be included in the next solution.

Step-6: Draw a closed path or loop for the unoccupied cell

selected in the previous step.
Please note that the right angle turn in this path is permitted
only at occupied cells and at the original unoccupied cell.

Step-7: Assign alternate plus and minus signs at the

unoccupied cells on the corner points of the closed path with a
plus sign at the cell being evaluated.
Modified Distribution Method (MODI) Cont.
Step-8: Determine the maximum number of units that should be
shipped to this unoccupied cell. The smallest value with a
negative position on the closed path indicates the number of
units that can be shipped to the entering cell. Now, add this
quantity to all the cells on the corner points of the closed path
marked with plus signs, and subtract it from those cells marked
with minus signs. In this way, an unoccupied cell becomes an
occupied cell.

Step-9: Repeat the whole procedure until an optimal solution is

obtained.
 Stepping Stone Method (SSM)
Step-1: Determine an initial basic feasible solution by any suitable
method. But VAM is very useful.
Step-2: Make sure that the number of occupied cells is exactly
equal to (m+n-1) where m is number of rows and n is the number
of columns of the cost matrix.
Step-3: Evaluate the cost effectiveness of shipping via
transportation routes not currently in the solution. This can be
testify considering each unoccupied cells in the current solution
by following steps:
(i)Select an unoccupied cell, where a new shipment can be made.
(ii) Beginning at this cell trace a closed loop using the most direct
route through at least three occupied cells used in the solution
and the back to the original and moving with only horizontal and
vertical lines. Further, since only the cell at the turning points are
considered to be on the closed path any unoccupied boxes may
be skipped. The cells at the turning points are called stepping
stones on the path.
 Stepping Stone Method (SSM) Cont.
Step-3 Cont.
(iii) Assign plus and minus signs alternately on each corner cell of
the closed path starting with a plus sign at the unoccupied cell.
(iv) Compute ‘net change in the cost’ along the closed path by
adding together the unit cost figures found in each cell containing
the minus sign.
(v) Repeat sub-step (i)-(iv) unit ‘net change’ in the cost to be
calculated for all unoccupied cells in the transportation table.

Step-4: Check the sign of each of the net changes computed. If

the net changes are greater than or equal to zero, then an
optimum solution has been obtained. If mot, it is possible to
improve the current solution.
 Stepping Stone Method (SSM) Cont.

Step-5: Select the unoccupied cell having the highest negative

net cost change and determine the maximum number of units
that can be assigned to a cell marked with a minus sign on the
closed path corresponding to the cell. Add this number to the
unoccupied cell and to all other cells on the path marked with a
plus sign, subtract this number from cells on the path with a
minus sign.
 Geographic Information Systems (GIS)
• Computerized system for storing, managing, creating,
analyzing, integrating, and digitally displaying geographic, i.e.,
spatial, data

• Specifically used for site selection

• Enables users to integrate large quantities of information about

potential sites and analyze these data with many different,
powerful analytical tools
GIS Diagram