2.

4 Facility
Location and
Layout Decisions

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 Outline

 Facility
Location
Decisions
 Facility Layout
Decisions

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Facility Location & Layout Decision

 Facilities:
◦ Places where products are stored, assembled or
fabricated
◦ Types of Facilities
 Plants
 Retail and service facilities
 Warehouses
◦ Two decisions
 Facility location
 Facility layout
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Facility Location & Layout Decision

 Facilities:
◦ Two decisions
 Facility location
 a specific position or point in a physical space
 a place where a firm produced its products
 Both goods and services
 For services, location is more critical compared to manufacturing
companies
 Facility layout
 the way facilities are placed or arranged
 the floor plan of a plant, where the machines are grouped according to
their functions
 the floor plan of a plant, where the machines are ordered by the assembly
sequence
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Facility Location Decision

 What is facility location then?

◦ It is the process of determining a
geographical site for a company’s operations
◦ It is among the strategic operations decisions
areas
◦ It answers the question:
 “Where should we locate the plant and/or
facility?”
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Nature & Reasons for Facility
Location Decision
 It is strategic and long-term in nature
 It is not reversible in short-term and made infrequently
 Once committed to a location, many resource and cost
issues are difficult to change
 Affects operational costs such as
◦ Costs of raw materials, transportation, labor, energy, land,
 Limits future expansion and growth potentials
 Limits the marketing effectiveness of an organization

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Facility Location Decision

The Operation Managers of a business firm, when

confronted with problems leading to a decision on plant
location, have several alternatives:
◦ Continuing operating on the present location and
subcontract for the additional demand when demand is
instable
◦ Expand the present plant on the present site provided that
there is available site.
◦ Keeping the present plant and at the same time build new
plant/plants elsewhere.
◦ Sell the present plant and relocate the entire operation.

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Facility Location Decision
If the decision is to build new plants elsewhere, then a complex
analysis is necessary related to:
◦ Which market will be served?
◦ Where are the sources of raw materials used?
◦ What type labor supply is necessary?
◦ What methods of transportation are necessary?
◦ How much land will be needed for the plant and for future
expansion?
◦ What types of power will be needed/required in the production
process?
◦ What particular type of climatic conditions required? Dry, temperate,
damp, …… climates

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 Facility Location Decision
Procedure for making location decisions
1. Problem …..location decision /where to locate
2. Decide on the criteria that will be used to evaluate location
alternatives, such as
◦ increased revenues, minimize cost, or community services.
3. Identify the factors that are important, such as location of
markets or raw materials.
4. Develop location alternatives:
◦ Identify the general region for a location
◦ Identify a small number of community alternatives
◦ Identify a particular site alternatives
5. Evaluate the alternatives and make a selection

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Considerations/Factors in Location
Decisions

➢ Regional Considerations/Factors
Proximity to markets
Proximity to materials
Adequate transportation facilities
Labor supply
Climates
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Considerations/Factors in Location
Decisions

➢ Community Considerations/Factors
 Managerial preference
 Community facilities
 Community attitudes
 Community government and taxation
 Availability and cost of sites

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Considerations/Factors in Location
Decisions

➢ Site Considerations/Factors
The following are some of the considerations:
 Size of the site
 Drainage and soil condition
 Water supply
 Utilities
 environmental considerations
 Land and development costs
 Transportation facilities

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Considerations/Factors in Location Decisions

Proximity to materials:
 Possible reasons to locate near source of raw
materials can be:
◦ When the weight or bulk of the product largely
decreases by further processing. e.g sugar cane
◦ When the perishability of products decrease by further
processing. e.g, freezing, canning, pasteurizing ....
◦ If the product needs a number of raw materials or
components
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Considerations/Factors in Location Decisions

➢ Labor supply
The following are labor-related questions that require
answers:
 The availability of potential employees
 The level of skill and education of potential employees
 Productivity of potential employees
 Their degree of unionization
 Costs of labor (including fringe benefits)
 Costs of living as related to labor cost

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Considerations/Factors in Location Decisions

 Managerial preference:
◦ relates to the personal preference of owners and
managers.
 Community facilities:
◦ is concerned with the availability of
 schools, churches, medical facilities, residential housing,
 recreational opportunities, police and fire protection, highways, etc.
 Community attitudes:
◦ to assure the long-term existence in that community
◦ interest, enthusiasm, and cooperation of the society.
◦ poor relations with local government, labor, customers

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Considerations/Factors in Location Decisions

 Community government and taxation

◦ stable, competent, honest and cooperative
government officials are great assets to a newly
located company.
 Availability and cost of sites:
◦ relates to the consideration of the availability of sites
and building.
◦ Selecting communities without assessing the
availability and costs of sites often leads to a mistake.

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Considerations/Factors in Location Decisions

 Where do we get such Information for Plant Location Analysis?

◦ Investment office (both federal and regional),
◦ Municipalities,…………. Sub cities,
◦ Addis Ababa Chamber of Commerce (AACC) ………….. Ethiopia
Chamber of Commerce (ECC),
◦ Commercial banks (both governmental and private),
◦ Industrial development corporations,
◦ Ethiopian Road Authority (ERA) or Addis Ababa Road Authority
Administration,
◦ Ethiopian Electric Power Corporation (EEPC),
◦ Addis Ababa Water and Sewerages Authority (AAWSA),
◦ Ethio telecom, etc

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 Methods/Approaches of Location Analysis

▪ Location break-even Analysis

▪ Location factor rating
▪ Center-of-gravity
▪ Transportation Model

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1. Location Break-even Analysis
 Examines cost trade-offs associated with demand
volume for different locations
 Cost
◦ Fixed costs
 constant over predictable period regardless of the
number of units produced
◦ Variable costs
 vary with the volume of units produced

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Location Break-even Analysis…
Four Steps
◦ Step 1: Determine the fixed and variable cost for each
location
◦ Step 2: Plot the Total Cost Line for each location
 Total cost = Fixed cost + Total variable cost
 TC = FC + (VC/unit X Volume)
◦ Step 3: Determine the BEP
◦ Step 4: Select the location with lowest total cost for the
expected production or demand volume

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 Location Break-even Analysis
Example:

There are three location options as shown below. Using the

location break-even analysis method, determine the range of
demand that each location is preferred:
Fixed Variable
Location Cost Cost/unit
A $30,000 $75
B $60,000 $45
C $110,000 $25
Total Cost = Fixed Cost + (Variable Cost/unit x Volume)

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 Location Break-even Analysis…
Step 1: Determine Total Cost Line and Plot It Graphically
Total Cost (TC) = Fixed Cost + (Variable Cost x Volume)
 TC for Q = V= 0 unit
◦ L-A= 30,000 + 75V = 30,000 + 75 (0) = $30,000
◦ L-B= 60,000 + 45V = 60,000 + 45(0) = $60,000
◦ L-C = 110,000 + 25V = 110,000 + 25(V) = $110,000
 TC for Q= V = 2,000 units
◦ L-A = 30,000 + 75(2,000) = $180,000
◦ L-B = 60,000 + 45(2,000) = $150,000
◦ L-C = 110,000 + 25(2,000) = $160,000
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Location Break-even Analysis

–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
Annual cost

–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
–| | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
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Location Break-even Analysis…
Step 2 Find BEP of Locations
 BEP for locations A and B
= TC at A = TC at B
Location A = Location B
$30,000 + $75v = $60,000 + $45v
$30v = $30,000
v = 1,000 units
 BEP for Locations B and C
TC at A = TC at B
Location B = Location C
$60,000 + $45v = $110,000 + $25v
$20v = $50,000
v = 2,500 units
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Location Break-even Analysis

–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
Annual cost

–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
L-A L-C
$30,000 – lowe
L-B lowest
lowest
– st
cost
cost
$10,000 – cost |
–| | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
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Location Break-even Analysis…
 Step 3: Determine the range of demand
each location is preferred
◦ If demand is below 1,000 units, choose location A
◦ If demand is above 1000 units and less than 2,500 units,
choose location B
◦ If demand is above 2,500 units, choose location C

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Location Break-even Analysis…
 Which Location is best for expected demand of 5000 units
given prices of the finished product are birr 100, 75 and
50 at locations A, B, and C respectively?
Steps
◦ Calculate profit for each location
 Profit = Total Revenue – Total Cost
◦ Select the location with the highest profit for the expected demand

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Location Break-even Analysis…
 Profit At L-A = TR – TC
 PV –(FC + ( VC/unit X V)
 100 (5000) – (30,000 + (75 X 5000)
 500,000 – 405,000 = $95,000
 Profit at L-B = TR- TC
 PV – (FC + (VC/unit X V)
 75 (5000) – (60,000 + (45 X 5000)
 375,000-285,000 = $90,000
 Profit at L-C = TR- TC
 PV – (FC + (VC/unit X V)
 50 (5000) – (110,000 + (25 X 5000)
 250,000-235,000 = $15,000

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 B. Location Factor Rating
 Popular because a wide variety of factors can be included
in the analysis
 Six steps in the method
1. Develop a list of relevant factors called critical success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each location and
sum weighted scores
6. Recommend the location with the highest point score
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Location Factor Rating: Example
SCORES (0 TO 100)

Location Factor Weight Site 1 Site 2 Site 3

Labor availability .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

Weighted Score for “Labor availability” for

Site 1 = (0.30)(80) = 24

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Location Factor Rating: Example (cont.)

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 factor
9.00 14.25 10.80 rating and considered to be
11.25 12.00 12.00 the best of the three
6.50 9.00 9.50 locations
4.25 4.60 3.25
2.50 3.25 4.50
77.50 80.80 82.05

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C. Center-of-Gravity Technique
 Center of Gravity Technique:
◦ is a quantitative method for locating facility at the
center of movement in geographic area based on
weight and distance traveled
◦ establishes a grid-map of area and finds location of
distribution center that minimizes distribution costs
◦ Considers
 Location of markets
 Volume of goods shipped to those markets
 Shipping cost (or distance)
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Grid-Map Coordinates

y n n
 xiWi  yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
 Wi  Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of
3 (x3, y3), W3 new facility at
y3 center of gravity
xi, yi = coordinates of
existing facility i
Wi = annual weight
shipped from
x1 x2 x x facility i
3

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Center-of-Gravity Technique: Example
Example:
 A food processor purchases ingredients from
four different food suppliers. The company wants
a new central distribution center to process and
package the ingredients before shipping them to
various restaurants. The suppliers transport
ingredient items in 40-foot truck trailers, each
with a capacity of 19,000 kg. The locations of the
four suppliers, A, B, C, and D, the X & Y
coordinates of the location of each supplier, and
the annual number of trailer loads that will be
transported to the distribution center from each
supplier are shown below

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Center-of-Gravity Technique: Example

Supplier A B C D
X-coordinate 200 100 250 500
(kilometer)
Y-coordinate 200 500 600 300
(kilometer)
Number of trailer 75 105 135 60
loads

 Using the-center-of-gravity
method, determine the possible
location of the new distribution
center
Center-of-Gravity Technique: Example

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

500 (105)
400
D
300
A (60)
20 (75)
0
100

0 10020 300400500600700x
0 Kilometers

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Center-of-Gravity Technique: Example (cont.)

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

n
 yiWi
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
y= = 75 + 105 + 135 + 60 = 444
n
 Wi
i=1

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Center-of-Gravity Technique: Example
(cont.)

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

500 (105)
Center of gravity (238, 444)
400
D
300
A (60)
20 (75)
0
100

0 10020 300400500600700x
0 kilometers

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 Thank you
Email: zb.gurmessa@gmail.com

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