Facility Location Planning

What is the need for location decisions

• New facilities
• As part of a marketing strategy to expand markets
• Growth in demand that cannot be satisfied by expanding
existing facilities
• Depletion of basic inputs requires relocation
• Shift in markets
• Cost of doing business at a particular location makes relocation
attractive
 Location decisions arise for a variety of reasons

 Objective
• Maximize the profit
• Minimize the cost of operations
• Provide quality product or
• satisfactory customer Service
Location Decision: General Procedure

Steps:
1. Decide on the criteria of evaluating alternative location
2. Identify important factors, such as location of markets, raw
materials, labor, cost of energy, taxes, Import / export
regulations, transport infrastructure,…
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community
alternatives
4. Evaluate the alternatives and make a decision
Location : Identifying a country
Government Policies on foreign ownership of production facilities
Local content requirements
Import restrictions
Currency restrictions
Environment regulations
Local product standards
Liability laws and Stability issues
Cultural differences Living circumstances for foreign workers and their dependents
Ways of doing business
Religious holidays/traditions
Customer preferences Possible “buy locally” sentiment
Labor Availability, Level of training and education of workers
Work ethic and Wage rates
Possible regulations limiting the number of foreign employees
Language differences
Resources Availability of raw materials, energy, water, transportation & infra.
Financial Financial incentives, tax rates, inflation rates, interest rates
Technological Rate of technological change, rate of innovations
Market Market potential, competition
Safety Crime, terrorism threat
Location: Identifying a Region
 Location of raw materials
• Availability
• Perishability
• Transportation costs
 Location of markets
• Close to customer
• Close to suppliers
• Distribution costs and perishability
 Labor factors
• Cost of labor
• Availability of skills and productivity of workers
• Wage rates in the area
• Attitudes toward work ?
• Whether unions pose potential problem
 Other factors
• Climate and taxes may play an important role in location decisions
Location: Identifying a Community

 Many communities actively attempt to attract new businesses

they perceive to be a good fit for the community

 Businesses also actively seek attractive communities based on

factors such as:
• Quality of life
• Services
• Attitudes
• Environmental regulations
• Utilities
• Development support
Location: Identifying a Site
 Primary site location considerations are
• Land
• Transportation
• Zoning
• Other restrictions
• Vastu

Types of Facilities
• Heavy-manufacturing facilities – Mining, Oil and Gas, steel, Locomotive,
skyscrapers, dams,
large and heavy parts and equipment, require a lot of space, and are expensive

• Light-industry facilities – food processing, textile, House hold electrical

appliances, plastic and leather industry.
smaller, cleaner plants and usually less costly

• Retail and service facilities – Stores, online stores, hospitals, restaurants,..

smallest and least costly
Evaluating Location Alternatives
 Common techniques:
1. Factor rating
2. Center of gravity method
3. Load - Distance method
4. Locational cost-volume-profit analysis
5. Transportation model
1. Location Factor Rating
Example 1
The Dynaco Manufacturing company is going to build a new plant to
manufacture bearings. The site selection team is evaluating three sites, and they
have scored the important factors for each as follows. Which site has the
highest factor rating

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
Weighted Score for “Labor pool and climate” for
Site 1 = (0.30)(80) = 24; site 2 = 19.5; site = 27
Location Factor Rating

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
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
 2. Center-of-Gravity Technique
• Locate facility at center of movement in geographic area
• Based on weight and distance traveled; establishes grid-map
of area
• Identify coordinates and weights shipped for each location

Supplement 7-11
Example 2

Reddy Ready mix concrete company wants to set up a concrete

mixing unit in an appropriate location to supply the mixed
concrete to four upcoming construction sites on daily basis for
the next one to two years. The location of the four sites A,B,C
and D and the daily tonnage of concrete distribution is shown in
the following table.
A B C D
Distance ‘x’ x 200 100 250 500
Distance ‘y’ y 200 500 600 300
weight W 75 105 135 60

Using the center of gravity method, determine a possible location

For the mixing plant
Center-of-Gravity Technique
y
A B C D
700
C x 200 100 250 500
600 (135) y 200 500 600 300
B
W 75 105 135 60
500 (105)
Miles

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

0 100 200 300 400 500 600 700 x

Miles

Supplement 7-13
Center-of-Gravity Technique

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

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

y
A B C D
700
C x 200 100 250 500
600 (135) y 200 500 600 300
B
W 75 105 135 60
500 (105)
Center of gravity (238, 444)
Miles

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

0 100 200 300 400 500 600 700 x

Miles
3.Load-Distance Calculations

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
3. Load-Distance Technique
• Compute (Load x Distance) for each site
• Choose site with lowest (Load x Distance)
• Distance can be actual or straight-line

Example 3
Reddy ready mix Concrete mix wants to evaluate three different sites it has
identified for its distribution center relative to four upcoming projects. The
coordinates of three sites under consideration are as follows,

Potential Sites Project sites

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
 Load-Distance

Potential Sites customers

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

Compute distance from each site to each customer

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

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*

* Choose site 3
4. Locational Cost-Profit-Volume Analysis

• Technique for evaluating location choices in economic terms

Steps:
1. Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or
highest profit) for the expected level of output

Assumptions
1. Fixed costs are constant for the range of probable output
2. Variable costs are linear for the range of probably output
3. The required level of output can be closely estimated
4. Only one product is involved
4. Cost-Profit-Volume Analysis
• Fixed and variable costs for four potential plant locations are shown below:

Fixed Cost Variable Cost

Location per Year per Unit

A Rs.250,000 Rs.11

B Rs.100,000 Rs.30

C Rs.150,000 Rs.20

D Rs.200,000 Rs.35
Solution Given data,
Total Cost  FC  v  Q Fixed Cost Variable Cost
Location per Year per Unit
where
A Rs.250,000 Rs.11
FC  Fixed cost
B Rs.100,000 Rs.30
v  Variable cost per unit
C Rs.150,000 Rs.20
Q  Quantity or volume of output
D Rs.200,000 Rs.35

Note : To plot the total cost lines, select an out put that is approximately equal to
the expected out put level e.g 10,000 units/year and compute the total cost for
each unit.

Location Fixed Cost Variable Cost Total Cost (FC+VQ)

per year (FC) per Unit (V *Q)

A Rs250,000 Rs.11 (10,000) Rs.360,000

B Rs.100,000 Rs.30 (10,000) Rs.400,000
C Rs.150,000 Rs,20 (10,000) Rs.350,000
D Rs.200,000 Rs.35(10,000) Rs.550,000
 Solution
Plot of Location Total Costs

Fixed Cost Variable Cost Total Cost

per Year per Unit
A Rs250,000 Rs.11 (10,000) Rs.360,000
B Rs.100,000 Rs.30 (10,000) Rs.400,000
C Rs.150,000 Rs,20 (10,000) Rs.350,000
D Rs.200,000 Rs.35(10,000) Rs.550,000
• 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
 Multiple Plant Manufacturing Strategies
Product strategy
• Entire products or product lines are produced in separate plants,
and each plant usually supplies the entire domestic market
 Process strategy
• Different plants focus on different aspects of a process
• automobile manufacturers – engine plant, body stamping plant,
etc.
• Coordination across the system becomes a significant issue
 Market area strategy
• Plants are designated to serve a particular geographic segment
of the market
• Plants produce most, if not all, of a company’s products
 General-purpose strategy
• Plants are flexible and capable of handling a range of products
Service and Retail Locations

• Considerations:
• Customer access is a prime consideration for services:
restaurants, hospitals, Education institutes, banks, Transport,
Insurance, entertainment etc.
• Tend to be profit or revenue driven, and so are concerned with
demographics, competition, traffic/volume patterns, and
convenience
• Clustering similar types of businesses locate near one another

Note: 1. Nearness to raw materials, suppliers or energy are not

usual considerations
2. Not an important consideration for services like call
centers, e-commerce, etc.
Assignment
Hathway cable and Datacom ltd, owns and operates cable television systems in five
communities in Cochi. They want to construct a centralized service facility from which to
send out their service trucks for repair and installations. The communities have the
following sets of location coordinates and annual number of repair truck visits.

A B C D E

xA = 20 xB = 55 xC = 25 xD = 10 xE = 60

yA = 20 xB = 30 xC = 60 xD = 40 xE = 50

wA = 420 wB = 610 wC = 505 wD = 370 wE = 570

Using the center-of-gravity method to determine the possible locations for the central
service facility.
 Next topic
Facility Layout