You are on page 1of 35

Facility Location

Facility Location is a Strategic Decision

One time decisions

Difficult to reverse

Affect fixed, variable and distribution costs

Affect sales
Facility Planning
 The capital investment in land, buildings,
technology, and machinery is enormous
 A firm must live with its facility planning
decisions for a long time, and these
decisions affect:
 Operating efficiency
 Economy of scale
 Ease of scheduling
 Maintenance costs
 … Profitability!
Your plant / facility may be ….

• Near the Raw Material sources


(Steel, Cement Plants )
• Near to Market / Customers
(FMCG, Perishables Goods, Services)
• Best facilities & infrastructure
( Union Territories, SEZs)
 Marketing strategy involves expanding
network of facilities

 Relative costs of doing business

 Growth in demand

 Depletion of resources
There are often many location
options
 Often must consider many location options
 No single location may be better than others
 Often must identify several locations from which to
choose

 Basic options to consider


 Expand existing facilities
 Add new facilities to network of existing facilities
 Shut down existing facility, move to new location
 Do nothing … stay in same location
A Sequence of Decisions
Political, social, economic stability;
National Decision
Currency exchange rates; . . . . .

Climate; Customer concentrations;


Regional Decision
Degree of unionization; . . . . .

Transportation system availability;


Community Decision
Preference of management; . . . . .

Site size/cost; Environmental impact;


Site Decision
Zoning restrictions; . . . . .
Considerations When
Making Location
Decisions
Typical steps when making
location decisions
1. Decide on the criteria that are important
for the location decision
2. Identify the important factors
3. Develop location alternatives
4. Evaluate each of the alternatives
5. Make a selection
Location Decision
Factors
Community
Regional Factors Considerations

Multiple Plant Site-related


Strategies Factors
Regional Factors
 Location near raw materials, due to
necessity, perishability, or transportation
costs
 Location of markets, clients, or
constituents
 Labor factors … cost, availability, skills,
education
 Climate
 Tax rates and tax incentives
Regional factors involved in
global location decisions
 Comparative advantage (e.g., labor) in many
developing countries
 Challenging to manage facilities, personnel and
operations around the world
 Tariffs can impede trade
 Import restrictions can hurt ability to move
technologies, equipment, spare parts
 Language differences
 Cultural differences
 Level of corruption
 Different legal systems
Community Considerations
 Quality of life
 Quality of services (police, fire, etc.)
 Local attitudes toward certain types of
businesses (N.I.M.B.Y.)
 Environmental regulations
 Public utilities: cost, availability
 Developer support
 Taxes and tax incentives
Tax incentives and credits are often a
major consideration when locating

 Tax Incentives and Tax Credits

 Factoring into location decisions …


 Job creation tax credits (64%)
 Sales tax exemptions (63%)

 Property tax abatements (52%)

 Enterprise zone tax credits (51%)

 Job training benefits (51%)

Source: http://www.facilitycity.com/busfac/bf_04_01_news1.asp
Site Related Factors
 Land – soil conditions, load factors, drainage
rates
 Transportation – access for semi-trucks, close
to freeway
 Zoning – residential vs. commercial vs. mixed
use
 Environmental regulations – swamp land,
endangered species
Multiple Plant Strategies
 Product plant strategy
 Products/product lines produced in separate
plants
 Market area plant strategy
 Each plant produces all products; plant
serves a geographic region
 Process plant strategy
 Each plant focuses on different processes
Service facility location
involves very different
considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking
Factors in selection of
location
National Decision Selection of region

1. Political stability , EXIM 1. Availability of raw


policy material
2. Currency & exchange 2. Nearness to market
rate 3. Availability of power
3. Cultural & economic 4. Transport facilities
peculiarities 5. Suitability of climate
4. Natural environment 6. Government policy
7. Competition among
states
Selection of community Selection of site
1. Availability of labour 1. Soil, size, & topography
2. Civic amenities for workers 2. Disposal of waste.
3. Existence of
complementary &
competing industries
4. Finance & R&D facilities
5. Availability of water & fire
fighting facilities
6. Local taxes & restrictions
7. Momentum of early start
8. Personal factors
Numerical Methods for
Analyzing Facility
Locations
Location Analysis
Techniques

 Location factor rating

 Center-of-gravity

 Load-distance

 Transportation model
Supplement 7-21
Location Factor Rating
The location factor rating technique may be used
 when many sites are available,
 Each site has some appealing characteristics.
 Involves giving rating to each factor based on its importance

 The steps in using the technique are:


 Identify important factors
 Rate each factor according to its relative importance
 Rate each location according to its merits on each factor
 Compute the product of ratings for each factor
 Compute the Sum of the product of ratings
 Which ever has highest rating i.e sutiable.
Location Factor Rating:
Example
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

Supplement 7-23
Location Factor Rating:
Example
(cont.)
WEIGHTED SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
Site 3 has the
20.00 18.20 15.00
highest factor rating
9.00 14.25 10.80
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

Supplement 7-24
The center-of-gravity
technique
 Used when multiple suppliers or customer
bases exist at different geographic locations,
and
 It is economically sensible to locate centrally to
service all of them.
 For locating a facility, such as a warehouse, at
the center of movement in a geographic area,
based on weight and distance.
Center-of-Gravity
Technique
 Based on weight and distance
traveled; establishes grid-map of area
 Identify coordinates and weights
shipped for each location

Supplement 7-26
Grid-Map Coordinates
y n n
∑ xW i i ∑ yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
∑W i ∑W i

1 (x1, y1), W1 i=1 i=1


y1
where,
x, y = coordinates of new
3 (x3, y3), W3 facility at center of gravity
y3 xi, yi = coordinates of
existing facility i
Wi = annual weight
shipped from facility i

x1 x2 x3 x
Supplement 7-27
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
500 (105)
Miles

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

0 100 200 300 400 500 600 700 x


Miles

Supplement 7-28
Center-of-Gravity
Technique: Example (cont.)
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= n
= = 444
75 + 105 + 135 + 60
∑ Wi
i=1

Supplement 7-29
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
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

Supplement 7-30
Load-Distance Technique
 In this method, a single centralized site
location is not found; rather, a number of
different site locations are evaluated for
distance and load.
 For example, three different sites can be
evaluated as possible locations for optimal
location among four different suppliers.
Load-Distance Technique
 Compute (Load x Distance) for each site
 Choose site with lowest (Load x
Distance)
 Distance can be actual or straight-line

Supplement 7-32
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

Supplement 7-33
Load-Distance: Example
Suppliers Potential Sites
A B C D Site X Y
X 200 100 250500 1 360
Y 200 500 600300 180
Wt 75 105 13560 2 420
450
3 250
Compute distance from each site to each supplier
400
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

Supplement 7-34
Load-Distance: Example
(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 = ∑ l i di
i=1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 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
Supplement 7-35