LOCATING OF FACILITIES

B Y: G E N W I L M . I L A G A N
 LOCATION

• Where should facilities for production and inventory storage

be located? Where are the most cost efficient locations for
production and for storage of inventory? Should existing
facilities be used or new ones built? Once these decisions are
made they determine the possible paths available for product
to flow through for delivery to the final consumer.
 LOCATION

• Refers to the geographical siting of supply chain facilities.

• Also includes the decisions related to which activities should
be performed in each facility.
 LOCATION DECISIONS

• Managers need to consider a range of factors that relate to a

given location including the cost of facilities, cost of labor,
skills available in the workforce, infrastructure conditions,
taxes, and tariffs, proximity to suppliers and costumers.
• Location decisions gave strong impacts on the cost and
performance characteristics of a supply chain. Once the size,
number, and location of facilities is determined, that also
defines the number of possible paths through which products
can flow on the way to the final customer.
 ALTERNATIVES TO LOCATING NEW
FACILITIES
Choosing a good location is one of the most common problems that
organizations face. There are several reasons why they need to consider
location, including:
• the end of a lease on existing premises
• expansion into new geographic areas
• changes in the location of customers or suppliers
• changes to operations
• upgrading facilities
• changes to transport
• changes in the transport network –
• mergers or acquisitions giving duplicate operations that must be
rationalised.
 LOCATION DECISIONS

When an organizations wants to change is facilities – either

expand, move or contract – it has three alternatives:
• expand or change existing facilities at an existing site
• open additional facilities at another site while keeping all
existing facilities
• close down existing operations and move
 LOCATION DECISIONS

Even when new facilities are clearly needed, there are different
ways of managing them. There are also alternatives that are not
so expensive. The following list gives five options in order of
increasing investment.
• 1. Licensing or franchising:
• 2. Exporting
• 3. Local distribution and sales
• 4. Local assembly and finishing
• 5. Full local production
CHOOSING THE GEOGRAPHIC REGION

Facility location involves a hierarchy of decisions.

Its composed of
• Broad decisions at the top
• Then comes more local views that consider alternative
countries or other.
• look more closely at alternative towns and cities within this
area.
 CONSIDERATIONS IN CHOOSING
REGIONS
• Location of Costumers: Service providers must generally be
close to their customers – which is why you find shops, buses,
libraries, restaurants, solicitors, banks and so on in town
centers.
• Location of suppliers and materials : Manufacturers are more
likely to locate near to supplies of raw materials, particularly if
these are heavy or bulky.
• Culture: It is easier to expand into an area that has a similar
language, culture, laws and costs, than to expand into a
completely foreign area.
 CONSIDERATIONS IN CHOOSING
REGIONS
• Governments Attitudes: National and local government
policies can seriously affect an area’s attractiveness.
• Direct Costs: These are the costs of operations, including
wages, materials, overheads and utilities.
• Indirect Costs: There can be many indirect costs of doing
business, including local taxes and charges on the payroll such
as social insurance, pension and social costs.
 CONSIDERATIONS IN CHOOSING
REGIONS
• Exchange Rates: These can appear as indirect costs, but they
are much less predictable.
• Social Attitudes: Some countries put more emphasis on social
welfare than others, and there may be higher union
membership or emphasis on individual rather than corporate
benefits.
• Organizations: An organization can keep a close check on new
operations by controlling these from existing headquarters and
giving local operations very little autonomy.
 CONSIDERATIONS IN CHOOSING
REGIONS
• Operations: It is easier to control operations in this way, but it
loses the benefit of local knowledge and practices.
INFINITE SET OF
APPROACHES
INFINITE SET OF APPROACHES
 INFINITE SET OF APPROACHES

Two Distinct approaches to location decisions are:

1. Infinite set approach – which uses geometric arguments to
find the best location assuming that there are no restrictions on
site availability.

2. Feasible set approach – were there are only a small number of

feasible sites and an organization has to choose the best.
 SIMPLE MODELS

Hoover was the first person to specify the three basic

alternatives for location.
• First, a facility can be located near to customers; this gives
good customer service and low costs for transport out to
customers, but high cost for transport in from suppliers.
• Second, it can be located near to suppliers; this moves
products quickly into the supply chain, gives low costs for
inward transport, but high costs for outward transport.
 SIMPLE MODELS

• Third, it can be located at some point between suppliers and

customers, giving a compromise with reasonable service and
lower costs.
 FEASIBLE SET OF APPROACHES

• An obvious analysis calculates the total cost of working from

each location and finds the cheapest. Feasible set approaches
identify available sites, compare them, and find the best. In
practice, many of the costs of running a facility are fixed
regardless of its location.
• Total variable cost = Operating cost + Inward transport cost +
Outward transport cost of a facility
 FEASIBLE SET OF APPROACHES

• We do not know in advance who our customers will be or how

much they will demand. Even if we have good forecasts of
demand, the costs will change over time and the analysis
becomes outdated. Cost calculations are useful for
comparisons, but they are not necessarily the costs that will
actually be incurred.
 FEASIBLE SET OF APPROACHES

• If we want to work out how much it costs to deliver a parcel to

a customer, we might as well make the calculations as easy as
possible. The operating costs in nearby locations might be
virtually the same, so we can remove these from the equation
and concentrate of transport costs.
• Nonetheless, we are only using these figures for comparison,
so can use any reasonable approximations. Another shortcut
uses map references or co-ordinates to find the rectilinear
distance between points.
 FEASIBLE SET OF APPROACHES

Rectilinear distance =
COSTING MODEL
COSTING MODEL
 SCORING MODEL

• Scoring models emphasise the factors that are important for

locations, but which cannot easily be costed or quantified.
FACTORS THAT WE NEED TO IDENTIFY

In the region and country

● availability, skills and productivity of workforce
● local and national government policies, regulations, grants and
attitudes
● political stability
● economic strength and trends
● climate and attractiveness of locations
● quality of life – including health, education, welfare and culture
● location of major suppliers and markets
● infrastructure – particularly transport and communications
● culture and attitudes of people.
FACTORS THAT WE NEED TO IDENTIFY

In the city or area

● population and population trends
● availability of sites and development issues
● number, size and location of competitors
● local regulations and restrictions on operations
● community feelings
● local services, including transport and utilities.
 IN THE SITE

● amount and type of passing traffic

● ease of access and parking
● access to public transport
● organizations working nearby
● total costs of the site
● potential for expansion or changes.
 SCORING MODELS

• Although we cannot quantify these factors directly, we can

move in this direction by giving each a score. This is what
happens with hotels: you cannot measure the quality of an
hotel, but when you see that one has been awarded five stars
you know that it is very good. This is the basis of scoring
models, which have the following five steps:
 SCORING MODELS

Step 1 decide the relevant factors in a decision.

Step 2 give each factor a maximum possible score that shows its
importance.
Step 3 consider each location in turn and give an actual score for
each factor, up to this maximum.
Step 4 add the total score for each location and find the highest.
Step 5 discuss the result and make a final decision.
 IMPORTANT FACTORS ON SCORING
MODELS

The decisions about the location for new factory are dominated
by:
● availability of a workforce with appropriate skills
● labour relations and community attitudes
● environment and quality of life for employees
● closeness of suppliers and service
● quality of infrastructure
● government policies toward industry
 IMPORTANT FACTORS ON SCORING
MODELS

On the other hand, services cannot be kept in stock, so they look

for smaller locations that are near to customers. Their decisions
about location put more weight on:
● population density
● socio-economic characteristics of the nearby population
● location of competitors and other services
● location of other attractions such as retail shops
● convenience for passing traffic and public transport
● ease of access and convenient parking
● visibility of site
 NETWORK MODELS

• Many databases of road networks automatically find the best

routes between two points. Such systems can be put into
vehicles and combined with global positioning and traffic
monitoring systems. A huge number of models have been built
for this kind of analysis, so we will illustrate typical
approaches.
 SINGLE MEDIAN PROBLEM

• A common measure is average travel distance or time, and

finding the shortest is called the single median problem.
• The easiest way to find the single median starts with a matrix
of the shortest distances between towns. In practice, we can
find this from route planning software, or using some
surrogate measure such as the straight-line or rectilinear
distance. To find the shortest average distance, we have to
combine these distances with the loads carried. So we multiply
the distances by the demands at each town, to get a matrix of
the weight-distances. Then we add these for each town, and
find the lowest overall value.
 COVERING PROBLEM

• Sometimes the average distance or time to a facility is less

important than the maximum time. Classic examples of this
are fire engines and ambulances which try to respond to
emergencies within a maximum time. In the same way,
suppliers often guarantee deliveries within one working day.
This is an example of the covering problem.
TWO VERSIONS OF COVERING PROBLEM

• The 1st version is that we are looking for the single location
that gives the best service to all towns.
• The 2nd version of the covering problem specifies a level of
service that must be achieved.
 LOCATION PLANNING

• A more formal procedure has the following five steps:

Step 1 Identify the features needed in a new location, determined by the

business and logistics strategies, structure of the supply chain, aims,
customers, and other relevant factors. Look for regions and countries that
can best supply these.
Step 2 Within the identified region, use an infinite set approach – such as
the center of gravity or similar model – to find the best area for locations.
Step 3 Search around this area to find a feasible set of available locations.
Step 4 Use a feasible set approach – such as a costing model or scoring
model – to compare these alternatives.
Step 5 Discuss all available information and come to a decision.
 LOCATION PLANNING

• We can describe a useful approach for coordinating location

decisions with other decisions about the supply chain. For this,
we start by recalling what we want the supply chain to do,
then examine the current supply chain’s performance, identify
any problems and design ways of overcoming these. To be
more specific, we can use the following procedure:
 LOCATION PLANNING

1. Examine the overall aims

2. Do a logistics audit
3. Identify mismatches
4. Examine alternatives for overcoming the mismatch
5. Location decisions
6. Confirm the locations
7. Implement and monitor the solutions
 TO SUM UP

❑ Location decisions find the best geographical positions for

the facilities in a supply chain. These are important, strategic
decisions with long-term effects on an organization's
performance.
❑ A location decision is needed whenever an organization
expands, contracts, or there are major changes to its operations.
The choice of best location depends on many different factors.