Source: From Assoc. Prof.

Ho Thanh Phong, IU lecture notes 1

 Lecture 2 and 3
Locating Facilities

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 2

Learning Objectives

Understand the importance of location decisions

Discuss factors that affect the choice of location
Understand a hierarchical approach to locating facilities
Use an infinite set approach, such as the centre of gravity
Use models for locating facilities on networks
Combine location decisions into a broader approach to
planning

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 3

Outline
1. Importance of location
2. Choosing the geographic region
3. Infinite set approaches
4. Feasible set approaches
5. Network models
6. Location planning

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 4

 1. Importance of Location
1.1. Location decisions
Decision where these facilities should be located.
FACILITIES LOCATION: finds the best geographic locations
for the different elements in a supply chain.
Needed whenever an organization opens new facilities.
Affect the organization's performance for many years.
If select a poor location: low productivity, unreliable
suppliers, poor materials, low quality products and high
costs.

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 5

Reasons:
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 – perhaps to introduce new technology
changes to transport – such as a switch from rail transport to
road
changes in the transport network
mergers or acquisitions giving duplicate operations

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 6

 1. Importance of Location
1.1. Location decisions
Consider many factors:
 Quantifiable: operating costs, wage rates, taxes, currency
exchange rates, number of competitors, distance from current
locations, development grants, population, reliability of
supplies.
 Non-quantifiable: quality of infrastructure, political stability,

social attitudes, industrial relations, legal system, future

developments of the economy etc.

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 7

In General - Location Decisions

 Long-term decisions
 Difficult to reverse
 Affect fixed & variable costs
 Transportation cost
 As
much as 25% of product price
 Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location to firm

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

1.2. Alternatives to locating new facilities
•Expand or change operations at an existing site
•Open additional facilities at another site, while maintaining
operations at the existing site
•Close down existing operations and move all operations to a
new site

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 9

Options in order of increasing investment:
1. Licensing or franchising: local organizations make and
supply the company’s products
2. Exporting: the company makes the product in its existing
facilities and sells it to a distributor working in the new
market.
3. Local distribution and sales: the company makes the product
in its existing facilities, but sets up its own distribution and
sales force in the new market.
4. Local assembly and finishing: the company makes most of
the product in existing facilities, but opens limited facilities
in the new market to finish or assemble the final product.
5. Full local production: the company opens complete facilities
in the new market.

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 10

 Break-Even Analysis
 Break-even analysis computes the amount of goods required to
be sold to just cover costs
 Break-even analysis includes fixed and variable costs
 Procedure:
 Step 1: For each location, determine the fixed an 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

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Break-Even Analysis
Remember the break even equations used for calculation
total cost of each location and for calculating the breakeven
quantity Q.

 Total cost = F + cQ
 Total revenue = pQ
 Break-even is where Total Revenue = Total Cost

Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Example using Break-even Analysis: Clean-Clothes Cleaners is considering four
possible sites for its new operation. They expect to clean 10,000 garments. The
table and graph below are used for the analysis.

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 you can see 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
Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
2. Choosing The Geographic Region
Overall approach

Considerations in choosing regions

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

GENERAL APPROACH COORDINATING LOCATION DECISIONS:
1.Review the aims of a supply chain
2.Do a logistics audit
3.Identify mismatches
4.Examine alternatives for overcoming the mismatch
5.Make location decisions
6.Confirm the location
7.Implement and monitor the solutions

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes 15

Overall approach - Hierarchy of Location decisions

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Considerations in Location Decisions
Location of customers
Location of suppliers and materials
Culture
Government attitudes
Direct costs
Indirect costs:
Exchange rates
Social attitudes:
Organization
Operations

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Location Decision Example
BMW decided to build
its first major
manufacturing plant
outside Germany in
Spartanburg, South
Carolina.

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Country Decision Factors

 Market location  Other

 U.S. is world’s largest luxury car
 Lower shipping cost
market ($2,500/car less)
 Growing (baby boomers)
 New plant & equipment
 Labor would increase
 Lower manufacturing labor costs productivity (lower
 $17/hr. (U.S.) vs. $27 (Germany) cost/car $2,000-3000)
 Higher labor productivity
 11 holidays (U.S.) vs.
31 (Germany)

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Region/Community Decision Factors

 Labor
 Lower wages in South Carolina (SC)
 Government incentives
 $135 million in state & local tax breaks
 Free-trade zone from airport to plant
 No duties on imported components or on exported cars

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Approaches to Location Decisions

1. Infinite set approach –finds the best location in principle by

using some geometric arguments, assume that there are no
restrictions on site availability, and then looks for a site
nearby.
2. Feasible set approach –compares sites that are currently
available and chooses the best

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

INFINITE SET APPROACHES
Simple Models
Simple Models

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Simple Models

Variation in transport cost with location

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
 Simple Models:
Center of Gravity (COG) Technique
A simple way of finding the best compromise location
calculates the centre of gravity of supply and demand.
 The co-ordinates of the centre of gravity are

(X0, Y0 ) are the co-ordinates of the centre of gravity which gives

the facility location
(Xi, Yi) are co-ordinates of each customer and supplier, i
Wi is expected demand at customer i, or expected supply from
supplier i
Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
 Grid-Map Coordinates

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Example
Van Hendrick Industries is building a central logistics
centre that will collect components from three suppliers,
and send finished goods to six regional warehouses. The
locations of these and the amounts supplied or demanded
are shown in the following table. Where should they start
looking for a site?

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Example (Van Hendrick Industries cont.)
Location X,Y co-ordinates Supply or demand
Supplier 1 91,8 40
Supplier 2 93,35 60
Supplier 3 3,86 80
Warehouse 1 83,26 24
Warehouse 2 89,54 16
Warehouse 3 63,87 22
Warehouse 4 11,85 38
Warehouse 5 9,16 52
Warehouse 6 44,48 28
Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
Example (Van Hendrick Industries cont.) Solution

Example - Solution

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Example (Van Hendrick Industries cont.) Solution

The centre of gravity is

X0 = 45.5
Yo = 50.3,
you can check by calculating:

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Example (Van Hendrick Industries cont.) Solution

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Weaknesses of the Centre of Gravity Method

Example:
Suppose you work in Alberta, Canada and want to
deliver 20 tons of materials a day to Edmonton and 40
tons a day to Calgary. These two cities are connected by a
straight road 300 km long. If the costs of getting
deliveries from suppliers are the same regardless of
location, where would you build a warehouse?

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Weaknesses of the Centre of Gravity Method

The centre of gravity is

(40 × 300 + 20 × 0)/60 = 200 km from Edmonton.

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Weaknesses of the Centre of Gravity Method

A warehouse at the centre of gravity would have to

deliver 20 tons to Edmonton for 200kms with 200x20
unit cost and to 40 tons to Calgary for 100kms with
100x40 unit cost
The total is 8000 unit cost
But if you built the warehouse in Calgary, you would
only have to move 20 tons to Edmonton with total cost is
6000 units cost

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

FEASIBLE SET APPROACHES
Costing models

Scoring models

Important factors for scoring models

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing models
Feasible set approaches identify available sites, compare them,
and find the best.
An obvious analysis calculates the total cost of working from
each location and finds the cheapest.
Many of the costs of running a facility are fixed regardless of its
location. We concentrate on those costs that vary, particularly
the transport and operating costs.
Total variable cost = Operating cost + Inward transport
cost + Outward transport cost of a facility

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing models

Locations near to customers have higher costs of inward

transport, and those near to suppliers have higher costs of
outward transport, so the best location is likely to be
somewhere in between.
We assume that the transport cost is proportional to the
distance moved. Uses map references or co-ordinates to find
the distance between points

Use this simple measure to identify the location with the

lowest total value of load × distance moved

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing model ( or Load-Distance Technique)

Compute (Load x Distance) for each site

Choose site with lowest (Load x Distance)
Distance can be actual or straight-line

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Distance Measure
There are two ways to measure the distance between two facilities.

1.Rectilinear Distance
2.Euclidean Distance

Rectilinear distance

When distance between two facilities is measured along path that is

orthogonal to each other, then that distance is termed as rectilinear distance.
Suppose two facilities are located at points represented by (X1 , Y 1) and at
(X2, Y2), then the rectilinear distance between the facilities will be :

| X1 - X2 | + | Y1 – Y2 |

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Distance Measure (Cont.)
Euclidean distance

When distance is measured along straight-line path between the two

facilities, then that distance is termed as Euclidean distance. Suppose
two facilities are located at points represented by (X1, Y1) and at (X2, Y2),
then the Euclidean distance between the facilities will be

{ ( X1 – X2)2 + ( Y1 - Y2 )2 }1 / 2

The rectilinear distance measure is often used for factories, American cities, etc which are laid out in the
form of a rectangular grid. For this reason it is sometimes called the Manhattan distance measure. The
Euclidean distance measure is used where genuine straight line travel is possible

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Costing Model (use Euclidean distance)
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

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

 Costing Model (use Euclidean distance)
: Example

Potential Sites Suppliers

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 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

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing Model (use Euclidean distance)
: Example (cont.)

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

Site 3 dA = 206.2 dB = 180.4 dC = 200 dD = 269.3

Compute load-distance
n
LD = l d i i
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) = 99,791
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*

* Choose site 3
Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
Costing models (use Rectilinear distance)
Example:

Bannerman Industries want to build a depot to serve seven

major customers located at coordinates (100, 110),
(120,130), (220, 150), (180, 210), (140, 170), (130, 180) and
(170, 80).
Average weekly demands, in vehicle loads, are 20, 5, 9, 12,
24, 11 and 8 respectively.
Three alternative locations are available at (120, 90), (160,
170) and (180,130).
Which is the best site if operating costs and inward
transport costs are the same for each location?

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing models (use Rectilinear distance)
Example (cont.):

Map for Bannerman Industries

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
 Costing models (use Rectilinear distance)
Example (cont.):

As operating and transport inward costs are the same for all
three locations, we only need a way of comparing the costs of
local deliveries from each. For simplicity we will use the
rectilinear distance to customers. Then the distance from A to
customer 1 is:

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing models (use Rectilinear distance)
Example (cont.):

Comparison of sites

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing models

We can use a version of this costing model to find the best
number of facilities

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes

Costing models

Finding the optimal number of facilities

Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes