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Facility Location Strategies

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Introduction
A factory or plant is the manufacturing facility of a company. A warehouse is the storage facility of a manufacturing or a distribution company. The offices of a service company, a bank, or an insurance company are its facilities. The facility location decision is very important for big business houses as well as new entrepreneurs. Wrong location of the facility may lead to a failure of the complete project.

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Relocate facility to a new location
1. Only machines and equipment can be relocated. Not the human resources. 2. Capital expenditure such as land, building, etc. have to be sold, which may take a long time and investment is blocked. 3. New investment is required to purchase land, construct the building, set up machines and equipment, and hire and train new workers from scratch at the new location.

Sell off the facility to other companies (divestment)

1. Finding buyer for wrong location is difficult. 2. The price received for sell-off are very less. 3. Divestment is a time consuming process

Facility set up without proper location planning

Continue Operations at the Existing Location
1. Low profit/less market share due to inherent problems.
2. Competitors having plants at better locations always have an edge. 3. In the long run, the company will have to plan another facility at the right location in order to beat competition.

Close down the operations completely and liquidate the assets

1. Liquidation of assets is most painful for any organisation. 2. Finding buyers and negotiating with them for different assets is tedious and time-consuming.

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Strategic Importance of Location

Companies make location decisions relatively infrequently, usually because demand has out grown the current plants capacity or because of changes in labour productivity, exchange rates, costs, or local attitudes. Companies may also relocate their manufacturing or service facilities because of shifts in demographics and customer demand.

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Strategic Importance of Location

Location Options include
Expanding an existing facility instead of moving. Maintaining current sited while adding another facility elsewhere Closing the existing facility and moving to another location

The objective of location strategy is to maximize the benefit of the location to the firm.

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Operations Strategies for Multiple Facilities 1. Separate facilities for different products/services. 2. Separate facilities to serve different geographical areas 3. Separate facilities for different processes.

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Separate facilities for different products/services.

Companies which are into diversified product/service ranges prefer to have separate facilities for each of these. Each facility takes care of the entire population (markets) or total geographical area for a particular product/service. This is done to avoid confusion and bring about economies of scale.

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Separate facilities to serve different geographical areas

This strategy reduces overall transportation cost and the lead time for supplying goods in the markets. Prompt action can be taken to deal with sudden changes in demand.

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Separate facilities for different processes.

This strategy helps to avoid confusion at the main manufacturing set up. At the same time, a lot of coordination is required between such plants as these serve as feeder units to other plants. In the service sector, banks and insurance companies have their central offices, where the main activity is designing various financial instruments/ policies.

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Factors affecting facility location planning

1. Proximity to customers (markets) 2. Proximity to raw material 3. Good transportation facilities 4. Availability of power supply 5. Basic amenities 6. Government policies 7. Environmental and community considerations 8. Proximity to subcontractors 9. Easy availability of cheap land 10. Less construction cost 11. Availability of cheap, skillful and efficient labour 12. Residential complexes, schools hospitals, clubs, etc.

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Locating Foreign Operations Facilities

Trade barriers International customers International competition Regulations Additional resources Lower cost Incentives Economies of scale Synergy Offensive in competitors home.

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A Sequence of Decisions
National Decision Political, social, economic stability; Currency exchange rates; . . . . .

Regional Decision

Climate; Customer concentrations; Degree of unionization; . . . . .

Transportation system availability; Preference of management; . . . . . Site size/cost; Environmental impact; Zoning restrictions; . . . . .

Community Decision

Site Decision

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Factors Affecting the Location Decision

Economic
Site acquisition, preparation and construction costs Labor costs, skills and availability Utilities costs and availability Transportation costs Taxes

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Factors Affecting the Location Decision

Non-economic
Labor attitudes and traditions Training and employment services Communitys attitude Schools and churches Recreation and cultural attractions Amount and type of housing available

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Facility Types and Their Dominant Locational Factors

Mining, Quarrying, and Heavy Manufacturing
Near their raw material sources Abundant supply of utilities Land and construction costs are inexpensive Availability and cost of labor

Light Manufacturing
Warehousing
Proximity to transportation facilities Incoming and outgoing transportation costs

. . . more

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Facility Types and Their Dominant Locational Factors

R&D and High-Tech Manufacturing
Ability to recruit/retain scientists, engineers, etc. Near companies with similar technology interests

Retailing and For-Profit Services

Near concentrations of target customers

Government and Health/Emergency Services

Near concentrations of constituents

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Analyzing Service Location Decisions

Consumer Behavior Research Market Research Data Gathering for Each Location Alternative Revenue Projections for Each Location Alternative Profit Projections for Each Location Alternative Why do customers buy our products and services? Who are our customers? What are their characteristics? Where are our customers concentrated? What are their traffic/spending patterns? What are the economic projections? What is the time-phased revenue? What are the projected revenues less time-phased operating costs?

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Steps in Facility Location Planning

Generate a list of alternative location options for the facility

Find out factors relevant to the facility being planned

Factor Rating Method

Break Even Analysis

Simple Median Method

Centre of Gravity Model

LoadDistance Method

Transportati on Model

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Factor-Rating Method
There are many factors, both qualitative and quantitative, considered in choosing a location. The factors affecting the facility location decision are all important for any type of industry. At the same time, the importance of each of these factor may vary for different types of plants. Managers can use weightings to make the decision process more objective.

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Factor-Rating Method
This method is popular because a wide variety of factors can be included in the analysis Six steps in the method
1. 2. 3. 4. 5. 6. Develop a list of relevant factors called critical success factors Assign a weight to each factor Develop a scale for each factor Score each location for each factor Multiply score by weights for each factor for each location Recommend the location with the highest point score

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Factor-Rating Example
Five flags over Florida, a US chain of 10 family-oriented theme parks, has decided to expand overseas by opening its first park in Europe. It whishes to select between France and Denmark. The ratings sheet lists critical success factors that management has decided are important; their weightings and their rating for two possible sites France and Denmark are shown

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Factor-Rating Example
Critical Success Factor
Labor availability and attitude People-to car ratio Per capita income Tax structure Education and health Totals Weight

Scores (out of 100) France Denmark

Weighted Scores France Denmark

.25
.05 .10 .39 .21 1.00

70
50 85 75 60

60
60 80 70 70

(.25)(70) = 17.5 (.25)(60) = 15.0

(.05)(50) = 2.5 (.05)(60) = 3.0

(.10)(85) = 8.5 (.10)(80) = 8.0 (.39)(75) = 29.3 (.39)(70) = 27.3 (.21)(60) = 12.6 (.21)(70) = 14.7 70.4
Table 8.3

68.0

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Solution
Weights and scores are used to evaluate alternative site locations. Given the option of 100 points assigned to each factor, the French location is preferable. Insight: By changing the points or weights slightly for those factors about which there is some doubt, we can analyze the sensitivity of the decision. For instance, we can see that changing the scores for Labour availability and attitude by 10 points can change the decision. The number used in factor weighting can be subjective and the models results are not exact even though this is a quantitative approach.

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Locational Break-Even Analysis Example

Triveni steels Pvt. Ltd is planning to start a new factory for manufacturing steel utensils. It is considering three location options, namely, Bokaro, Jamshedpur, and Bhilai. The fixed costs at the three locations have been estimated at Rs 8.15 million, Rs 7.377 million, and Rs 7.903 million, respectively. The variable costs at the three locations are estimated at Rs 500 per unit, Rs 580 per unit, and Rs 490 per unit, respectively. The factory will have annual production capacity of 10,000 steel utensils and in the initial years it will operate at 75% efficiency. Find the best location option, which has the lowest total cost of production.

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Solution
At 75% efficiency, the factory will annually produce 75% of 10,000 units = 7,500 units Total production cost TC = FC + VC * no. of units For Bokaro TC = 8,150,000 + (500 x 7,500) = Rs 11,900,000 For Jamsedpur TC = 7,377,000 + (580 x 7,500) = Rs 11,727,000 For Bhilai TC = 7,903,000 + (490 x 7,500) = Rs 11,578,000 Hence, Bhilai is the best location from the economic point of view, as the total cost is minimum there.

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Locational Break-Even Analysis Example

John Kros, owner of Carolina Ignitions Manufacturing, needs to expand his capacity. He is considering three locations Akron, Bowling Green, and Chicago for the new plant. The compnay wishes to find the most economical location for an expected volume of 2,000 units per year. Kros conducts locational break even analysis. To do so, he determines that fixed costs per year at he sites are $30,000, $60,000 and $110,000, respectively; and variable costs are $75 per unit, $45 per unit and $25 per unit, respectively. The expected selling price of each ignition system produced is $120.

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Locational Break-Even Analysis Example

Three locations: City Fixed Cost Variable Cost $75 $45 $25 Total Cost $180,000 $150,000 $160,000

Akron $30,000 Bowling Green $60,000 Chicago $110,000 Selling price = $120 Expected volume = 2,000 units

Total Cost = Fixed Cost + Variable Cost x Volume

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Locational Break-Even Analysis Example

$180,000 $160,000 $150,000 $130,000 $110,000 $80,000 $60,000 $30,000 $10,000 | 0

Akron lowest cost

| |

Bowling Green lowest cost

| | |

Locational break-even results can be sensitive to input data. For a volume of less than 1,000, Akron would be preferred. For a volume greater than 2,500, Chicago would yield the greatest profit. Chicago
lowest cost
|

Annual cost

500

1,000

1,500

2,000

2,500

3,000

Volume

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Simple Median Model

This model is used for the final selection of the best location option. Transportation cost is a major consideration in facility location planning. This model helps to locate a new facility such that the total transportation cost between the new facility and the existing facilities of the organization is minimum.

The term median refers to the statistical median of the loads to be transported between the existing facilities and the new facility.

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Locating New Plant

The table below gives information about the existing facilities of a beverage company The existing facilities may be the factories, warehouses, or markets of the company. The company wants to know where it should locate its new plant.
Coordinate location (x,y) (10,80) (30,60) (80,50) (50,10) (80,10) Cost (C) of moving one unit by unit distance (Rs) 10 10 10 10 10 Annual Load (L) Units 452 678 483 711 539

Facility (F)

Bareilly Shahjahanpur Gonda Kanpur Sultanpur

2,863

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Plot of the Existing Facilities (F)

North-South 120 90 60 30
|

Bareilly (10,80)

Shahjanpur (30,60) Kanpur (50,10)

| |

Gonda (80,50)

Sultanpur (80,10)
| | |

30 Arbitrary origin

60

90

120

150

East-West

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Step 1 : Find the Median Load

Assume the loads are marked with identification numbers starting from 1 to 2,863. Hence, we may say that the loads are arranged in the ascending order of numbering ( a requirement for finding the median). The median is the [(n+1)/2]th item. Therefore, (2,863 +1)/2, i.e., 1,432 is the median load.

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Step 2 : Find the x coordinate of the New Plant (NP)

Move from the extreme left towards the right along the positive xaxis. In doing so we come across Bareilly first. Assume that loads 1 to 452 has to be moved between Bareilly and the NP as the Bareillys annual load is 452. This range does not include the median load 1,432. Further we come across Shahjanhanpur next, Assume that loads 453 to 1,130 (678 is the annual load of Shahjahanpur) are moved. This range does not include the median load 1,432. We come across Kanpur now. Assume that loads 1,131 to 1,842 (712 is the annual load of Kanpur) are moved between Kanpur and the NP. This rang includes the median load 1,432. Therefore the x coordinate of the new plant is same as the xcoordinate of Kanpur i.e., 50 There fore = 50

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Step 3 : Find the y coordinate of the New Plant (NP)

Move from the bottom towards along the positive y-axis. In doing so we come across Kanpur and Sultanpur simultaneously. Assume that loads 1 to 1,250 have to be moved between Kanpur and the NP as the Kanpur and Sultanpur have annual loads of 711 and 539 repectively. This range does not include the median load 1,432. Further we come across Gonda next, Assume that loads 1251 to 1,733 (483 is the annual load of Gonda) are moved. This range includes the median load 1,432.

Therefore the y coordinate of the new plant is same as the ycoordinate of Gondai.e., 50
There fore = 50

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Plot of the Existing Facilities (F)

North-South 120 90 60 30
|

Bareilly (10,80) New Plant (50,50) Shahjanpur (30,60) Kanpur (50,10)

| |

Gonda (80,50)

Sultanpur (80,10)
| | |

30 Arbitrary origin

60

90

120

150

East-West

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Solution
As shown the route to be followed between, say, NP and Bareilly is represented by a dotted line.

The total distance here is

l50-xl + ly-50l = l50-10l +l80-50l

= 40+30 = 70

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Locating New Plant

Facility (F) Coordinate location (x,y) Distance (D) Cost (C) of Annual moving one Load (L) unit by unit Units distance (Rs) 10 10 10 10 452 678 483 711 Transportat ion Cost (Rs) T= DCL 316,400 203,400 144,900 284,400

Bareilly Shahjahanp ur Gonda Kanpur

(10,80) (30,60) (80,50) (50,10)

70 30 30 40

Sultanpur

(80,10)

70

10

539

377,300
1,326,400

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Center-of-Gravity Method
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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Center-of-Gravity Method
Place existing locations on a coordinate grid
Grid origin and scale is arbitrary Maintain relative distances

Calculate X and Y coordinates for center of gravity

Assumes cost is directly proportional to distance and volume shipped

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Center-of-Gravity Method
dixQi x - coordinate =
i

Qi
i

diyQi

y - coordinate =
where dix = diy = Qi =

Qi
i

x-coordinate of location i y-coordinate of location i Quantity of goods moved to or from location i

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= 49.66

= 39.64

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Center-of-Gravity Method
Quains Discount Department Stores, a chain of four large Target type outlets, has store locations in Chicago, Pittsburg, New York, and Atlanta; they are currently being supplied out of an old and inadequate warehouse in Pittsburg, the sit of the chains first store. The firm wants to find some central location in which to build a new warehouse.
It gaters data on demand rates at each outlet as , Chicago = 2,000, Pittusburg = 1,000, New york = 1,000 and Atlanta = 2,000

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Center-of-Gravity Method
North-South

New York (130, 130)

120 90 60 30
|

Chicago (30, 120) Pittsburgh (90, 110)

Atlanta (60, 40)

| | | | |

30 Arbitrary origin

60

90

120

150

East-West

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Center-of-Gravity Method
Store Location

Number of Containers Shipped per Month 2,000 1,000 1,000 2,000

Chicago (30, 120) Pittsburgh (90, 110) New York (130, 130) Atlanta (60, 40)

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) x-coordinate = 2000 + 1000 + 1000 + 2000 = 66.7 (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 1000 + 2000 = 93.3

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Center-of-Gravity Method
North-South

New York (130, 130)

120 90 60 30
|

Chicago (30, 120) Pittsburgh (90, 110)

Center of gravity (66.7, 93.3)

Atlanta (60, 40)

| | | | |

30 Arbitrary origin

60

90

120

150

East-West

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Insight
By overlaying a US map on this exhibit, we find this location is near central Ohio. The firm may well wish to consider Columbus, Ohio, or a nearby city as an appropriate location.

But it is important to have both NorthSouth and East-West interstate highways near the city selected to make delivery times quicker.

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The Load-Distance Method

The load distance method enables a location planner to evaluate two or more potential candidates for locating a proposed facility vis-vis the demand (or supply)points. This method provides an objective measure of the total load distance for each of the potential candidates.

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The Load-Distance Method

Let us use the following notation for the load-distance method:
Number of existing demand (or supply) points in the grid map = n Index used for existing demand (or supply) points = i Coordinates of existing demand (or supply) points i and proposed facility = Number of candidates for the proposed facility = Index used for the candidates = Coordinates of the candidate j in the grip map = The distance measure for the Cartesian coordinates between an existing demand (or supply) point i and a candidate j for the proposed facility is given by

The load-distance for a candidate j for the proposed facility is nothing but the product of the distance between the candidate and all existing demand (or supply) points. It is given by:

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Manufacturer of Industrial Component

A manufacturer of certain industrial component is interested in locating a new facility in a target market and would like to know the most appropriate place in the target market to locate the proposed facility. The manufacturer feels that there are no location constraints in the target market (that is, any point in the target market is good enough). There are four supply points in the locality that will provide key inputs to the new facility A, B, C, and D.

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Manufacturer of Industrial Component

A two-dimensional grid map of the target market in which we would like to locate a new facility, along with the distance coordinates of the four supply points is on the next slide. The annual supply from these four points to the proposed facility is 200, 450, 175 and 150 tonnes respectively. The coordinates with in parentheses show the distance from the origin of the target map to each of the supply points, the number that follows is the annual shipment (in tonnes) form these points to the proposed facility. Identify the most appropriate point in the grid map to locate the new facility.

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Grid Map
A (125, 550), 200
500 400 300 200 100
| | | |

B (350, 400), 450

Center of gravity (366, 376), 175

D (700, 300, 150)

C (450, 125), 175

| | | |

120 Arbitrary origin

200

300

400

500

600

700

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The Load-Distance Method

Consider the previous example. Assume that the manufacturer came to know that there are constraints in locating the new facility. Based on an initial survey of possible sites for the proposed facility, the manufacturer identified four candidates. The figure in the next slide has the location coordinates of the four candidates (numbered 1 to 4). What is the best location for the proposed new facility.

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Grid Map
A (125, 550), 200
500 400 300 200 100
| | | |

1 (300, 500) 2 (200, 500) 3 (500, 350) B (350, 400), 450 D (700, 300) 4 (400, 200)

C (450, 125), 175

| | | |

120 Arbitrary origin

200

300

400

500

600

700

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Solution
Let us first summarize the coordinates of the existing supply points and the candidates for the proposed facility by tabulating them from the grid map for the target market. Let us also tabulate the quantum of shipment from these supply points to the proposed facility. The table on the next slide presents this information

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Solution
Coordinates of supply points and proposed locations.
Existing Supply points Candidates for proposed facility

A
B C D

125
350 450 700

550
400 125 300

200
450 175 150

1
2 3 4

300
200 500 400

500
500 350 200

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Solution
Using the formula for distance measure we can compute values between every pair of supply point and candidate for locating new facility.
The computation for A-1 is as follows

= 182.00

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Solution
Computing for all the pairs in this manner, one can obtain a matrix of , as shown in the table.
1 A B C 182.00 111.80 403.89 2 90.14 180.28 450.69 3 425.00 158.11 230.49 4 445.11 206.16 90.14

447.21

538.52

206.16

316.23

Also, using the formula for Load-Distance we can obtain the values and select the candidate with the least value of LD.
1 2,24,474.41 2 2,58,801.57 3 2,27,410.05 4 2,45,000.8

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Insight
AS we see from the table, Candidate 1 has the least LD value and therefore, is the most appropriate place to locate the proposed new facility. It is interesting to note the Candidates 1 and 3 are very close to the center of gravity that we computed earlier and therefore they have the minimum LD compared to the other two sites.

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Transportation Model
Finds amount to be shipped from several points of supply to several points of demand Solution will minimize total production and shipping costs A special class of linear programming problems

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Worldwide Distribution of Volkswagens and Parts

Figure 8.4

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Service Location Strategy

1. Purchasing power of customer-drawing area 2. Service and image compatibility with demographics of the customer-drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firms and competitors locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management

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Location Strategies
Service/Retail/Professional Location Revenue Focus Volume/revenue Drawing area; purchasing power Competition; advertising/pricing Physical quality Parking/access; security/lighting; appearance/image Cost determinants Rent Management caliber Operations policies (hours, wage rates) Goods-Producing Location Cost Focus Tangible costs Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, and so on Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government

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Location Strategies
Service/Retail/Professional Location Techniques Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of area Center-of-gravity method Geographic information systems Goods-Producing Location Techniques Transportation methods Factor-rating method Locational break-even analysis Crossover charts

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Location Strategies
Service/Retail/Professional Location
Assumptions Location is a major determinant of revenue High customer-contact issues are critical Costs are relatively constant for a given area; therefore, the revenue function is critical

Goods-Producing Location
Assumptions Location is a major determinant of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on the identifiable costs Intangible costs can be evaluated

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How Hotel Chains Select Sites

Location is a strategically important decision in the hospitality industry
La Quinta started with 35 independent variables and worked to refine a regression model to predict profitability The final model had only four variables
Price of the inn Median income levels State population per inn Location of nearby colleges r2 = .51 51% of the profitability is predicted by just these four variables!

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Telemarketing/Internet Industries
Require neither face-to-face contact nor movement of materials
Have very broad location options

Traditional variables are no longer relevant

Cost and availability of labor may drive location decisions