Facilities Location Decisions

A location planning exercise requires three steps:

Identification of factors which influences location decision Establishing the relative importance of these measures for location decision Develop a methodology to assess the impact of these factors

Factors affecting location decision

Market related issues Market for product and services Raw material availability Number and proximity of suppliers Availability of skilled labour Quality of infrastructure Regulatory and Policy issues Government and economic stability Quality of legal and other institutions Trading blocks and trading agreements Cost related issues Wage rates Transportation costs Taxes and other tariff

Other issues Culture Climate Quality of life

LOCATION PLANNING METHODS

Location Decisions:
One facility multiple candidates (eg: To choose a location for opening a new plant out of six alternatives available) Multiple facility multiple candidates (eg: To choose four locations for four warehouses out of 10 alternatives available)

I. Location Factor Rating

Four steps:
Identify relevant factors Establish relative importance
Rating each factor in the scale of 0 to 100. Normalization of ratings to obtain the relative weights

Rate the performance of each location in each factor using a rating mechanism Compute the total score for each location, based on its performance against each factor and rank them in the decreasing order of the score

Example: A manufacture of garments is actively considering five alternative locations for setting up its factory. The firm arrived at six factors for final site selection. The ratings of each factor (on a scale of 0 to 100) are provided. Also the ratings of the locations against each factor (on a scale of 0 to 100) are given. Use this information to rank the locations.
Locations I 20 30 80 80 70 20 II 40 30 30 20 70 40 III 60 40 50 10 45 90 IV 35 60 60 20 50 50 V 55 80 50 20 50 60

Factors Availability of infrastructure Size of the market Industrial relations Tax benefits Availability of cheap labour Nearness to port

Rating 90 60 50 30 30 65

II. Centre of Gravity Method

Use of distance measure to evaluate the impact of a proposed location This approach is beneficial in situations of locating the facility close to the demand points (or supply points, if raw material is supplied from several locations) In the centre of gravity method, all demand points are represented in a Cartesian coordinate system Each demand point will also have weights, which indicate the quantum of demand per unit time In this context, it is possible to identify the centre of gravity of the various demand points Locating the new facility at this point will be most appropriate

 Let the number of existing demand (or supply) points be n Coordinates of location i in the grid map be (xi, yi) Quantum of shipment between existing demand (or supply) point i and the proposed facility be Wi. Coordinates of the centre of gravity in the grid map be (Xc, Yc) Coordinates of the centre of gravity are given by:

Xc

x W
i i 1 n

W
i 1

and
i

Yc

y W
i i 1 n

W
i 1

Example: A manufacturer of a certain industrial component is interested in locating a new facility in a target market. There are four supply points A, B, C and D, in the locality that will provide key inputs to the new facility A(125, 550), 200 B(350, 400), 450 C(450, 125), 175 D(700, 300), 150 The coordinates within parentheses show the distance from the origin and the number following is the annual supply. Plot the supply points on a two-dimensional grid map of the target market and identify the most appropriate point to locate the new facility.

III. 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 Load-distance measure for each candidate is computed and the candidate with minimum load-distance value is selected

The number of existing demand (or supply) points be n Index used for demand (or supply) points be i Coordinates of demand point i in the grid map be (xi, yi) Quantum of shipment between existing demand (or supply) point i and the proposed facility be Wi. The number of candidates for the proposed facility be m Index used for candidates for the proposed facility be j Coordinates of candidate j in the grid map be (Xj, Yj) The distance between an existing demand (or supply) point i and a candidate j for the proposed facility is given by

Dij (x i X j ) 2 (y i Yj ) 2
The load-distance for a candidate j for the proposed facility is

LD ij

D W
ij i 1

Example
Consider the above example. The location coordinates of the four candidates (1 to 4) are given as: 1(300, 500) 2(200, 500) 3(500, 350) 4(400, 200).

What is the best location for the proposed new facility?

IV Transportation Model
Selection of multiple locations instead of just one. Decision regarding which demand points will be served by each of the locations and to what extent so that total transportation cost is minimum

Example:
Market 1 Market 2 Market 3 Warehouse A Warehouse B Warehouse C Warehouse D Demand 100 30 75 20 2000 70 95 20 40 1500 50 40 65 95 1200 Market 4 30 125 40 85 2800 Market 5 40 50 30 80 2500 Supply 2900 2300 3700 1100 10000

Final Allocation Table

Market 1 Warehouse A Warehouse B Warehouse C Warehouse D Demand
1100 900 75 1500 20 40 95 85 20 100 30

Market 2
70 95

Market 3
50 40 1200 65

Market 4
30 2800 125

Market 5
40 100 50 200 30 2200 80

Supply 2900 2300 3700 1100 10000

40

2000

1500

1200

2800

2500

Total cost of transportation = Rs 2,91,000