Facility Location

Location Strategy
One of the most important decisions a
firm makes
Increasingly global in nature
Significant impact on fixed and variable
costs
Decisions made relatively infrequently
The objective is to maximize the benefit
of location to the firm

Factors That Affect Location Decisions

Labor Productivity
Exchange Rates and Currency Risks
Costs
Political Risk, Values, and Culture
Proximity to Markets
Proximity to Suppliers
Proximity to Competitors (Clustering)

Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT

GLOBAL COMPETITION

PHASE I
Supply Chain
Strategy

PHASE II
Regional Facility
Configuration

REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific

TARIFFS AND TAX

INCENTIVES

PHASE IV
Location Choices

AVAILABLE
INFRASTRUCTURE

LOGISTICS COSTS
Transport, inventory, coordination

Facility Types and Their

Dominant Locational Factors

Manufacturing
Near their raw material sources
Abundant supply of utilities
Inexpensive land and construction costs

Warehousing
Proximity to transportation facilities
Incoming and outgoing transportation costs

R&D
Ability to recruit/retain scientists, engineers, etc.
Near companies with similar technology interests

Services
Near concentrations of target customers

Making Location Decisions

Analysis should follow 3 step process:
Step 1: Identify dominant location factors
Step 2: Develop location alternatives
Step 3: Evaluate locations alternatives

Some simple techniques for evaluation location

alternatives include

Factor rating method

Break even analysis
Center of gravity approach
Load-distance model
Transportation problem

Factor-Rating Method
Popular because a wide variety of factors can be
included in the analysis
Six steps in the method
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

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

Weight

Scores
(out of 100)
A
B

Weighted Scores
A
B

.25

70

60

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

.05

50

60

.10
.39

85
75

80
70

(.10)(85) = 8.5 (.10)(80) = 8.0

(.39)(75) = 29.3 (.39)(70) = 27.3

.21
1.00

60

70

(.21)(60) = 12.6 (.21)(70) = 14.7

70.4
68.0

(.05)(50) = 2.5

(.05)(60) = 3.0

Center-of-Gravity
Technique
Locate facility at center of movement in
geographic area
Based on weight and distance traveled;
establishes grid-map of area
Identify coordinates and weights shipped for
each location

Grid-Map Coordinates
y

i=1

2 (x2, y2), W2

y2

x=

i=1

1 (x1, y1), W1

xiWi

i=1
y=

y1

Wi

yiWi

i=1

Wi

where,

3 (x3, y3), W3

y3

x1

x2

x3

x, y =
coordinates of new
facility at center of gravity
xi, yi = coordinates of existing
facility i
Wi =annual weight shipped
from facility i

Center-of-Gravity
Technique
y
700
600

Miles

500

(135)

B
(105)

400
300
200

x
y
W

D
(60)

A
(75)

100
0

100 200 300 400 500 600 700 x

Miles

A
200
200
75

B
100
500
105

C
250
600
135

D
500
300
60

Center-of-Gravity Technique
n

xW
i
i

x=

i=1
n

W
i

(200)(75) + (100)(105) + (250)(135) + (500)(60)

= 75 + 105 + 135 + 60
= 238

i=1
n

yW
i
i

y=

i=1
n

W
i

i=1

(200)(75) + (500)(105) + (600)(135) + (300)(60)

= 75 + 105 + 135 + 60
= 444

Center-of-Gravity
Technique
y
700
600

Miles

500

C
(135)

B
(105)

400
300
200

x
y
W

Center of gravity (238,

444) D
(60)

(75)

100
0

A
200
200
75

100 200 300 400 500 600 700 x

Miles

B
100
500
105

C
250
600
135

D
500
300
60

Load-Distance Technique

Compute (Load x Distance) for each

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

Load-Distance Calculations
n

LD =

i=1

where,
LD =

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

Load-Distance
Potential Sites
SiteX Y
1 360 180
2 420 450
3 250 400

Suppliers
A B C D
X 200 100 250 500
Y 200 500 600 300
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

Load-Distance
Site 2 dA = 333

dB = 323.9 dC = 226.7 dD = 170

Site 3 dA = 206.2 dB = 180.3 dC = 200

Compute load-distance

dD = 269.3

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*

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