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Facility Location

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Location Options

Expanding existing facilities


Building a new facility (for the
beginners)
Moving to another facility
Addition of one or more facilities to
the existing network in order to
expand capacity
Closing of one or more facilities in
order to shrink capacity

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The Need for Location Decisions
Location decisions may arise for a variety of reasons:
Addition of new facilities
As part of a marketing strategy to expand
markets
Growth in demand that cannot be satisfied by
expanding existing facilities
Depletion of basic inputs requires relocation
Shift in markets
Cost of doing business at a particular location
makes relocation attractive
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Location Decisions: Strategically
Important
Location decisions:
Are long-term decisions
Are closely tied to an organizations strategies
Low-cost
Convenience to attract market share
Effect capacity and flexibility
Are difficult to reverse
Represent a long-term commitment of resources
Effect investment requirements,
Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc)
Effect revenues,
Effect operations
Impact competitive advantage
Important to supply chains

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Location Decisions: Objectives
Location decisions are based on:
Cost or profit potential and customer service
Finding a number of acceptable locations from which to choose (no single
location may be better than others)
Position in the supply chain
End: accessibility, consumer demographics, traffic patterns, and local
customs are important
Middle: locate near suppliers or markets
Beginning: locate near the source of raw materials
Supply chain management issues such as supply chain configuration
Centralized vs. decentralized distribution

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Industrial Location Decisions

Cost focus
Revenue varies little
between locations
Location is a major
cost factor
Location effects shipping & 1995 Corel Corp.

production costs (costs vary


greatly between locations
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Service Location Decisions
Revenue focus
Costs vary little between market areas
Location is a major revenue factor
Factors such as Traffic volume, good
transportation, customer
safety and convenience
most important
Location effects amount of
customer contact
Locaiton effects volume of
business

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Organizations That Need To Be
Close to Markets
Government agencies
Police & fire departments
Post Office
Retail Sales and Service
Fast food restaurants, supermarkets, gas stations
Drug stores, shopping malls
Bakeries
Other Services
Doctors, lawyers, accountants, barbers
Banks, auto repair, motels
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General Procedure for Making
Location Decisions
Decide on the criteria to use for evaluating location alternatives
Identify important factors (such as location of markets or raw
materials)
Develop location alternatives
- identify the country or countries for location
- identify the general region for location
- identify a small number of community
alternatives
- identify site alternatives among the cummunity
alternatives
Evaluate the alternatives and make a selection
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Location Decision Sequence
Country Region/Community

Site
.
.

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Factors That Affect Location Decisions
Global Factors
Regional
Factors

Community Considerations Site-related Factors

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Global Location: Facilitating
Factors
Key factors that have contributed to the attractiveness of
globalization:
Trade Agreements such as
North American Free Trade Agreement (NAFTA)
General Agreement on Tarriffs and Trade (GATT)
U.S.-China Trade Relations Act
EU and WTO efforts to facilitate trade
Technology
Advances in communication and information technology

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Global Location: Benefits

A wide range of benefits have accrued to


organizations that have globalized operations:
Markets
Cost savings
Legal and regulatory
Financial
Other

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Global Location: Disadvantages

There are a number of disadvantages that


may arise when locating globally:
Transportation costs
Security costs
Unskilled labor
Import restrictions
Criticism for locating out-of-country

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Global Location: Risks
Organizations locating globally should be
aware of potential risk factors related to:
Politicalinstability and unrest
Terrorism
Economic instability
Legal regulation
Ethical considerations
Cultural differences

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Managing Global Operations

Managerial implications for global operations:


Language and cultural differences
Risk of miscommunication
Development of trust
Different management styles
Corruption and bribery
Level of technology and resistance to technological
change
Domestic personnel may resist locating, even temporarily

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Location: Identifying a Country

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Location: Identifying a Region
Primary regional factors:
Locating close to the raw materials
Necessity
Perishability
Transportation costs
Locating close to the markets
As part of a profit-oriented companys competitive strategy
So not-for-profits can meet the needs of their service users
Distribution costs and perishability

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Location: Identifying a Region
Labor factors
Cost of labor
Availability of suitably skilled workers
Wage rates in the area
Labor productivity
Attitudes toward work
Whether unions pose a serious potential problem

Other factors
Climate and taxes may play an important role in location
decisions

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More on Regional Location Factors
Labor (availability, Incentive packages
education, cost and Governmental, legal
unions) regulations, policies and
Proximity of customers barriers
Number of customers Environmental regulations
Construction/leasing costs Raw material availability
Land costs Commercial travel
Modes and quality of Climate
transportation Infrastructure (cost and
Transportation costs availability of utilities)
Quality of life
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More on Regional Location Factors

Community government Availability of sites


Local business regulations Financial Services
Government services Community
Business climate inducements
Community services Proximity of suppliers
Taxes Education system
Environmental impact Free trade zones
issues

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Geographic Information System
(GIS)
GIS
A computer-based tool for collecting, storing,
retrieving, and displaying demographic data on maps
Aids decision makers in
Targeting market segments
Identifying locations relative to their market
potential
Planning distribution networks
Portraying relevant information on a map makes it
easier for decision makers to understand

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Location: Identifying a Community
Many communities actively attempt to attract new businesses they
perceive to be a good fit for the community
Businesses also actively seek attractive communities based on such
factors such as:
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Development support

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Location: Identifying a Site

Primary site location considerations are


Land
Transportation
Environmental
Zoning
Legal
Other restrictions

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Site Location Factors
Customer base Zoning restrictions
Construction/ leasing cost Safety/security
Site costs (land, expansion,
Competition
parking, etc.
Quality of life issues in the
Area business climate
community (education, health Income level
care, sports, cultural activities Host community
etc.) Competitive advantage
Site size
Utilities including gas,
Transportation
electric, water and their
Traffic costs
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Plant Strategies

Single Plant Strategy


Multiple Plant Strategy
- Product Plant Strategy
- Market Area Plant Strategy
- Process Plant Strategy

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Multiple Plant Strategies
Product plant strategy
Entire products or product lines are produced in separate
plants, and each plant usually supplies the entire
domestic market
Market area plant strategy
Plants are designated to serve a particular geographic
segment of the market
Plants produce most, if not all, of a companys products

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Multiple Plant Strategies

Process plant strategy


Different plants focus on different aspects of a process
automobile manufacturers engine plant, body stamping
plant, etc.
Coordination across the system becomes a significant issue
General-purpose plant strategy
Plants are flexible and capable of handling a range of
products

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Service and Retail Locations

Nearness to raw materials is not usually a consideration


Customer access is a
Prime consideration for some: restaurants, hotels, etc.
Not an important consideration for others: service
call centers, etc.
Tend to be profit or revenue driven, and so are
Concerned with demographics, competition,
traffic/volume patterns, and convenience

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Evaluating Location Alternatives
Common techniques for location
evaluation:
Locational cost-volume-
profit analysis
Factor rating method
Load-distance method
Center of gravity method
Transportation model (a
specialized linear
programming method)30
Locational Cost-Profit-Volume Analysis

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Locational Cost-Profit-Volume
Analysis
Locational Cost-Profit-Volume (Break-even)Analysis
A technique for evaluating location choices in
economic terms
Steps:
1. Determine the fixed and variable costs for each
alternative
2. Plot the total-cost lines for all alternatives on the same
graph
3. Determine the location that will have the lowest total
cost (or highest profit) for the expected level of output

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Locational Cost-Profit-Volume
Analysis

Assumptions
1. Fixed costs are constant for the range of
probable output
2. Variable costs are linear for the range of output
3. The required level of output can be closely
estimated
4. Only one product is involved

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Locational Cost-Profit-Volume
Analysis

For a cost analysis, compute the total cost for


each alternative location:
Total Cost FC v Q
where
FC Fixed cost
v Variable cost per unit
Q Quantity or volume of output

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Example: Cost-Profit-Volume Analysis

Fixed and variable costs for four potential


plant locations are shown below:

Fixed Cost Variable Cost


Location per Year per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35

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Example: Cost-Profit-Volume Analysis
Comparison of total costs at a production volume of 10,000

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Example: Cost-Profit-Volume Analysis
$(000) Plot of total costs
800 D
700
600 B
500 C
400 A
300
200
100
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

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Example: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

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Example: Cost-Profit-Volume
Analysis
Range approximations
B Superior (up to 4,999 units)
Total Cost of C Total Cost of B
150,000 20Q 100,000 30Q
50,000 10Q
Q 5,000
C Superior (>5,000 to 11,111 units)
Total Cost of A Total Cost of C
250,000 11Q 150,000 20Q
100,000 9Q
A superior (11,112 units and up)
Q 11,111 .11

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Factor Rating Method

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Factor Rating Method
A general approach to evaluating locations that
includes quantitative and qualitative inputs
Most widely used location technique
Useful for service and industrial locations
Rates locations using both
tangible (quantitative) factors such as short-run and
long-run costs and
intangible (qualitative) factors such as education
quality, labor skills.
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Factor Rating
Procedure:
Determine which factors are relevant
Assign a weight to each factor that indicates its relative importance
compared with all other factors.
Weights typically sum to 1.00
Decide on a common scale for all factors (such as 1-100), and set a
minimum acceptable score if necessary
Score each location alternative along each factor
Multiply the factor weight by the score for each factor, and sum the results
for each location alternative
Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score

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Example: Factor Rating
A photo-processing company intends to open a new branch
store. The following table contains information on two
potential locations. Which is better?
Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to
existing source .10 100 60
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00
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Example: Factor Rating
A photo-processing company intends to open a new
branch store. The following table contains information
on two potential locations. Which is better?
Scores
(Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2

Proximity to
existing source .10 100 60 .10(100) = 10.0 .10(60) = 6.0

Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0


Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00
44 70.6 82.7
Centre of Gravity Method

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Center of Gravity Method
A method for locating a distribution center that minimizes distribution
costs
Finds location of a single distribution center serving several
destinations
Used primarily for services
Treats distribution costs as a linear function of the distance and the
quantity shipped
The quantity to be shipped to each destination is assumed to be fixed
The method necessitates to identify coordinates and weights shipped for
each location and includes the use of a map that shows the locations of
destinations
The map must be accurate and drawn to scale
A coordinate system is overlaid on the map to determine relative
locations

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Center of Gravity Method

Considers
Location of existing destinations eg. Markets, retailers etc.
Volume to be shipped
Shipping distances (or costs)
Shipping cost/unit/mile is constant
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Center of Gravity Method
If quantities to be shipped to every location are equal,
you can obtain the coordinates of the center of gravity by
finding the average of the x-coordinates and the average
of the y-coordinates

x
x i

y
y i

n
where
xi x coordinates of destination i
yi y coordinates of destination i
n Number48
of destinations
Center of Gravity Method
Suppose you are attempting to find the center of gravity
for the problem .
Destination x y

D1 2 2 x
x i

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4.5
n 4
D2 3 5
D3 5 4
D4 8 5 y
y i

16
4
18 16
n 4

Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure

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Center of Gravity Method
When the quantities to be shipped to every location
are unequal, you can obtain the coordinates of the
center of gravity by finding the weighted average of
the x-coordinates and the average of the y-coordinates
Cx
xQ
i i

Q i

Cy
yQ
i i

Q i

where
Qi Quantity to be shipped to destination i
xi x coordinates of destination i
yi y coordinate
50s of destination i
Grid-Map Coordinates
y n n
xQ i i yQ i i
i=1 i=1
2 (x2, y2), Q2 Cx =
y2 n Cy = n
V i V i
i=1 i=1
1 (x1, y1), Q1
y1
where,
3 (x3, y3), Q3 Cx, Cy = coordinates of
y3 the new facility at
center of gravity
xi, yi = coordinates of
existing facility i
Vi = annual volume
x1 x2 x3 51 x shipped from or to the
Center of Gravity Method: Example 1

Suppose the shipments for the problem depicted in


Figure are not all equal. Determine the center of
gravity based on the following information.
Weekly
Destination x y Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 1,000

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Center of Gravity Method: Example 1

Cx
xQ i i

2(800) 3(900) 5(200) 8(100) 6,100
3.05
Q i 2,000 2,000

Cy
y Q i 2(800) 5(900) 4(200) 5(100) 7,400 3.7
i i

Q i 2,000 2,000

The coordinates for the center of gravity are (3.05, 3.7). You
may round the x-coordinate down to 3.0, so the coordinates for
the center of gravity are (3.0, 3.7). This south of destination
D2 (3, 5).

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Center of Gravity Method: Example 1

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Center-of-Gravity Technique:
Example 2
A B C D
y
x 200 100 250 500
700 y 200 500 600 300
C
600 (135) Vt 75 105 135 60
B
500 (105)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x


Miles
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Center-of-Gravity Technique:
Example 2
y
n
700
xiWi C
i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
Cx = 600 = (135) 75 + 105 + 135 + 60 = 238
n B
500
Wi (105)
i=1
Miles

400
D
n 300
(60)
yiWi A
(200)(75) + (500)(105) + (600)(135) + (300)(60)
i = 1 200 (75)
Cy = n
= 75 + 105 + 135 + 60 = 444
100
Wi
i=1
0 100 200 300 400 500 600 700 x
Miles 56
Center-of-Gravity Technique:
Example 2
y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135) Wt 75 105 135 60
B
500 (105)
Center of gravity (238, 444)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x


Miles 57
Worldwide Distribution of
Volkswagens and Parts

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Telemarketing and Internet
Industries
Require neither face-to-face contact with
customers (or employees) nor movement of
material
Web based retail organizations are effectively
location dependent
Presents a whole new perspective on the
location problem

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Final Thought
The ideal location for many
companies in the future will
be a floating factory ship
that will go from port to
port, from country to
country wherever cost
per unit is lowest.

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