FACILITY LOCATION

FACILITY LOCATION
Once a firm has decided to open a new facility
OR relocate an existing facility, It must decide
where that facility should be located.
Need for selecting a suitable site or
location
While starting a new factory
During the expansion of the existing plant
When the existing plant is to be re-located at
some other place, to remove the drawbacks of
the present location or to gain the benefits of a
still better location.
How to solve the problem of location
The problem of site selection of a factory can be
solved in the following three stages:
Selection of the region
Selection of the locality
Selection of Actual Site
Factors affecting size of the firm
Availability of capital
Entrepreneurial Ability & Efficiency
Risk of Uncertainties
Type of Organization
Availability of Inputs
Nature of Product
Government Regulation or Licensing Policy of
Government
 FACILITY LOCATION
Facility location problem involves the evaluation of
various sites for a new facility.

There are various factors that influence the Facility

Location Decision and they can be divided into the
main two categories:
 Primary Factors
 Secondary Factors
Primary Factors
Supply of Raw Material
Nearness to Market
Transport Facilities
Labour supply
Availability of Power
Supply of Capital
Secondary Factors
Facilities
Natural Factors
Political Factors
Government Subsidies & Facilities
Historical & Religious Factors
Initial Start & Goodwill
Personal Factors
FACILITY LOCATION
There are many analytical techniques that can be used
in facility location decision.
Some of these are:
1) Factor Rating
2) Cost-Profit-Volume analysis
3) Transportation Method
4) Simulation Models.
 Method of Factor Rating
In factor rating method, first we must identify the Most
Important Factors in evaluating alternative sites for the
new facility.
Then we should assign a weight between 0 and 100 to
each of these factors.
 Method of Factor Rating
Each alternative location will then be rated based on
these factor weights.
The most weighted alternative is selected as the best
alternative.
Example
Samson Ltd. is considering three alternative sites
for its new facility.
After evaluating the firm’s Needs, the Managers
have Narrowed the list of Important Selection
Criteria down into three major Factors.
- Availability of skilled labor
- Availability of Raw materials, and
- Proximity to the firm’s markets.
Example
Weights reflecting the relative importance of
each factor have been assigned as follows:
Example
Based on these criteria, the three
Alternative sites were scored between 0
and 100 points:
Example
Now we will multiply each score by its
corresponding factor weight:
Weighted scores are calculated as: (Site
Score)x(Factor Weight)
Example
From these results, the largest total weight is for Site
A. It appears to be the best location.
Example
What happens if we change the factor weights. Lets
use the following factor weights:
Skilled labor: 0.45; Raw Materials: 0.40; and
Market: 0.15
Then the following results are obtained:
Example
 Example
In this case, Site C appears to be the best choice with
largest weight score.
Therefore, factor rating method is very sensitive to the
weights assigned to each factor.
Example
Since factor weights, selected factors, and assigned
scores are all determined subjectively, the managers
should be very careful in selecting these items and
numbers.
Cost-Profit-Volume Analysis

When the fixed and

variable costs for each
site differ, Cost-profit-
volume analysis can be
used to identify the
location with the
lowest cost.
Example
Foster Paper Ltd. is considering three alternative sites
for its new production facility.
The Annual Production Cost associated with each
alternative is a linear function of the production
volume. That is:
Example
Total Production Cost = (Fixed Cost) + (variable unit
cost) x (annual production volume)

Assume that The expected annual production volume is

250.000 units.
And further assume that:
(x: production volume = 250.000)
 Example

For Site A: Prod. Cost = 10.000.000 + 250 x

For Site B: Prod. Cost = 25.000.000 + 150 x
For Site C: Prod. Cost = 60.000.000 + 50 x

Based on these information, Which site has the lowest cost?

Example
At a production volume of 250.000 units, site B
has the lowest cost, because
For Site A: Prod. Cost = 10.000.000 + 250
(250.000) = 72.500.000
For Site B: Prod. Cost = 25.000.000 + 150
(250.000) = 62.500.000
For Site C: Prod. Cost = 60.000.000 + 50
(250.000) = 72.500.000
 Transportation Model

A special form of linear

programming, that is
Transportation Model, can
be used to compare the
total transportation cost
associated with each
alternative site.
Transportation Model
The transportation model technique can be used to
determine how many units should be shipped from
each plant to each warehouse To Minimize Total
Transportation Cost.
Simulation Models

Firms often Consider many variables and Factors

when they choose a facility location.
Simulation Models
These variables are often difficult to estimate and they
also change in time.
In these kinds of Dynamic Situations, Simulation may be
the best modeling technique.
Simulation Models
Simulation models allow managers to examine a range
of Scenarios AND are well suited to open-ended
problems.
However, the determination of the parameters in a
simulation is also a challenging task.
Also, developing a simulation model may take
considerable time and effort.
Recent Trends in the Location of
Industries
Priority for the suburban Areas
Industrial development in the notified backwards areas
Establishment of industrial estate
Decentralization of industries
Increased role of the Government in the decision of
location of industries
Competition between Government & institutions
THANK YOU