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Facility Location

Location Analysis

Facility location is the process of

identifying the best geographic location for a service or production facility

Importance of Facility Location


Each prospective location implies a new allocation of

capacity to respective market area Government sometimes play an important role in the choice of the location keeping in view the national benefits Location depends on size and nature of business. A large scale industry needs huge investment and option for extension and cannot be shifted in future.

Importance of Facility Location


Location affected the firms ability to serve

the customers quickly and efficiently. Location affects the competitive advantage. Optimum location reduces transportation cost, labor cost, taxes, etc.

Factors Affecting Location Decisions


Proximity to source of supply:
Reduce

transportation costs of perishable or bulky raw materials high population areas, close to JIT partners

Proximity to customers:
E.g.:

Proximity to labor:
Local

wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley)

More Location Factors


Community considerations: Local communitys attitude toward the facility (e.g.: prisons, utility plants, etc.) Site considerations: Local zoning & taxes, access to utilities, etc. Quality-of-life issues: Climate, cultural attractions, commuting time, etc. Other considerations: Options for future expansion, local competition, etc.

Other factors to consider


Skilled workforce Environmental laws / cost of compliance Cost of utilities, labor, taxes Suppliers close by fast & cheap access Customers close by Competitors close by? Skilled labor pool International - control issues?

Globalization - Should Firm Go Global?


Globalization is the process of locating

facilities around the world Potential advantages:

Inside track to foreign markets, avoid trade barriers, gain access to cheaper labor

Potential disadvantages: Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation Other issues: Language barriers, different laws & regulations, different business cultures

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 Procedures for evaluation location

alternatives include

Factor rating method A procedure that can be used to evaluate multiple alternative locations based on a number of selected factors.

Steps for Factor Rating


Step 1 Identify dominant factors Step 2 Assign weights to factors reflecting the importance of each factor relative to the other factors. Step 3 Select a scale by which to evaluate each location relative to each factor. A commonly used scale is a five-point scale, with 1 being poor and 5 excellent. Step 4 Evaluate each alternative relative to each factor; using the scale selected in Step 3. Step 5 For each factor and each location, multiply the weight of the factor by the score for that factor and sum the results for each alternative. Step 6 Select the alternative with the highest score.

Factor Rating
Antonio is evaluating two different locations for his new Italian restaurant. Costs are comparable at all two locations. He has identified 5 factors that he considers important and has decided to use factor rating to evaluate his two location alternatives based on a five-point scale, with 1 being poor and 5 excellent.

Factor Rating Example

Load-distance model A procedure for evaluating location alternatives based on distance. The objective of the model is to select a location that minimizes the total amount of loads moved weighted by the distance traveled.

A load represents the goods moved in or out of a facility or the number of movements between facilities. For Example, if 200 boxes of Kelloggs cereal are shipped

between the local warehouse and a grocery store, that is load between the warehouse and grocery store. The idea is to reduce the amount of distance between facilities that have a high load between them.

Load Distance Steps


Step 1 Identify Distances
Rectilinear distance

The shortest distance between two points measured by using only north-south and east-west movements.

Step 2 Identify Loads Step 3 Calculate the Load-Distance Score for Each Location

A Load-Distance Model Example: Matrix Manufacturing is considering where to locate its warehouse in order to service its four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered; Mansfield and Springfield, Ohio. Use the load-distance model to make the decision. Calculate the rectilinear distance: dAB 30 10 40 15 45 miles

Multiply by the number of loads between each site and the four cities

Step 1 Identify Distances


Distance to Springfield
City
Cleveland Columbus Cincinnati |11-6| |4-6| + + |22-6.5| |7-6.5| |1-6.5| = 20.5 = 4.5 = 7.5 |10-6| +

Dayton

|3-6|

|6-6.5|

= 3.5

Distance to Mansfield
City Cleveland Columbus Cincinnati Dayton |11-11| |4-11| |3-11| + + + |22-14| |7-14| |1-14| |6-14| =8 =8 = 20 = 16 |10-11| +

Step 2 Identify Loads

City
Cleveland Columbus Cincinnati Dayton

Load Between City and Warehouse

15 10 12 4

Step 3 Calculating the Load-Distance Score for Springfield vs. Mansfield


Computing the Load-Distance Score for Springfield City Load Distance ld Cleveland 15 20.5 307.5 Columbus 10 4.5 45 Cincinnati 12 7.5 90 Dayton 4 3.5 14 Total Load-Distance Score(456.5) Computing the Load-Distance Score for Mansfield City Load Distance ld Cleveland 15 8 120 Columbus 10 8 80 Cincinnati 12 20 240 Dayton 4 16 64 Total Load-Distance Score(504)

The load-distance score for Mansfield is higher than for

Springfield. The warehouse should be located in Springfield.

The Center of Gravity Approach


This approach requires that the analyst find the center

of gravity of the geographic area being considered

Computing the Center of Gravity for Matrix

Manufacturing
Xc.g.

l X l
i i

325 7.9 ; Yc.g. 41

l Y l
i i

436 10.6 41

Break Even Analysis


Break-even analysis computes the amount of

goods required to be sold to just cover costs Break-even analysis includes fixed and variable costs Remember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q.

Total cost = F + cQ
Total revenue = pQ Break-even is where Total Revenue = Total Cost

Q = F/(p-c)
Q = break-even quantity p = price/unit c = variable cost/unit F = fixed cost

Break-Even Analysis
Break-even analysis can be used for location

analysis especially when the costs of each location are known

Step 1: For each location, determine the fixed and variable costs Step 2: Plot the total costs for each location on one graph Step 3: Identify ranges of output for which each location has the lowest total cost Step 4: Solve algebraically for the break-even points over the identified ranges

Example using Break-even Analysis: Clean-Clothes Cleaners is considering four possible sites for its new operation. They expect to clean 10,000 garments. The table and graph below are used for the analysis.

Example 9.6 Using Break-Even Analysis Location Fixed Cost Variable Cost Total Cost A $350,000 $ 5(10,000) $400,000 B $170,000 $25(10,000) $420,000 C $100,000 $40(10,000) $500,000 D $250,000 $20(10,000) $450,000
From the graph you can see that the two lowest cost intersections

occur between C & B (4667 units) and B & A (9000 units) The best alternative up to 4667 units is C, between 4667 and 9000 units the best is B, and above 9000 units the best site is A

The Transportation Method

The transportation method of linear programming

can be used to solve specific location problems It could be used to evaluate the cost impact of adding potential location sites to the network of existing facilities It could also be used to evaluate adding multiple new sites or completely redesigning the network

Capacity Planning and Facility Location Across the Organization


Capacity planning and location analysis affect

operations management and are important to many others


Finance provides input to finalize capacity decisions Marketing impacted by the organizational capacity and location to customers

Highlights

Several tools can be sued to facilitate location

analysis. Factor rating is a tool that helps managers evaluate qualitative factors. The loaddistance model and center of gravity approach evaluate the location decision based on distance. Break-even analysis is used to evaluate location decisions based on cost values. The transportation method is an excellent tool for evaluating the cost impact of adding sites to the network of current facilities.

QUIZ
1. It is the process of identifying the best geographic location for a service or production facility. 2. It is the process of locating facilities around the world. 3. It provides input to finalize capacity decisions. 4. It impacted by the organizational capacity and location to customers. 5. A procedure that can be used to evaluate multiple alternative locations based on a number of selected factors. 6-11. Factors Affecting Location Decisions 12-14. 3 Step Procedure for Making Local Decisions

15. This approach requires that the analyst find the center of gravity of the geographic area being considered. 16. A procedure for evaluating location alternatives based on distance. 17. It computes the amount of goods required to be sold to just cover costs. 18. It could be used to evaluate the cost impact of adding potential location sites to the network of existing facilities. 19. The shortest distance between two points measured by using only north-south and east-west movements. 20.