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Ô Facility role: What role should each facility play? What
processes should be performed at each facility?

Ô Facility location: Where should facilities be located?

Ô Capacity allocation: How much capacity should be allocated to

each facility?

Ô Market and supply allocation: What markets should each

facility serve? Which supply sources should feed each facility?

Ô (How many plants, DC¶s, retail stores, etc. to build?)

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Competitive STRATEGY GLOBAL COMëETITION
ëHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

ëRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support ëHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMëETITIVE
ENVIRONMENT ëOLITICAL, EXCHANGE
RATE AND DEMAND RISK

ëHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
ëRODUCTION METHODS
Skill needs, response time

FACTOR COSTS ëHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

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Ô Once a firm has decided to open a new facility OR relocate an existing
facility, It must decide where that facility should be located.

Ô Facility location problem involves the evaluation of various sites for a new
facility.

Ô There are several factors that influence the Facility Location Decision:
Labor availability, Labor cost, Labor Skills;
Materials Availability, Material cost, material quality;
Equipment availability, Equipment Cost;
Land availability, Land suitability, Land cost;
Energy availability, energy cost;
Water availability, water quality, water cost.

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 Factors Related to market

Ô ëroximity to the firm¶s market, size of the market, potential needs of the
market.

Factors Related to the Infrastructure

Ô Availability of Financial Institutions, Strength of Financial Institutions

Ô Government Stability, Government taxes, Import and Export restrictions.
Ô Quality of life, Cultural issues,
Ô Environmental regulations, Transportation availability, Transportation cost
Ô And finally, Competitors¶ size, strength and attitude in that region.

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ÔThere are many analytical techniques that can
be used in facility location decision.

ÔSome of these are:

1) Factor Rating
2) Cost-ërofit-Volume analysis
3) Transportation and Simulation Models.

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Ô In factor rating method, first we must identify the Most Important Factors in
evaluating alternative sites for the new facility.

Ô Then we should assign a weight between 0 and 100 to each of these factors.

Ô Each alternative location will then be rated based on these factor weights.

Ô The most weighted alternative is selected as the best alternative.

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ÔSamson Ltd. is considering three alternative sites for
its new facility.

ÔAfter 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
- ëroximity to the firm¶s markets.

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Ô Weights reflecting the relative importance of each factor have been
assigned as follows:

Ô Based on these criteria, the three Alternative sites were scored between 0
and 100 points:

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Ô Now we will multiply each score by its corresponding factor weight:
Ô Weighted scores are calculated as: (Site Score)x(Factor Weight)

From these results, the largest total weight is for Site A. It appears to be the
best location.

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ÔWhat happens if we change the factor weights.
Lets use the following factor weights:
ÔSkilled labor: 0.45; Raw Materials: 0.40; and
Market: 0.15
ÔThen the following results are obtained:

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ÔIn this case, Site C appears to be the best choice with

largest weight score.

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ÿ
 
When the fixed and variable costs for each site differ, |ost-profit-volume
analysis can be used to identify the location with the lowest cost.

EXAMPLE

Ô Foster ëaper Ltd. is considering three alternative sites for its new production
facility.
Ô The Annual ëroduction Cost associated with each alternative is a linear
function of the production volume. That is:

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Total ëroduction Cost = (Fixed Cost) + (variable unit cost) x (annual production
volume)

For Site A: ërod. Cost = 10,000,000 + 250 x

For Site B: ërod. Cost = 25,000,000 + 150 x
For Site C: ërod. Cost = 60,000,000 + 50 x
Ô Assume that The expected annual production volume is 2,50,000 units.
(· production volume = 2,50,000)

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

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ÔAt a production volume of 2,50,000 units, site B has
the lowest cost, because
ÔFor Site A: ërod. Cost = 10,000,000 + 250 (2,50,000)
= 72,500,000
ÔFor Site B: ërod. Cost = 25,000,000 + 150 (2,50,000)
= 62,500,000
ÔFor Site C: ërod. Cost = 60,000,000 + 50 (2,50,000)
= 72,500,000

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ÔThis graphic shows that annual production cost changes with
different production volumes.

Ô-If the expected annual production volume is below 150.000

units, then choose site A.

Ô-If the expected annual production volume is between

150.000 and 350.000 units, then choose site B.

Ô-If the expected annual production volume is over 350.000

units, then choose site C.

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Ô A special form of linear programming, that is Transportation Model, can be
used to compare the total transportation cost associated with each alternative
site.

Ô 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.

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Ô Straub Ltd. has V
Vrunning at full capacity in Des Moines, Racine,
and Gary.

Ô These plants supply four Distribution a


 in St. ëaul, Milwaukee,
Chicago, and Detroit.

Ô Straub plans to build a new plant. It has narrowed down the choice of sites
to two possibilities: Kalamazoo and Duluth.

Ô We will now determine which site results in the lowest transportation Cost
by using the
-warehouse demands,
-plant capacities
- unit transportation costs,
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Ô We will approach this problem in the following manner:
Ô We will first assume that the selected plant is the Kalamazoo plant, and
calculate the total transportation cost.
Ô Later, we will assume the selected plant is Duluth. Then we will compare
the transportation costs for both plants.

Ô Now, the first step is to find the Optimal 


 
VV  Va
 Va

combination. This also gives the optimal
transportation cost for the problem.
Ô We can use any of the computerized Lë tools for finding the optimum
values for this problem. Some of these include WINQSB, OM Expert, and
Excel.
Ô We use WINQSB to solve this transportation model. The result is as
follows:

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ÔThe total transportation cost will be $10,225 if the
new plant is built in Kalamazoo.

ÔOn the other hand, The optimal number of units to

ship between each plant and Duluth Warehouse is
found as follows:

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ÔThe total transportation cost will be $13,825 if
the new plant is built in Duluth.

ÔTherefore, the Kalamazoo plant will incur the

lowest transportation cost.

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Ô Firms often Consider many variables and Factors when they choose a
facility location.

Ô These variables are often difficult to estimate and they also change in time.

Ô In these kinds of Dynamic Situations, @imulation may be the best modeling

technique.

Ô Simulation models allow managers to examine a range of Scenarios AND

are well suited to open-ended problems.

Ô Also, developing a simulation model may take considerable time and effort.

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ÔIT systems help with network design by:
1. Making the modeling of the network design
problems easier
2. Containing high-performance optimization
technologies
3. Allowing for ³what-if´ scenarios
4. Interfacing with planning and operational
software

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ÔDo not underestimate the life span of facilities
ÔDo not gloss over the cultural implications
ÔDo not ignore quality of life issues
ÔFocus on tariffs and tax incentives when
locating facilities

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