Facility Location

1. Facility Location

2. 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

3. 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

4. Location Decisions: Strategically Important • Location decisions: • Are long-term decisions • Are closely tied to an organization’s 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

5. 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

6. Industrial Location Decisions • Cost focus • Revenue varies little between locations • Location is a major cost factor • Location effects shipping & production costs (costs vary greatly between locations © 1995 Corel Corp.

7. 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 ofbusiness

8. 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

9. 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

10. Region/Community Country Site . . Location Decision Sequence

11. Factors That Affect Location Decisions Global Factors Regional Factors Community Considerations Site-related Factors

12. 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

13. Global Location: Benefits • A wide range of benefits have accrued to organizations that have globalized operations: • Markets • Cost savings • Legal and regulatory • Financial • Other

14. 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

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

16. 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

17. Location: Identifying a Country

18. 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 company’s competitive strategy • So not-for-profits can meet the needs of their service users • Distribution costs and perishability

19. 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 locationdecisions

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

21. More on Regional Location Factors • Community government • Local business regulations • Government services • Business climate • Community services • Taxes • Environmental impact issues • Availability of sites • Financial Services • Community inducements • Proximity of suppliers • Education system • Free trade zones

22. 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

23. 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

24. Location: Identifying a Site • Primary site location considerations are • Land • Transportation • Environmental • Zoning • Legal • Other restrictions

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

26. Plant Strategies • Single Plant Strategy • Multiple Plant Strategy - Product Plant Strategy - Market Area Plant Strategy - Process Plant Strategy

27. 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 company’s products

28. 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

29. 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

30. 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)

31. Locational Cost-Profit-Volume Analysis

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

33. Locational Cost-Profit-Volume Analysis Assumptions • Fixed costs are constant for the range of probable output • Variable costs are linear for the range of output • The required level of output can be closely estimated • Only one product is involved

34. Locational Cost-Profit-Volume Analysis For a cost analysis, compute the total cost for each alternative location:

35. Example: Cost-Profit-Volume Analysis Fixed and variable costs for four potential plant locations are shown below:

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

37. $(000) 800 700 600 500 400 300 200 100 0 D B C A 0 2 4 6 8 10 12 14 16 Annual Output (000) Example: Cost-Profit-Volume Analysis Plot of total costs

38. $(000) 800 700 600 500 400 300 200 100 0 D B C A A Superior C Superior B Superior 0 2 4 6 8 10 12 14 16 Annual Output (000) Example: Solution

39. Example: Cost-Profit-Volume Analysis • Range approximations • B Superior (up to 4,999 units) • C Superior (>5,000 to 11,111 units) • A superior (11,112 units and up)

40. Factor Rating Method

41. 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.

42. 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

43. 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?

44. 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?

45. Centre of Gravity Method

46. Center of Gravity Method • A method for locating a distribution center that minimizesdistribution 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

47. 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

48. 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

49. Center of Gravity Method Suppose you are attempting to find the center of gravity for the problem . Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure

50. 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