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Facility Location
Introduction
Facility location is the process of determining geographic sites for a firm’s operations. It is a problem
composed of two parts that interact. First is the facility location problem and second the specific
facility (site) that is chosen. Location choices can be critically important for firms and have a
profound impact on a firm’s value chain. For example they can affect the supplier relationship
process: the expanding global economy gives firms greater access to suppliers around the world,
many of whom can offer lower input costs or better quality services and products. Nonetheless when
manufacturing facilities are off-shored, locating far from one’s suppliers can lead to higher
transportation costs and coordination difficulties. The customer relationship process can also be
affected by the firm’s location decisions. The location of a business’s facilities has a significant
impact on the company’s operating costs, the prices it charges for services and goods and its ability
to compete in the market place and penetrate new customer segments.

The Need for Location Decisions

Existing organizations become involved in location decisions for a variety of reasons:
1. Marketing Strategy: Firms such as banks, fast-food chains, super-markets, and retail stores
view locations as a marketing strategy, and they look for locations that will help them to
expand their markets.
2. Growth in Demand: Firms involve in location decisions when it experiences a growth in
demand for its products or services that cannot be satisfied by an expansion at an existing
location.
3. Depletion of Basic Inputs: Some firms become involved in location decision through depletion
of basic inputs. For example, mining operations are often forced to relocate due to the
exhaustion at a given location.
4. Shift in Market: For some firms, a shift in their markets causes them to consider relocation or
the costs of doing business at a particular location reach a point where other locations begin to
look more attractive.
5. Change in Political or Economic Conditions: Some times firms relocate facilities for political
or economic changes.

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General Procedure for Making Location Decision

The way an organization approaches location decisions often depends on its size and the nature or
scope of its operations. The general procedure for making location decisions usually consists of the
following steps:
1. Describe on the criteria to use for evaluating location alternatives such as increased revenues or
community service.
2. Identify important factors such as location of markets or raw materials.
3. Develop location alternatives:
(a) Identify the general region for a location
(b) Identify a small number of community alternatives
(c) Identify site alternatives among the community alternatives.
4. Evaluate the alternatives and make a selection.

Location factors
The following six factors normally play a significant role in location decisions:
1. Process inputs: Such dependency is the case where bulky or heavy raw materials are major
inputs for the production process. It is why analytic-type industries try to locate near the
source of their materials. In this way they can minimize their overall transportation costs.
These overall transportation costs include shipping inputs to the facilities and shipping
outputs from them. Workforce costs are one of the most important factors in the
determination of a suitable plant location for certain labour intensive industries. Service
industries are particularly sensitive to this factor. Companies that employ large workforces
have been known to change locations to take advantage of a lower wage scale. In addition
there are more subtle costs of human resources. Foremost is the availability of various skills
within a particular region. Movement from a high-skill, high-wage area to a low skill low
wage area can be accomplished only when sufficient process mechanization and/or
automation is achieved.
2. Process outputs: The location of the company’s markets can be a significant factor under
certain circumstances. For example, service industries must be near their markets. The
assembly functions of synthetic industries frequently locate near markets, because many raw
materials must be gathered together from diverse locations and assembled into large-scale
single units.

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3. Process requirements: Many processes require special environments. When the technology
of the process requires large amounts of water, then only locations where such water
resources are available can be considered. Another common process requirement is the need
for substantial amounts of power. Not too many locations can supply such power.
Accordingly the location problem is cut down in size.
Certain processes produce disagreeable odors and in other ways disturb the
environment. For such cases, both urban and suburban locations are ruled out. Pollution
control laws differ by regions. Noise and other community irritants should be considered
even if not covered by law.
Sometimes a process is responsive to factors such as temperature, humidity, and other
weather conditions. To an extent, internal weather conditioning obviates such factors. But
this is not always the case. Coastal locations must be avoided when a saline atmosphere
adversely affects materials and equipments. Another example of the relevance of weather
conditions is frequently overlooked. If a process requires highly skilled individuals to
perform certain operations then absenteeism can be a significant problem. It would be a
sensible to locate in a climate where illnesses due to weather are less common.
4. Personal preferences: CEO’s and owner/entrepreneur may prefer a specific location for
entirely personal reasons. Logical arguments for other locations are not likely to prevail.
Once it has been decided to relocate an operating facility, strong monetary incentives must be
used to encourage company personnel to relocate with the company. The cost of moving
people and inducing them to do so must be added to the cost of losing talented workers and
managers. These costs should be balanced against the costs of building a new group with
same level of skills and company loyalty in the new location.
5. Tax and legal factors: Because of high corporate taxes, personal income taxes, and sales
taxes, desirable locations with respect to other variables may be bypassed. A favorable tax
structure provides such basic motivation that many decisions are made to locate a new plant
or to relocate a going operation solely for this reason. Many states provide tax and regulatory
advantages which attract new companies. The regulatory advantages result in shifts of
company headquarters to the more favorable locations. In addition to tax advantages,
communities attempt to attract industries by providing industrial parks or properly zoned land
at advantageous rates. Cities offer tax abatement, financing, and even joint investment to
attract business. Although some communities want industrial growth, most attempt to attract
only certain types of industries. Others have been reluctant and even hostile toward industrial
development.

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6. Site and plant availabilities: At any point in time, a list of available sites can be complied. A
complex problem exists: namely, when should we make the decision to buy or rent one of
them? Some sites already have structures built o them. Other sites require building.

Dominant Factors in Manufacturing Location

The following six groups of factors dominate the decisions firms, make about the location of new
manufacturing plants:
1. Favorable labour climate: A favorable labour climate may well be the most important factor
for labour intensive firms in industries such as textiles, furniture, and consumer electronics.
Labour climate is a function of wage rates, training requirement, attitude towards work,
worker productivity and union strength. Having a favorable climate applies not only to the
workforce already on site.
2. Proximity to markets: After determining where the demand for services and goods is
greatest, management must select a location for the facility that will supply that demand.
Locating near markets is particularly important when the final goods are bulky or heavy and
outbound transportation rates are high. For example, manufacturers of products, such as
plastic pipe and heavy metals all require proximity to their markets.
3. Quality of life. Good schools, recreational facilities, cultural events, and an attractive lifestyle
contribute to quality of life. This factor can make the difference in location decisions.
4. Proximity to suppliers and resources: Firms dependent on inputs of bulky, perishable, or
heavy raw materials emphasize proximity to their suppliers and resources. In such cases
inbound transportation costs become a dominant factor, encouraging such firms to locate
facilities near suppliers. For example, locating paper mills near forests and food processing
facilities near farms is practical. Another advantage of locating near suppliers is the ability to
maintain lower inventories.
5. Proximity to the parent company’s facilities: In many companies, plants supply parts to
other facilities or rely on other facilities for management and staff support. These ties require
frequent coordination and communication which can become more difficult as distance
increases.
6. Utilities, taxes, and real estate costs: Other location decision factors include utility costs
(telephone, energy and water), local and state taxes, financing incentives offered by local or
state governments, relocation costs and land costs.

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Dominant Factors in Services Location

The factors mentioned for manufacturers also apply to service providers with one important
addition the impact of location on sales and customer satisfaction. Customers usually care about how
close a service facility is.
1. Proximity to customers: Location is a key factor in determining how conveniently customers
can carry on business with a firm. In addition, customer proximity by itself is not enough – the
key is proximity to customers who will patronize the facility and seek its services.
2. Transportation costs and proximity to markets: For warehousing and distribution operations,
transportation costs and proximity to markets are extremely important. With a warehouse
nearby many firms can hold inventory closer to the customer, thus reducing delivery time and
promoting sales.
3. Location of competitors: One complication related to estimating the sales potential of different
locations is the impact of competitors. Management must not only consider the current location
of competitors but also try to anticipate their reaction to the firm’s new location. Avoiding
areas where competitors are already well established often pays off. However, in some
industries, such as new car sales showrooms and fast-food chains locating near competitors is
actually advantageous.
4. Site-specific factors: Retailers must consider the level of retail activity residential density
traffic flow, and site visibility. Retail activity in the area is important because shoppers often
decide on impulse to go shopping or to eat in a restaurant. Traffic flows and visibility are
important because businesses’ customers arrive in cars. Management considers possible traffic
tie-ups, traffic volume and direction by time of day, traffic signals, intersections, and the
position of traffic medians. Visibility involves distance from the street and the size of nearby
buildings and signs. A high residential density increases nighttime and weekend business if the
population in the area fits the firm’s competitive priorities and target market segment.

Locating a Single Facility Comparing Several Sites

The process of selecting a new facility location involves a series of steps:
1. Identify the important location factors and categories them as dominant or secondary.
2. Consider alternative regions; then narrow the choices to alternative communities and finally
to specific sites.
3. Collect data on the alternatives from location consultants, state development agencies, city
and country planning departments, chambers of commerce, land developers, electric power

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companies, banks, and onsite visits. Some of these data and information may also be
contained inside the GIS.
4. Analyze the data collected beginning with the quantitative factors – factors that can be
measured in dollars, such as annual transportation costs or taxes.
5. Bring the qualitative factors pertaining to each site into the evaluation. A qualitative factor is
one that cannot be evaluated in dollar terms, such as community attitudes, or quality of life.
To merge qualitative and quantitative factors some managers review the expected
performance of each factor, while others assign each factor a weight of relative importance
and calculate a weighted score for each site, using a preference matrix. The site with the
highest weighted score is best.

Evaluating Location Alternatives

There are a number of techniques that are helpful in evaluating location alternatives:
1. Locational cost-profit-volume analysis
2. Location factor rating
3. Centre of gravity method

Locational cost-profit-volume analysis

The economic comparison of location alternatives is facilitated by the use of cost-profit-
volume analysis. The analysis can be done numerically or graphically. The graphical approach
should be demonstrated because it enhances understanding of the concept and indicates the ranges
over which one of the alternatives is superior to the others.
The procedure for Locational cost-profit-volume analysis involves the following steps:
Step 1: Determine the fixed and variable costs associated with each location alternative.
Step 2: Plot the total-cost lines for all location alternatives on the same graph.
Step 3: Determine which location will have the lowest total cost for the expected level of output.
Alternatively, determine which location will have the highest profit.
Step4: Solve algebraically for the breakeven points over the relevant ranges.

This method assumes the following:

1. Fixed costs are constant for the range of profitable output.
2. Variable costs are linear for the range of profitable output.
3. The required level of output can be closely estimated.

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4. Only one product is involved.

For a cost analysis, compute the total cost for each location:
Total cost = FC + v  Q
where FC = Fixed cost
v = variable cost per unit
Q = Quantity or volume of output.

Example-1: Fixed and variable costs are for four potential plant locations are shown below:
Location Fixed cost per year Variable cost per unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35
Requirements:
(a) Plot the total cost lines for these locations on a single graph.
(b) Identify the range of output for which each alternative is superior (i.e. has the lowest total
cost)
(c) If the expected output at the selected location is to be 8,000 units per year, which location
would provide the lowest total cost?
Solution:
(a) To plot the total cost lines, we select an output (e.g., 10,000 units per year) that is approximately equal to
the expected output level. Compute the total cost for each location at that level:
Location Fixed Cost + Variable Cost = Total Cost
A $250,000 + $11(10,000) = $360,000
B 100,000 + 30(10,000) = 400,000
C 150,000 + 20(10,000) = 350,000
D 200,000 + 35(10,000) = 550,000

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Now we plot each location’s fixed cost (total cost at output level 0) and the total cost at 10,000 units
and connect the two points with a straight line.

900 D
800
700 B
600 C
Total Annual 500 A
Cost ($000) 400
300
200
100

2 4 6 8 10 12 14 16
B superior C superior A superior
Annual output (‘000 units)
(b) To approximate ranges for which the various alternatives will yield the lowest costs are shown on
the graph. Note that location D is never superior. The exact ranges can be determined by finding
output level at which lines B and C and lines C and A cross. To do this set their total cost equations
equal and solve for Q, the break-even output level. Thus for B and C:
B = C
$100,000 + 30Q = $150,000 + 20Q
By solving we get Q= 5,000 units per year
Similarly for C and A
C = A
$150,000 + 20Q = $250,000 + 11Q
By solving we get Q= 11,111 units per year
Thus,
Output range 0 – 5,000 units, location B is superior.
At output level 5.000 units, location B and C are indifferent.
Output range 5,000 – 11,111 units, location C is superior.
At output level 11,111 units, location C and A are indifferent.
At output level more than 11,111 units, location A is superior
(c) From the graph we see that for 8,000 units per year location C provides the lowest total cost.

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Example-2: A firm implements dealer is seeking a fourth warehouse location to complement three existing
warehouses. There are three potential locations: Charlotte, Atlanta, and Columbia. Charlotte would involve a
fixed cost of $4000 per month and a variable cost of $4 per unit; Atlanta would involve a fixed cost of $3,500
per month and a variable cost of $5 per unit; and Columbia would involve a fixed cost of $5,000 per month
and a variable cost of $6 per unit. Use of the Charlotte location would increase system transpiration cost by
$19,000 per month, Atlanta by $22,000 per month and Columbia by $18,000 per month. Which location
would result in the lowest total cost to handle 800 units per month?

Solution: Given volume 800 per month.

Location Fixed cost per Variable cost per Transportation cost
month unit per month
Charlotte $4,000 $4 $19,000
Atlanta $3,5000 $5 $22,000
Columbia $5,000 $6 $18,000
Monthly total cost = FC + VC + Transportation cost
Charlotte: $4,000 + $4  800 + $19,000 = $26,200
Atlanta: $3,500 + $5  800 + $22,000= $29,500
Columbia: $5,000 + $6  800 + $18,000= $27,800
Hence Charlotte would have the lowest cost for this monthly volume.

Example-3: A manufacturer of staplers is about to lose its lease, so it must move to another location.
Two sites are currently under consideration. Fixed costs would be $8,000 per month at site A, and
$9,400 per month at site B. Variable costs are expected to be $5 per unit at site A and $4 per unit at
site B. Monthly demand has been steady at 8800 units for the last several years and is not expected to
deviate from that amount in the foreseeable future. Assume staplers sell for $6 per unit. Determine
which location would yield the higher profit under these conditions.

Solution:
Given volume 8,800 per month.
Profit = Q(R – v) – FC

Site Revenue Fixed cost per v Monthly profit

month
A $52,800 $8,000 $44000 $800
B $52,800 $9,4000 $35200 $8,200

Hence site B is expected to yield the higher monthly profit.

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Example-4: The operations manager for Mile-High Beer narrowed the search for a new facility
location to seven communities. Annual fixed costs (land, property taxes, insurance, equipment, and
buildings) and variable costs (labour, materials, transportation and variable overhead) are shown in
below:
Community Fixed cost per year Variable costs per Barrel
A $1,600,000 $17
B $2000,000 $12
C $1,500,000 $16
D $3,000,000 $10
E $1800,000 $15
F $1200,000 $15
G $1700,000 $14
Requirements:
(a) Which of the communities can be eliminated from further consideration because are
dominated (both variable and fixed costs are higher) by another community?
(b) Plot the total cost curves for all remaining communities on a single graph. Identify on
the graph the approximate range over which each community provides the lower cost.
(c) Using breakeven analysis, calculate the breakeven quantities to determine the range
over which each community provides the lowest cost.
Solution:
(a) A and C are dominated by F because both fixed and variable costs are higher for those
communities than for F. E is dominated by G.
Location Fixed cost + Variable cost = Total cost
A $1,600,000+ $17(10,000) = $1770,000
B $2000,000+ $12(10,000) = $2120,000
C $1,500,000+ $16 (10,000) = $1660,000
D $3,000,000+ $10(10,000) = $3100,000
E $1800,000+ $15(10,000) = $1950,000
F $1200,000+ $15(10,000) = $1350,000
G $1700,000+ $14(10,000) = $1840,000
(b) Figure shows that F is the best for low volumes, B for intermediate volumes and D for high
volumes. Although G is not dominated by any community, it is the second or third choice over
the entire range. G does not become the lowest cost choice at any volume.

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(c) The breakeven point between F and B is

$1200,000 + 15Q = $2000,000 + 12Q
Q = 266,667 barrels per year.
The breakeven point between D and B is
$3000,000 + 10Q = $2000,000 + 12Q
Q = 500,000 barrels per year.

Practice # 5: A newly formed firm must decide on a plant location. There are two alternatives, City X and
City Y, under consideration: X locates near the major raw materials; Y locates near the major customers.
Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but
the owners feel there would be a loss in sales volume. Revenue per unit will be $185 in either case. Using the
following information, determine which location would produce the greater profit.
Location X Location Y
Annual fixed cost ($ million) 1.2 1.4
Variable cost per unit 36 47
Expected annual demand (units) 8,000 12,000
(Result: City Y $256,000)
Practice # 6: The owner of Genuine Subs Inc. hopes to expand her present operations by adding one
new outlet. Three locations have been studied. Each would have the same labor and materials cost of
0.76 per sandwich. Sandwiches sell for $1.65 each in al locations. Rent and equipment costs would
be $5,000 per month for location A, $5,500 per month for location B, and $5,800 per month for
location C.
(a) Determine the volume necessary at each location to realize a monthly profit of $10,000.
(b) If expected sales at A, B, and C are 21,000 per month, 22,000 per month and 23,000 per month
respectively, which location would yield the highest profit?
[Results: (a) A: 16,854; B: 17,416; C: 17,753. (b) C: $14,670]

Practice # 7: A small producer of machine tools wants to move a larger building. Two alternatives
have been identified. Location A would have fixed costs of $8,00,000 per year and variable costs of
$14,000 per unit; Location B would have fixed costs of $9,20,000 per year and variable costs of
$13,000 per unit. The finished items sell for $17,000 each.
(a) At what volume of output would the two locations have the same total costs?
(b) For what range of output would location A be superior? For what range of output would
location B be superior?

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[Results: (a) 120 units; (b) A: 0 to 119; B: 121+]

Practice # 8: Location A would result in annual fixed costs of $3,00,000, variable costs of $63 per
unit, and revenue of $68 per unit. Annual fixed costs of location B are $8,00,000, variable costs are
$32 per unit, and revenues are $68 per unit. Sales volume is estimated to be 25,000 units per year.
Which location is more attractive?

Practice # 9: A firm is considering two locations, one in the center of the city and another on the
outskirts of the city. The in-city location would involved fixed monthly costs of $7,000 and labor,
materials, and transportation costs of $30 per unit. The outside location would have fixed monthly
costs of $4,700 and labor, materials, and transportation costs of $40 per unit. Selling price at either
location will be $90 per unit.
(a) Which location will yield the highest profit if monthly demand is:
i. 200 units;
ii. 300 units.
(b) At what volume of output will the two sites yield the same profit?
[Results: (a) i. Outside city; ii. in-city (b) 230 units.]

Location Factor Rating:

A typical location decision involves both qualitative and quantitative inputs, which tend to
vary from situation to situation depending on the needs of each organization. Factor rating is a
general approach that is useful for evaluating a given alternative and comparing alternatives. The
value of factor rating is that it provides a rational basis for evaluation and facilitates comparison
among alternatives by establishing a composite value for each alternative that summarizes all related
factors. Factor rating enables decision makers to incorporate their personal options and quantitative
information in the decision process.
The following procedure is used to develop a factor rating:
1. Determine which factors are relevant (e.g. location of market, water supply, parking facilities,
revenue potential)
2. Assign a weight to each factor that indicates its relative importance compared with all other
factors. Typically weights sum to 1.00.
3. Decide on a common scale for all factors (e.g. 0 to 100).
4. Score each location alternative.

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5. Multiply the factor weight by the score for each factor, and sum the results for each location
alternative.
6. Choose the alternative that has the highest composite score.

Example-1: A photo processing company intends to open a new branch store. The table below
contains information on two potential locations. Which is the better alternative?
Scores (Out of 100)
Factor Weight Alternative 1 Alternative 2
Proximity to existing store 0.10 100 60
Traffic volume 0.05 80 80
Rental costs 0.40 70 90
Size 0.10 86 92
Layout 0.20 40 70
Operating costs 0.15 80 90
Solution:
Weight scores
Alternative 1 Alternative 2
0.10(100) = 10.0 0.10(60) = 6.0
0.05(80) = 4.0 0.05(80) = 4.0
0.40(70) = 28.0 0.40(90) = 36.0
0.10(86) = 8.6 0.10(92) = 9.2
0.20(40) = 8.0 0.20(70) = 14.0
0.15(80) = 12.0 0.15(90) = 13.5
= 70.6 = 82.7
Hence, Alternative – 2 is better because it has the higher composite score.

Example-2: Determine which location has the highest factor rating given the following information:
Location
Factor Weight A B
Labour cost 0.50 20 40
Material cost 0.30 10 30
Supplier base 0.20 50 10

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Solution: Combining the weights with the location scores, we can see that location B has the highest
score:
Location Weighted Scores
Factor Weight A B A B
Labour cost 0.50 20 40 0.50(20) = 10 0.50(40) = 20
Material cost 0.30 10 30 0.30(10) = 3 0.30(30) = 9
Supplier base 0.20 50 10 0.20(50) = 10 0.20(10) = 2
Total 1.00 23 31

Example-3: An electronics manufacturer must expand by building a second facility. The search has
been narrowed to four locations; all are acceptable to management in terms of dominant factors.
Assessment of these sites in terms of seven location factors is shown in the following table. For
example, location A has a factor score 5 (excellent) for labor climate; the weight for this factor (20)
is the highest of any.
Factor Factor score for each location
Location Factor weight A B C D
1. Labor climate 20 5 4 4 5
2. Quality of life 16 2 3 4 1
3. Transportation system 16 3 4 3 2
4. Proximity to market 14 5 3 4 4
5. Proximity to materials 12 2 3 3 4
6. Utilities 10 5 4 3 3
7. Community attitude 12 2 5 5 4
Calculate the weighted score for each location. Which location should be recommended?
Solution:
Location factor weight Weighted score for each location
A B C D

1. Labor climate 20 100 80 80 100

2. Quality of life 16 32 48 64 15
3. Transportation 16 48 64 48 32
4. Proximity to market 14 70 42 56 56
5. Proximity to materials 12 24 36 36 48
6. Utilities 10 50 40 30 30
7. Community attitude 12 24 60 60 48

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-------- ------ ----- ------ --------

Total 100 348 370 374 330
_______________________________________________________________
The total weighted score is the highest for location C, so it is better to choose the community C for
locating facility.

Centre of Gravity Method:

The centre of gravity is a method to determine the location of a distribution centre that will
minimize distribution costs. It treats distribution cost as a linear function of the distance and the
quantity shipped. The quantity to be shipped to each destination is assumed to be fixed (i.e. will not
change overtime).
The method includes the use of a map that shows the locations of destinations. The map must
be an accurate and drawn to scale. A coordinate system is overlaid on the map to determine the
relative locations. The location of the 00 point of the coordinate system and its scale is unimportant.
Once the coordinate system is in place we can determine the coordinates of each destination. If the
quantities to be shipped to every location are equal, we can obtain the coordinates of the centre of
gravity (i.e. the location of the distribution centre) by finding the average of the x-coordinates and the
average of the y- coordinates. These averages can be easily determined by using the following
formulas:

x=
x i
y=
y i

n n
where xi = x − coordinate of destination i.

yi = y − coordinate of destination i

n = number of destinations.
When the numbers of units to be shipped are not the same for all destinations, a weighted average
must be used to determine the centre of gravity with the weights being the quantities to be shipped.
The appropriate formulas are

x=
x Qi i
y=
yQ i i

Q i Q i

where Q i = Quantity to be shipped to destination i.

xi = x − coordinate of destination i.

yi = y − coordinate of destination i

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Example-1: Determine the coordinates of the centre of gravity for the following problem. Assume
that the shipments from the centre of gravity to each of the four destinations will be equal quantities.
Destination x, y
A 2, 2
B 3, 5
C 5, 4
D 8, 5
Solution: The coordinates of the centre of gravity can be obtained in the following way:

x=
x i
=
18
= 4.5 y=
y i
=
16
=4
n 4 n 4
Hence the centre of gravity is at (4.5, 4).

Example-2: Suppose the shipments for the following problem are not all equal but instead are the
followings:
Destination x, y Weekly
quantity
A 2, 2 800
B 3, 5 900
C 5, 4 200
D 8, 5 100
Determine the centre of gravity.
Solution: Because the quantities to be shipped differ among destinations, we must use the weighted
average formulas:

x=
 x Q = 2(800)+ 3(900)+ 5(200)+ 8(100) = 6100 = 3.05
i i

Q i 2000 2000

y=
 y Q = 2(800) + 5(900) + 4(200) + 5(100) = 7400 = 3.7
i i

Q i 2000 2000

Hence the coordinates of the centre of gravity are (3.05, 3.7).

Load-distance Method:
The load-distance method is a mathematical model used to evaluate locations based on
proximity factors. The objective is to select a location that minimizes the sum of the loads times the
distance the load travels. Time may be used instead of distance if so desired.

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Euclidean distance: Euclidean distance is the straight line distance or the shortest possible path
between two points. To calculate this distance we create a graph. The distance between two points
say points A and B is

d AB = ( x A − x B ) 2 + ( y A − y B ) 2

Rectilinear distance: Rectilinear distance measures distance between two points with a series of 90-
degree turns as along city blocks. The distance traveled in the x-direction is the absolute value of the
difference in x-coordinates. Adding this result to the absolute value of the difference in the y-
coordinates gives
d AB = x A − x B + y A − y B

ld =  li d i

Example-1: A supplier to the electric utility industry has a heavy product, and the transportation
costs are high. One market area includes the lower part of the Great Lakes region and the upper
portion of the southeastern region. More than 600,000 tons are to be shipped to eight major customer
locations as shown below:
Customer location Tons shipped x, y coordinates
A 5,000 (7, 13)
B 92,000 (8, 12)
C 70,000 (11, 10)
D 35,000 (11, 7)
E 90,00 (12, 4)
F 227,000 (13, 11)
G 16,000 (14, 10)
H 153,000 (15, 5)
Requirements:
(a) Calculate the centre of gravity, rounding coordinates to the nearest tenth.
(b) Calculate the load distance score for this location using rectilinear distance
Solution:
Here Q i = 5000 + 92000+ 70000 + 35000+ 9000 + 227000+ 16000 + 153000 = 607000

Q x i i = 5000(7) + 92000(8) + 70000(11) + 35000(11) + 9000(12) + 227000(13)

+ 16000(14) + 153000(15) = 7504000

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x=
Q x i i
=
7504000
= 12.4
Q i 607000

Q y i i = 5000(13) + 92000(12) + 70000(10) + 35000(7) + 9000(4) + 227000(11)

+ 16000(10) + 153000(5) = 5572000

y=
Q y i i
=
5572000
= 9.2
Q i 607000
Hence the centre of gravity is (12.4, 9.2).

(b) The load distance score is

Load dis tan ce =  Qi d i = 5000(5.4 + 3.8) + 92000(4.4 + 2.8) + 70000(1.4 + 0.8) + 35000(1.4 + 2.2)
+ 9000(0.4 + 5.2) + 227000(0.6 + 1.8) + 16000(1.6 + 0.8) + 153000(2.6 + 4.2) = 2662.4

where d i = xi − x + yi − y = 7 − 12.4 + 13 − 9.2 etc

Example 2: Consider the following:

Potential Sites
Site X Y
1 360 180
2 420 450
3 250 400
Suppliers
A B C D
X 200 100 250 500
Y 200 500 600 300
Wt 75 105 135 60
Compute distance from each site to each supplier
Solution:
For Site 1:

d A1 = ( x A − x1 ) 2 + ( y A − y1 ) 2 = (200 − 360) 2 + (200 − 180) 2 = 161.2

d B1 = ( x B − x1 ) 2 + ( y B − y1 ) 2 = (100 − 360) 2 + (500 − 180) 2 = 412.3

d C1 = ( xC − x1 ) 2 + ( yC − y1 ) 2 = (250 − 360) 2 + (600 − 180) 2 = 434.2

d D1 = ( x D − x1 ) 2 + ( y D − y1 ) 2 = (500 − 360) 2 + (300 − 180) 2 = 184.4

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For Site 2:

d A2 = ( x A − x2 ) 2 + ( y A − y 2 ) 2 = (200 − 420) 2 + (200 − 450) 2 = 333

d B 2 = ( x B − x2 ) 2 + ( y B − y 2 ) 2 = (100 − 420) 2 + (500 − 450) 2 = 323.9

d C 2 = ( xC − x 2 ) 2 + ( yC − y 2 ) 2 = (250 − 420) 2 + (600 − 450) 2 = 226.7

d D 2 = ( x D − x2 ) 2 + ( y D − y 2 ) 2 = (500 − 420) 2 + (300 − 450) 2 = 170

For Site 3:

d A3 = ( x A − x3 ) 2 + ( y A − y3 ) 2 = (200 − 250) 2 + (200 − 400) 2 = 206.2

d B 3 = ( x B − x3 ) 2 + ( y B − y3 ) 2 = (100 − 250) 2 + (500 − 400) 2 = 180.4

d C 3 = ( xC − x3 ) 2 + ( yC − y3 ) 2 = (250 − 250) 2 + (600 − 400) 2 = 200

d D 3 = ( x D − x3 ) 2 + ( y D − y3 ) 2 = (500 − 250) 2 + (300 − 400) 2 = 269.3

The load distance score can be calculated as ld =  li d i

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063

Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
Hence one should choose site 3.

GIS Method for Locating Multiple Facilities

A geographical information system (GIS) is a system of computer software, hardware, and data
that the firm’s personnel can use to manipulate, analyze and present information relevant to a
location decision. A GIS can also integrate different systems to create a visual representation of a
firm’s location choices. Among other things, it can be used to (i) store databases (ii) display maps
and (iii) create models that can take information from existing datasets, apply analytic functions and
write results into new derived datasets. Together these three functionalities of data storage, map
displays and modeling are critical parts of an intelligent GIS, and used to a varying extent in all GIS
applications.
The use of GIS tools often simplifies the search for solution. Visualizing customer locations and
data, as well as the transportation structure of roads and interstate highways, allows the analyst to
quickly arrive at a reasonable solution to the multiple facility location problems. The multiple-
facility location problem has three dimensions – location, allocation and capacity that must be
solved simultaneously. Load-distance score and centre of gravity data can be merged with customer

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databases in Excel to arrive at trial locations for facilities, which can then be evaluated for annual
driving time or distance using a GIS such as MapPoint and a Visual Basic Macro in Excel. A five-
step framework that captures the use of GIS for locating multiple facilities is outlined here.
1. Map the data for existing customers and facilities in the GIS.
2. Visually split the entire operating area into the number of parts or sub-regions that equal the number
of facilities to be located.
3. Assign a facility location for each region based on the visual density of customer concentration or
other factors. Alternately, determine the centre of gravity for each part or sub-region identified in
Step-2 as the starting location point for the facility in that sub-region.
4. Search for alternate sites around the centre of gravity to pick a feasible location that meets the firm’s
managerial criteria such as proximity to major metropolitan areas or highways.
5. Compute the load-distance scores and perform capacity checks before finalizing the locations for each
region.

Transportation Model for Evaluating Location Alternatives:

Transportation model plays an important role in location decisions. When a problem involves
shipments of goods from multiple sending points to multiple receiving points, and a new location,
transportation model can be very helpful. The transportation model can be used to determine how to
allocate the supplies to the warehouses available from various factories in such a way that total
transportation cost is minimized.

Information Needed to Use Transportation Model:

(a) A list of origins and each one’s capacity or supply quantity per period.
(b) A list of destinations and each one’s demand per period
(c) The unit cost of shipping items from each origin to each destination.

Assumptions of Transportation Model:

Use of transportation model implies that certain assumptions are satisfied. The major ones are:
(a) The items to be shipped are homogeneous (i.e., these are same regardless of their source or
destination).
(b) Shipping cost per unit is the same regardless of the number of units sipped.
(c) There is only one route or mode of transportation being used between each source and each
destination.

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Solution of Transportation Model

A. Initial Basic Feasible Solution:
i. North-West Corner Rule;
ii. Least Cost Method;
iii. Vogel’s Approximation Method.
B. Optimum Solution:
i. Modified Distribution method;
ii. Stepping Stone Method.

North-West Corner Rule

Steps in North-West Corner Method:
Step # 1: The North-West Corner method begins with the cell that is in the upper left-hand corner of
the matrix, allocating as many units as possible to that cell so that either the capacity of source-1 is
exhausted, or the requirement of destination-1 is satisfied, or both.
Step # 2: If requirement of destination-1 is more than the capacity of source-1, the capacity is
exhausted but the requirement is still not satisfied. Move down vertically to the second row and
make the second allocation.
(a) If requirement of destination-1 is satisfied, but the capacity of source-1 is not completely
exhausted move to the right horizontally to the second column and make the second
allocation.
(b) If requirement of destination-1 is equal to the capacity of source-1, requirement is satisfied as
well as source capacity is exhausted. Make new allocation to the new upper left-hand corner.

Example1: A computer assembling company assembles computers in its three plants located at A, B
and C cities. These computers are supplied to four show rooms located at D, E, F and G cities. The
number of assembled computers in these three plats and demand of four show rooms are as follows:
Number of assembled computers Demand of show rooms
Plants No. of computers Show rooms No. of computers
A 500 D 400
B 700 E 900
C 800 F 200
Total 2000 G 500
Total 2000

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Computers are transported by common carrier and charges are on a per computer basis. The relevant
costs (in dollar) are given below:
To Show rooms
From D E F G
A 12 13 4 6
Plants B 6 4 10 11
C 10 9 12 4
Calculate total transportation cost using the North-West Corner method.

Solution:
We formulate the given transportation problem as under:
To Show rooms Supply
From D E F G
12 13 4 6
A 400 100 500
Plants 6 4 10 11 700
B 700
C 10
100 9
200 12
500 4 800
Demand 400 900 200 500 2000

Plant A can supply 500 units but show room D needs 400 units. Hence, assign 400 units to cell AD,
completely satisfying D’s demand and leaving plant A with a supply of 100 units.
Staying in row A and moving to column E, we see that show room E has a demand of 900units, 100
units of which can be supplied from plant A. Thus, supply of plant A is exhausted but demand of
show room E is not satisfied.

Staying in column E and dropping down to row B we observe that plant B has a supply of 700 units.
Assigning 700 units to cell BE exhausts B’s supply and leaves show room E with 10 units.
Staying in column E and dropping down to row C, we assign 100 units to cell CE, which satisfies E’s
demand and exhausts 100 unites of C’s supply. C’s remaining 700 units can be distributed to F & G
show rooms as: 200 units to E and 500 units to G. Thus, all the plant’s supplies are exhausted as well
as all the show rooms’ demands are satisfied.

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Total Transportation Cost:

From Plant To Show room Units Cost per unit Total cost
A D 400 $12 $4,800
A E 100 13 1,300
B E 700 4 2,800
C E 100 9 900
C F 200 12 2,400
C G 500 4 2,000
Total $14,200

Least Cost Method or the Intuitive Approach

With the Intuitive Approach, cell allocations are made according to cell cost, beginning with the
lowest cost. The procedure involves the following steps:
Step # 1: Identify the cell with the lowest cost.
Step # 2: Allocate as many units as possible to that cell, cross out the row or the column (or both)
that is exhausted by this.
Step # 3: Find the cell with the next lowest cost from among the feasible cells.
Step # 4: Repeat steps 2and 3 until all units have been allocated.

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Example1: A company has contracted to provide topsoil for three residential housing developments.
Topsoil can be supplied from three different farms as follows:
Weekly Capacity
Farm (cubic yards)
A 100
B 200
C 200
Demand for the topsoil generated by the construction projects is:
Weekly Demand
Project (cubic yards)
1 50
2 150
3 300
The manager of the company has estimated the cost per cubic yard to ship over each of the possible
routes:
To Cost per Cubic Yard
From Project # 1 Project # 2 Project # 3
Farm A $4 $2 $8
Farm B 5 1 9
Farm C 7 6 3
Determine feasible distribution for this company to minimize shipping costs (use Intuitive Method).

Solution:
We formulate the given transportation problem as under:
Project # 1 Project # 2 Project # 3 Supply
$4 $2 $8
Farm A 50 50 100
$5 $1 $9
Farm B 150 50 200
$7 $6 $3
Farm C 200 200
Demand 50 150 300 500

Cell B2 has the lowest cost ($1). The Farm B supply is 200, and Project#2 demand is 150. Therefore,
the most we can allocate to this cell is 150 units. Since demand 150 is satisfied, we cross out the B2
cell as well as the demand of Project # 2. We adjust the row total to reflect the allocation, which
leaves 50 units.

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The next lowest cost is $3 for cell C3. Allocating 200 units to this cell exhausts the row supply and
leaves 100 units of demand of Project # 3. We cross out the cell C3.
The next lowest cost is $4 for cell A1. Allocating 50 units to this cell satisfies Project # 1 demand
and leaves 50 units for Farm A. We cross out the cell A1.

The next lowest cost is $8 for cell A3. Allocating 50 units to this cell exhausts Farm A supply and
leaves 50 units of demand of Project # 3. We cross out the cell A3.

The only remaining cell with a cost that has not been crossed out is cell B3. Both supply and demand
are 50 units, so 50 units are assigned to this cell. This completes the allocation.

Calculation of total shipping cost:

Route Unit shipped Cost per unit Total cost
Form Farm A to Project # 1 50 $4 $4 x 50 = $200
Form Farm A to Project # 1 50 8 8 x 50 = 400
Form Farm A to Project # 1 150 1 1 x 150 = 150
Form Farm A to Project # 1 50 9 9 x 50 = 450
Form Farm A to Project # 1 200 3 3 x 200 = 600
Total cost $1,800

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