BUSI3020 Plant Location

and Design
Session 3: Plant Location (2)

Dr. Lin Wu
[email protected]
C13 Siyuan Centre, Jubilee Campus
Attendance
Recap
Session objectives

To use mathematics to find optimal

(or close to optimal) solutions.
By the end of this session, you will be
able to:
▪ Select and perform simple and
appropriate facility location
selection calculations
 Plant location selection methodologies

▪ Methods of evaluating location alternatives:

• The Factor Rating Method

• Locational Break-Even Analysis
• Centre-of-Gravity Method
Factor rating
 Factor rating method
 A multi-criteria decision-making tool used to evaluate and compare
different location options based on various factors.
 Widely used in plant location selection because it allows decision-makers
to incorporate both qualitative and quantitative criteria.
 Steps
1. Identify the key factors – Select the important criteria that impact the decision
2. Assign weights to each factor – Assign a weight (typically in percentage form,
summing to 100%) to reflect the relative importance of each factor
3. Rate each location for each factor – Score each location (usually on a scale of 1-10)
based on performance in each factor
4. Calculate the weighted score – Multiply the rating of each location by the respective
weight of the factor
5. Compute the total score – Sum up the weighted scores for each location
6. Select the best location – The location with the highest total weighted score is the
most favourable
 Factor rating illustration

Steps 1-3 ▪ A company is choosing

between three cities (A, B,
and C) for setting up a
Factor Weight (%) A score B score C score manufacturing plant. The
Labour cost 30 8 7 6 decision is based on five
Proximity to market 25 7 9 8
factors:
Infrastructure 20 9 6 7

Government incentives 15 6 8 9

Quality of life 10 7 7 8
 Step 4 – calculate weighted scores

Factor A A weighted B B weighted C C weighted

score score score
Labour cost 8*0.3 2.4 7*0.30 2.1 6*0.3 1.8
Proximity to 7*0.25 1.75 9*0.25 2.25 8*0.25 2
market
Infrastructure 9*0.2 1.8 6*0.2 1.2 7*0.2 1.4
Government 6*0.15 0.9 8*0.15 1.2 9*0.15 1.35
incentives
Quality of life 7*0.1 0.7 7*0.1 0.7 8*0.1 0.8
 Steps 5 & 6

▪ Total scores:
➢City A: 7.55
➢City B: 7.45
➢City C: 7.35
▪ Conclusion: the company should select City A for the new factory.
 Factor rating example

▪ A logistics company is choosing between two warehouse locations

(X and Y). The decision is based on four factors:

Factor Weight (%) X score Y score

Transport cost 40 7 8
Labour availability 30 8 6
Utility costs 20 6 9
Tax incentives 10 9 7

▪ Which one is the optimal location for the warehouse?

 Strengths of factor rating

▪ Simple and easy to use

▪ Flexible and adaptable
▪ Allows for a systematic comparison
▪ Can handle multiple decision criteria
▪ Can be used for group decision-making
▪ Provides transparency and justification
 Limitations of factor rating

▪ Subjectivity in assigning weights and scores

▪ Does not consider interaction between factors
▪ Sensitivity to weighting changes
▪ Lacks cost optimization
▪ Static and does not account for uncertainty
▪ No absolute scale for ratings

▪ How to overcome (some of) the limitations?

Locational break-even
analysis
 Locational break-even analysis

 Locational cost-volume analysis. ▪ Fixed costs – costs that do not change with
production volume (e.g., rent, taxes,
administrative salaries)
 A quantitative method used to
compare multiple location options ▪ Variable costs – costs that vary with production
volume (e.g., raw materials, labour, utilities,
based on fixed and variable shipping costs)
costs to determine which location ▪ Total cost – the sum of fixed and variable costs
is most cost effective at different ▪ Total cost = fixed cost + (variable cost per unit *
levels of production/sales. quantity)
▪ Break-even quantity
 Helps decision-makers evaluate
the financial feasibility of different 𝐹𝐶1 − 𝐹𝐶2
locations by finding the break-even 𝑄∗ =
𝑉𝐶2 − 𝑉𝐶1
point – the level of output at which FC1, FC2 = fixed costs of two locations
total costs are equal across VC1, VC2 = variable costs per unit of two locations
different sites.
 Locational break-even analysis

 Three steps in the method

1. Determine fixed and
variable costs for each
location
2. Plot the cost for each
location
3. Select location with lowest
total cost at the expected
production volume level
 Locational break-even analysis illustration

▪ Three locations

Fixed Variable Total

City Cost Cost Cost
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Expected volume = ?? units
Locational break-even analysis illustration

–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
Annual cost

–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
Akron Chicago
$10,000 – Bowling Green lowest
lowest lowest cost
– cost cost

| | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
 Locational break-even analysis example 1

▪ What is the location with the lowest total cost when expected volume
is 4,000, 12,000 and 20,000 respectively?

Location Fixed cost/year Variable cost/year/unit

A 250,000 11
B 100,000 30
C 150,000 20
D 200,000 35
 Locational break-even analysis example 2

▪ A company wants to set up a new factory and is considering two

locations:
• City A: Higher fixed costs but lower variable costs.
• City B: Lower fixed costs but higher variable costs.

Location Fixed cost (£) Variable cost per unit (£)

City A 500,000 15
City B 300,000 25
 Strengths of locational break-even analysis

▪ Simple and easy to use

▪ Provides a clear cost comparison
▪ Quantitative and objective decision-making
▪ Helps in capacity planning and scalability
▪ Applicable across different industries
▪ Supports sensitivity analysis
 Limitations of locational break-even analysis

▪ Assumes costs are constant and predictable

▪ Ignores qualitative factors
▪ Cannot be used for revenue-based decisions
▪ Does not consider capacity constraints
▪ Break-even point is only an approximate guide
▪ Ignores transport and distribution cost
Centre-of-gravity method
 Centre-of-gravity method

▪ A quantitative technique used to determine the optimal

central location for a facility, such as a warehouse, factory,
or distribution centre.
▪ The goal is to minimize transport costs by selecting a
location that balances the distances and demands from
multiple supply or demand points.
▪ Considers
▪ Location of markets
▪ Volume of goods shipped to those markets
▪ Shipping cost (or distance)
 Centre-of-gravity method

➢ Place existing locations on a coordinate grid

➢ Grid origin and scale is arbitrary
➢ Calculate X and Y coordinates for ‘center of gravity’
➢ Assumes cost is directly proportional to distance and volume
shipped
Centre-of-gravity method

∑dixQi
X coordinate of centre of gravity =
∑Qi

∑diyQi
Y coordinate of centre of gravity =
∑Qi

where dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods to be moved to location i
Centre-of-gravity method illustration

North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –

60 –

30 –
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Centre-of-gravity method illustration

Number of Containers
Store Location Shipped per Month
Chicago (30, 120) 2,000
Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000
Centre-of-gravity method illustration

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
 Centre-of-gravity method illustration
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
 Centre-of-gravity method example

▪ A company is setting up a warehouse to serve four customer

locations. The demand at each location and their respective
coordinates are given:

Customer X coordinate Y coordinate Demand (tons)

A 30 40 100
B 50 20 150
C 20 10 200
D 40 30 50
 Strengths of centre-of-gravity method

▪ Minimizes transport costs

▪ Simple and easy to use
▪ Considers demand/supply volume
▪ Helps in initial location planning
▪ Can be used for multiple locations
 Limitations of centre-of-gravity method

▪ Only considers the distances traveled. Ignores real-world

geographical constraints.
▪ Does not consider other costs (e.g., labour, land, taxes)
▪ Assumes distribution costs change in a linear fashion with the
distance and the quantity transported.
▪ Also assumes quantity transported is fixed for the duration of the
journey.
▪ Does not consider transport modes
▪ Does not account for facility expansion
New tools for location selection

Geographic Information
Systems
Artificial Intelligence (AI) and
Machine learning
Big data analytics
Internet of things (IoT)
 Session objectives

Now you should be able to:

▪ Apply factor rating, break-even, and centre-of-gravity methods to

perform location analysis;
▪ Evaluate the strengths and limitations of each method; and
▪ Identify the most appropriate method to use based on specific
locational decision-making scenarios.
Thank you!