FACILITY LOCATION

DECISIONS
Lecture Outline
Location Options
Types of facilities
Site selection: where to locate
Location analysis techniques
 Introduction
 Is strategic decision which involves a long
term commitment about geographically
static factors dealing with the questions
such as ‘where the main operations should
be based?’
 the question of location is very much
linked to two competitive imperatives:
i) The need to produce close to the
customers due to time-based competition,
trade agreements, and shipping costs.
ii) The need to locate near the appropriate
labor pool to take advantage of low wage
costs and /or high technical skills.
The Need for location Decisions
Reasons for existing organizations to
get involved in location decision :
i. Opportunity for expanding market
share
ii. Business growth in demand
iii.Depletion of Basic resources
iv.Shift in Market /demand
v. Increase in Operating Costs
vi.Merge of companies
vii.Introduction of new product
THE STRATEGIC IMPORTANCE OF
LOCATION
The strategic decision often
depends on the type of business.
For industrial location decisions
the strategy is usually is
minimizing costs, whereas for
service organizations the strategy
focuses on maximizing revenue.
In general, the objective of
location strategy is to maximize
the benefit of location to the firm.
 Location options include:
(1) not moving, but instead
expanding an existing facility.
(2) maintaining current sites, but
adding another facility elsewhere,
(3)closing the existing facility and
moving to another location.
(4) Starting new facility
Factors affecting location
decisions
Proximity to sources of supply, to
customers, to source of labor and to
financial institutions;
Community considerations
Site considerations
Quality-of-life issues
Globalization
Types of Facilities
Type of facility determine the
location and location determines
cost. Three types:
Heavy-manufacturing facilities
◦ large, require a lot of space, and are
expensive
Light-industry facilities
◦ Smaller plants and usually less costly
Retail and service facilities
◦ smallest and least costly
Factors in Heavy Manufacturing
Location
Proximity to raw materials
Construction costs
Land costs
Raw material and finished goods
shipment modes
Utilities
Labor availability
Factors in Light Industry
Location
Transportation costs
Proximity to markets
Frequency of delivery required by
customer
Land costs
Easily accessible geographic
region
Education and training
capabilities
Factors in Retail Location
Proximity to customers
 Location is everything

??? Observe your community and identify

types of facilities and why they have
chosen your locality as their base for
operation?
Global Location Factors
 Government  Raw material
stability availability
 Government  Number and proximity

regulations of suppliers
 Transportation and
 Political and
distribution system
economic systems
 Labor cost and
 Economic stability
education
and growth  Available technology
 Exchange rates
 Commercial travel
 Culture  Technical expertise
 Climate  Cross-border trade
 Export - import regulations
regulations, duties  Group trade
and tariffs agreements
Regional Location Factors
Labor Modes and quality
(availability, of transportation
education, cost, Transportation
and unions) costs
Proximity of Community
customers government
Number of  Local business
customers regulations
Construction/ Government

leasing costs services (e.g.,

Land cost Chamber of
Commerce)
Regional Location Factors
(cont.)
 Business climate  Infrastructure (e.g.,
 Community services roads, water,
 Incentive packages sewers)
 Quality of life
 Government
 Taxes
regulations
 Availability of sites
 Environmental
 Financial services
regulations
 Raw material  Community

availability inducements
 Proximity of
 Commercial travel
 Climate
suppliers
 Education system
Location Incentives
Tax credits
Relaxed government regulation
Job training
Infrastructure improvement
Money
 Location Analysis
Techniques
Various quantitative models are used
to help determine the best location of
facilities.
Evaluation of alternative regions, sub
regions, and community is termed
micro analysis. These include:
i. Location rating factor
ii. Break even Analysis
iii.Center-of-gravity
iv. Load-distance
v. Linear Programming Models(Transportation
Models)
Factor rating method
Factor ratings are frequently used to
evaluate location alternatives because
1. Their simplicity facilitates
communication about why one site is
better than another
2. They enable mangers to bring diverse
location consideration into the
evaluation process
3. Then faster consistency and
judgment about location alternatives.
 Location Rating Factor
 Steps:
 Identify important factors
 Weigh the factors (0.00 - 1.00)
based on importance of the factor
 Determine the range of rating
score (e.g. 0 - 100 or 1 to 10…)
 Subjectively rate/ score each
factor
 Sum weighted scores
 Choose the alternative based on
 Location Factor Rating:
Example
SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3
Labor pool and climate .30 80 65 90
Proximity to suppliers .20 100 91 75
Wage rates .15 60 95 72
Community environment .15 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
Air service .05 50 65 90

Weighted Score for “Labor pool and climate” for

Site 1 = (0.30)(80) = 24
Location Factor Rating

Site 3 has the

highest factor
rating
2. LOCATIONAL BREAK-EVEN
ANALYSIS
is the use of cost-volume analysis to
make an economic comparison of
location alternatives.
By identifying fixed and variable cost
and graphing them for each location, we
can determine which one provides the
lowest cost.
It can be done mathematically or
graphically. The graphic approach has
the advantage of providing the range of
volume for which each location is
preferable.
Mainly used for manufacturing facilities.
Cont’d…
The three steps to locational
break-even analysis are:
i. Determine the fixed and variable
cost for each location
ii.Plot the costs for each location,
which costs on the vertical axis of
the graph and annual volume on
the horizontal axis
iii.Select the location that has the
lowest total cost for the expected
production volume.
Cont’d…
Example:
A manufacturer of automobile carburetors is
considering three locations Addis, Awassa and
Adama for a new plant. Cost studies indicate
the fixed costs per year at the sites are
$30,000. $60,000, and $110,000, respectively;
and variable costs are $75 per unit, $45 per
unit, and $25 per unit respectively. The
expected selling price of the carburetors
produced is $120. The company wishes to find
the most economical location for an expected
volume of zeros units) and the total cost (fixed
cost + variable costs) at the expected volume
of output. Identify the range over which each
site is economical?
Center-of-Gravity
Technique
 Objective: Locate single facility
at center of geographic area.
 Based on weight and distance
traveled, establish grid-map of
area.
 Identify coordinates and weights
shipped for each location
 Steps
Step 1:
i.Place existing warehouse, fulfillment
center, and/or distribution center locations
in a coordinate grid.
ii.Place the grid on an ordinary map.
iii.The relative distances must be noted.
Step2:
Calculate the X and Y coordinates using
equations/ formula given in the next slide.
Step 3:
Once you have obtained the X and Y
coordinates, place that location on the map.
 Grid-Map Coordinates
y n n
 xW i i  yW i i

2 (x2, y2), W2 i=1 i=1

y2 x= n y= n
W i W i

1 (x1, y1), W1 i=1 i=1

y1
where,
x, y =coordinates of
3 (x3, y3), W3 new facility at center
y3 of gravity
xi, yi =coordinates of
existing facility i
Wi =annual weight
shipped from facility i
x1 x2 x3 x
 Center-of-Gravity Technique:
Example
y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
500 (105)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles
Center-of-Gravity Technique: Example
(cont.)
 Center-of-Gravity Technique:
Example (cont.)
y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
500 (105)
Center of gravity (238, 444)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles
Load-Distance Technique
Compute (Load x Distance) for
each site
Choose site with lowest (Load x
Distance)
 Distance can be actual or straight-
line.
Load-Distance Calculations
 Load-Distance: Example
Use the previous example

Potential Sites Suppliers

Site X Y A B C D
1 360 180 X 200 100 250 500
2 420 450 Y 200 500 600 300
3 250 400 Wt 75 105 135 60

Compute distance from each site to each

supplier
Site dA = (xA - x)2 + (yA - y)2 = (200-360)2 + (200-180)2 = 161.2
1
dB = (xB - x)2 + (yB - y)2 = (100-360)2 + (500-180)2 = 412.3

dC = 434.2 dD = 184.4
 Load-Distance: Example
(cont.)
Site 2 dA = 333 dB = 323.9 dC = 226.7 dD = 170
Site 3 dA = 206.2 dB = 180.4 dC = 200 dD = 269.3

Compute load-distance
n
LD =  li di
i=1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(184.4) = 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*

* Choose site 3
LINEAR PROGRAMMING
The transportation method of
linear programming can be used
to test the cost impact of different
candidate locations on the entire
production-distribution network.
Can be solved using
transportation Model or
converting transportation model
to LPM and solve it using Various
soft wares or manually.
 LOCATING SERVICE FACILITIES
the focus in the service sector is on
maximizing revenue since
manufacturing costs tend to vary
substantially between locations, but in
service firms’ location often has more
impact on revenue than cost.
Therefore, for the service firm a specific
location often influences revenue more
than it does cost. This means that the
location focus for service firms should be
on determining the volume of business
and revenue.
 Cont’d…
A common problem encountered by
service-providing organizations are
deciding how many service outlets to
establish within a geographic area, and
where.
The problem is complicated by the many
possible locations and several options in
the absolute number of service centers.
Thus, attempting to find a good solution,
much less than optimal one can be
extremely time consuming even for a
relatively small problem.
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