Facility Location

Suhas Rane
 Learning Objectives
U shd. be able to Identify or Define:
 Objective of location strategy
 International location issues
 Clustering
 Geographic information systems

3 methods of solving the location problem

 Factor-rating method
 Locational breakeven analysis
 Center-of-gravity method
Facility Location is a Strategic Decision

One time decisions

Difficult to reverse

Affect fixed, variable and distribution costs

Affect sales
 Your plant / facility may be ….

• Near the Raw Material sources

(Steel, Cement Plants )
• Near to Market / Customers
(FMCG, Perishables Goods, Services)
• Best facilities & infrastructure
(MIDC, Union Territories, SEZs)
Country Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor availability, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
currency risks
Country Factors
Region / Community Factors
1. Corporate desires
2. Attractiveness of region
MN
3. Labor availability, costs,
WI
attitudes towards unions
MI
4. Costs and availability of utilities
IL OH
IN 5. Environmental regulations
6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
8. Land/construction costs
Site Factors

1. Site size and cost

2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Nearness of services/
supplies needed
5. Environmental impact
issues
Approach to Location

Profit maximization (Service industry)

Cost minimization (Manufacturing)

 Approach to Location

Service/Retail Location Goods Mfg. Location

Revenue Focus Cost Focus

Volume/revenue Tangible costs

Drawing area; purchasing power Transportation cost of raw
Competition; advertising/pricing material
Shipment cost of finished goods
Physical quality Energy and utility cost; labor;
Parking, Access; Security, Raw material; taxes, and so on
Lighting; Appearance, Image
Intangible and future costs
Cost determinants Attitude toward union
Rent, Management caliber Quality of life
Operations policies Education expenditures by state
(hours, wage rates) Quality of state and local
government
Approach to Location

Service/Retail/Prof. Locn. Goods-mfg. Location

Techniques Techniques
Regression models to determine Transportation methods
importance of various factors
Factor-rating method Factor-rating method
Traffic counts
Demographic analysis of drawing Locational break-even
area analysis
Purchasing power analysis of area
Crossover charts
Center-of-gravity method
Geographic information systems
Hotel Location
( Case : To open Chain of Hotels across the country )

Location is a strategically important decision in the

hospitality industry

Finally, the model considered only four variables

- Property Prices of the inn

- Median income levels

- State population per inn

- Location of nearby businesses / industries/

colleges
Telemarketing Location

Require neither face-to-face contact

nor movement of materials

Have very broad location options

Traditional variables are no longer relevant

Cost and availability of labor may drive location

decisions
Clustering

Reason for
Industry Locations
clustering
Wine makers Napa Valley (US); Natural resources of land
Bordeaux region and climate
(France)
Software firms Silicon Valley, Boston, Talent resources of bright
Bangalore (India) graduates in sc./tech. areas,
venture capitalists nearby
Electronic firms Northern Mexico Duty free export zones

Computer Singapore, Taiwan High tech penetration rate

hardware and per capita GDP,
manufacturers Skilled/educated workforce
with large pool of engineers
Clustering

Reason for
Industry Locations
clustering
Textiles Surat, Ludhiana,
Tirupur

Automobiles Pune- Chakan,

& Ancillaries Pithampur, Manesar

Leather Kanpur, Agra,

Chennai

BPO Mind-space
Methods for Location

• Factor Rating
• Transportation model
• Centroid Method
• Load Distance
• Break-even Analysis
• Qualitative Factor Analysis
 Factor rating method
Factors Factor Location Rating Rating Product
Rating (1 to 10)
(1 to 5)
Location Location Location Location
A B A B
1) Proximity to Mkts 4 3 8 12 32
2) Tax advantage 5 6 7 30 35
3) Availability of 3 7 8 21 2
power
4) Water availability 4 9 7 36 28
5) Community 2 6 3 12 6
attitude
6) Infrastructure 2 6 5 12 10
Development
7) Support industry 1 5 3 5 3
128 138
Location B is Preferred to A
 Centre of Gravity Method – Problem
Retail Expected
Outlets Demand
A 80
B 100
C 120
D 130
E 100
F 150
G 90
Total Demand 770

Q. : Where should we set up a

centralized warehousing facility?
 Centre of Gravity Method

16
•B
14 •G

12
10 •A
Y-Distance (KM)

8 • Center-of-gravity

6 •C •E

•F
4
•D
2

0
4 8 12 16 20
X- Distance (KM)
 Centre of Gravity Method
Retail Xi Yi Volume Vi Xi Vi Yi
Outlet Dist Dist (Vi) QTY
A 4 10 80 320 800
B 3.5 15 100 350 1500
C 4 6 120 480 720
D 10 2 130 1300 260
E 16 6 100 1600 600
F 8 5 150 1200 750
G 14 13 90 1260 1170
∑ Vi = 770 ∑ Vi Xi = 6510 ∑ Vi Yi = 8500

Xc=6510/770 Yc = 5800 /770

= 8.45 = 7.53
Load Distance method
Used to minimise the load distance product for pre selected locations

Matrix Manufacturing is considering where to locate its warehouse in order

to service its four Ohio stores located in Cleveland, Cincinnati, Columbus,
Dayton. Two sites are being considered; Mansfield and Springfield, Ohio.
Use the load-distance model to make the decision.
Load Distance method

Computing the Load-Distance Score for Springfield

City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)

Computing the Load-Distance Score for Mansfield

City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)
Break Even method
Cost-volume analysis method used for industrial locations

3 Steps in the method –

 Determine fixed and variable costs for each location

 Plot the cost for each location

3. Select location with lowest total cost for expected

production volume
Cost-Volume-Profit (or Br. Even Analysis)

Revenue

TCA

FCA
Cost

Vo

Volume of Sales
 Break Even Analysis Method

• Location A : Annual fixed costs of Rs.3 L,

Variable Costs - Rs. 63 / unit,
Revenues Rs. 68 per unit.

• Location B : Annual fixed costs Rs. 8 L

Variable costs Rs. 32 per unit,
Revenues are Rs. 68 per unit.

Exp. Sales volume 25000 units per year.

Which location is more attractive?
 Answer -Break Even Analysis Method
• B E Volume = Fixed cost / (Contribution / unit)

• VBE (A) = Rs 3 L / 68-63 = 60,000 units

• VBE (B) = Rs 8 L / 68-32 = 22,222 units

• At the expected demand of 25000 units,

A B
Revenue 17,00,000 17,00,000

Variable Cost 15,75,000 8,00,000

Fixed Cost 3,00,000 8,00,000

Total Cost 18,75,000 16,00,000

Profit (Loss) (1,75,000) 1,00,000

Location B is more attractive, even if annual fixed cost is higher

Transportation method

Finds amount to be shipped from several points of supply to several

points of demand

Solution will minimize total production and shipping costs

A special class of linear programming problems

Transportation method
 Analytical Delphi Method
(for complex multi-location decisions)

1. Coordinating Team (comprising Co-Employees &

External. Consultants ) uses questionnaire to illicit

information from Forecasting Panel.

2. Forecasting Panel - to identify Future Trends in
environment, threats, opportunities. Process is
repeated several times till consensus is reached.
3. This information is given to Strategic Panel to
identify Long Term Strategic Goals & Objectives.
4. Various ALTERNATIVES are developed.
 Thank You

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