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Facility Location: Factors and Importance

Explore the strategic importance of facility location and the process of determining the optimum number of facilities. Learn about the major influences and specialized characteristics of facility location.

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Facility Location: Factors and Importance

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  1. CHAPTER 9 Facility Location

  2. Learning Objectives To examine the strategic importance of facility location To explain the general process of determining the optimum number of facilities To describe the major factors that influence facility location

  3. Learning Objectives To examine a site’s specialized location characteristics To explain location decisions using simple grid systems To learn about facility relocation and facility closing

  4. Facility Location Key Terms • Agglomeration (industry cluster) • Brownfields • Center-of-gravity approach • Expatriate workers • Facility closing • Facility location • Facility relocation • Free trade zone • Grid system • Intermodal competition • Intramodal competition

  5. Facility Location Key Terms • Inventory tax • Locavore strategy • Maquiladora • Pure materials • Quality-of-life considerations • Right-to-work laws • Supplier parks • Sweatshops • Weight-gaining products • Weight-losing products

  6. Facility Location • Facility location • refers to choosing the locations for distribution centers, warehouses, and production facilities to facilitate logistical effectiveness and efficiency

  7. The Strategic Importance of Facility Location • Factors that can influence facility location decisions include: • Cost considerations • Consumers sensitized to buy only when prices are low • Low price/low cost framework led companies to operate in countries with low-cost labor • Companies reconsidering locations due to significant surge in oil prices (adopting near-sourcing)

  8. The Strategic Importance of Facility Location • Factors that can influence facility location decisions include: • Customer service expectations • Expectations continue to increase over time • Customers looking for faster and more reliable order cycles

  9. The Strategic Importance of Facility Location • Factors that can influence facility location decisions include: • Location of Customer or Supply Markets • Population shift • Economics growth • Sustainability

  10. The Strategic Importance of Facility Location

  11. Determining the Number of Facilities • Facilities are generally added when service levels become unacceptable • Software packages exist to help in determining the number and location of facilities • Key issue—time it takes to get from facility to majority of the U.S. (or target) population • Moving from 2 to 5 facilities saves 1 day lead time • Moving from 5 to 10 facilities saves ½ day lead time

  12. General Factors Influencing Facility Location • Influences on location of manufacturing, processing, or assembly facility • Raw materials • Component parts • Labor • Markets • Warehouses, distribution centers, and cross-docking facilities locations influenced by locations of products they handle and markets served

  13. General Factors Influencing Facility Location

  14. General Factors Influencing Facility Location • Natural Resources • Pure materials • Weight-losing products • Weight-gaining products • Population Characteristics—Market for Goods • Population Characteristics—Labor • Maquiladora • Sweatshops • Right-to-work laws • Expatriate workers

  15. General Factors Influencing Facility Location • Taxes and Incentives • Inventory tax • Incentive packages • Transportation Considerations • Availability • Refers to the number of transportation modes (intermodal competition) and • The number of carriers within each mode (intramodal competition) • Cost

  16. General Factors Influencing Facility Location • Proximity to Industry Clusters • Agglomeration concept, better known today as the industry cluster concept • Offers organizations proximity to key suppliers • Catalyst in the development of supplier parks

  17. General Factors Influencing Facility Location

  18. General Factors Influencing Facility Location • Trade Patterns • Commodity flow data studied to determine changes occurring in the movement of raw materials and semiprocessed goods • How much is being produced? • Where is it being shipped? • Trade agreements, i.e. NAFTA

  19. General Factors Influencing Facility Location • Quality-of-Life Considerations • Cost of living • Educational opportunities • Crime rates • Employment opportunities • Weather • Cultural amenities • Others

  20. General Factors Influencing Facility Location • Considerations when locating in other countries • Relevant legal system • Political stability • Bureaucratic red tape • Corruption • Protectionism • Nationalism • Privatization • Expropriation (confiscation) • Treaties and trade agreements

  21. Specialized Location Characteristics • Current zoning of the land • There may be limits on how the land can be used • Local unions • Have areas of jurisdiction • Firm’s labor relations manager may have distinct preferences with which locals they are willing to work with • Different supplemental agreements provide companies with differing levels of managerial flexibility (or inflexibility)

  22. Specialized Location Characteristics • Title search • May be needed to make sure a parcel of land can be sold and that there are no liens against it • Engineers examine site for proper drainage and to determine load-bearing characteristics of the soil • Brownfields • Previously used site that contain chemicals or other types of industrial waste • Environmental regulations may require due diligence be carried out to determine who previously owned the prospective site and how it was used

  23. Specialized Location Characteristics • Weather • Decisions can be influenced by the potential for • Tornadoes • Floods • Hurricanes • Others • Experts can be hired to evaluate site-specific climate risks and the associated mitigation costs

  24. Specialized Location Characteristics • Free Trade Zone • Nondomestic merchandise may be stored, exhibited, processed, or used in manufacturing operations without being subjected to duties and quotas until the goods or their products enter the customs territory of the zone country • Have become extremely popular in recent years • Often located at, or near, water ports, although they can also be located at, or near, airports

  25. Specialized Location Characteristics • Free Trade Zone • Foreign trade zones are highly specialized sites in which to locate a free trade zone • Free trade subzones refer to specific locations at an existing free trade zone • Particularly popular with automotive manufacturers

  26. Finding the Lowest-Cost Location • Grid systems • Allow one to analyze spatial relationships with mathematical tools • Checkerboard patterns • Placed so that they coincide with north-south and east-west line on a map

  27. Finding the Lowest-Cost Location

  28. Finding the Lowest-Cost Location • Grid systems • Center-of-gravity approach used for locating a single facility while minimizing the distance to existing facilities • Weighted center-of-gravity approach takes volume into account • Facility will be located closer to the existing sites with the greatest current demand

  29. Finding the Lowest-Cost Location

  30. Finding the Lowest-Cost Location

  31. Facility Relocation and Facility Closing • Two specialized situations regarding location choice • Facility relocation • Associated with business growth • Facility closing • Associated with business contraction

  32. Facility Relocation and Facility Closing • Facility relocation • occurs when a firm decides that it can no longer continue operations in its present facility and must move operations to another facility to better serve suppliers or customers. • Common reason for facility relocation • Lack of room for expansion at current site

  33. Facility Relocation and Facility Closing • Facility relocation • Decision involves a comparison of the advantages and disadvantages of a new site to the advantages and disadvantages of an existing location • Must also consider the potential consequences of relocation on their human resources (consequences that may not be easily quantified) • Must keep current employees informed • Be prepared for unplanned glitches during transition to prevent customer service issues

  34. Facility Relocation and Facility Closing • Facility Closing • occurs when a company decides to discontinue operations at a current site because the operations may no longer be needed or can by absorbed by other facilities. • Examples leading to facility closure: • Eliminating redundant capacity in mergers and acquisitions • Improving supply chain efficiency • Poor planning • Insufficient volume of business

  35. Facility Relocation and Facility Closing • Facility closing • Largely a business-oriented decision • Other considerations can factor into the decision such as union contracts • Human impact must be considered • Employees should be kept informed • Individuals are losing jobs and pay • Individuals suffer a loss of self-esteem • Poorly handled closings can lead to negative publicity

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