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Facility Location. Location Decisions. Long-term decisions (expand existing facilities, add new facilities, move) Difficult to reverse Affect fixed & variable costs Transportation cost As much as 25% of product price Other costs: Taxes, wages, rent etc.

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location decisions
Location Decisions
  • Long-term decisions (expand existing facilities, add new facilities, move)
  • Difficult to reverse
  • Affect fixed & variable costs
    • Transportation cost
      • As much as 25% of product price
    • Other costs: Taxes, wages, rent etc.
  • Objective: Maximize benefit of location to firm
need for location decisions
Need for Location Decisions
  • Marketing Strategy
  • Cost of Doing Business
  • Growth
  • Depletion of Resources
nature of location decisions
Nature of Location Decisions
  • Strategic Importance of location decisions
    • Long term commitment/costs
    • Impact on investments, revenues, and operations
    • Supply chains
  • Objectives of location decisions
    • Profit potential
    • No single location may be better than others
    • Identify several locations from which to choose
  • Location Options
    • Expand existing facilities
    • Add new facilities
    • Move
slide5

Industrial Location Decisions

  • Cost focus
    • Revenue varies little between locations
  • Location is a major cost factor
    • Affects shipping & production costs (e.g., labor)
    • Costs vary greatly between locations

© 1995 Corel Corp.

slide6

Service Location Decisions

  • Revenue focus
    • Costs vary little between market areas
  • Location is a major revenue factor
  • Traffic volume, good

transportation, customer

safety and convenience

most important

    • Affects amount of customer contact
    • Affects volume ofbusiness
slide8

Organizations That Need To Be Close to Markets

  • Government agencies
    • Police & fire departments
    • Post Office
  • Retail Sales and Service
    • Fast food restaurants, supermarkets, gas stations
    • Drug stores, shopping malls
    • Bakeries
  • Other Services
    • Doctors, lawyers, accountants, barbers
    • Banks, auto repair, motels
slide9

General Procedure for Making Location Decisions

  • Decide on the criteria to use for evaluating alternatives
  • Identify important factors
  • Develop location alternatives

- identify the general region for a location

- identify community alternatives

- identify site alternatives

  • Evaluate alternatives and make a selection
factors that affect location decisions
Factors That Affect Location Decisions

Community Considerations

Regional Factors

Site-related Factors

Multiple Plant Strategies

regional factors
Regional Factors
  • Location of raw materials
  • Location of markets
  • Labor factors
  • Climate and taxes
community considerations
Community Considerations
  • Quality of life
  • Services
  • Attitudes
  • Taxes
  • Environmental regulations
  • Utilities
  • Developer support
site related factors
Site Related Factors
  • Land
  • Transportation
  • Environmental
  • Legal
plant strategies
Plant Strategies
  • Single Plant Strategy
  • Multi-Plant Strategies

* Product Plant Strategy

* Market Area Plant Strategy

* Process Plant Strategy

location decision sequence

Region/Community

Country

Site

© 1995 Corel Corp.

.

Location Decision Sequence
slide16

Global Location Factors

  • Government stability
  • Government regulations
  • Political and economic systems
  • Economic stability and growth
  • Exchange rates
  • Culture
  • Climate
  • Export import regulations, duties and tariffs
  • Raw material availability
  • Number and proximity of suppliers
  • Transportation and distribution system
  • Labor cost and education
  • Available technology
  • Commercial travel
  • Technical expertise
  • Cross-border trade regulations
  • Group trade agreements
slide17

Regional Location Factors (1 of 2)

  • Incentive packages
  • Governmental, legal regulations, policies and barriers
  • Environmental regulations
  • Raw material availability
  • Commercial travel
  • Climate
  • Infrastructure (cost and availability of utilities)
  • Quality of life
  • Labor (availability, education, cost and unions)
  • Proximity of customers
  • Number of customers
  • Construction/leasing costs
  • Land costs
  • Modes and quality of transportation
  • Transportation costs
slide18

Regional Location Factors (2 of 2)

  • Community government
  • Local business regulations
  • Government services
  • Business climate
  • Community services
  • Taxes
  • Environmental impact issues
  • Availability of sites
  • Financial Services
  • Community inducements
  • Proximity of suppliers
  • Education system
  • Free trade zones
slide19

Site Location Factors

  • Customer base
  • Construction/ leasing cost
  • Site costs (land, expansion, parking, etc.
  • Quality of life issues in the community (education, health care, sports, cultural activities etc.)
  • Site size
  • Transportation
  • Traffic
  • Zoning restrictions
  • Safety/security
  • Competition
  • Area business climate
  • Income level
  • Host community
  • Competitive advantage
  • Utilities including gas, electric, water and their costs
slide20

Location Incentives

  • Tax credits
  • Relaxed government regulation
  • Job training
  • Infrastructure improvement
  • Money
location evaluation methods methods of solving location problems
Location Evaluation Methods(Methods of Solving Location Problems)
  • Factor-rating method
  • Center of gravity method
  • Load-distance method
  • Locational break-even analysis
  • Transportation model (a specialized linear programming method)
factor rating method 1 of 4
Factor-Rating Method (1 of 4)
  • Decision based on minimum distribution costs
  • Most widely used location technique
  • Useful for service & industrial locations
  • Rates locations using factors
    • Tangible (quantitative) factors
      • Example: Short-run & long-run costs
    • Intangible (qualitative) factors
      • Example: Education quality, labor skills
steps in factor rating method 2 of 4
Steps in Factor Rating Method (2 of4)
  • Identify important relevant factors
  • Assign importance weight to each factor (0.00 – 1.00)
  • Develop scale for each factor (such as 1 – 100)
  • Score each location along each factor
  • Multiply scores by weights for each factor & sum weighted factors
  • Select location with maximum total score
slide25

SCORES (0 TO 100)

LOCATION FACTOR

WEIGHT

Site 1

Site 2

Site 3

Labor pool and climate

Proximity to suppliers

Wage rates

Community environment

Proximity to customers

Shipping modes

Air service

.30

.20

.15

.15

.10

.05

.05

80

100

60

75

65

85

50

65

91

95

80

90

92

65

90

75

72

80

95

65

90

Location Factor Rating (3 of 4)

Weighted Score Site 1 = (0.30)(80) = 24

slide26

WEIGHTED SCORES

SCORES (0 TO 100)

Site 1

Site 2

Site 3

LOCATION FACTOR

WEIGHT

Site 1

Site 2

Site 3

24.00

20.00

9.00

11.25

6.50

4.25

2.50

77.50

19.50

18.20

14.25

12.00

9.00

4.60

3.25

80.80

27.00

15.00

10.80

12.00

9.50

3.25

4.50

82.05

Labor pool and climate

Proximity to suppliers

Wage rates

Community environment

Proximity to customers

Shipping modes

Air service

.30

.20

.15

.15

.10

.05

.05

80

100

60

75

65

85

50

65

91

95

80

90

92

65

90

75

72

80

95

65

90

Location Factor Rating (4 of 4)

Best one

slide28

2. Center of Gravity (Centroid) Method (1 of 10)

  • Decision based on minimum distribution costs
  • Finds location ofsingle distribution center serving several destinations
  • Used primarily for services
  • Considers
    • Location of existing destinations
      • Example: Markets, retailers etc.
    • Volume to be shipped
    • Shipping distances (or costs)
      • Shipping cost/unit/mile is constant
slide29

Center-of-Gravity Method (2 of 10)

  • Locate 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
slide30

Center of Gravity Method: Steps (3 of 10)

  • This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria
  • Place existing locations on a coordinate grid
    • Grid has arbitrary origin & scale
    • Maintains relative distances
  • Calculate X & Y coordinates for ‘center of gravity’
    • Gives location of distribution center
    • Minimizes transportation cost
slide31

y

n

n

xiVi

yiVi

i = 1

i = 1

2 (x2, y2), V2

y2

Cx =

Cy =

n

n

Vi

Vi

i = 1

i = 1

1 (x1, y1), V1

y1

3 (x3, y3), V3

y3

x1

x2

x3

x

Grid-Map Coordinates (4 of 10)

where,

Cx, Cy= coordinates of the new facility at center of gravity

xi, yi= coordinates of existing facility i

Vi = annual volume shipped from or to the ith location

slide32

y

A B C D

x 200 100 250 500

y 200 500 600 300

Vt 75 105 135 60

700

C

600

(135)

B

500

(105)

400

Miles

D

(60)

300

A

(75)

200

100

x

0

100

200

300

400

500

600

700

Miles

Center-of-Gravity Technique (5 of 10)Example 1

slide33

n

xiWi

i = 1

y

(200)(75) + (100)(105) + (250)(135) + (500)(60)

75 + 105 + 135 + 60

700

C

n

Cx = = = 238

600

Wi

(135)

B

i = 1

500

(105)

n

400

Miles

D

yiWi

(60)

300

i = 1

A

(200)(75) + (500)(105) + (600)(135) + (300)(60)

75 + 105 + 135 + 60

(75)

200

Cy= = = 444

n

Wi

100

i = 1

x

0

100

200

300

400

500

600

700

Miles

Center-of-Gravity Technique (6 of 10)Example 1

slide34

y

A B C D

x 200 100 250 500

y 200 500 600 300

Wt 75 105 135 60

C

700

(135)

B

600

(105)

500

Center of gravity (238, 444)

Miles

D

400

(60)

A

300

(75)

200

100

0

x

100

200

300

400

500

600

700

Miles

Center-of-Gravity Technique (7 of 10)Example 1

slide35

Centre of Gravity Method (8 of 10)

Y

Q

(790,900)

D

(250,580)

A

(100,200)

(0,0)

X

Example 2

Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom

Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

slide36

Centroid Method (9 of 10)Example 2

Y

Q

(790,900)

D

(250,580)

A

(100,200)

(0,0)

X

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

You must also have the volume information on the business activity at the existing facilities.

slide37

Y

New location of facility Z about (443,627)

Q

(790,900)

Z

D

(250,580)

A

(100,200)

(0,0)

X

Centroid Method (10 of 10) Example 2

You then compute the new coordinates using the formulas:

You then take thecoordinates and place them on the map:

locational break even analysis1
Locational Break-Even Analysis
  • Method of cost-volume analysis used for industrial locations
  • Steps
    • Determine fixed & variable costs for each location
    • Plot total cost for each location (Cost on vertical axis, annual volume on horizontal axis)
    • Select location with lowest total cost for expected production volume
      • Must be above break-even
location break even analysis
Location Break-Even Analysis
  • Assumptions
    • Fixed costs are constant
    • Variable costs are linear
    • Output can be closely estimated
    • Only one product involved
locational break even analysis example 1 1 of 2

© 1995 Corel Corp.

Locational Break-Even Analysis Example 1(1 of 2)

You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are$75, $45, &$25 respectively. The price per case is $120. What is the best location for an expected volume of2,000 cases per year?

locational break even crossover chart 2 of 2

200000

Akron

150000

Chicago

100000

Annual Cost

Bowling Green

50000

Bowling Green lowest cost

Akron lowest cost

Chicago lowest cost

0

0

500

1000

1500

2000

2500

3000

Volume

Locational Break-Even Crossover Chart (2 of 2)
example 2 cost volume analysis 1 of 3
Example 2: Cost-Volume Analysis (1 of 3)

Fixed and variable costs for four potential locations

example 2 solution 3 of3

$(000)

800

700

600

500

400

300

200

100

0

D

B

C

A

A Superior

C Superior

B Superior

0

2

4

6

8

10

12

14

16

Annual Output (000)

Example 2: Solution (3 of3)
transportation model
Transportation Model
  • Decision based on movement costs of raw materials or finished goods
  • Finds amount to be shipped from severalsources to several destinations
  • Used primarily for industrial locations
  • Seeks to minimize costs of shipping n units to m destinations
  • Type of linear programming model
    • Objective: Minimize total production & shipping costs (shipping n units to m destinations)
    • Constraints
      • Production capacity at source (factory)
      • Demand requirements at destinations
global locations
Global Locations
  • Reasons for globalization
  • Benefits
  • Disadvantages
  • Risks
  • Global operations issues
globalization
Globalization
  • Facilitating Factors
    • Trade agreements
    • Technology
  • Benefits
    • Markets
    • Cost savings
    • Legal and regulatory
    • Financial
globalization1
Globalization
  • Disadvantages
    • Transportation costs
    • Security
    • Unskilled labor
    • Import restrictions
    • Criticisms
  • Risks
    • Political
    • Terrorism
    • Legal
    • Cultural
telemarketing and internet industries
Telemarketing and Internet Industries
  • Require neither face-to-face contact with customers (or employees) nor movement of material
  • Presents a whole new perspective on the location problem
final thought
Final Thought

The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.

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