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Facility Location JOASH MAGETO. Facility Location is a Strategic Decision. One time decisions Difficult to reverse It affects fixed, variable and distribution costs Affect sales. Your plant / facility may be …. Near the Raw Material sources (Steel, Cement Plants )

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Facility location joash mageto

Facility Location JOASH MAGETO

Facility location joash mageto

Facility Location is a Strategic Decision

One time decisions

Difficult to reverse

It affects fixed, variable and distribution costs

Affect sales

Facility location joash mageto

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)

Facility location joash mageto

Country Factors

Political risks, government rules, attitudes, incentives

Cultural and economic issues

Location of markets

Labor availability, attitudes, productivity, costs

Availability of supplies, communications, energy

Exchange rates and currency risks

Facility location joash mageto







Region / Community Factors

Corporate desires

Attractiveness of region

Labor availability, costs, attitudes towards unions

Costs and availability of utilities

Environmental regulations

Government incentives and fiscal policies

Proximity to raw materials and customers

Land/construction costs

Facility location joash mageto

Site Factors

Site size and cost

Air, rail, highway, and waterway systems

Zoning restrictions

Nearness of services/ supplies needed

Environmental impact issues

Facility location joash mageto

Approach to Location

Profit maximization (Service industry)

Cost minimization (Manufacturing)

Facility location joash mageto

Service/Retail Location Goods Mfg. Location

Revenue Focus Cost Focus


Drawing area; purchasing power

Competition; advertising/pricing

Physical quality

Parking, Access; Security,

Lighting; Appearance, Image

Cost determinants

Rent, Management caliber

Operations policies

(hours, wage rates)

Tangible costs

Transportation cost of raw material

Shipment cost of finished goods

Energy and utility cost; labor;

Raw material; taxes, and so on

Intangible and future costs

Attitude toward union

Quality of life

Education expenditures by state

Quality of state and local government

Approach to Location

Facility location joash mageto

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

Techniques Techniques

Regression models to determine importance of various factors

Factor-rating method

Traffic counts

Demographic analysis of drawing area

Purchasing power analysis of area

Center-of-gravity method

Geographic information systems

Transportation methods


Locational break-even


Crossover charts

Approach to Location

Facility location joash mageto

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

Facility location joash mageto

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

Facility location joash mageto

Methods for Location

  • Factor Rating

  • Transportation model

  • Centroid Method

  • Load Distance

  • Break-even Analysis

  • Qualitative Factor Analysis

Centre of gravity

  • The center of gravity method is used to determine the location of a single distribution center that will minimize distribution costs. It treats distribution cost as a linear function of the distance and the quantity shipped, which is assumed to be fixed, although an acceptable variation is that quantities are allowed to change as long as their relative amounts remain the same.

  • It is helpful in a limited number of situations – primarily service entities – where geography and transportation costs are important; as opposed to the critical factor method, which is more qualitative and general.

  • The method includes the use of a map that shows the locations of destinations. The map must be accurate and drawn to scale. A coordinate system is then overlaid on the map to determine relative locations. Once done, coordinates for each destination can then be placed.

  • If the quantities to be shipped to every location are equal, the solution is straightforward, as you can simply average the x and y coordinates. When they are not (as is usually the case), a weighted average must be applied, with the weights being the quantities to be shipped. The center of mass of a system of particles is defined as the average of their positions weighted by their masses:

  • As an example, consider six locations that require a central warehouse; each are plotted on a map with the following x and y values, followed by their importance (weights):

Centre of gravity method problem
Centre of Gravity Method – Problem

Retail Expected


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
Centre of Gravity Method


  • B


  • G



  • A


  • Center-of-gravity

  • E


  • C

Y-Distance (KM)

  • F


  • D








X- Distance (KM)

Facility location joash mageto

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.

Facility location joash mageto

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


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





Volume of Sales

Break even analysis method
Break Even Analysis Method

  • Location A : Annual fixed costs of sh 0.3m, Variable Costs - sh. 63 / unit,

    Revenues sh. 68 per unit.

  • Location B : Annual fixed costs sh. 0.8m,

    Variable costs sh. 32 per unit,

    Revenues are sh. 68 per unit.

    Exp. Sales volume 25000 units per year.

    Which location is more attractive?

Answer break even analysis method
Answer -Break Even Analysis Method

  • B E Volume = Fixed cost / (Contribution / unit)

  • VBE (A) = sh 300000 / 68-63 = 60,000 units

  • VBE (B) = sh 800000 / 68-32 = 22,222 units

  • At the expected demand of 25000 units,

    A B

    Revenue 1,700,000 1,700,000

    Variable Cost 1,575,000 800,000

    Fixed Cost 300,000 800,000

    Total Cost 1,875,000 1,600,000

    Profit (Loss) (175,000) 100,000

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

Facility location joash mageto

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

Analytical delphi method for complex multi location decisions
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.

5. These alternatives are then prioritized