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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 )
• 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 markets4. Labor availability, attitudes,
productivity, costs5. Availability of supplies,
communications, energy6. Exchange rates and
currency risks
Country Factors
Region / Community Factors
1. Corporate desires
2. Attractiveness of region
3. Labor availability, costs, attitudes towards unions
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives and fiscal policies
7. Proximity to raw materials and customers
8. Land/construction costs
MN
WI
MI
IL IN OH
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 Location Goods Mfg.Goods Mfg. Location Location
RevenueRevenue Focus Focus Cost Cost FocusFocus
Volume/revenueDrawing area; purchasing powerDrawing area; purchasing powerCompetition; advertising/pricingCompetition; advertising/pricing
Physical qualityParking, Access; Security,Parking, Access; Security,
Lighting; Appearance, ImageLighting; Appearance, Image
Cost determinantsRent, Rent, Management caliberManagement caliberOperations policies Operations policies
(hours, wage rates)(hours, wage rates)
Tangible costsTransportation cost of raw Transportation cost of raw materialmaterialShipment cost of finished goodsShipment cost of finished goodsEnergy and utility cost; labor;Energy and utility cost; labor;Raw material; taxes, and so onRaw material; taxes, and so on
Intangible and future costsAttitude toward unionAttitude toward unionQuality of lifeQuality of lifeEducation expenditures by stateEducation expenditures by stateQuality of state and local Quality of state and local governmentgovernment
Approach to Location
Service/Retail/Prof.Service/Retail/Prof. Locn. Locn. Goods-mfg.Goods-mfg. Location Location
TechniquesTechniques Techniques Techniques
Regression models to determine Regression models to determine importance of various factorsimportance of various factors
Factor-rating methodFactor-rating methodTraffic countsTraffic countsDemographic analysis of drawing Demographic analysis of drawing
areaareaPurchasing power analysis of areaPurchasing power analysis of area
Center-of-gravity methodmethod
Geographic information systemsGeographic information systems
Transportation methodsTransportation methods
Factor-rating methodmethod
Locational Locational break-even
analysisanalysis
Crossover chartsCrossover charts
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
Industry LocationsReason for clustering
Wine makers South Africa; Natural resources of land and climate
supermarket firms Silcon valley, Boston, Bangalore (India)
Talent resources of bright graduates in sc./tech. areas, venture capitalists nearby
Electronic firms Northern Mexico Duty free export zones
Computer hardware manufacturers
Singapore, Taiwan High tech penetration rate and per capita GDP, Skilled/educated workforce with large pool of engineers
Clustering
Industry LocationsReason for clustering
Textiles Surat, Ludhiana, Tirupur
Automobile repairs
& Ancillaries
Kirinyaga road, industrial area
Nearness to spare parts
Methods for Location
1. Factor Rating
2. Transportation model
3. Centroid Method
4. Load Distance
5. Break-even Analysis
6. Qualitative Factor Analysis
Factors Factor Rating (1 to 5)
Location Rating (1 to 10)
Rating Product
Location A
Location B
Location A
Location B
1) Proximity to Mkts 4 3 8 12 32
2) Tax advantage 5 6 7 30 35
3) Availability of power
3 7 8 21 2
4) Water availability 4 9 7 36 28
5) Community attitude
2 6 3 12 6
6) Infrastructure Development
2 6 5 12 10
7) Support industry 1 5 3 5 3
128 138
Location B is Preferred to A
Factor rating method
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
Retail Expected Outlets Demand A 80
B 100C 120D 130E 100F 150
G 90 Total Demand 770
Q. : Where should we set up a centralized warehousing facility?
Centre of Gravity Method
Y-D
ista
nce
(KM
)
04
2
4
6
8
10
12
14
16
8 12 16 20
X- Distance (KM)
• B• G
• Center-of-gravity
• D
• F
• A
• C • E
Centre of Gravity Method
Retail Outlet
Xi
DistYi
DistVolume (Vi) QTY
Vi Xi Vi Yi
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
= 8.45
Yc = 5800 /770
= 7.53
Load Distance methodUsed 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 SpringfieldCity Load Distance ld
Cleveland 15 20.5 307.5Columbus 10 4.5 45Cincinnati 12 7.5 90Dayton 4 3.5 14
Total Load-Distance Score(456.5)
Computing the Load-Distance Score for MansfieldCity Load Distance ld
Cleveland 15 8 120Columbus 10 8 80Cincinnati 12 20 240Dayton 4 16 64
Total Load-Distance Score(504)
Break Even method
Cost-volume analysis method used for industrial locations
3 Steps in the method –
1. Determine fixed and variable costs for each location
2. Plot the cost for each location
3. Select location with lowest total cost for expected production volume
Cost-Volume-Profit (or Br. Even Analysis)
C
ost
Volume of Sales
TCA
FCA
Vo
Revenue
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
• 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
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.
5. These alternatives are then prioritized
Thank You
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