04- Facility Location

8/8/2019 04- Facility Location

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Facility LocationFacility Location

MODULEMODULE--44MODULEMODULE--44


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SmileSmile -- It's theIt's the

second bestsecond bestthing you can dothing you can do

with your lips.with your lips.


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OverviewOverviewOverviewOverview

Facility PlanningFacility Planning

LongLong--Range Capacity PlanningRange Capacity Planning

Facility LocationFacility Location

WrapWrap--Up: What WorldUp: What World--ClassClass

Companies DoCompanies Do


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Facility PlanningFacility PlanningFacility PlanningFacility Planning

HOW MUCH long range capacity isHOW MUCH long range capacity isneeded?needed?

WHEN additional capacity isWHEN additional capacity is

needed?needed?

WHERE the production facilitiesWHERE the production facilities

should be located?should be located? WHAT the layout and characteristicsWHAT the layout and characteristics

of the facilities should be?of the facilities should be?


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Facility PlanningFacility PlanningFacility PlanningFacility PlanningThe capital investment in land, buildings,The capital investment in land, buildings,technology, and machinery is enormous.technology, and machinery is enormous.

A firm must live with its facility planningA firm must live with its facility planning

decisions for a long time, and these decisionsdecisions for a long time, and these decisionsaffect:affect:

Operating efficiencyOperating efficiency

Economy of scaleEconomy of scale

Ease of schedulingEase of scheduling

Maintenance costsMaintenance costs

Profitability! Profitability!


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A Sequence of Facility Location DecisionsA Sequence of Facility Location DecisionsA Sequence of Facility Location DecisionsA Sequence of Facility Location Decisions

National DecisionNational Decision

Regional DecisionRegional Decision

Community DecisionCommunity Decision

Site DecisionSite Decision

Political, social, economic stability;

Currency exchange rates; . . . . .

Climate; Customer concentrations;Degree of unionization; . . . . .

Transportation system availability;

Preference of management; . . . . .

Site size/cost; Environmental impact;

Zoning restrictions; . . . . .


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Importance of Planning theImportance of Planning the

Location of New FacilityLocation of New Facility


Location of New FacilityLocation of New Facility

Repercussions of Setting up a FacilityRepercussions of Setting up a Facilitywithout Planning :without Planning :

Sell off the facility to other companies :Sell off the facility to other companies :

Finding buyer is difficult,Finding buyer is difficult, Price received is much less than thePrice received is much less than the

investmentinvestment

Relocate facility to a new location :Relocate facility to a new location : Only machine/Only machine/ eqpteqpt. can be relocated, not HR,. can be relocated, notHR,

Investment in land / building blocked for longInvestment in land / building blocked for long


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Location of New Facility (contd.)Location of New Facility (contd.)



Repercussions of Setting up a FacilityRepercussions of Setting up a Facilitywithout Planning (without Planning (contdcontd) :) :

Continue operations at existing location :Continue operations at existing location :

Inherent problems lead to low profit / lessInherent problems lead to low profit / lessmarket share,market share,

Competitors plant at better location haveCompetitors plant at better location have

advantages,advantages,

In the long run, company will have to planIn the long run, company will have to plan

another facility at the right location to beatanother facility at the right location to beat

competition ,competition ,


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Repercussions of Setting up a FacilityRepercussions of Setting up a Facility

without Planning (without Planning (contdcontd) :) :

Close down the operations completelyClose down the operations completely

and liquidate the assets :and liquidate the assets :

Liquidation of assets is painful,Liquidation of assets is painful,

Finding buyers / negotiations is tedious /Finding buyers / negotiations is tedious /

time consuming,time consuming,

Price received much less than investmentPrice received much less than investment


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Facility Location DecisionFacility Location Decision --

CharacteristicsCharacteristics

Facility Location DecisionFacility Location Decision --

CharacteristicsCharacteristics

1. Long-term non-programmed decision,

2. Taken by the top management,

3. Involves heavy commitment of resources for a

very long time,

4. These are irreversible decisions. Other

repercussions have been discussed before.

5. Such decisions can be for new business or for oldbusiness,

6. Ideal facility location is not the guarantee of

success but it reduces uncertainty,


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Facility Location DecisionFacility Location DecisionCharacteristics (contd.)Characteristics (contd.)Facility Location DecisionFacility Location DecisionCharacteristics (contd.)Characteristics (contd.)

7. Location determines the capital cost and operating

cost,

8. Location decisions are dynamic in nature and may

have to be taken a number of times,

9. A good location decision affects other decisions

such as :

Type of production system,

Plant layout,

Distribution of products / services

Purchasing of raw material

Marketing decisions, etc


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Factors AffectingFactors Affecting thethe Location DecisionLocation DecisionFactors AffectingFactors Affecting thethe Location DecisionLocation Decision

Economic Factors :Economic Factors : Site acquisition, preparation andSite acquisition, preparation and

construction costsconstruction costs

Labor costs, skills and availabilityLabor costs, skills and availability Utilities costs and availabilityUtilities costs and availability

Proximity to marketsProximity to markets

Proximity to raw materialsProximity to raw materials Transportation costsTransportation costs

Govt. policies and taxesGovt. policies and taxes


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Factors AffectingFactors Affecting thethe Location DecisionLocation DecisionFactors AffectingFactors Affecting thethe Location DecisionLocation Decision

NonNon--economic Factors :economic Factors :

Labor attitudes and traditionsLabor attitudes and traditions

Training and employment services

Training and employment services

Environment & communitys attitudeEnvironment & communitys attitude

Schools, religious places & hospitalsSchools, religious places & hospitals

Recreation and cultural attractionsRecreation and cultural attractions Amount and type of housing availableAmount and type of housing available

Climatic conditionsClimatic conditions


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Facility Types and TheirFacility Types and Their

Dominant Locational FactorsDominant Locational Factors



Mining, Quarrying, and Heavy ManufacturingMining, Quarrying, and Heavy Manufacturing

Near their raw material sourcesNear their raw material sources

Abundant supply of utilitiesAbundant supply of utilities

Land and construction costs are inexpensiveLand and construction costs are inexpensive

Light ManufacturingLight Manufacturing

Availability and cost of laborAvailability and cost of labor

WarehousingWarehousing

Proximity to transportation facilitiesProximity to transportation facilities Incoming and outgoing transportation costsIncoming and outgoing transportation costs

. . . more. . . more


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R&D and HighR&D and High--Tech ManufacturingTech Manufacturing

Ability to recruit/retain scientists, engineers, etc.Ability to recruit/retain scientists, engineers, etc.

Near companies with similar technology interestsNear companies with similar technology interests

Retailing and ForRetailing and For--Profit ServicesProfit Services Near concentrations of target customersNear concentrations of target customers

Government and Health/EmergencyGovernment and Health/Emergency

ServicesServices Near concentrations of constituentsNear concentrations of constituents


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Some Reasons Due to WhichSome Reasons Due to Which

Facility Location Decision ArisesFacility Location Decision Arises



Changes in the market :Changes in the market : ExpansionExpansion

ContractionContraction

Geographic shiftGeographic shift

Changes in inputs :Changes in inputs : Labor skills and/or costsLabor skills and/or costs

Materials costs and/or availabilityMaterials costs and/or availability

Utility costsUtility costs

. . . more. . . more


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Changes in the environment :Changes in the environment :

Regulations and lawsRegulations and laws

Attitude of the communityAttitude of the community

Changes in technologyChanges in technology


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Analyzing Service Location DecisionsAnalyzing Service Location DecisionsAnalyzing Service Location DecisionsAnalyzing Service Location Decisions

Consumer BehaviorConsumer Behavior

ResearchResearch

Market ResearchMarket Research

Data Gathering forData Gathering for

Each LocationAlternativeEach LocationAlternative

Revenue Projections forRevenue Projections for

Each LocationAlternativeEach LocationAlternative

Why do customers buy ourproducts and services?

Who are our customers?

What are their characteristics?

What are the economic projections?

What is the time-phased revenue?

Profit Projections forProfit Projections for

Each LocationAlternativeEach LocationAlternativeWhat are the projected revenues

less time-phased operating costs?

Where are our customers concentrated?

What are their spending patterns?


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Analyzing Industrial Facility LocationsAnalyzing Industrial Facility LocationsAnalyzing Industrial Facility LocationsAnalyzing Industrial Facility Locations

Factors that tend to dominate theFactors that tend to dominate the

industrialindustrial--facility location decision are :facility location decision are :

Transportation costs

Transportation costs

Labor cost and availabilityLabor cost and availability

Materials cost and availabilityMaterials cost and availability Utilities costUtilities cost


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Analyzing Industrial Facility LocationsAnalyzing Industrial Facility LocationsAnalyzing Industrial Facility LocationsAnalyzing Industrial Facility Locations

Locating a Single Facility :Locating a Single Facility :

A simple way to analyze alternative locations isA simple way to analyze alternative locations is

conventional cost analysisconventional cost analysis

ProsPros ease of communication and understandingease of communication and understanding ConsCons time value of money ignored andtime value of money ignored and

qualitative factors not consideredqualitative factors not considered

Locating Multiple Facilities :Locating Multiple Facilities :

More sophisticated techniques are often used :More sophisticated techniques are often used :

Linear programming, computer simulation,Linear programming, computer simulation,

network analysis, and othersnetwork analysis, and others


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Qualitative Factors in Location DecisionsQualitative Factors in Location DecisionsQualitative Factors in Location DecisionsQualitative Factors in Location Decisions

OftenOften--important qualitative factors include :important qualitative factors include :

HousingHousing

ClimateClimate

Community activitiesCommunity activities

Education and health servicesEducation and health services

RecreationRecreation

SpiritualSpiritual Union activitiesUnion activities

Community attitudesCommunity attitudes


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Integrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative FactorsIntegrating Qualitative & Quantitative Factors

Managers often wrestle with the task of tradingManagers often wrestle with the task of trading

off qualitative factors against quantitativeoff qualitative factors against quantitative

ones.ones.

Methods for systematically displaying theMethods for systematically displaying therelative advantages and disadvantages, bothrelative advantages and disadvantages, both

qualitative and quantitative, of each locationqualitative and quantitative, of each location

alternative have been developedalternative have been developed TheThe RRelativeelative--AggregateAggregate--ScoresScores approach isapproach is

one such methodone such method


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RelativeRelative--AggregateAggregate--Scores ApproachScores ApproachRelativeRelative--AggregateAggregate--Scores ApproachScores Approach

Quantitative and Qualitative FactorsQuantitative and Qualitative FactorsLocation ALocation A Location BLocation B

Econ.Econ. WgtWgt. Econ.. Econ. WgtWgt..

FactorFactor Weight Data ScoreWeight Data Score ScoreScore Data ScoreData Score ScoreScore

Prod.costProd.cost/ton/ton .45.45 RsRs 30003000 .923.923 .415.415 RsRs 28002800 1.0001.000 .450.450

Transp.costTransp.cost/ton/ton .35.35 RsRs 900900 .944.944 ..330330 RsRs 850850 1.0001.000 ..350350

Labor Avail.Labor Avail. .15.15 .700.700 .105.105 .500.500 .075.075

Union ActivityUnion Activity .05.05 .450.450 .023.023 .750.750 .038.038

Total ScoreTotal Score ..873873 .913.913


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End of Module-4End of Module-4

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04- Facility Location