5d. Facility Location

7/29/2019 5d. Facility Location

1/49

Facility Location


2/49

Learning Objectives

U shd. be able to Identify or Define: Objective of location strategy

International location issues

Clustering

Geographic information systems

3 methods of solving the location problem

Factor-rating method Locational breakeven analysis

Center-of-gravity method


3/49

Facility set upwithout properlocation planning

Problems

Problems

Problems

Problems

Relocate facility

to a new location

Continue

operations at the

existing location

Sell off the

facility to other

companies

(Divestment)

Close down the

operations

completely and

liquidate the assets


4/49

Operations Strategies with Multiple Facilities

1. Separate facilities for different products/services

2. Separate facilities to serve differentgeographical areas

3. Separate facilities for different processes inthe manufacture of a product or in providinga service


5/49

REASONS FOR LOCATION CHANGES

Different situations for location change could be (i) a new plant is just beingstarted, (ii) a new branch of an existing plant is to be located, or (iii) anew location for an existing plant is being sought.

In addition to the need for greater capacity, there are other reasons for

changing or adding locations:Changes in resources may occur. The cost or availability of labor, rawmaterials, and supporting resources (such as subcontractors) may change.

The geography of demand may shift. As product markets change, it maybe desirable to change facility location to provide better service to

customers. Some companies may merge, making facilities locationredundant.

New products may be introduced, changing the availability of resourcesand markets. Political and economic conditions may change.


6/49

GENERAL PROCEDURES FOR FACILITY LOCATION

Preliminary Screening

--Sources of Information (Chambers of commerce)

--Detailed Analysis

Selection of exact siteTransportation facilities ---Availability of water, power, gas and

sewerage ---Soil characteristics----Drainage----Parking space

Space for expansion----Accessibility by workers

Cost of land----Existing buildings


7/49

Location Decision Process

Facility Location is typically conducted hierarchically and

involves the following basic decisions where appropriate .

1)Global Location

2)Regional Location

3)District or community Location

4)Local Site Selection


8/49

Behavioral impact in facility Location

Cultural Differences

Job Satisfaction

Consumer Considerations


9/49

GENERAL FACTORS INFLUENCING LOCATION

Proximity to Good Highways

Abundant Labor Supply

Proximity to Markets

Availability of Suitable Land and Land Cost Adequate Water Supply

Nearness to Raw Materials and Suppliers

Nearness to an Existing Plant

Transportation

Power SupplyClimate

Water Disposal and Pollution---Taxes


10/49

Factors that Affect Location Decisions

Regional Factors

Location of Raw Materials (necessity, perishability, and

transportation costs)

Location of Markets (locate near the markets, distributioncosts, the perishability of a finished product, GIS)

Labor Factors (cost and availability of labor, wage rates in an

area, labor productivity and attitudes toward work, and

unions)

Climate and Taxes


11/49

Goodtransportation

facilities

Close

Proximity

to the raw

material

Close

Proximit

y to

Markets

Residential

complexes,

schools,

hospitals,clubs, etc.

Availability

of cheap &

skillful

labor

Less

construction

costs

Easy

availability

of cheap

land

Proximity

to sub-contractors

Environment

and

community

Government

policies

Basicamenitie

s

Availability

of powersupply

FacilityLocatio

nPlannin

g

Factors in Facility Location Planning


12/49

Your plant / facility may be .

Near the Raw Material sources

(Steel, Cement Plants )

Volume Compression Ratio

(Higher the ratio, nearer to RM source)

Near to Market / Customers

(FMCG, Perishables Goods, Services) Better facilities & infrastructure

(MIDC, Union Territories, SEZs, FTZs)


13/49


14/49

Country Factors

1. Political risks, governmentrules, attitudes, incentives

2. Cultural and economicissues

3. Location of markets4. Labor availability, attitudes,productivity, costs

5. Availability of supplies,communications, energy

6. Exchange rates andcurrency risks


15/49

Region / Community Factors

1. Corporate desires2. 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 INOH


16/49

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


17/49

Offensive incompetitors

home

country

Power &

prestige

Synergy

Economies

of scale

Exploitation

of firm

specific

advantages Incentives

Low costs

Additional

resources

Regulations

International

competition

International

customers

Trade

barriers

InternationalFacility

LocationPlanning

Factors in International Location Planning


18/49

Approach to Location

Profit maximization (Service industry)

Cost minimization (Manufacturing)


19/49


Service/Retail Location Goods Mfg. LocationRevenueFocus CostFocus

Volume/revenue

Drawing area; purchasing powerCompetition; advertising/pricing

Physical qualityParking, Access; Security,

Lighting; Appearance, Image

Cost determinants

Rent, Management calibre

Operations policies

(hours, wage rates)

Tangible costs

Transportation cost of raw materialShipment cost of finished goods

Energy and utility cost; labor;

Raw material; taxes, and so on

Intangible and future costs

Attitude toward unionQuality of life

Education expenditures by state

Quality of state and localgovernment


20/49


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

Techniques Techniques

Regression models to determine

importance of various factorsFactor-rating method

Traffic counts

Demographic analysis of drawingarea

Purchasing power analysis of area

Center-of-gravitymethodGeographic information systems

Transportation methods

Factor-ratingmethod

Locationalbreak-even

analysis

Crossover charts


21/49

Clustering

Industry Locations Reason for clustering

Wine makers Napa Valley (US);

Bordeaux region (France)

Natural resources

Land, Climate

Softwarefirms Silicon Valley, Boston,Bangalore (India) Talent resources of brightgrads. in Sc./tech. areas,

venture capitalists nearby

Electronic firms Northern Mexico Duty free export zones

Computer hardwaremanufacturers

Singapore, Taiwan High tech penetration rate,Skilled/educated workforce

with large pool of engineers


22/49

Location Decision Process

Facility Location is typically conducted hierarchically and

involves the following basic decisions where appropriate .

1)Global Location

2)Regional Location

3)District or community Location

4)Local Site Selection


23/49

Cost Volume Break even Analysis of Location

Revenues and costs are affected by facility location .Break

even analysis helps relate costs and revenues to facility

location .Revenue minus total cost at each location .

1)Estimate the fixed and variable cost associated with each

location

2)Graph them for a representative volume

3)If revenues vary from one location to another ,the

comparison should be made on the basis of total Revenue

minus total cost at each location

Different breakeven volumes for four location options for


24/49

Location 1

Cost/

Revenue

(Rs)

Cost/

Revenue

(Rs)

Cost/

Revenue

(Rs)

Cost/

Revenue

(Rs)

VC (High)

VC (Low)

FC (Low)

FC (High)

VBE VBE

VBE VBE

Volume of Production (units) Volume of Production (units)

Volume of Production (units) Volume of Production (units)

TR

TC

TC

Different breakeven volumes for four location options for

different FC and VC values

Location 2

Location 3 Location 4


25/49

Cost/Revenue

(Rs)

Volume of Production

(units)

0

FC (X)

VBE (X)

TCDS(X)

VMAX (X) VMAX (X)DS

FC (X)EXP

TC (X)

TCDS, EXP (X)

VMAX (X)DS,

EXP

FC (Y)

TC[(X) DS, EXP +(Y)]

VMAX [(X)DS,

EXP+(Y)]VBE [(X)DS,

EXP+(Y)]

TR

TC[(X) DS, EXP+ (Y)DS]

Break-evenanalysis for afacilityexperiencingvery high

demandincreasing at ahigh rate

VMAX [(X)DS, EXP+(Y)DS]


26/49

Fixed Costs and Variable costs

In economics, fixed costs are business expenses that are not

dependent on the level of goods or services produced by the

business. They tend to be time-related, such as salaries or

rents being paid per month, and are often referred to as

overhead costs.

In management accounting, fixed costs are defined as

expenses that do not change as a function of the activity of a

business, within the relevant period. For example, a retailer

mustpay rentand utility bills irrespective of sales.


27/49

The Effect of Location on Fixed Costs

New or additional facilities entail fixed Costs .

Normally Fixed costs are incurred only once .

To be recovered from revenues over a period of Time New facilities involve costs for new construction ,purchase

,renovation .

Once acquired more money is spent on fixtures and

equipments . The magnitude of these costs depend on the Location .


28/49

The Effect of Location on Revenues

In business, revenue is income that a company receives from

its normal business activities, usually from the sale of goods

and services to customers.

Facilities location affects the revenue in both Goods and

Services industry .

Delivery Time and distance plays a crucial role in revenue

Generation


29/49

Reasons for Location Changes

Changes in resources may occur .The cost or availability of

labor ,raw materials and supporting resources (Such as sub

contractors)may change .

The geography of demand may change

Companies may merge ,making facilities redundant

New products may be introduced ,changing the availability of

resources and markets

Political and economic conditions may change


30/49

Labour and Demand factors

Labor supply

Labor management Relations

Ability to retain Labor force Availability of adequate labor skills

Labor rates

Location of competitors

Volume of traffic around location .


31/49

Climate and Environment factors

Climate and Living conditions

School facilities

Universities and research facilities Community attitudes

Health care facilities

Property costs

Cost of Living


32/49

State and Local Legal and Political Factors

Taxation climate and Policies

Local and Tax structures

Opportunity for highway advertising Tax incentives and Abatements

Health and safety laws

Regulatory agencies and policies .


33/49

Utilities Factor

Adequate water supply

Waste Disposal

Power supply

Fuel Availability Communications Capability

Price/Cost

Utility Regulatory Laws and Practices .


34/49

Transportation Factors

Closeness to sources of supply

Closeness to markets

Adequacy of transportation modes (Air,truck,train ,water) Costs of transportation

Visibility of the facility from the highway

Parking Capability

Response time for emergency services .


35/49

Methods Of Evaluating Location Alternatives

1. The Factor-Rating Method

2. Locational Break-Even Analysis

3. Center-of-Gravity Method

4. The Transportation Method


36/49

Factors Ratings

Factor ratings are used to evaluate location alternativesbecause

(i) their simplicity helps decide why one site is better thananother;

(ii) they enable managers to bring diverse locationalconsiderations into the evaluation process; and

(iii) they foster consistency of judgement about locationalternatives.

The following steps are involved in factor rating:

Develop a list of relevant factors. Assign a weight to each factor to indicate its relativeimportance (weights may total 1.00).

Assign a common scale to each factor (e.g., 0 to 100 points),and designate any minimums.

Score each potential location according to the designated scale,and multi l the scores b the wei hts.


37/49

Example

A Automobile manufacturing company intends

to open a new facility . The following table

contains information on two potential

locations. Which is the better alternative?


38/49

Factor-Rating Example

Critical ScoresSuccess (out of 100) Weighted ScoresFactor Weight Sanand Singur Sanand Singur

Laboravailability

and attitude .25 70 60People-to

car ratio .05 50 60

Per capitaincome .10 85 80

Tax structure .39 75 70Education

and health .21 60 70

Totals 1.00


39/49

Factor-Rating Example

Critical ScoresSuccess (out of 100) Weighted ScoresFactor Weight Sanand Singur Sanand Singur

Laboravailability

and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0People-to

car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capitaincome .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3Education

and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7

Totals 1.00 70.4 68.0


40/49

Center-of-Gravity Method

Place existing locations on a coordinategrid

Grid origin and scale is arbitrary

Maintain relative distances

Calculate X and Y coordinates for center

of gravity Assumes cost is directly proportional to

distance and volume shipped


41/49

Centre of Gravity Method

The Center of gravity Method determines X and Y Coordinates (Location ) fora single facility .

1. Place the locations to be supported on a coordinate system (like agraph).

2. Calculate the center of gravity:Cx= Xi Wi / Wi & Cy= Yi Wi / Wi

Where:

Cx =x coordinate of the center of Gravity

Cy=y coordinate of the center of Gravityxi = x-coordinate of location i.

yi = y-coordinate of location i.Wi= quantity (load) of goods moved to/from location i.


42/49

Centre of Gravity Method Problem

Retail Expected

Outlets DemandA 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?

C t f G it M th d


43/49


Y-Distance(KM)

04

2

4

6

8

10

12

1416

8 12 16 20

X- Distance (KM)

B

G

Center-of-gravity

D

F

A

C E


44/49


Retail

Outlet

Xi

Dist

Yi Dist Volume

(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 = 5800

Xc=6510/770

= 8.45

Yc = 5800 /770

= 7.53


45/49

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 expectedproduction volume


46/49

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

C

ost

Volume of Sales

TCA

FCA

Vo

Revenue

VCA


47/49

Break Even Analysis Method

Location A : Annual fixed costs of Rs.3 L,

Variable Costs - Rs. 63 / unit,

Revenues Rs. 68 per unit.

Location B : Annual fixed costs Rs. 8 L

Variable costs Rs. 32 per unit,

Revenues are Rs. 68 per unit.

Exp. Sales volume 25000 units per year.

Which location is more attractive?


48/49

Answer -Break Even Analysis Method

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

VBE (A) = Rs 3 L / 68-63 = 60,000 units

VBE (B) = Rs 8 L / 68-32 = 22,222 units

At the expected demand of 25000 units,

A B

Revenue 17,00,000 17,00,000

Variable Cost 15,75,000 8,00,000

Fixed Cost 3,00,000 8,00,000

Total Cost 18,75,000 16,00,000

Profit (Loss) (1,75,000) 1,00,000

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


49/49

Service Location Strategy

1. Purchasing power of customer-drawing area

2. Service and image compatibility with demographics of the

customer-drawing area

3. Competition in the area

4. Quality of the competition

5. Uniqueness of the firms and competitors locations

6. Physical qualities of facilities and neighboring businesses

7. Operating policies of the firm8. Quality of management

Documents

5d. Facility Location