FACILITY LOCATION

FACILITY LOCATIONOnce a firm has decided to open a new facility OR relocate an existing facility, It must decide where that facility should be located.

Need for selecting a suitable site or location

While starting a new factoryDuring the expansion of the existing

plantWhen the existing plant is to be re-

located at some other place, to remove the drawbacks of the present location or to gain the benefits of a still better location.

How to solve the problem of location

The problem of site selection of a factory can be solved in the following three stages:

Selection of the regionSelection of the localitySelection of Actual Site

Factors affecting size of the firm

Availability of capitalEntrepreneurial Ability & EfficiencyRisk of UncertaintiesType of OrganizationAvailability of InputsNature of ProductGovernment Regulation or Licensing

Policy of Government

FACILITY LOCATION

Facility location problem involves the evaluation of various sites for a new facility.

There are various factors that influence the Facility Location Decision and they can be divided into the main two categories:

Primary FactorsSecondary Factors

Primary Factors

Supply of Raw MaterialNearness to MarketTransport FacilitiesLabour supplyAvailability of PowerSupply of Capital

Secondary Factors

FacilitiesNatural FactorsPolitical FactorsGovernment Subsidies & FacilitiesHistorical & Religious FactorsInitial Start & GoodwillPersonal Factors

FACILITY LOCATIONThere are many analytical techniques that

can be used in facility location decision.Some of these are:1) Factor Rating2) Cost-Profit-Volume analysis3) Transportation Method4) Simulation Models.

Method of Factor Rating

In factor rating method, first we must identify the Most Important Factors in evaluating alternative sites for the new facility.

Then we should assign a weight between 0 and 100 to each of these factors.

Method of Factor Rating

Each alternative location will then be rated based on these factor weights.

The most weighted alternative is selected as the best alternative.

ExampleSamson Ltd. is considering three

alternative sites for its new facility.After evaluating the firm’s Needs, the

Managers have Narrowed the list of Important Selection Criteria down into three major Factors.

- Availability of skilled labor- Availability of Raw materials, and- Proximity to the firm’s markets.

Example

Weights reflecting the relative importance of each factor have been assigned as follows:

Example

Based on these criteria, the three Alternative sites were scored between 0 and 100 points:

Example

Now we will multiply each score by its corresponding factor weight:

Weighted scores are calculated as: (Site Score)x(Factor Weight)

ExampleFrom these results, the largest total weight

is for Site A. It appears to be the best location.

ExampleWhat happens if we change the factor

weights. Lets use the following factor weights:

Skilled labor: 0.45; Raw Materials: 0.40; and Market: 0.15

Then the following results are obtained:

Example

ExampleIn this case, Site C appears to be the best

choice with largest weight score.Therefore, factor rating method is very

sensitive to the weights assigned to each factor.

ExampleSince factor weights, selected factors, and

assigned scores are all determined subjectively, the managers should be very careful in selecting these items and numbers.

Cost-Profit-Volume Analysis

When the fixed and variable costs for each site differ, Cost-profit-volume analysis can be used to identify the location with the lowest cost.

ExampleFoster Paper Ltd. is considering three

alternative sites for its new production facility.

The Annual Production Cost associated with each alternative is a linear function of the production volume. That is:

Example

Total Production Cost = (Fixed Cost) + (variable unit cost) x (annual production volume)

Assume that The expected annual production volume is 250.000 units.

And further assume that: (x: production volume = 250.000)

Example

For Site A: Prod. Cost = 10.000.000 + 250 xFor Site B: Prod. Cost = 25.000.000 + 150 xFor Site C: Prod. Cost = 60.000.000 + 50 x

Based on these information, Which site has the lowest cost?

ExampleAt a production volume of 250.000

units, site B has the lowest cost, because

For Site A: Prod. Cost = 10.000.000 + 250 (250.000) = 72.500.000

For Site B: Prod. Cost = 25.000.000 + 150 (250.000) = 62.500.000

For Site C: Prod. Cost = 60.000.000 + 50 (250.000) = 72.500.000

Transportation Model

A special form of linear programming, that is Transportation Model, can be used to compare the total transportation cost associated with each alternative site.

Transportation ModelThe transportation model technique can be

used to determine how many units should be shipped from each plant to each warehouse To Minimize Total Transportation Cost.

Simulation Models

Firms often Consider many variables and Factors when they choose a facility location.

Simulation ModelsThese variables are often difficult to estimate

and they also change in time.In these kinds of Dynamic Situations,

Simulation may be the best modeling technique.

Simulation ModelsSimulation models allow managers to

examine a range of Scenarios AND are well suited to open-ended problems.

However, the determination of the parameters in a simulation is also a challenging task.

Also, developing a simulation model may take considerable time and effort.

Recent Trends in the Location of Industries

Priority for the suburban AreasIndustrial development in the notified

backwards areasEstablishment of industrial estateDecentralization of industriesIncreased role of the Government in the

decision of location of industriesCompetition between Government &

institutions

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