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Facility Location StrategiesFacility Location Strategies
Eng. R. L. NkumbwaEng. R. L. Nkumbwa™™www.nkumbwa.weebly.comwww.nkumbwa.weebly.com
2© 2010 Nkumbwa™.
Importance of LocationImportance of Location
• Up to 25% of the product’s selling cost
• Once a company commits to a location, many costs are fixed and difficult to change
• Energy
• Labor
• Location depends on the type of business
• Manufacturing – minimizing cost
• Retail and professional services – maximizing revenue
• Warehouse – cost and speed of delivery
3© 2010 Nkumbwa™.
In General - Location DecisionsIn General - Location Decisions
• Long-term decisions
• Difficult to reverse
• Affect fixed & variable costs
• Transportation cost
• As much as 25% of product price
• Other costs: Taxes, wages, rent etc.
• Objective: Maximize benefit of location to firm
4© 2010 Nkumbwa™.
Location OptionsLocation Options
• Expand the existing facility instead of moving
• Maintain current sites while adding another facility
• Closing the existing facility and moving to another
5© 2010 Nkumbwa™.
Factors The Affect Location DecisionsFactors The Affect Location Decisions
Country DecisionsCountry Decisions
Government rules, attitudes, stability, incentivesGovernment rules, attitudes, stability, incentives
Cultural and economic issuesCultural and economic issues
Location of marketsLocation of markets
Labor availability, attitudes, productivity, costsLabor availability, attitudes, productivity, costs
Availability of supplies, communications, energyAvailability of supplies, communications, energy
Exchange ratesExchange rates
6© 2010 Nkumbwa™.
Factors The Affect Location DecisionsFactors The Affect Location Decisions
Region/Community DecisionsRegion/Community Decisions
Corporate desiresCorporate desires
Attractiveness of region (culture, taxes, climate, etc…)Attractiveness of region (culture, taxes, climate, etc…)
Labor availability, costs, attitudes towards unionsLabor availability, costs, attitudes towards unions
Cost and availability of utilitiesCost and availability of utilities
Environmental regulations of state and townEnvironmental regulations of state and town
Government incentivesGovernment incentives
Proximity to raw materials and customersProximity to raw materials and customers
Land/construction costsLand/construction costs
7© 2010 Nkumbwa™.
Factors The Affect Location DecisionsFactors The Affect Location Decisions
Site DecisionsSite Decisions
Site size and costSite size and cost
Air, rail, waterway systemsAir, rail, waterway systems
Zoning restrictionsZoning restrictions
Nearness of services/supplies neededNearness of services/supplies needed
Environmental impact issuesEnvironmental impact issues
8© 2010 Nkumbwa™.
Location Decision Example - Location Decision Example - BMWBMW
In 1992, BMW decided to build its first major manufacturing plant outside Germany In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. in Spartanburg, South Carolina.
9© 2010 Nkumbwa™.
Location Decision Example – Location Decision Example – BMWBMW Country Decision FactorsCountry Decision Factors
Market location Market location
U.S. is world’s largest luxury car market U.S. is world’s largest luxury car market
Growing (baby boomers) Growing (baby boomers)
Labor Labor
Lower manufacturing labor costs Lower manufacturing labor costs
$17/hr. (U.S.) vs. $27 (Germany) $17/hr. (U.S.) vs. $27 (Germany)
Higher labor productivity Higher labor productivity
11 holidays (U.S.) vs. 31 (Germany) 11 holidays (U.S.) vs. 31 (Germany)
Other Other
Lower shipping cost ($2,500/car less) Lower shipping cost ($2,500/car less)
New plant & equipment would increase productivity (lower cost/car $2,000-3000)New plant & equipment would increase productivity (lower cost/car $2,000-3000)
10© 2010 Nkumbwa™.
Location Decision Example – Location Decision Example – BMWBMW Region/Community Decision FactorsRegion/Community Decision Factors
Labor Labor
Lower wages in South Carolina (SC) Lower wages in South Carolina (SC)
About $17,000/yr (SC) vs. $27,051/yr (US) About $17,000/yr (SC) vs. $27,051/yr (US)
Based on 1993 metropolitan averages for all workers Based on 1993 metropolitan averages for all workers
Government incentives Government incentives
$135 million in state & local tax breaks $135 million in state & local tax breaks
Free-trade zone from airport to plant Free-trade zone from airport to plant
No duties on imported components or on exported carsNo duties on imported components or on exported cars
11© 2010 Nkumbwa™.
Organizations That Need To Be Close to MarketsOrganizations That Need To Be Close to Markets
Government agencies Government agencies
Police & fire departments Police & fire departments
Post Office Post Office
Retail Sales and Service Retail Sales and Service
Fast food restaurants, supermarkets, gas stations Fast food restaurants, supermarkets, gas stations
Drug stores, shopping malls Drug stores, shopping malls
Bakeries Bakeries
Services Services
Doctors, lawyers, accountants, barbers Doctors, lawyers, accountants, barbers
Banks, auto repair, motels Banks, auto repair, motels
12© 2010 Nkumbwa™.
Ranking of the Business Environment Ranking of the Business Environment in 20 Countries, 1997 - 2001in 20 Countries, 1997 - 2001
1 Netherlands 1 Netherlands
2 Britain 2 Britain
3 Canada 3 Canada
4 Singapore 4 Singapore
5 U.S. 5 U.S.
6 Denmark 6 Denmark
7 Germany 7 Germany
8 France 8 France
9 Switzerland 9 Switzerland
10 Sweden10 Sweden
11 Finland
12 Belgium
13 New Zealand
14 Hong Kong
15 Austria
16 Australia
17 Norway
18 Ireland
19 Italy
20 Chile
13© 2010 Nkumbwa™.
Labor ProductivityLabor Productivity Low wage rates often heavily influence location choicesLow wage rates often heavily influence location choices
What about productivity?What about productivity?
Example:Example:
Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day:plant pays $25 per day with a productivity of 20 units per day:
Labor cost per day/Productivity (units per day) = Cost per unitLabor cost per day/Productivity (units per day) = Cost per unit
14© 2010 Nkumbwa™.
Labor Productivity - Example:Labor Productivity - Example:
Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day:plant pays $25 per day with a productivity of 20 units per day:
Labor cost per day/Productivity (units per day) = Cost per unitLabor cost per day/Productivity (units per day) = Cost per unit
Case 1: Texas PlantCase 1: Texas Plant
$70 per day/60 units per day = $70/60 = $1.17 per unit$70 per day/60 units per day = $70/60 = $1.17 per unit
Case 2: Mexican PlantCase 2: Mexican Plant
$25 per day/20 units per day = $25/20 = $1.25 per unit$25 per day/20 units per day = $25/20 = $1.25 per unit
Lesson: Employees with poor training, poor education, or poor work habits may not be Lesson: Employees with poor training, poor education, or poor work habits may not be a good buy even at low wages.a good buy even at low wages.
15© 2010 Nkumbwa™.
Costs: Tangible Vs. IntangibleCosts: Tangible Vs. Intangible Tangible costs – those that are readily identifiable and precisely measuredTangible costs – those that are readily identifiable and precisely measured
UtilitiesUtilities
LaborLabor
MaterialMaterial
TaxesTaxes
DepreciationDepreciation
Other costs that accounting can easily identifyOther costs that accounting can easily identify
Intangible costs – not easily quantifiableIntangible costs – not easily quantifiable
Quality of educationQuality of education
Public transportation facilitiesPublic transportation facilities
Community attitudes toward the industry and the companyCommunity attitudes toward the industry and the company
Quality and attitude of prospective employeesQuality and attitude of prospective employees
ClimateClimate
16© 2010 Nkumbwa™.
Proximity To MarketsProximity To Markets
Service organizations (drug stores, restaurants, post offices) find proximity to market is Service organizations (drug stores, restaurants, post offices) find proximity to market is the primary location factorthe primary location factor
Manufacturing – useful to be close to customers when transporting finished goods is Manufacturing – useful to be close to customers when transporting finished goods is expensive or difficultexpensive or difficult
17© 2010 Nkumbwa™.
Proximity To SuppliersProximity To Suppliers
Firms locate near their raw materials and suppliers because:Firms locate near their raw materials and suppliers because:
PerishabilityPerishability
Transportation costsTransportation costs
BulkBulk
18© 2010 Nkumbwa™.
Proximity To CompetitorsProximity To Competitors
Clustering – the location of competing companies near each other, often because of a Clustering – the location of competing companies near each other, often because of a critical mass of information, talent, ventire capital, or natural resourcescritical mass of information, talent, ventire capital, or natural resources
19© 2010 Nkumbwa™.
Location Evaluation MethodsLocation Evaluation Methods
Factor-rating method Factor-rating method
Locational break-even analysis Locational break-even analysis
Center of gravity method Center of gravity method
Transportation modelTransportation model
20© 2010 Nkumbwa™.
Factor-Rating MethodFactor-Rating Method
Most widely used location technique Most widely used location technique
Useful for service & industrial locations Useful for service & industrial locations
Rates locations using factors Rates locations using factors
Intangible (qualitative) factors Intangible (qualitative) factors
Example: Education quality, labor skills Example: Education quality, labor skills
Tangible (quantitative) factors Tangible (quantitative) factors
Example: Short-run & long-run costsExample: Short-run & long-run costs
21© 2010 Nkumbwa™.
Factors Affecting Location SelectionFactors Affecting Location Selection
Labor costs (including wages, unionization, productivity) Labor costs (including wages, unionization, productivity)
Labor availability (including attitudes, age, distribution, and skills) Labor availability (including attitudes, age, distribution, and skills)
Proximity to raw materials and suppliers Proximity to raw materials and suppliers
Proximity to markets Proximity to markets
State and local government fiscal policies (including incentives, taxes, unemployment State and local government fiscal policies (including incentives, taxes, unemployment compensation) compensation)
Utilities (including gas, electric, water, and their costs)Utilities (including gas, electric, water, and their costs)
22© 2010 Nkumbwa™.
Factors Affecting Location Selection - continuedFactors Affecting Location Selection - continued
Site costs (including land, expansion, parking, drainage) Site costs (including land, expansion, parking, drainage)
Transportation availability (including rail, air, water, and interstate roads) Transportation availability (including rail, air, water, and interstate roads)
Quality-of-life issues (including all levels of education, cost of living, health care, Quality-of-life issues (including all levels of education, cost of living, health care, sports, cultural activities, transportation, housing, entertainment, religious facilities) sports, cultural activities, transportation, housing, entertainment, religious facilities)
Foreign exchange Including rates and stability Foreign exchange Including rates and stability
Quality of government (including stability, honesty, attitudes toward new business - Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local)whether overseas or local)
23© 2010 Nkumbwa™.
Steps in Factor Rating MethodSteps in Factor Rating Method
State relevant factors in terms of “max” or “min”State relevant factors in terms of “max” or “min”
Assign weights to each factor (should add to 100%)Assign weights to each factor (should add to 100%)
Assign rating to each factor (1-5) (1=poor, 5=excellent)Assign rating to each factor (1-5) (1=poor, 5=excellent)
Multiply scores by weights for each factor & total Multiply scores by weights for each factor & total
Calculate percent of totalCalculate percent of total
Compare top 2 alternatives (using percent as a basis of comparison)Compare top 2 alternatives (using percent as a basis of comparison)
24© 2010 Nkumbwa™.
Steps in Factor Rating MethodSteps in Factor Rating Method
Alternative AAlternative A Alternative BAlternative B
FactorFactor WeightWeight RatingRating ScoreScore RatingRating ScoreScore
Min. Operating CostMin. Operating Cost 2020 44 8080 33 6060
Max. FlexibilityMax. Flexibility 3030 33 9090 22 6060
Max. Space Max. Space utilizationutilization
1010 33 3030 55 5050
Min. Payback periodMin. Payback period 4040 11 4040 44 160160
TotalTotal 240240 330330
PercentPercent 240/330 240/330 = .7272= .7272
330/330 = 330/330 = 1.001.00
25© 2010 Nkumbwa™.
Locational Break-Even AnalysisLocational Break-Even Analysis
Method of cost-volume analysis used for industrial locations Method of cost-volume analysis used for industrial locations
Steps Steps
Determine fixed & variable costs for each location Determine fixed & variable costs for each location
Plot total cost for each location Plot total cost for each location
Select location with lowest total cost for expected production volume Select location with lowest total cost for expected production volume
Must be above break-evenMust be above break-even
26© 2010 Nkumbwa™.
Locational Break-Even Analysis ExampleLocational Break-Even Analysis Example
You’re an analyst for AgileWorld Manufacturing Group Plc. You’re considering a new You’re an analyst for AgileWorld Manufacturing Group Plc. You’re considering a new manufacturing plant in Ndola, Kitwe, or Solwezi. manufacturing plant in Ndola, Kitwe, or Solwezi.
Fixed costs per year are $30k, $60k, & $110k respectively. Fixed costs per year are $30k, $60k, & $110k respectively.
Variable costs per case are $75, $45, & $25 respectively. Variable costs per case are $75, $45, & $25 respectively.
The price per case is $120. The price per case is $120.
What is the best location for an expected volume of 2,000 cases per year?What is the best location for an expected volume of 2,000 cases per year?
27© 2010 Nkumbwa™.
Locational Break-Even Analysis ExampleLocational Break-Even Analysis Example
Ndola:Ndola:
Total cost = $30,000 + $75(2000) = $180,000Total cost = $30,000 + $75(2000) = $180,000
Kitwe: Kitwe:
Total Cost = $60,000 + $45(2000) = $150,000Total Cost = $60,000 + $45(2000) = $150,000
Solwezi:Solwezi:
Total Cost = $110,000 + $25(2000) = $160,000Total Cost = $110,000 + $25(2000) = $160,000
With an expected volume of 2000 units per year, Kitwe provides the lowest cost location. The With an expected volume of 2000 units per year, Kitwe provides the lowest cost location. The expected profit is:expected profit is:
Total Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per yearTotal Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per year
28© 2010 Nkumbwa™.
Locational Break-Even Analysis ExampleLocational Break-Even Analysis Example
The crossover point for Ndola and Kitwe:The crossover point for Ndola and Kitwe:
30,000 + 75(x) = 60,000 + 45(x)30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,00030(x) = 30,000
X = 1,000X = 1,000
And the crossover point between Kitwe and Solwezi:And the crossover point between Kitwe and Solwezi:
60,000 + 45(x) = 110,000 + 25(x) 60,000 + 45(x) = 110,000 + 25(x)
20(x) = 50,00020(x) = 50,000
X = 2,500X = 2,500
Thus, for a volume o less than 1,000, Ndola would be preferred, and for a volume greater than Thus, for a volume o less than 1,000, Ndola would be preferred, and for a volume greater than 2,500, Solwezi would yield the greatest profit.2,500, Solwezi would yield the greatest profit.
Now let:Now let:
Akaron = NdolaAkaron = Ndola
Bowling Green = KitweBowling Green = Kitwe
Chicago = SolweziChicago = Solwezi
29© 2010 Nkumbwa™.
Locational Break-Even Analysis ExampleLocational Break-Even Analysis Example
30© 2010 Nkumbwa™.
Center of Gravity MethodCenter of Gravity Method
Finds location of single distribution center serving several destinations Finds location of single distribution center serving several destinations
Used primarily for services Used primarily for services
Considers Considers
Location of existing destinations Location of existing destinations
Example: Markets, retailers etc. Example: Markets, retailers etc.
Volume to be shipped Volume to be shipped
Shipping distance (or cost) Shipping distance (or cost)
Shipping cost/unit/mile is constant Shipping cost/unit/mile is constant
31© 2010 Nkumbwa™.
Center of Gravity Method StepsCenter of Gravity Method Steps
Place existing locations on a coordinate grid Place existing locations on a coordinate grid
Grid has arbitrary origin & scale Grid has arbitrary origin & scale
Maintains relative distances Maintains relative distances
Calculate X & Y coordinates for ‘center of gravity’ Calculate X & Y coordinates for ‘center of gravity’
Gives location of distribution center Gives location of distribution center
Minimizes transportation costMinimizes transportation cost
32© 2010 Nkumbwa™.
Center of Gravity Method StepsCenter of Gravity Method Steps
33© 2010 Nkumbwa™.
Center of Gravity Method - ExampleCenter of Gravity Method - Example Consider the case of Ryan’s discount Department stores, a chain o four large K-Mart Consider the case of Ryan’s discount Department stores, a chain o four large K-Mart
type outlets. The firm’s store locations are in Ndola, Kitwe, Luanshya, and Mufulira; type outlets. The firm’s store locations are in Ndola, Kitwe, Luanshya, and Mufulira; they are currently being supplied out of an old and inadequate warehouse in Luanshya, they are currently being supplied out of an old and inadequate warehouse in Luanshya, the site of the chain’s first store. the site of the chain’s first store.
Store LocationStore Location Number of containers shipped pre monthNumber of containers shipped pre month
NdolaNdola 20002000
KitweKitwe 10001000
LuanshyaLuanshya 10001000
MufuliraMufulira 20002000
34© 2010 Nkumbwa™.
Center of Gravity Method - ExampleCenter of Gravity Method - Example
30
60
90
120
30 60 90 120 150
Ndola (30,120)Luanshya (130,130)
Kitwe (90,110)
Mufulira (60,40)
Center of gravity (66.7, 93.3)
35© 2010 Nkumbwa™.
Center of Gravity Method - ExampleCenter of Gravity Method - Example
X-coordinate of the center of gravity:X-coordinate of the center of gravity:
= = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000
= 400,000/6000 =66.7= 400,000/6000 =66.7
Y-coordinate of the center of gravity:Y-coordinate of the center of gravity:
= = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000
= 560,000/6000 =93.3= 560,000/6000 =93.3
36© 2010 Nkumbwa™.
Transportation ModelTransportation Model
Finds amount to be shipped from several sources to several destinations Finds amount to be shipped from several sources to several destinations
Used primarily for industrial locations Used primarily for industrial locations
Type of linear programming model Type of linear programming model
Objective: Minimize total production & shipping costs Objective: Minimize total production & shipping costs
Constraints Constraints
Production capacity at source (factory) Production capacity at source (factory)
Demand requirement at destinationDemand requirement at destination
37© 2010 Nkumbwa™.
Components of Volume and Revenue for a Service FirmComponents of Volume and Revenue for a Service Firm
1. Purchasing power of customer drawing area 1. Purchasing power of customer drawing area
2. Service and image compatibility with demographics of the customer drawing area 2. Service and image compatibility with demographics of the customer drawing area
3. Competition in the area 3. Competition in the area
4. Quality of the competition 4. Quality of the competition
5. Uniqueness of the firm’s and competitor’s locations 5. Uniqueness of the firm’s and competitor’s locations
6. Physical qualities of facilities and neighboring businesses 6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm 7. Operating policies of the firm
8. Quality of management8. Quality of management
38© 2010 Nkumbwa™.
Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Service/Retail/Professional Revenue FocusService/Retail/Professional Revenue Focus
Volume/revenue Volume/revenue
Drawing area, purchasing power Drawing area, purchasing power
Competition; advertising/pricingCompetition; advertising/pricing
Physical quality Physical quality
Parking/access; security/ lighting; appearance/imageParking/access; security/ lighting; appearance/image
Cost determinants Cost determinants
Rent Rent
Management caliber Management caliber
Operations policies (hours, wage rates) Operations policies (hours, wage rates)
39© 2010 Nkumbwa™.
Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Industrial Revenue FocusIndustrial Revenue Focus
Tangible costs Tangible costs
Transportation cost of raw materials Transportation cost of raw materials
Shipment cost of finished goods Shipment cost of finished goods
Energy and utility cost; labor; raw material; taxes, etc. Energy and utility cost; labor; raw material; taxes, etc.
Intangible and future costs Intangible and future costs
Attitude toward union Attitude toward union
Quality of life Quality of life
Education expenditures by state Education expenditures by state
Quality of state and local governmentQuality of state and local government
40© 2010 Nkumbwa™.
Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Service/Retail/Professional TechniquesService/Retail/Professional Techniques
Correlation analysis to determine importance of factors for a particular type of Correlation analysis to determine importance of factors for a particular type of operation operation
Traffic counts Traffic counts
Demographic analysis of drawing area Demographic analysis of drawing area
Purchasing power analysis of drawing area Purchasing power analysis of drawing area
Assumptions Assumptions
Location is a major determinate of revenue Location is a major determinate of revenue
Issues manifesting from high customer contact dominate Issues manifesting from high customer contact dominate
Costs are relatively constant for a given area; therefore, revenue function is criticalCosts are relatively constant for a given area; therefore, revenue function is critical
41© 2010 Nkumbwa™.
Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Industrial TechniquesIndustrial Techniques
Linear Programming (Transportation method) Linear Programming (Transportation method)
Weighted approach to intangibles Weighted approach to intangibles
Breakeven analysis Breakeven analysis
Crossover charts Crossover charts
Assumptions Assumptions
Location is a major determinate of cost Location is a major determinate of cost
Most major costs can be identified explicitly for each site Most major costs can be identified explicitly for each site
Low customer contact allows focus on costs Low customer contact allows focus on costs
Intangible costs can be objectively evaluatedIntangible costs can be objectively evaluated
42© 2010 Nkumbwa™.
Major Methods of Solving Location ProblemsMajor Methods of Solving Location Problems
Weighted methods which: Weighted methods which:
Assign weights and points to various factors Assign weights and points to various factors
Determine tangible costs Determine tangible costs
Investigate intangible costs Investigate intangible costs
Center of Gravity Method Center of Gravity Method
Find best distribution center locationFind best distribution center location
Location breakeven methods Location breakeven methods
Special case of breakeven analysisSpecial case of breakeven analysis
Transportation method Transportation method
A specialized linear programming methodA specialized linear programming method
43© 2010 Nkumbwa™.
Telemarketing and Internet IndustriesTelemarketing and Internet Industries
Require neither face-to-face contact with customers (or employees) nor Require neither face-to-face contact with customers (or employees) nor movement of material movement of material
Presents a whole new perspective on the location problemPresents a whole new perspective on the location problem