Facility Location

2014.07.06

Objectives: 1. Learn how to select location for a facility 2. Learn the different techniques on

Location Analysis 3. Describe the factors affecting location

decisions

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Federal Express • Stresses “hub” concept • Advantages:

• enables service to more locations with fewer aircraft • enables matching of aircraft flights with package loads • reduces mishandling and delay in transit because

there is total control of packages from pickup to delivery

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Objective of Location Strategy

Maximize the benefit of location to the firm

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Industrial Location Decisions

♦Cost focus ♦ Revenue varies little

between locations ♦ Location is a major

cost factor ♦ Affects shipping &

production costs (e.g., labor) ♦ Costs vary greatly between

locations

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Service Location Decisions

• Revenue focus

• Costs vary little between market areas • Location is a major

revenue factor • Affects amount of

customer contact • Affects volume of

business

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In 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

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Location Decision Sequence Country

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Region/Community

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Site

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Factors That Affect Location Decisions

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Factors Affecting Country ♦ Government rules, attitudes,

political risk, incentives ♦ Culture & economy ♦ Market location ♦ Labor availability, attitudes,

productivity, and cost ♦ Availability of supplies,

communications, energy ♦ Exchange rates and currency

risks © 1995 Corel Corp.

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Region Location Decisions • Corporate desires • Attractiveness of region (culture,

taxes, climate, etc.) • Labor, availability, costs, attitudes

towards unions • Costs and availability of utilities • Environmental regulations of state

and town • Government incentives • Proximity to raw materials &

customers • Land/construction costs

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Factors Affecting Site

• Site size and cost • Air, rail, highway, and

waterway systems • Zoning restrictions • Nearness of

services/supplies needed

• Environmental impact issues

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Location Decision Example

BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

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Country Decision Factors • Market location

• U.S. is world’s largest luxury car market

• Growing (baby boomers) • Labor

• Lower manufacturing labor costs

• $17/hr. (U.S.) vs. $27 (Germany)

• Higher labor productivity • 11 holidays (U.S.) vs.

31 (Germany)

♦Other ♦ Lower shipping cost

($2,500/car less) ♦ New plant & equipment

would increase productivity (lower cost/car $2,000-3000)

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Region/Community Decision Factors • Labor

• Lower wages in South Carolina (SC) • Government incentives

• $135 million in state & local tax breaks • Free-trade zone from airport to plant

• No duties on imported components or on exported cars

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CSF in Location Analysis - Continued Critical Success Factors Country

1 Country

2 Country

3 Country

4

Total Rating Points 50 43 35 48

Social and Cultural Aspects

Similarity in language Work ethic

5 4

1 2

5 3

4 1

Economic factors

Tax rates Inflation Availability of raw materials Interest rates

3 3 2 3

3 5 4 4

2 5 3 2

5 5 5 5

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Global Competitiveness of Countries

• Finland…..………………………. • United States ………………..…. • Netherlands……………………... • Germany….………………….…. • Canada …………………………. • … • Japan ……..………………….…. • … • Brazil ………….. ……………….. • … • Russia ……………………….…. • … • Ecuador …………………….....… • Bangladesh ……………………... • Honduras ……………………….. • Bolivia………………………..…...

1 2 3 4 11 15 35 58 72 73 74 75

2001 Ranking

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Ranking Corruption Rank Score

1 Finland 9.9 2 Denmark 9.5 3 New Zealand 9.4 4 Singapore 9.2 16 Israel & U.S.A (Tied)

7.6

21 Japan 7.1 57 China 3.5 79 Russia 2.3 90 Nigeria 1.0 91 Bangladesh 0.4

A score of 10 represents corruption free

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Organizations That Need To Be Close to Markets

• Government agencies • Police & fire departments • Post Office

• Retail Sales and Service • Fast food restaurants, supermarkets, gas stations • Drug stores, shopping malls • Bakeries

• Services • Doctors, lawyers, accountants, barbers • Banks, auto repair, motels

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Location Evaluation Methods

♦ Factor-rating method ♦ Locational break-even

analysis ♦ Center of gravity method ♦ Transportation model

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Factor-Rating Method • Most widely used location technique • Useful for service & industrial locations • Rates locations using factors

• Tangible (quantitative) factors

• Example: Short-run & long-run costs • Intangible (qualitative) factors

• Example: Education quality, labor skills

Factor Rating Method A location method that instills objectivity into the process of identifying hard to evaluate costs. Steps: 1. Develop a list of relevant factors called critical success

factors 2. Assign a weight to each factor to reflect its relative

importance in the company’s objectives. 3. Develop a scale for each factor (1 to 10 , 1 to 100points) 4. Have management score each location for each factor,

using scale in step 3 5. Multiply the score by the weights for each factor and total

the score for each location. 6. Make a recommendation based on the maximum point

score, considering the results of quantitative approaches as well.

Example • A U.S. chain of 10 family-oriented theme parks, has decided to

expand overseas by opening its first theme park in Europe. The rating sheet in table 18.4 lists critical success factors that management has decided are important; their weights and their rating for the two possible sites – Dijon, France, and Copenhagen, Denmark.

Solution

• Given the option of 100 points assigned each factor, the French Location is preferable. For instance, we can change the scores for the “labor availability and attitude” by 10 points can change the decision

• When decision is sensitive to minor changes, further analysis of either the weights of the points assigned may be appropriate.

Note: The numbers used in factor weighting can be subjective and the model’s result are not “exact” even though this is a quantitative approach.

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Factors Affecting Location Selection

• Labor costs (including wages, unionization, productivity)

• Labor availability (including attitudes, age, distribution, and skills)

• Proximity to raw materials and suppliers • Proximity to markets • Government fiscal policies (including incentives,

taxes, unemployment compensation)

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Factors Affecting Location Selection - Continued

• Environmental regulations • Utilities (including gas, electric, water, and

their costs) • Site costs (including land, expansion, parking,

drainage) • Transportation availability (including rail, air,

water, and interstate roads)

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Factors Affecting Location Selection - Continued

• Quality-of-life issues in the community (including all levels of education, cost of living, health care, sports, cultural activities, transportation, housing, entertainment, religious facilities)

• Foreign exchange Including rates and stability • Quality of government (including stability, honesty,

attitudes toward new business - whether overseas or local)

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Steps in Factor Rating Method • List relevant factors • Assign importance weight to each factor (such

as 0 – 1) • Develop scale for each factor (such as 1 – 100) • Score each location using factor scale • Multiply scores by weights for each factor &

total • Select location with maximum total score

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• Method of cost-volume analysis used for industrial locations

• Steps • Determine fixed & variable costs for each location • Plot total cost for each location (Cost on vertical axis, Annual

Volume on horizontal axis) • Select location with lowest total cost for expected production

volume • Must be above break-even

Locational Break-Even Analysis

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Locational Break-Even Analysis Example You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year?

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Solution: Total Cost = Fixed Cost + Variable Cost(Quantity) For Akron, TC = $30,000 + $75,000(2,000units) = $180,000 For Bowling Green, TC = $60,000 + $45,000(2,000units) = $150,000 For Chicago, TC = $110,000 + $25,000(2,000units) = $160,000

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Locational Break-Even Crossover Chart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

Ann

ual C

ost

Bowling Green lowest cost

Chicago lowest

cost

Akron lowest cost

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Center of Gravity Method • Finds location of single distribution center serving several

destinations • Used primarily for services • Considers

• Location of existing destinations

• Example: Markets, retailers etc. • Volume to be shipped • Shipping distance (or cost)

• Shipping cost/unit/mile is constant

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Center of Gravity Method Steps

• Place existing locations on a coordinate grid • Grid has arbitrary origin & scale • Maintains relative distances

• Calculate X & Y coordinates for ‘center of gravity’ • Gives location of distribution center • Minimizes transportation cost

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Center of Gravity Method Equations

dix = x coordinate of location i

Wi = Volume of goods moved to or from location i

diy = y coordinate of location i

X Coordinate

Y Coordinate

∑

∑=

ii

iiix

x W

WdC

∑

∑=

ii

iiiy

y W

WdC

Example • Quain’s Discount Department Store has four large target type

outlets. The firm’s store location s are in Chicago, Pittsburgh, New York and Atlanta; they are currently being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the chain’s first store. Below are the data on demand rates at each outlet.

Solution: X-coordinate of COG = (30)(2000)+(90)(1000)+(130)(1000)+(60)(2000) = 400,000 2000+1000+1000+2000 6,000 = 66.7 Y-coordinate of the COG = (120)(2000)+(110)(1000)+(130)(1000)+(140)(2000) = 560,000 2000+1000+1000+2000 6,000 = 93.3 Answer: (66.7,93.3)

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Coordinate Locations of Four Quain’s Department Stores and the Center of Gravity

Load Distance Technique • A variation of the center-of-gravity method for determining the

coordinates of a facility location. • Method of evaluating different locations based on the load

being transported and the distance. n LD= ∑ lidi

i=1 Where, LD= Load Distance value li = Load expressed as a weight, no. of trips or units being shipped from the proposed site to location i di = the distance between the proposed site and location I di= √((xi-x)2+(yi-y)2) Where, (x,y) = coordinates of the proposed site (xi,yi) = coordinates of the existing facility

Example Burger Doodle wants to evaluate three different sites it has identified for its new distribution center relative to the location of its four suppliers. The coordinates of the three sites are as follows: Suppliers: Site 1: x1=360, y1=180 A = (200,200), W=75 Site 2: x2=420, y2=450 B = (100,500), W=105 Site 3: x3=250, y3=400 C = (250,600), W=135 D = (500,300), W=60 Solution: Site 1: dA = √((xA-x1)2+(yA-y1)2) = √((200-360)2+(200-180)2) =161.2

Site 1: dB = √((xB-x1)2+(yB-y1)2) = √((100-360)2+(500-180)2) = 412.3 dC = √((xC-x1)2+(yC-y1)2) = √((250-360)2+(600-180)2) = 434.2 dA = √((xD-x1)2+(yD-y1)2) = √((500-360)2+(300-180)2) = 184.4 Site 2: dA=333, dB=323.9, dC=226.7, dD=170 Site 3: DA=206.2, dB=180.3, dC=200, dD=269.3

LD (site 1) = 75(161.2) + (105)(412.3) + (135)(434.2) + (60)(184.4) = 125,063 LD (site 2) = 75(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789 LD (site 2) = 75(206.2) + (105)(180.3) + (135)(200) + (60)(269.3)) = 77,555 Since Site 3 has the lowest load-distance value, it would be assumed that this location would also minimize transportation costs.

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Components of Volume and Revenue for a Service Firm 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 firm’s and competitor’s locations 6. Physical qualities of facilities and neighboring

businesses 7. Operating policies of the firm 8. Quality of management

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Location Strategies – Service vs. Industrial Service/Retail/Professional

Revenue Focus Volume/revenue

Drawing area, purchasing power Competition;

advertising/pricing Physical quality

Parking/access; security/ lighting; appearance/image

Cost determinants Rent Management caliber Operations policies (hours,

wage rates)

Goods-Producing Location Cost Focus

Tangible costs Transportation cost of raw

materials Shipment cost of finished

goods Energy and utility cost; labor;

raw material; taxes, etc. Intangible and future costs

Attitude toward union Quality of life Education expenditures by

state Quality of state and local

government

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Location Strategies – Service vs. Industrial

Service/Retail/Professional Techniques

Regression models to determine importance of various factors

Factor-rating method Traffic counts Demographic analysis of drawing

area Purchasing power analysis of

drawing area Center of gravity method Geographic information systems

Goods Producing Location Techniques

Linear Programming (Transportation method)

Factor-rating method Locational breakeven

analysis Crossover charts

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Location Strategies – Service vs. Industrial Service/Retail/Professional

Assumptions Location is a major determinate

of revenue High customer-contact issues

are critical Costs are relatively constant for

a given area; therefore, the revenue function is critical

Goods-Producing Location Assumptions

Location is a major determinate of cost

Most major costs can be identified explicitly for each site

Low customer contact allows focus on identifiable costs

Intangible costs can be evaluated

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Telemarketing and Internet Industries • Require neither face-to-face contact with customers (or

employees) nor movement of material • Presents a whole new perspective on the location problem

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Geographic Information Systems • New tool to help in location analysis • Enables combination of many parameters

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Final Thought The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.

© 1995 Corel Corp.