Locating FacilitiesLocating Facilities

Importance of Location

Location DecisionsLocation Decisions

Facilities Location finds the best geographic locations for the different elements in a supply chain.

Location decisions are needed whenever an organization opens new facilities. These are important decisions that affect the organization’s performance for many years.

If an organization makes a mistake and opens facilities in a poor location, it cannot simply close down and move to a better place. Working in the wrong location can give very poor performance, but moving can be equally difficult.

The right location does not guarantee success, but the wrong location will certainly guarantee failure.

Location decisions are invariably difficult, and organizations have to consider many factors.

Reasons why companies need to Reasons why companies need to consider locationconsider location

The end of a lease on existing premisesExpansion into new geographic areasChanges in the location of customers or

suppliersChanges to operations (i.e. electricity company

moving from coal generators to gas)Upgrading facilitiesChanges to transportChanges in the transport networkMergers or acquisitions giving duplicate

operations that must be rationalized

Alternatives to locating new Alternatives to locating new facilitiesfacilities

Licensing or Franchising◦Local organizations make and supply the

company’s products in return for a share of the profit.

Exporting◦The company makes the product in its existing

facilities and sells it to a distributor working in the new market.

Local Distribution and Sales◦The company makes the product in its existing

facilities, but sets up its own distribution and sales force in the new market.

Local Assembly and Finishing◦The company makes most of the product in

existing facilities, but opens limited facilities in the new market to finish or assemble the final product.

Full Local Production◦The company opens complete facilities in the

new market.

Sample ProblemSample Problem

Warwick Suppliers is planning to expand into Europe. It is considering a number of options, each of which has a fixed annual payment (for rent, electricity, and other overheads) and a variable cost that depends on throughput (handling, depreciation, staff, and so on). The following table shows a simplified view of these costs.

Alternative Fixed Cost Variable Cost

Exporting from existing facilities

€800,000 €900

Using a local distributor €2,400,000 €700

Open a facility for local finishing

€9,000,000 €520

Open limited production facilities

€8,000,000 €360

Open larger production facilities

€12,000,000 €440

Alternatively, Warwick can avoid entering the market by licensing a local manufacturer to make the product in return for a royalty of about 2% of sales. How might it approach this decision, if it is planning on selling about 10,000 units a year with a contribution to profit of 10%?

SolutionSolution

Alternative A is the cheapest for throughput, X, from 0 up to◦ 800,000 + 900x =2,400,000 + 700x => 8,000

After this Alternative B is cheapest until◦ 2,400,000 + 700x = 8,000,000 + 360x =>16,471

After this point, Alternative D remains the cheapest

With production of 10,000 units a year, alternative B, using a local distributor, is cheapest with costs of €9.4M (2.4M + 10K x 700)

Alternative A, exporting directly with existing facilities is not much more expensive at €9.8M (800K + 10K x 900), and is probably easier to organize.

Option B has an average cost of €940, and adding a contribution to profit of 10% gives a selling price of 940 x 1.1 = €1034, and total profit of €940,000. If Warwick negotiated a royalty of 2% of sales, they would get a profit of only 1034 x 0.02 . 10,000 = €206,800.

Take note that Warwick still has to look at the more detailed costs, their aims, longer term plans, amount of control they want, and a whole series of other factors.

Choosing the Geographic Region

Hierarchy of Decisions for Hierarchy of Decisions for LocationsLocations

Business Strategy

Available Sites

Local Conditions

Culture, Costs, Customers, Suppliers, etc

Individual Sites

Cities and Towns

Countries and Areas

Geographical Regions for Locations

Overall ApproachOverall Approach

Facility location involves a hierarchy of decisions. At the top of this are the broad decisions about at which geographic regions to work in. Then come more local views that consider alternative countries or areas within this region. Then we look more closely at alternative towns and cities within this area.

The broad decisions about geographical regions and countries come from the business strategy. An organization with a strategy of global operations or expansion must continually look for new locations.

Obvious choices for location are to get close to customers, or close to suppliers.

Another option is to open facilities in areas that give lower operating costs. Manufacturers move to areas with low production costs, even when these are some way from both their customers and suppliers. This puts more pressure on logistics. The supply chains become more complicated, but logistics has to be so efficient that lower production costs are not swamped by higher logistics costs.

A problem with moving to areas with low cost operations is that they might give higher total costs than expected.

Another problem is that transport costs change quickly, and rises can make them more important than operating costs.

Perhaps the overriding consideration is that costs may not be a dominant factor in location. A logistics strategy might focus on quality, flexibility, speed of response, reliability, customer service and so forth, rather than lowest cost.

Considerations in Choosing Considerations in Choosing RegionsRegions

Location of CustomersLocation of Suppliers and MaterialsCulturesGovernment AttitudesDirect CostsIndirect CostsExchange RatesSocial AttitudesOrganizationOperations

Infinite Set Approaches

After making a decision about the geographical region and country, an organization has to look in more detail at the areas, towns, cities, and individual sites.

There are several ways they can approach these decisions, and the best depends on specific circumstances.

One approach that is NOT recommended is PERSONAL PREFERENCE.

Two Distinct Approaches to Two Distinct Approaches to Location DecisionsLocation Decisions

Infinite Set Approach◦Which uses geometric arguments to find the

best location, assuming that there are not restrictions on site availability.

Feasible Set Approach◦Where there are only a small number of

feasible sites, and an organization has to choose the best.

Simple Methods Simple Methods (Infinite Set)(Infinite Set)

A facility can be located near to customers

It can be located near to suppliersIt can be located at some point

between suppliers and customers

NEAR TO CUSTOMERS

NEAR TO SUPPLIERS

COMPROMISE POSITION

Costing Models Costing Models (Feasible Set)(Feasible Set)

Feasible set approaches identify available sites, compare them, and find the best. An obvious analysis calculates the total cost of working from each location and finds the cheapest. In practice, many of the costs of running a facility are fixed regardless of its location.

Arguments (For Costing Models)Arguments (For Costing Models)

If an organization concentrates activities in a few key locations – such as main logistics centers – inward transport consists of large deliveries made to a few facilities and the cost is low. However, the few facilities are, on average, further away from customers and the outward transport cost is high.

If there are a large number of spread-out facilities – such as retail shops – inward transport consists of small deliveries to more destinations and the cost is high. The facilities are, on average, nearer to customers, so they have the benefits of higher customer service and lower outward transport cost.

Operating costs also vary with facility size, with larger facilities generally more efficient and giving economies of scale. Remember, though, that larger facilities do not necessarily give economies of scale, and there can be real ‘diseconomies’ caused by higher cost of supervision, coordination, communication, etc.

Few facilities give low cost for inward transport, but high cost for outward transport

More facilities give high cost for inward transport, but low cost for outward transport

Scoring Models Scoring Models (Feasible Set)(Feasible Set)

Scoring models emphasize the factors that are important for locations, but which cannot easily be costed or quantified.

Even if we cannot quantify the important factors, we still need to identify them.

In the region and country…In the region and country…

Availability, skills and productivity of workforce

Local and national government policies, regulations, grants and attitudes

Political stabilityEconomic strength and trendsClimate and attractiveness of locationsQuality of life – including health, education,

welfare and cultureLocation of major suppliers and marketsInfrastructure – particularly transport and

communicationsCulture and attitudes of people

In the city or area…In the city or area…

Population and population trendsAvailability of sites and development

issuesNumber, size and location of

competitorsLocal regulations and restrictions on

operationsCommunity feelingsLocal services, including transport

and utilities

In the site…In the site…

Amount and type of passing traffic

Ease of access and parkingAccess to public transportOrganizations working nearbyTotal costs of the sitePotential for expansion or changes

Important Factors for Scoring ModelsImportant Factors for Scoring Models

For manufacturing businesses◦Availability of a workforce with appropriate

skills◦Labor relations and community attitudes◦Environment and quality of life for employees◦Closeness of suppliers and services◦Quality of infrastructure◦Government policies toward industry

For services◦Population density◦Socio-economic characteristics of the nearby

population◦Location of competitors and other services◦Location of other attractions such as retail

shops◦Convenience for passing traffic and public

transport◦Ease of access and convenient parking◦Visibility of site

Network ModelsNetwork Models

Sometimes it is difficult to relate the two approaches to actual road layout and geographic features. There are, however, many databases of road networks that automatically find the best routes between two points, such as Microsoft AutoRoute Express and Softkey Journey Planner.