FACILITY LOCATION Prepared by Şevkinaz Gümüşoğlu using different references about POM using...

FACILITY LOCATION

Prepared by Şevkinaz GümüşoğluPrepared by Şevkinaz Gümüşoğlu using different references about POMusing different references about POM

Facility Location Concept • Facility location, also known as location

analysis or center problem, is a branch of operations research and computational geometry concerning itself with mathematical modeling and solution of problems concerning optimal placement of facilities in order to minimize transportation costs, avoid placing hazardous materials near housing, outperform competitors' facilities, etc. Although originated from location problems, the study also applies to data clustering, which in turn is related to unsupervised learning, classification, databases, spatial range-searching, data-mining etc. .

• Facility location is the process of determining a geographic site for a firm’s operations. Managers of both service and manufacturing organizations must weigh many factors when assessing the desirability of a particular site, including proximity to customers and suppliers, labour costs, and transportation costs.

• The selection of location is a key-decision as large investment is made in building plant and machinery. It is not advisable or not possible to change the location very often. So an improper location of plant may lead to waste of all the investments made in building and machinery, equipment.

Copyright 2011 John Wiley & Sons, Inc. Supplement 7-3

Location Strategy

The objective of location strategy is to The objective of location strategy is to maximize the benefit of location to the maximize the benefit of location to the

firmfirm..

Strategic location of an optimal number Strategic location of an optimal number of physical facilities is vital to success in of physical facilities is vital to success in

our business.our business.

We need to understand how each of We need to understand how each of profitability compenents depend on profitability compenents depend on

where the facility is situated.where the facility is situated.

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Location Strategy

One of the most important decisions a firm makes

Increasingly global in nature

Significant impact on fixed and variable costs

Decisions made relatively infrequently

The objective is to maximize the benefit of location to the firm

Importance of Facility Location• Facility Location decisions are part of the company’s strategy. Infrequent

but expensive.• Reasons for the importance:

• Facility Location requires large investment that can not be recovered.• Facility Location decisions affect the competitive capacity of the company.

• All areas of the company are affected by Facility Location: Operations, but also Business Development, Human Resources, Finance, etc.

• The facility location decisions affect not only costs but the company’s income:

• For a service business, market proximity is critical to determine the capacity to attract customers.

• For a manufacturing business, facility location affects product delivery time and level of customer service, which affects sales.

• Regarding costs, facility location affects a great variety of them:• Land costs.• Labor costs.• Raw materials.• Transportation and distribution

Causes that originate Location decision problems• An expanding market.

• It will require the addition of more capacity at a certain geographic point, either in an existent facility or in a new one.

• Introduction of new products or services.• A contracting demand, or changes in the location of the demand.

• It may require the shut down and/or relocation of operations.• The exhaustion of raw materials in a certain area.

• Example: Extraction companies.• Obsolescence of a manufacturing facility due to the appearance of

new technologies.• It means the creation of a new modern plant somewhere else.

• The pressure of the competence.• To increase the level of service, it can force the company to increase

capacity of certain plants or relocate some of them.• Change in other resources, like labor conditions or subcontracted

components, or change in the political or economic environment in a certain region.

• Mergers and acquisitions.• Some facilities may appear as redundants, or bad located with

respect to others.

Location decisions goal is;


Location Decisions

Long-term decisions

Decisions made infrequently

Decision greatly affects both fixed and variable costs

Once committed to a location, many resource and cost issues are difficult to change

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable Sites

PHASE IVLocation Choices

Competitive STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTSTransport, inventory, coordination

Levels of Decisions.

Market Region

Subregion

Community

Sites

Market PotentialMarket Share

Operating Cost

Transport Cost (RM)Taxes

Raw material costsLabor Cost and Availability

Access to market/materialsMaterial Cost

Labor Cost and AvailabilityTaxes

Availability of public servicesAvailabilty of sites

Community amenities

Access to transport NetworkSite Characterics

TaxesAvailability of public services

Land and acquisition costsConstruction Costs

© 2011 Pearson Education, Inc. publishing as Prentice Hall© 2011 Pearson Education

Location DecisionLocation DecisionKey Success Factors:Key Success Factors:1. Strategic Plan1. Strategic Plan2. Global Conditions2. Global ConditionsThe other reasonsThe other reasons


Location Decisions

Country DecisionCountry Decision Key Success FactorsKey Success Factors

1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues

3. Location of markets

4. Labor talent, attitudes, productivity, costs

5. Availability of supplies, communications, energy

6. Exchange rates and currency risks

Figure 8.1


Location Decisions

Region/ Region/ Community Community

DecisionDecision

Key Success FactorsKey Success Factors

1. Corporate desires

2. Attractiveness of region

3. Labor availability and costs

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

Figure 8.1

Location Incentives


• Tax credits• Relaxed government regulation• Job training• Infrastructure improvement• Money


Location Decisions

Site DecisionSite Decision Key Success FactorsKey Success Factors

1. Site size and cost

2. Air, rail, highway, and waterway systems

3. Zoning restrictions

4. Proximity of services/ supplies needed

5. Environmental impact issues

Figure 8.1

Site Selection: Where to Locate

• Infrequent but important• being “in the right place at the

right time”

• Must consider other factors, especially financial considerations

• Location decisions made more often for service operations than manufacturing facilities

• Location criteria for service• access to customers

• Location criteria for manufacturing facility• nature of labor force• labor costs• proximity to suppliers and

markets• distribution and transportation

costs• energy availability and cost• community infrastructure• quality of life in community • government regulations and

taxes

Copyright 2011 John Wiley & Sons, Inc. R.Taylor Supplement 7-17

Facility location problem involves the evaluation of various sites for a new facility or relocate an existing facility.

• Location decisions are strategic nature. Once a firm has decided to open a new one or relocated an existing one ,it must be decides where that facilitiy should be located. Decisions like :• New plant ( continent, country,region, city, land)• Expansion• Decentralisation• Shut down plant• To run partial capacities• To run over time capacities .

You can handle them with using some analytical &mathematical model.

• How you would determine the best facilities

Location.• Finding best location manufacturing plant is

related with long term decision and these activity too expensive

• Seting up the machine & equipment facilities are related with mid term & short term decision.

We must carry out to determine optimal decision among the possible locations with relevent factors.


Location and Costs

Location decisions based on low cost require careful consideration

Once in place, location-related costs are fixed in place and difficult to reduce

Determining optimal facility location is a good investment

Cost vs Response TIme

Local FG

Mix

Regional FG

Local WIP

Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Cost

Response Time HiLow

Low

Hi

Clientes

Centro distribución

Response Time 3 days-> 5 Distribution CenterResponse Time 3 days-> 5 Distribution Center

Customer

DC

Same Day Response --> 26 Distribution CentersSame Day Response --> 26 Distribution Centers

Response time vs. Number of facilities

Number of Facilities

Res

pons

eT

ime

Cost vs Number of Facilities

Percent Percent Service Service Level Level

Within Within Promised Promised

TimeTimeTransportationTransportation

Cos

t of

Op

erat

ion

sC

ost

of O

per

atio

ns

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs

LaborLabor

Different facilities lacations


Federal Express

• Central hub concept• 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


Location and Costs

Location decisions based on low cost require careful consideration

Once in place, location-related costs are fixed in place and difficult to reduce

Determining optimal facility location is a good investment


Location and Innovation Cost is not always the most important

aspect of a strategic decision

Four key attributes when strategy is based on innovation High-quality and specialized inputs

An environment that encourages investment and local rivalry

A sophisticated local market

Local presence of related and supporting industries

Facilities Location Decision for Natural Gas

http://www.youtube.com/watch?v=YNI0K1TkjI8


Types of Facilities

• Heavy-manufacturing facilities• large, require a lot of space, and are expensive

• Light-industry facilities• smaller, cleaner plants and usually less costly

• Retail and service facilities• smallest and least costly


Factors in Heavy Manufacturing Location


• Construction costs• Land costs• Raw material & finished goods shipment modes• Proximity to raw materials• Utilities• Means of waste disposal• Labor availability

Factors in Light Industry Location

• Land costs• Transportation costs• Proximity to markets

• depending on delivery requirements including frequency of delivery required by customer


Global Supply Chain Factors

• Government stability• Government regulations• Political & economic systems• Economic stability & growth• Exchange rates• Culture• Export/import regulations,

duties & tariffs• Raw material availability

• Climate • Number & proximity of

suppliers• Transportation & distribution

system• Labor cost & education• Available technology• Commercial travel• Technical expertise• Cross-border trade

regulations• Group trade agreements


LOCATION PROBLEM TYPES

Location problems can be characterized by choice among multiple sites.

Each location decision tends to be different. In some cases, the decision criterion is cost. In others it is revenue, vehicle response time, or multiple criteria.

Some location problem include distribution costs from multiple plants and warehouses, other do not.

Since there are many different types of location problems, the following classification framework has been developed.

1.Single-facility location

A factory or warehouse

Government facilities

Hospital

Electric power plant

2.Location of multiple factories and warehouse

( min. prod. and distribution cost )

Multiple factories

Multiple warehouses

Multiple factories and warehouses

3.Location of competitive retail stores

Banks

Department stores

Supermarkets

Restaurants

4.Emergency-services location

(minimize response time)

Ambulance

Fire station

Police station

Location decisions are crucial to both new and existing facilities because they interest to organize the long-term cost, employment, and marketing patterns. Location (and relocation) opportunities should be reviewed as •labor conditions•raw-material supplies (pure, weight losing,ubiquities material)•market demands change

especially to in the manufacturing plant.

Firms can respond to the change by maintaining their status-quo, by expanding or closing existing facilities, or by developing new ones.

No locational procedures can ensure that an optimal location is chosen.

Avoiding a some trouble location is perhaps more important than finding an ideal site

Numerous firms have encountered unexpected problems withzoning restrictionswater supplywaste disposallabor unionstransportation coststax lawscommunity attitudes about pollution

In order to avoide some important problems , a systematic analysis (including the use of comprehensive checklist) is strongly recommended.

Firms often do a quantitative analysis first to establish the alternative locations, then follow with an exhaustive review of qualitative (less tangible) factors.

.

Single Facility Location

Many location require the selection of a site for a single facility. These include the location of a factory, a warehouse, and a government office. A crucial assumption in these problem is that the revenue, costs or other facility characteristics.

Most facility location problems involve multiple criteria. Multiple decision criteria can be simplified into two types: cost and non-cost factors. The most factors can be measured objectively. The non-cost factors include various intangible.

The types of tangible costs usually involved in a location problem include:

1.Cost of land, buildings, and equipment

2.Transportation costs

3.Utilities costs

4.Taxes and insurance

5.Labor cost

.

The non-cost factors which should be considered include:

1.Supply of labor

2.Labor and union relations

3.Community attitudes

4.Goverment regulations

5.Quality of life(climate, schools, living, recreation)

6.Environmental impact

7.Corporate strategy

These factors may be intangible, they can be systematically evaluated and logically considered together with the tangible factors. One way to combine all these factors is to develop a rating scale for each one which reduces management judgment to a quantifiable score.

Location Factor Rating :Return on investment is normalized to a ten-point maximum scale, the some as the subjective ratings.

The next step is to develop a weighting scheme among the factors by rating, subjectively, the importance of each factors in relation to the others. In this one,100 points have been assigned to all the factory. However, it is not necessary. If an additive scale is used, it is appropriate to multiply the weight by the factor scores to arrive at a total score for each factor.

The procedure which has been described can be summarized as follows:

Where

Sj : Total score for location j

Wi : Weight for factor i

Fij : Factor score for factor i on location j

n : Number of locations

m : Number of factors

Example 1: we are considering two different cities Richmond, Birmingham for the location of a medium-sized Red Bakery Firm. The bakery will produce an assortment of bakery goods on site and will sell directly to retail customers as well as whole sale do grocery stores, restaurants, etc. The factors shown in Table-1 have been evaluated for two cites.

The total score can be computed for each site. This is done by first converting the rating for each non-cost factor to a numerical score.

The conversion for the example is shown in Table-2 using a 10-point scale

.

The location with the highest total score is then the best choice.

The total scores are as follows:

S1 =15(8)+5(6)+5(10)+5(2)+10(8)+60(6)

S2 =15(10)+5(4)+5(8)+5(6)+10(6)+60(10)

S1 =650 S2 =900

This scoring system, therefore, indicates that alternative 2, Birmingham, is preferred.


Location Factor Rating Example 2:

Key ScoresSuccess (out of 100) Weighted ScoresFactor Weight France Denmark France Denmark

Labor availability 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) = 3.0Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0Tax 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

Table 8.4

Location Factor RatingExample 3:

Copyright 2011 John Wiley & Sons, Inc., R.Taylor Supplement 7-47

Labor pool and climateProximity to suppliersWage ratesCommunity environmentProximity to customersShipping modesAirport service

LOCATION FACTOR

.30

.20

.15

.15

.10

.05

.05

WEIGHT

80100

6075658550

Site 1

65919580909265

Site 2

90757280956590

Site 3

SCORES (0 TO 100)

Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24

Location Factor Rating

Copyright 2011 John Wiley & Sons, Inc.,R.Taylor Supplement 7-48

24.0020.00

9.0011.25

6.504.252.50

77.50

Site 1

19.5018.2014.2512.00

9.004.603.25

80.80

Site 2

27.0015.0010.8012.00

9.503.254.50

82.05

Site 3

WEIGHTED SCORES

Site 3 has the highest factor rating


Locational Break-Even Analysis

Method of cost-volume analysis used for industrial locations

Three 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 expected production volume

Locational Break-event analysis:

Example 1: Potential locations at Albany, Baker and Casper have the cost structures shown in Table for a product expected to sell for $130.

a)Find the most economical location for an expected to sell volume of 6.000 units per year.

b)What is the expected profit if the site selected in (a) is used ?

c)For what output range is each location best?

.

a)

A: TC:$150.000+$75(6.000) =$600.000

B: TC:$200.000+$50(6.000) =$500.000 *

C: TC:$400.000+$25(6.000) =$550.000

Therefore the most economical location is B

b) Expected profit (using B )

P=$130 (6.000)-$500.000=$280.000/Yr

c) From the graph, use A for volumes up to 2000, B for 2000-8000 and C for volumes greater than 8000 units.


Locational Break-Even Analysis Example 2

Three locations:

Akron $30,000 $75 $180,000

Bowling Green $60,000 $45 $150,000

Chicago $110,000 $25 $160,000

Fixed Variable TotalCity Cost Cost Cost

Total Cost = Fixed Cost + (Variable Cost x Volume)

Selling price = $120Expected volume = 2,000 units


Locational Break-Even Analysis Example

–$180,000 –

–$160,000 –$150,000 –

–$130,000 –

–$110,000 –

––

$80,000 ––

$60,000 –––

$30,000 ––

$10,000 ––

An

nu

al c

ost

| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000

Volume

Akron lowest

cost

Bowling Green lowest cost

Chicago lowest cost

Chicago cost curve

Akron co

st

curv

e

Bowling Green

cost curve

Figure 8.2


Transportation Model

Finds amount to be shipped from several points of supply to several points of demand

Solution will minimize total production and shipping costs

A special class of linear programming problems


Worldwide Distribution of Volkswagens and Parts

Figure 8.4

Applications - Operations

• Stores and Warehouses– Where do we build our

warehouses so that they are close to our stores?

– And how many should we build to attain efficiency?

• Here, accuracy far outweighs speed

Location of Multiple Factories and Warehouses

Transportation Linear Programming

Transportation adds no value to a product other than place utility.

However, the transportation costs for raw materials and finished goods are often significant and merit special analysis.

Before deciding on a plant location, management may want to know which plants will be used to produce what quantities and to which distribution warehouses all quantities should be shipped.

If the location problem can be formulated as one of minimizing a transportation cost, subject to satisfying overall supply and demand requirements.

Facilities Location for the source-destination problem

n

i

n

j

ijijXCMinZ1 1

To use the transportation linear-programming format, the demand requirements and supply availabilities are formulated in a rectangularmatrix. The transportation costs between the supply and demand points are placed in the upper corner of each cell.

Supply is allocated to meet demand. The solution procedure is an iterative one that begins which an initial solution that is feasible but not necessarily optimal.The solution is progressively tested and improved upon until an optimal solution is reached.The optimal solution satisfies demand at the lowest total cost. Several methods of obtaining initial and optimal solution have been developed:

Copyright 2011 John Wiley & Sons, Inc.

Example 1:Rent’R Cars is a multi-site car rental company in the city. Its trying out a new ”return the car to the location most convenient for you” policy to improve costumer service. But this means that the company has to constantly move cars around the city to maintain required levels of the vehicle availabilty. The supply and demand for economy cars , and the total cost of moving these vehicle between sites are shown below:

From Supply (car)

1.Cincinati 300

2.Atlanta 200

3.Pittsburg 200

To Demand (car)

A.New York 150

B.Dallas 250

C.Detroit 300

Unit Cost Table

A B C

1 $16 $18 $11

2 $14 $12 $13

3 $13 $15 $17

Linear Programming Model Xij i=1,2,3 j=A,B,C

Objective Function

Minimize Z=16X1A+16X1B+11X1C+14X2A+12X2B+13X2C+13X3A+15X3B+17X3C

Subject to:

X1A+X1B+X1C ≤300

X2A+X2B+X2C ≤200 Supply Constraints

X3A+X3B+X3C≤200

X1A+X2A+X3A=150

X1B+X2B+X3C=250 Demand Constraints

X1C+X2C+X3C=300

Xij≥0

n

i

n

j

ijijXCMinZ1 1

FOR EACH ROW AND COLUMN REMAıNıNG UNDER

CONSıDERATıON, CALCULATE ıTS DİFFERENCES

• BETWEEN SMALLEST AND NEXT-TO- THE-SMALLEST UNıT COST(CİJ) STıL REMAıNıNG ıN THAT ROW OR COLUMN (opportunity cost)

• In that row or column having the largest difference, select the variable having the smalest remaining unit cost.

Example 2:

• Warehouse• Factory 1 2 3 4 Supply• 1 19 30 50 10 7• 2 70 30 40 60 9• 3 40 8 70 20 18• Demand 5 8 7 14 34

Solving: Nort-west: $1015

VAM : $779

Steping stone : $743

The Single Facility Rectilinear Distance Location Problem

• Goal: locate n facilities to minimize the weighted sum of rectilinear distances from the new facility to existing facilities.

• Solution: locate the new facility at the median location of the existing facilities. This is accomplished by taking the median location component by component of existing locations.

The Gravity Problem

• The objective is to minimize the weighted sum of the squared Euclidean distances of the new facility to the current facilities. It is an uncommon problem but has a simple solution.

• The optimal solution is that both the x and y coordinates of the new facility are the ratio of the weighted x and y coordinates of the existing facilities divided by the sum of the weights.


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 firm’s and competitors’ locations

6. Physical qualities of facilities and neighboring businesses

7. Operating policies of the firm

8. Quality of management


Location Strategies

Table 8.6

Service/Retail/Professional Location Goods-Producing Location

Revenue Focus Cost Focus

Volume/revenueDrawing area; purchasing powerCompetition; advertising/pricing

Physical qualityParking/access; security/lighting; appearance/image

Cost determinantsRentManagement caliberOperations policies (hours, wage rates)

Tangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; raw material; taxes, and so on

Intangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and local government


Location Strategies

Table 8.6

Service/Retail/Professional Location Goods-Producing Location

Techniques Techniques

Regression models to determine importance of various factors

Factor-rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systems

Transportation methodFactor-rating methodLocational break-even analysisCrossover charts


Geographic Information Systems (GIS)

Important tool to help in location analysis

Enables more complex demographic analysis

Available data bases include Detailed census data

Detailed maps

Utilities

Geographic features

Locations of major services


Geographic Information Systems (GIS)

• http://www.youtube.com/watch?v=gxCIooxvch8


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