Facility Location

• Issues in Facility Location

• Various Plant Location Methods

Preamble

• There is no such thing as a perfect location. Every location has a mix of attributes—some very strong, others not

• The winning location is usually the one that seems optimal when evaluated as a whole

• This means that the weaknesses, on balance, are either negated via some form of action to mitigate their impact, or are deemed inconsequential in light of the other relative strengths

Competitive Imperatives Impacting Location

• Factors Related to Markets:– The need to produce close to the customer due to time-based competition,

trade agreements, and shipping costs.

• Factors Related to Resources:The need to locate near the appropriate resources to take advantage of low costs– Labor skills availability, Labor cost– Materials Availability, Material cost, Material quality (Ancilarisation)– Equipment availability, Equipment cost– Land availability, Land suitability, Land cost– Energy availability, energy cost– Water quality availability, water cost

Competitive Imperatives Impacting Location (contd)

• Factors Related to the Infrastructure – Availability of Financial Institutions– Government Stability, Government taxes, Import and Export restrictions– Quality of life, Cultural issues– Environmental regulations, – Transportation availability, Transportation cost– Competitors’ size, strength and attitude in that region

• Other Factors– Exchange rates– Financial Incentives– Export Zones

Other Factors (e.g. India)

• Population Mix– Over 50% of the population is below 25 years of age– Over 65% of the population is below 35 years of age– Average age is expected to be 29 years in 2020

• Second largest pool of scientists and engineers380 Universities13,800 Colleges (4,600 in professional fields)1,500 Research Institutions500,000 Scientists and Engineers graduate every year

• 7 million new entrants every year to the working populationFewer days to fill skilled job vacanciesCosts significantly lower than emerging economiesWork 3 shifts, 6 days a week

• Legislation remains a significant drag on business. Rigidity of firing regulations

Other Factors (e.g. India) (contd)• Infrastructure

Unreliability of power supply (17 outages a month v/s 5 in China, 60% industries depend on private power supply)Road network (6,000 Kms of expressways, plan for 14,300 Kms in next 5 years)

• InstitutionsProperty Rights are watertight and enforceableJudiciary is highly independentFreedom of Press and political right is assured

• Federation of 29 StatesTotal Tax Incentive Package is high

• Corruption“An irritant rather than a critical issue”LiberalisationRTI Act

Other Factors (e.g. India) (contd)

• Administrative approvals to start new business is 89 days (double than China)

• Closing business takes up to 10 years

• Manufacturing Excellence

– TPM Excellence Awards instituted by Japanese Institute of Plant Maintenance

153 (132) plants in India – highest tally outside Japan

– Deming Quality Awards instituted by Japanese Union of Scientists and Engineers

21 (15) companies in India – highest tally outside Japan

Other Factors (e.g. India) (contd)

• If one is looking for markets outside IndiaHigh Volume, Low Variety, Low or Moderate Technology – its China!!Low Volume, High Variety, High Technology – its India!!

• If one is looking for Indian markets – its India (76% of India’s GDP is domestic consumption!)

Location Decision Example - BMW

In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina

Location Decision Example – BMW Country Decision FactorsMarket 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)

Location Decision Example – BMW Region/Community Decision Factors

Labor – Lower wages in South Carolina (SC)

• About $17,000/yr (SC) vs. $27,051/yr (US) – Based on 1993 metropolitan averages for all workers

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

Labor Productivity

• Low wage rates often heavily influence location choices

• What about productivity?

Example:

– 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:

– Labor cost per day/Productivity (units per day) = Cost per unit

Labor Productivity - Example:• 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

• Labor cost per day/Productivity (units per day) = Cost per unit

Case 1: Texas Plant

– $70 per day/60 units per day = $70/60 = $1.17 per unit

Case 2: Mexican Plant

– $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 a good buy even at low wages

Issues in Facility Location

• Business Climate• Political Risks• Environmental Regulations• Host Community• Infrastructure – Power, Telecommunication, Connectivity, etc• Quality of Labor • Suppliers / Ancilarisation• Incentives / Free Trade Zones• Total Costs

Plant Location Methodology: Factor Rating Method Example

Location A is assigned the following range of point values and respective points

Factor Weight

Location A

Rating (1-100)

Factor Rating

Business Climate 0.20 60 12.0

Environmental Regulations 0.05 80 4.0

Infrastructure Availability (a) 0.10 40 4.0

Infrastructure Availability (b) 0.10 30 3.0

Quality of labour 0.15 50 7.5

Suppliers 0.10 50 5.0

Host Community 0.10 30 3.0

Incentives 0.15 70 10.5

Others 0.05 60 3.0

Total 52.0

Plant Location Methodology: Transportation Method of Linear Programming

• Transportation method of linear programming seeks to minimize costs of shipping n units to m destinations or its seeks to maximize profit of shipping n units to m destinations.

Plant Location Methodology: Center of Gravity Method

• The center of gravity method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them.

• This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above.

Plant Location Methodology: Center of Gravity Method Formulae

C = d V

V x

ix i

i

Cx = X coordinate of center of gravity

Cy = X coordinate of center of gravity

dix = X coordinate of the ith location

diy = Y coordinate of the ith location

Vi = Volume of goods moved to or from ith location

C = d V

Vyiy i

i

Plant Location Methodology: Example of Center of Gravity Method

• Center of gravity method example– Several automobile dealers are located according to the

following grid which represents coordinate locations for each showroom.

Question: What is the best location for a new Z-Mobile facility considering only distances and quantities sold per month?

S ho wro o m No o f Z-Mob ile s s o ld pe r month

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

Plant Location Methodology: Example of Center of Gravity Method: Determining Existing Facility Coordinates

S ho wro om No o f Z-Mo bile s s o ld pe r mo nth

A 1250

D 1900

Q 2300

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

You must also have the volume information on the business activity at the existing facilities.

Plant Location Methodology: Example of Center of Gravity Method: Determining the Coordinates of the New Facility

C = 100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49

C = 200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89

S ho wro o m No o f Z-Mob ile s s o ld pe r month

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You then compute the new coordinates using the formulas:

Z New location