Facility Location
By
Dr. Debadyuti Das, ReaderFaculty of Management StudiesUniversity of Delhi
Overview Involves the long-term commitment of large amount of
capital under conditions of considerable uncertainty.
Determines a permanent framework of operating constraints.
Significant impact on investment requirements, operating costs, revenues and operations.
Has significant consequences on the competitive position of the firm.
Need for location decision
Significant changes in the level of demand.
Significant changes in the geographical distribution of demand.
Changes in the costs or quality requirement of critical production inputs.
Significant changes in the real-estate value of existing or adjacent sites.
Depletion of resources.
Strategic importance of location decision
To become the low cost producer of final products.
To increase profits by planning to capture the increased market share.
To base location of the facilities based on customer convenience.
To base location of a facility based on where it fits in the entire supply chain. (Beginning, Middle or end of the chain)
Location options
Expand existing facilities
Add new facilities while retaining the existing ones.
Move to a new location
Doing nothing
Making Location Decisions
Decide on the criteria
Identify the important ones
Develop location alternatives
Evaluate the alternatives
Make selection
Factors influencing Location Decision
Regional Factors
Site-related Factors
Multiple Plant Strategies
Community Considerations
Location of raw materials Location of markets Labor factors Infrastructure Climate and taxes
Regional Factors
Quality of life Services (Medical, police, fire services etc.) Attitude of the people Taxes Environmental regulations Utilities (cost and availability)
Community Considerations
Land (cost, degree of development required, soil characteristics etc.)
Transportation Environmental Legal
Site Related Factors
Product plant strategy Market area plant strategy Process plant strategy
Multiple Plant Strategies
Comparison of Service and Manufacturing Considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking
Issues in global locations
Trading Blocs Political Risk Foreign Government
-Policies on foreign ownership of production facilities-Import restrictions-Currency restrictions-Local product standards-Environmental Regulations Cultural differences Resources Labour -Possible regulation limiting no. of foreign employees-Language differences
Evaluating Locations Transportation Model
Decision based on movement costs of raw materials or finished goods
Cost-Profit-Volume Analysis- Decision based on fixed cost, variable cost and the level of output produced at a particular location.
Center of Gravity (or Centroid) Method Decision based on minimum distribution costs
Factor Rating Decision based on quantitative and qualitative inputs
Analytic Hierarchy Process
Evaluating Locations
Cost-Profit-Volume Analysis Determine fixed and variable costs at each
location alternative
Plot total cost lines for all location alternatives on the same graph
Determine the lowest total costs for the expected level of output.
Location Cost-Volume Analysis
Assumptions Fixed costs are constant for the range of probable
output Variable costs are linear for the range of probable
output Output can be closely estimated Only one product is involved
Example 1: Cost-Volume Analysis
Fixed and variable costs for four potential locations (for 10,000 units)
L o c a t i o n F i x e dC o s t
V a r i a b l eC o s t
ABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 13 02 03 5
Example 1: Solution
F i x e dC o s t s
V a r i a b l eC o s t s
T o t a lC o s t s
ABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )
$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0
Example 1: Solution
800700600500400300200100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
BC
B SuperiorC Superior
A Superior
D
Plant Location Methodology: Centroid Method
The centroid 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: Centroid Method Formulas
C = d V
V x
ix i
i
C = d V
V x
ix i
i
Where:Cx = X coordinate of centroidCy = Y coordinate of centroiddix = X coordinate of the ith locationdiy = Y coordinate of the ith locationVi = volume of goods moved to or from ith location
C = d V
Vy
iy i
i
C = d V
Vy
iy i
i
Plant Location Methodology: Example of Centroid Method
Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?
Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?
Centroid method example Several mobile phone showrooms are located according to the
following grid which represents coordinate locations for each showroom
S howroom No o f Z-Mo b ile s s o ld p e r mo nth
A 1250
D 1900
Q 2300X
Y
A(100,200)
D(250,580)
Q(790,900)
(0,0)
Plant Location Methodology: Example of Centroid Method (Continued): Determining Existing Facility Coordinates
To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.
To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.
X
Y
A(100,200)
D(250,580)
Q(790,900)
(0,0)
You must also have the volume information on the business activity at the existing facilities.
You must also have the volume information on the business activity at the existing facilities.
S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth
A 1250
D 1900
Q 2300
Plant Location Methodology: Example of Centroid Method (Continued): Determining the Coordinates of the New Facility
C = 100(1250) + 250(1900) + 790(2300)
1250 + 1900 + 2300 =
2,417,000
5,450 = x 443.49C =
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 627.89C =
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-Mo b ile s s o ld p e r mo nth
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:You then compute the new coordinates using the formulas:
ZZ
New location of facility Z about (443,627)
New location of facility Z about (443,627)
You then take the coordinates and place them on the map:You then take the coordinates and place them on the map:
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