Facility Location Wk4

(1)

Facility Location

(2)

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

(3)

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

(4)

Objective of Location Strategy

(5)

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

(6)

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

(7)

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.

(8)

Location Decision Sequence

(9)

(10)

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

(11)

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

(12)

Factors Affecting Site

• Site size and cost

• Air, rail, highway, and

waterway systems

• Zoning restrictions

• Nearness of

services/supplies

needed

• Environmental

impact issues

(13)

Location Decision Example

BMW decided to

build its first major

manufacturing plant

outside Germany in

Spartanburg, South

Carolina.

(14)

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)

(15)

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

(16)

CSF in Location Analysis - Continued

Critical Success Factors

Country

1 Country2 Country3 Country4

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 rawmaterials

Interest rates 3 3 2 3 3 5 4 4 2 5 3 2 5 5 5 5

(17)

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

(18)

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

(19)

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

(20)

Location Evaluation Methods

♦

_{Factor-rating method}

♦

_{Locational break-even}

analysis

♦

_{Center of gravity method}

♦

_{Transportation model}

(21)

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

(22)

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.

(23)

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.

(24)

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

(25)

• 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.

(26)

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)

(27)

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,

(28)

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)

(29)

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

(30)

• 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

(31)

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?

(32)

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,

(33)

Locational Break-Even

Crossover Chart

0 50000

100000

150000

200000

0

500 1000

1500

2000

2500

3000

Volume

A

nnua

l C

ost

Bowling Green

lowest cost Chicago lowest cost Akron

(34)

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)

(35)

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

(36)

Center of Gravity Method

Equations

d

_ix

= x coordinate of

location i

W

_i

= Volume of goods

moved to or from location i

d

_iy

= y coordinate of

location i

X Coordinate

Y Coordinate

∑ ∑

=

i i i ix i x

W

d

C

∑ ∑

=

i i i iy i y

W

d

C

(37)

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.

(38)

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

(39)

Coordinate Locations of Four

Quain’s Department Stores and

the Center of Gravity

(40)

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= ∑ l_id_i

i=1

Where, LD= Load Distance value

l_i = Load expressed as a weight, no. of trips or units being shipped from the proposed site to location i

d_i = the distance between the proposed site and location I

d_i= √((x_i-x)2_+(y

i-y)2)

Where, (x,y) = coordinates of the proposed site (x_i,y_i) = coordinates of the existing facility

(41)

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 = √((x_A-x₁)2_+(y A-y1)2) = √((200-360)2_+(200-180)2₎ =161.2

(42)

Site 1: d_B = √((x_B-x₁)2_+(y B-y1)2) = √((100-360)2_+(500-180)2₎ = 412.3 d_C = √((x_C-x₁)2_+(y C-y1)2) = √((250-360)2_+(600-180)2₎ = 434.2 d_A = √((x_D-x₁)2_+(y D-y1)2) = √((500-360)2_+(300-180)2₎ = 184.4 Site 2: d_A=333, d_B=323.9, d_C=226.7, d_D=170 Site 3: D_A=206.2, d_B=180.3, d_C=200, d_D=269.3

(43)

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.

(44)

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 manageme

nt

(45)

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}

(46)

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

(47)

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}

(48)

Telemarketing and Internet

Industries

• Require neither face-to-face contact with customers (or

employees) nor movement of material

(49)

Geographic Information

Systems

• New tool to help in location analysis

(50)