Facility Location

Learning Objectives U shd. be able to Identify or Define: Objective of location strategy International location issues Clustering Geographic information systems 3 methods of solving the location problem Factor-rating method Locational breakeven analysis Center-of-gravity method

Your plant / facility may be …. Near the Raw Material sources (Steel, Cement Plants ) Volume Compression Ratio (Higher the ratio, nearer to RM source) Near to Market / Customers (FMCG, Perishables Goods, Services) Better facilities & infrastructure (MIDC, Union Territories, SEZs, FTZs)

Country Factors Political risks, government rules, attitudes, incentives Cultural and economic issues Location of markets Labor availability, attitudes, productivity, costs Availability of supplies, communications, energy Exchange rates and currency risks

Region / Community Factors Corporate desires Attractiveness of region Labor availability, costs, attitudes towards unions Costs and availability of utilities Environmental regulations Government incentives and fiscal policies Proximity to raw materials and customers Land/construction costs MN WI MI IL IN OH

Site Factors Site size and cost Air, rail, highway, and waterway systems Zoning restrictions Nearness of services/ supplies needed Environmental impact issues

Approach to Location Profit maximization (Service industry) Cost minimization (Manufacturing)

Approach to Location Revenue Focus Cost Focus Volume/revenue Service/Retail Location Goods Mfg. Location Revenue Focus Cost 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) Tangible costs Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; Raw material; taxes, and so on Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government

Approach to Location Techniques Techniques Center-of-gravity method Service/Retail/Prof. Locn. Goods-mfg. Location Techniques Techniques Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of area Center-of-gravity method Geographic information systems Transportation methods Locational break-even analysis Crossover charts

Clustering Industry Locations Reason for clustering Wine makers Napa Valley (US); Bordeaux region (France) Natural resources Land, Climate Software firms Silicon Valley, Boston, Bangalore (India) Talent resources of bright grads. in Sc./tech. areas, venture capitalists nearby Electronic firms Northern Mexico Duty free export zones Computer hardware manufacturers Singapore, Taiwan High tech penetration rate, Skilled/educated workforce with large pool of engineers

Point Rating Method ( for Facility Location) Factor Rated Max. Possible Points Points assigned to Location A Location B Availability of fuel 600 400 500 Labor availability 440 Water supply 200 160 140 Transportation 300 250 150 Topography 100 80 90 Total 1330 1280

Location B is Preferred to A Factor rating method Factors Factor Rating (1 to 5) Location Rating (1 to 10) Rating Product Location A Location B 1) Proximity to Mkts 4 3 8 12 32 2) Tax advantage 5 6 7 30 35 3) Availability of power 21 2 4) Water availability 9 36 28 5) Community attitude 6) Infrastructure Development 10 7) Support industry 1 128 138 Location B is Preferred to A

Centre of Gravity Method – Problem Retail Expected Outlets Demand A 80 B 100 C 120 D 130 E 100 F 150 G 90 Total Demand 770 Q. : Where should we set up a centralized warehousing facility?

Centre of Gravity Method 16 B 14 G 12 10 A 8 Center-of-gravity E 6 C Y-Distance (KM) F 4 D 2 4 8 12 16 20 X- Distance (KM)

Centre of Gravity Method Retail Outlet Xi Dist Yi Dist Volume (Vi) QTY Vi Xi Vi Yi A 4 10 80 320 800 B 3.5 15 100 350 1500 C 6 120 480 720 D 2 130 1300 260 E 16 1600 600 F 8 5 150 1200 750 G 14 13 90 1260 1170 ∑ Vi = 770 ∑ Vi Xi = 6510 ∑ Vi Yi = 5800 Xc=6510/770 = 8.45 Yc = 5800 /770 = 7.53

Break Even method Cost-volume analysis method used for industrial locations 3 Steps in the method – Determine fixed and variable costs for each location Plot the cost for each location 3. Select location with lowest total cost for expected production volume

Cost-Volume-Profit (or Br. Even Analysis) Revenue TCA FCA Cost VCA Vo Volume of Sales

Break Even Analysis Method Location A : Annual fixed costs of Rs.3 L, Variable Costs - Rs. 63 / unit, Revenues Rs. 68 per unit. Location B : Annual fixed costs Rs. 8 L Variable costs Rs. 32 per unit, Revenues are Rs. 68 per unit. Exp. Sales volume 25000 units per year. Which location is more attractive?

Answer -Break Even Analysis Method B E Volume = Fixed cost / (Contribution / unit) VBE (A) = Rs 3 L / 68-63 = 60,000 units VBE (B) = Rs 8 L / 68-32 = 22,222 units At the expected demand of 25000 units, A B Revenue 17,00,000 17,00,000 Variable Cost 15,75,000 8,00,000 Fixed Cost 3,00,000 8,00,000 Total Cost 18,75,000 16,00,000 Profit (Loss) (1,75,000) 1,00,000 Location B is more attractive, even if annual fixed cost is higher