Operations Management Dr. Ron Lembke Facility Location Operations Management Dr. Ron Lembke

Location Decisions Long-term decisions Difficult to reverse Affect fixed & variable costs Transportation costs (25% of price) Other costs: taxes, wages, rent Objective: maximize benefit of location to firm

What factors should we consider? Suppliers close by – fast & cheap access Customers close by Skilled workforce Competitors close by? Skilled labor pool Cost of utilities, labor, taxes, insurance Environmental laws / cost of compliance “Business friendly” – ease of operating Weather – odds of disruption International - control issues?

Local consumption Potato chips – one-day trip Electronics – China Coffee – one-way valves

Tesla Essentially tax free 10 years Invest $3.5B in mfg & bldgs. $10B expected investment

1.8m 1.6m

Jobs 50% from NV June, 2016 Dec 2015 – 300 2019 – 4,000 2020 – 6,500

Production Capacity

Third Party Logistics Providers (3PL) I don’t have a truck neither do you

3PLs today – all the movements

Distribution Center Location Minimize demand-weighted distance: distance to each customer times the volume of shipments to the customer How many to build? Where to build?

Cost Focus Revenue does not vary much, depending on the location. Customers don’t care if your warehouse is in Sparks or Sacramento Location is a major cost driver Impacts shipping, labor, production costs Varies greatly by location

Cost Minimization Identify the costs that will vary most with the location you choose. Transportation, taxes, labor, Facility construction cost, utilities Other considerations Proximity of services, suppliers Quality of life Government incentives

Case Study: Retailer Location of a 5th returns processing facility Addresses of 2125 Continental U.S. stores Location of 4 Return Goods Processing Centers List of all return shipments from each store, including pounds and # pallets Calculated actual highway distances from every store to its DC

Current Returns Center Network

Local Streets

Transportation Cost Approx. Current Pallets: 205,254 Current Pallet Miles: 77.9m Cost / pallet-mile 11.68 cents Pallet-Mile = 1 pallet traveling 1 mile Minimize average distance traveled

Dallas Realignment

Close 1 Existing RC

Output Factors Minimize costs of deliveries to customers

Case Study: Importing from China to E. Coast

China to U.S. Container Rates NY / NJ $3,600 36 days Wilmington DE $3,950 36 days (door) Norfolk $3,600 34 days Charleston $3,600 35 days Atlanta $3,200 37 days (door) New Orleans $3,200 36 days

Allentown 575 305 Drayage Rates 428 Elizabeth, NJ 850 Harrisburg 343 295 350 Philadelphia 305 265 850 375 Wilmington 656 750 Baltimore 825 305 375 750 780 950 1125 725 950 888 Roanoke 750 Norfolk

China to Long Beach

Landbridge Data Columbus $3000, 21days Cincinnati $2925, 21d Louisville $3050, 20d Murray $3350, 22d Nashville $3300, 22d Memphis $2900, 18.5d Atlanta $3300, 23d

P-Median Problem Minimize average weighted distance to customers, when locating P facilities, where P>=1. Can consider 100s of locations. Complex to solve – there is software for this.

Cost Focus Process Overview Identify general region to locate in Usually based on mostly on transp. costs Identify a list of candidate cities Choose cities with good transp. Access Estimate labor cost & availability, facilities costs Select metro area, identify candidate properties. Find cost of building or leasing individual properties

Location Methods Minimize demand-weighted distance Center of Gravity – minimizing demand-weighted distances of one facility (P-Median Problem – minimize demand-weighted, multiple facilities) (Maximum Covering – facilities must be within 300 miels, etc.) Factor Weighting – consider qualitative factors Break-even – Consider fixed & variable costs

Center of Gravity Compute X and Y coordinates separately Xi is the X coordinate of location i. Yi is the Y coordinate of i. Qi is the X demand at i. XOPT and YOPT are the coordinates of the DC.

Center of Gravity Example 1 You need to decide where to build a new DC for Motorola. It needs to serve wholesalers in Reno, Dallas, and Chicago. Locate these cities on an unscientific, rectangular grid. Grid must maintain relative distances, but X and Y grids could be different.

Center of Gravity – Ex 1 100 80 60 40 20 0 20 40 60 80 100 120 140 160

Center of Gravity Method City Location Demand Reno is at 17, 55 100 Dallas is at 78, 20 90 Chicago is at 112, 63 120 Sum 310 Demand is TL/month Cx 17*100 78*90 112*120 22,160 Cx=22,160/310 =71.5

Center of Gravity

Center of Gravity – Ex 1 100 80 60 40 20 0 20 40 60 80 100 120 140 160

North Platte Sharon Springs Salina KS Ctr Grav. Ex 1 - Detail

Compromise Solution Closest town is Sharon Springs, KN Population 872 30 miles from I-70. Probably not a good choice Salina, KN puts us at I-70 and I-35 North Platte NE is at I-80 and 83. Access to Dallas less convenient

Center of Gravity – Ex 1 100 80 60 40 20 0 20 40 60 80 100 120 140 160

Finalizing City Go where other warehouses are More choice in pre-built buildings Cheaper, easier to build a new one More trucks to and from town, means more carriers there, means cheaper rates. Backhaul situation Get estimates of inbound, outbound trucking costs. Provide lists of # loads per year to each destination, from each source

Biggest Freight Lanes

Maps Mercator – North –South preserved Robinson projection – less distortion

Center of Gravity Example 2 You need to decide where to locate a DC in South Dakota X Y Demand Pierre 78 47 50 Watertown 150 65 8 Sioux Falls 160 25 90 Rapid 12 42 60 Total 208

Center of Gravity- #2 100 80 60 40 20 0 20 40 60 80 100 120 140 160

Center of Gravity

Final Location? 100 80 60 40 20 0 20 40 60 80 100 120 140 160

Break Country Into Regions Not optimal, but better than nothing, great if each division needs its own DC

Johannesburg, South Africa Medical waste disposal candidate site List of all medical waste generating pts

Factor Rating Method Most widely used method? Useful for service or industrial facilities: can include intangible, qualitative factors List relevant factors, assign a weight Develop a scale for each factor Score each factor using the scale Multiply scores by weights, add up Choose location with highest total score Kind of like “Miss America”

Factor Rating Example We need to decide where to build a new coffee roasting plant. There are two possible locations: Dallas, and Denver. We consider the following factors Transp: annual trucking costs in $k Lease: annual costs in $k Labor availability: scale 1-10, unemployment, related industries Quality of life: scale 1-10: outdoor activities, cultural, sports, education

Factor Rating Example Using a scoring system we developed, we have the following. Factor Weight TX CO Transportation 0.4 900 1023 Plant Lease Cost 0.3 45 39 Labor availability 0.2 10 8 Quality of Life 0.1 7 9.5 Sum 1.0

Normalizing Scores All factors must be scored on the same scale, like 1-10, or 0-1.0, etc. Costs need to be re-scaled Lowest cost site gets a 10. More expensive site gets Plant Lease: 39/45 * 10 = 8.7 Transportation: 900/1,023 * 10 = 8.8 Multiply these raw scores by the weights for weighted scores

Factor Rating Example TX CO Factor Wt Nrml Wtd Nrml Wtd Transp. 0.4 10 4.00 8.80 3.52 Plant 0.3 8.7 2.61 10 3.00 Labor 0.2 10 2.00 8 1.60 Q Life 0.1 7 0.70 9.5 0.95 TOTAL 9.31 9.07 TX is best, but not by a huge amount

Service Facilities – Traffic focus Revenue changes a huge amount, depending on the location. Old Navy in Stead because of cheap land? Location, location, location: you need traffic Make it convenient! vitamins: need enough, but it has to be the right kind people who would want to buy your products when they are there. Cost probably doesn’t change nearly as much, by location All malls have high rent

Northtowne Center Wal-Mart Toys Party Office Max WinCo

A Tale of Two Stores W K

Kmart Access “I-80 & McCarran” sounds great. Kmart Sins: Can’t see from anywhere - see where we’re going Very circuitous entry feels inconvenient, no matter how long it actually takes

Wal-Mart Access

Give Me Convenience

How Many Dealerships? 925 Cadillac Nebr. 2009: 22 -> 8 4x Lexus & BMW Reduce dealers Who owns the cars? When is GM paid? Just like Tesla! Virtual Reality?

VR?

Cadillac, 1994 "Research shows we lose 10% to 11% because the car's not available,“ cars will take about a day to arrive at a dealership. Delivery handled by the lot, funded by Florida dealers as well as GM. Earl Fields, a Cadillac dealer in Lake Wales, expects to cover the extra cost by having less inventory on his lot, 25 cars as opposed to 60. In the long run, he says, "It could mean smaller dealerships." GM expects dealership inventories to decline by about 25% at first and later by 50%. Mr. Fields also owns Buick and Oldsmobile dealerships and says those GM divisions are seriously considering similar tests. Cadillac officials acknowledge other GM divisions are watching the test.

Max Covering - 10

Max Covering 20

Maximum Covering Problem A facility can “cover” a customer if the customer is within X miles of the facility. Try to find the best location, and minimum number of facilities to cover all demands. Cover a table with plates. Math also very hard.

Comparison of Results (Using Distances of 150, 200, 250,250) Demand Covered Number of Facilities

Solving large problems

Incremental or clean-slate apprach Take into account existing facilities What is the best location to add, given the existing facilities? What is the best to add, if we were to close down one of the current facilities? Unfortunately, only P-Median or Maximum Covering can deal with these.

Possible Approach Break country into regions Center of Gravity to find general area Use factor weighting to choose city. Transportation, labor, facility costs from 3PL Finalize facility Available real estate

Break-Even Analysis Hey – this sounds familiar! Determine fixed and variable costs for each location Fixed cost: how much it would cost to open a facility there Variable cost: how much total costs would increase as production increases: Transportation costs Labor costs Taxes Increased construction costs Hey – this sounds familiar!

Locating Service Facilities Using Linear Regression Collect data about your current facilities Use regression to determine which variables have a significant impact on profits Choose new facilities which have these characteristics

Method Comparison Center of gravity minimizes average distance for one facility only. Ardalan Minimizes weighted distances for more than one facility. Breakeven: fixed & variable costs. Factor weighting considers many other important aspects of location, but does not minimize distance.

Transportation Method You have 3 DCs, and need to deliver product to 4 customers. Find cheapest way to satisfy all demand D 2 A 10 E 4 B 10 F 12 C 10 G 11

Solving Transportation Problems Trial and Error Linear Programming – ooh, what’s that?! Tell me more! D E F G A 10 9 8 7 B 11 4 5 C

Summary Center of Gravity Factor Rating