Facility Location

Location Options Expanding existing facilities Building a new facility (for the beginners) Moving to another facility Addition of one or more facilities to the existing network in order to expand capacity Closing of one or more facilities in order to shrink capacity

The Need for Location Decisions Location decisions may arise for a variety of reasons: Addition of new facilities As part of a marketing strategy to expand markets Growth in demand that cannot be satisfied by expanding existing facilities Depletion of basic inputs requires relocation Shift in markets Cost of doing business at a particular location makes relocation attractive

Location Decisions: Strategically Important Are long-term decisions Are closely tied to an organization’s strategies Low-cost Convenience to attract market share Effect capacity and flexibility Are difficult to reverse Represent a long-term commitment of resources Effect investment requirements, Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc) Effect revenues, Effect operations Impact competitive advantage Important to supply chains

Location Decisions: Objectives Location decisions are based on: Cost or profit potential and customer service Finding a number of acceptable locations from which to choose (no single location may be better than others) Position in the supply chain End: accessibility, consumer demographics, traffic patterns, and local customs are important Middle: locate near suppliers or markets Beginning: locate near the source of raw materials Supply chain management issues such as supply chain configuration Centralized vs. decentralized distribution

Industrial Location Decisions Cost focus Revenue varies little between locations Location is a major cost factor Location effects shipping & production costs (costs vary greatly between locations © 1995 Corel Corp.

Service Location Decisions Revenue focus Costs vary little between market areas Location is a major revenue factor Factors such as Traffic volume, good transportation, customer safety and convenience most important Location effects amount of customer contact Locaiton effects volume of business

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 Other Services Doctors, lawyers, accountants, barbers Banks, auto repair, motels

General Procedure for Making Location Decisions Decide on the criteria to use for evaluating location alternatives Identify important factors (such as location of markets or raw materials) Develop location alternatives - identify the country or countries for location - identify the general region for location - identify a small number of community alternatives - identify site alternatives among the cummunity alternatives Evaluate the alternatives and make a selection

Location Decision Sequence Country . Region/Community Site

Factors That Affect Location Decisions Global Factors Regional Factors Community Considerations Site-related Factors

Global Location: Facilitating Factors Key factors that have contributed to the attractiveness of globalization: Trade Agreements such as North American Free Trade Agreement (NAFTA) General Agreement on Tarriffs and Trade (GATT) U.S.-China Trade Relations Act EU and WTO efforts to facilitate trade Technology Advances in communication and information technology

Global Location: Benefits A wide range of benefits have accrued to organizations that have globalized operations: Markets Cost savings Legal and regulatory Financial Other

Global Location: Disadvantages There are a number of disadvantages that may arise when locating globally: Transportation costs Security costs Unskilled labor Import restrictions Criticism for locating out-of-country

Global Location: Risks Organizations locating globally should be aware of potential risk factors related to: Political instability and unrest Terrorism Economic instability Legal regulation Ethical considerations Cultural differences

Managing Global Operations Managerial implications for global operations: Language and cultural differences Risk of miscommunication Development of trust Different management styles Corruption and bribery Level of technology and resistance to technological change Domestic personnel may resist locating, even temporarily

Location: Identifying a Country

Location: Identifying a Region Primary regional factors: Locating close to the raw materials Necessity Perishability Transportation costs Locating close to the markets As part of a profit-oriented company’s competitive strategy So not-for-profits can meet the needs of their service users Distribution costs and perishability

Location: Identifying a Region Labor factors Cost of labor Availability of suitably skilled workers Wage rates in the area Labor productivity Attitudes toward work Whether unions pose a serious potential problem Other factors Climate and taxes may play an important role in location decisions

More on Regional Location Factors Labor (availability, education, cost and unions) Proximity of customers Number of customers Construction/leasing costs Land costs Modes and quality of transportation Transportation costs Incentive packages Governmental, legal regulations, policies and barriers Environmental regulations Raw material availability Commercial travel Climate Infrastructure (cost and availability of utilities) Quality of life

More on Regional Location Factors Community government Local business regulations Government services Business climate Community services Taxes Environmental impact issues Availability of sites Financial Services Community inducements Proximity of suppliers Education system Free trade zones

Geographic Information System (GIS) A computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps Aids decision makers in Targeting market segments Identifying locations relative to their market potential Planning distribution networks Portraying relevant information on a map makes it easier for decision makers to understand

Location: Identifying a Community Many communities actively attempt to attract new businesses they perceive to be a good fit for the community Businesses also actively seek attractive communities based on such factors such as: Quality of life Services Attitudes Taxes Environmental regulations Utilities Development support

Location: Identifying a Site Primary site location considerations are Land Transportation Environmental Zoning Legal Other restrictions

Site Location Factors Customer base Zoning restrictions Construction/ leasing cost Site costs (land, expansion, parking, etc. Quality of life issues in the community (education, health care, sports, cultural activities etc.) Site size Transportation Traffic Zoning restrictions Safety/security Competition Area business climate Income level Host community Competitive advantage Utilities including gas, electric, water and their costs

Plant Strategies - Product Plant Strategy - Market Area Plant Strategy Single Plant Strategy Multiple Plant Strategy - Product Plant Strategy - Market Area Plant Strategy - Process Plant Strategy

Multiple Plant Strategies Product plant strategy Entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market Market area plant strategy Plants are designated to serve a particular geographic segment of the market Plants produce most, if not all, of a company’s products

Multiple Plant Strategies Process plant strategy Different plants focus on different aspects of a process automobile manufacturers – engine plant, body stamping plant, etc. Coordination across the system becomes a significant issue General-purpose plant strategy Plants are flexible and capable of handling a range of products

Service and Retail Locations Nearness to raw materials is not usually a consideration Customer access is a Prime consideration for some: restaurants, hotels, etc. Not an important consideration for others: service call centers, etc. Tend to be profit or revenue driven, and so are Concerned with demographics, competition, traffic/volume patterns, and convenience

Evaluating Location Alternatives Common techniques for location evaluation: Locational cost-volume-profit analysis Factor rating method Load-distance method Center of gravity method Transportation model (a specialized linear programming method)

Locational Cost-Profit-Volume Analysis

Locational Cost-Profit-Volume Analysis Locational Cost-Profit-Volume (Break-even)Analysis A technique for evaluating location choices in economic terms Steps: Determine the fixed and variable costs for each alternative Plot the total-cost lines for all alternatives on the same graph Determine the location that will have the lowest total cost (or highest profit) for the expected level of output

Locational Cost-Profit-Volume Analysis Assumptions Fixed costs are constant for the range of probable output Variable costs are linear for the range of output The required level of output can be closely estimated Only one product is involved

Locational Cost-Profit-Volume Analysis For a cost analysis, compute the total cost for each alternative location:

Example: Cost-Profit-Volume Analysis Fixed and variable costs for four potential plant locations are shown below: Location Fixed Cost per Year Variable Cost per Unit A $250,000 $11 B $100,000 $30 C $150,000 $20 D $200,000 $35

Example: Cost-Profit-Volume Analysis Comparison of total costs at a production volume of 10,000

Example: Cost-Profit-Volume Analysis Plot of total costs 800 700 600 500 400 300 200 100 Annual Output (000) $(000) 8 10 12 14 16 6 4 2 A B C D

Example: Solution 800 700 600 500 400 300 200 100 Annual Output (000) Annual Output (000) $(000) 8 10 12 14 16 6 4 2 A B C B Superior C Superior A Superior D

Example: Cost-Profit-Volume Analysis Range approximations B Superior (up to 4,999 units) C Superior (>5,000 to 11,111 units) A superior (11,112 units and up)

Factor Rating Method

Factor Rating Method A general approach to evaluating locations that includes quantitative and qualitative inputs Most widely used location technique Useful for service and industrial locations Rates locations using both tangible (quantitative) factors such as short-run and long-run costs and intangible (qualitative) factors such as education quality, labor skills.

Factor Rating Procedure: Determine which factors are relevant Assign a weight to each factor that indicates its relative importance compared with all other factors. Weights typically sum to 1.00 Decide on a common scale for all factors (such as 1-100), and set a minimum acceptable score if necessary Score each location alternative along each factor Multiply the factor weight by the score for each factor, and sum the results for each location alternative Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score

Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Factor Weight Alt 1 Alt 2 Proximity to existing source .10 100 60 Traffic volume .05 80 Rental costs .40 70 90 Size 86 92 Layout .20 40 Operating Cost .15 1.00

Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Weighted Scores Factor Weight Alt 1 Alt 2 Proximity to existing source .10 100 60 .10(100) = 10.0 .10(60) = 6.0 Traffic volume .05 80 .05(80) = 4.0 Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0 Size 86 92 .10(86) = 8.6 .10(92) = 9.2 Layout .20 40 .20(40) = 8.0 .20(70) = 14.0 Operating Cost .15 .15(80) = 12.0 .15(90) = 13.5 1.00 70.6 82.7

Centre of Gravity Method

Center of Gravity Method A method for locating a distribution center that minimizes distribution costs Finds location of a single distribution center serving several destinations Used primarily for services Treats distribution costs as a linear function of the distance and the quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method necessitates to identify coordinates and weights shipped for each location and includes the use of a map that shows the locations of destinations The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative locations

Center of Gravity Method Considers Location of existing destinations eg. Markets, retailers etc. Volume to be shipped Shipping distances (or costs) Shipping cost/unit/mile is constant

Center of Gravity Method If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates

Center of Gravity Method Suppose you are attempting to find the center of gravity for the problem . Destination x y D1 2 D2 3 5 D3 4 D4 8 18 16 Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure

Center of Gravity Method When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates

Grid-Map Coordinates  x1 x2 x3 x y2 y y1 y3 1 (x1, y1), Q1 Vi i = 1 xiQi Cx = yiQi Cy = x1 x2 x3 x y2 y y1 y3 1 (x1, y1), Q1 2 (x2, y2), Q2 3 (x3, y3), Q3 where, Cx, Cy = coordinates of the new facility at center of gravity xi, yi = coordinates of existing facility i Vi = annual volume shipped from or to the ith location

Center of Gravity Method: Example 1 Suppose the shipments for the problem depicted in Figure are not all equal. Determine the center of gravity based on the following information. Destination x y Weekly Quantity D1 2 800 D2 3 5 900 D3 4 200 D4 8 100 18 16 1,000

Center of Gravity Method: Example 1 The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7). This south of destination D2 (3, 5).

Center of Gravity Method: Example 1

Center-of-Gravity Technique: Example 2 A B C D x 200 100 250 500 y 200 500 600 300 Vt 75 105 135 60 y 700 500 600 400 300 200 100 x A B C D (135) (105) (75) (60) Miles

Center-of-Gravity Technique: Example 2 700 500 600 400 300 200 100 x A B C D (135) (105) (75) (60) Miles Cx = = = 238 n  Wi i = 1 xiWi (200)(75) + (100)(105) + (250)(135) + (500)(60) 75 + 105 + 135 + 60  n Wi i = 1 yiWi Cy = = = 444 (200)(75) + (500)(105) + (600)(135) + (300)(60) 75 + 105 + 135 + 60

Center-of-Gravity Technique: Example 2 A B C D x 200 100 250 500 y 200 500 600 300 Wt 75 105 135 60 y 700 500 600 400 300 200 100 x A B C D (135) (105) (75) (60) Miles Center of gravity (238, 444)

Worldwide Distribution of Volkswagens and Parts Which of the methodologies discussed should Volkswagen use to choose a new location?

Telemarketing and Internet Industries Require neither face-to-face contact with customers (or employees) nor movement of material Web based retail organizations are effectively location dependent Presents a whole new perspective on the location problem Given the significant impact of the World Wide Web, this slide should be discussed in detail.

Final Thought The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest. Students should asked to consider: - is this the ultimate in “locations”? - what are the implications of this idea?