Facility Location Models

Location Strategy One of the most important decisions a firm makes Increasingly global in nature Long term impact and decisions are difficult to change The objective is to maximize the benefit of location to the firm

Location Decisions Long-term decisions Decisions made infrequently Decision greatly affects both fixed and variable costs Once committed to a location, many resource and cost issues are difficult to change

Critical Success Factors Location Decisions Country Decision Critical Success 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 Decision Critical Success Factors Location Decisions Region/ Community Decision Critical Success 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

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

Factors That Affect Location Decisions Labor productivity Wage rates are not the only cost Lower productivity may increase total cost Labor cost per day Productivity (units per day) = cost per unit A = $1.17 per unit $70 60 units Z = $1.25 per unit $25 20 units

Factors That Affect Location Decisions Exchange rates and currency risks Can have a significant impact on cost structure Rates change over time Costs Tangible - easily measured costs such as utilities, labor, materials, taxes Intangible - less easy to quantify and include education, public transportation, community, quality-of-life

Factors That Affect Location Decisions Attitudes National, state, local governments toward private and intellectual property, zoning, pollution, employment stability Worker attitudes towards turnover, unions, absenteeism Globally cultures have different attitudes towards punctuality, legal, and ethical issues

Factors That Affect Location Decisions Proximity to markets Very important to services JIT systems or high transportation costs may make it important to manufacturers Proximity to suppliers Perishable goods, high transportation costs, bulky products

Types Of Facilities Heavy manufacturing Light industry Auto plants, steel mills, chemical plants Light industry Small components mfg, assembly Warehouse & distribution centers Retail & service

Factors in Heavy Manufacturing Location Construction costs Land costs Raw material and finished goods shipment modes Proximity to raw materials Utilities Labor availability

Factors in Light Industry Location Construction costs Land costs Easily accessible geographic region Education & training capabilities

Factors in Warehouse Location Transportation costs Proximity to markets

ปัจจัยในการเลือกทำเลที่ตั้งคลังสินค้า สุทิศา สรรพกิจไพศาล, 2550 1. การขนส่งทางบก 2. การขนส่งทางรถไฟ 3. อยู่ใกล้กับลูกค้า 4. อยู่ใกล้แหล่งวัตถุดิบ / โรงงานผลิต 5. สาธารณูปโภค 6. การระบายน้ำ 7. การถ่ายเทของเสีย / การจัดการของเสีย

ปัจจัยในการเลือกทำเลที่ตั้งคลังสินค้า สุทิศา สรรพกิจไพศาล, 2550 8. การเป็นเจ้าของที่ดิน 9. แรงจูงใจจากคลังสินค้าที่ตั้งอยู่ก่อน 10. แรงงานและค่าจ้าง 11. อัตราผลตอบแทนจากการลงทุน 12. ระยะเวลาคืนทุน 13. มูลค่าเงินปัจจุบันสุทธิ 14. การวิเคราะห์ระยะทางกับภาระงาน (Load distance analysis)

Location Analysis Techniques Location rating factor Center-of-gravity Load-distance Break Even LP and Non-LP

Location Rating Factor Identify important factors Weight factors (0.00 - 1.00) Subjectively score each factor (0 - 100) Sum weighted scores

Location Factor Rating Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service LOCATION FACTOR .30 .20 .15 .10 .05 WEIGHT 80 100 60 75 65 85 50 Site 1 91 95 90 92 Site 2 72 Site 3 SCORES (0 TO 100) Weighted Score Site 1 = (0.30)(80) = 24

Location Factor Rating Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service LOCATION FACTOR .30 .20 .15 .10 .05 WEIGHT 80 100 60 75 65 85 50 Site 1 91 95 90 92 Site 2 72 Site 3 SCORES (0 TO 100) 24.00 20.00 9.00 11.25 6.50 4.25 2.50 77.50 19.50 18.20 14.25 12.00 4.60 3.25 80.80 27.00 15.00 10.80 9.50 4.50 82.05 WEIGHTED SCORES Weighted Score Site 1 = (0.30)(80) = 24

Center-of-Gravity Technique Locate facility at center of geographic area Based on weight and distance traveled Establish grid-map of area Identify coordinates and weights shipped for each location

Grid-Map Coordinates  x1 x2 x3 x y2 y y1 y3 1 (x1, y1), W1 Wi i = 1 xiWi x = yiWi y = where, x, y = coordinates of the new facility at center of gravity xi, yi = coordinates of existing facility i Wi = annual weight shipped from facility i

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

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

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

Load-Distance Technique Compute Load x Distance for each site Choose site with lowest Load x Distance Distance can be actual or straight-line

Load-Distance Calculations  lij dij j = 1 n LDij = LDij= load-distance value from site i to all existing facility j’s lij = load expressed as a weight, number of trips or units being shipped from proposed site i and location j dij = distance between proposed site i and location j dij = (xi - xj)2 + (yi - yj)2 (xi,yi) = coordinates of proposed site i (xi , yj) = coordinates of existing facility j where,

Load-Distance: Example Potential Sites Site X Y 1 360 180 2 420 450 3 250 400 Suppliers A B C D X 200 100 250 500 Y 200 500 600 300 Wt 75 105 135 60 Compute distance from each site to each supplier = (200-360)2 + (200-180)2 d1A = (xA - x1)2 + (yA - y1)2 Site 1 = 161.2 = (100-360)2 + (500-180)2 d1B = (xB - x1)2 + (yB - y1)2 = 412.3 d1C = 434.2 d1D = 184.4

Load-Distance: Example (cont.) Site 2 d2A = 333 d2C = 226.7 d2B = 323.9 d2D = 170 Site 3 d3A = 206.2 d3C = 200 d3B = 180.4 d3D = 269.3 Compute load-distance j = 1 n  lijdij LDij = Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063 Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791 Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555* * Choose site 3

Break-Even Analysis Method of cost-volume analysis used for industrial locations Three steps in the method Determine fixed and variable costs for each location Plot the cost for each location Select location with lowest total cost for expected production volume

Expected volume = 2,000 units Break-Even Analysis Three locations: Chonburi $30,000 $75 $180,000 Lumphoon $60,000 $45 $150,000 Songkla $110,000 $25 $160,000 Selling price = $120 Expected volume = 2,000 units Fixed Variable Total City Cost Cost Cost Total Cost = Fixed Cost + Variable Cost x Volume

Break-Even Analysis Annual cost Volume – $180,000 – $160,000 – $180,000 – $160,000 – $150,000 – $130,000 – $110,000 – $80,000 – $60,000 – $30,000 – $10,000 – Annual cost | | | | | | | 0 500 1,000 1,500 2,000 2,500 3,000 Volume Lumphoon cost curve Chonburi cost curve Songkla cost curve lowest cost lowest cost lowest cost