Chapter 10 Facility Location in a Global Environment IDS 605 M. Busing Spring 1999

Facility Location l Facility Location is the placement of facility with respect to customers, suppliers and other interacting facilities. It should consider: »Operating costs »Customer convenience »Transportation costs »Access to key related services such as banking and educational opportunities »Strategic factors Transparency 10.1

Location as a Strategic Decision 1. Long-term commitment 2. Linked to customer base 3. Regional facility supplies specific area 4. Product facility supplies globally 5. Combination of regional and product facilities Transparency 10.2 Regional or Global

Factors Affecting the Location Decision l Strategic nature of decision l Quantitative factors l Government incentives l Qualitative factors Transparency 10.3

Data for Site in Indianapolis, Indiana (Slide 1 of 2) (Exhibit 10.1)Transparency 10.4a Labor Material Utilities Transportation Welding Electrical General assembly Sheet metal Threaded fasteners Electrical wire Natural gas Electricity In rail Motor carrier Out motor carrier $10.00/hr. $12.00/hr. $9.00/hr $.40/lb. $2.00/100 $.06/lineal ft. $4.00/1,000 cu. ft. $.06/kilowatt hr. $.03/lb. (sheet metal)* $.04/lb. (fasteners) $.04/lb (wire) $20/unit (finished) Type Rate Projected usage Variable Production Costs 0.5 hrs./unit 0.3 hrs./unit 1.1 hrs./unit 100 lbs./unit 20/unit 70 lineal ft./unit 500 cu. ft./unit 200 kilowatt hrs./unit 100lbs./unit 5 lbs./unit 4 lbs./unit 1

Data for Site in Indianapolis, Indiana (Slide 2 of 2) Facility Overhead Initial Investment Special Considerations (Exhibit 10.1)Transparency 10.4b Land acquisition costs Building construction Plant start-up costs Initial employee training Tax abatement Low-interest loans Supplementary training expenses $2,100,000 $175,000,000 $25,000,000 Type Rate Projected usage Variable Production Costs *Rates are given from a specific origin to a specific destination, so distance has been accounted for.

Pro Forma Operating Budget for One Year (Slide 1 of 2) (Exhibit 10.2)Transparency 10.5a Labor Welding Electric Assembly Total labor costs Material Sheet metal Fasteners Wire Total material costs Utilities Natural gas Electricity Total utility costs ($10.00/hr.)(.5 hrs./unit)(45,000 units) ($12.00/hr.)(.3 hrs./unit)(45,000 units) ($9.00/hr.)(1.1 hrs./unit)(45,000 units) ($.40/lb.)(100 lbs./unit)(45,000 units) ($2.00/100)(20/unit)(45,000 units) ($.06/lin.ft.)(70 lin.ft.)(45,000 units) ($4.00/1,000 cu./ft.)(500 cu./ft/unit)(45,000 units) ($.06/kwh)(200 kwh/unit)(45,000 units) $ 225, , ,500 $ 832,500 $1,800,000 18, ,000 $2,007,000 $ 90, ,000 $ 630,000

Pro Forma Operating Budget for One Year (Slide 2 of 2) Transportation Sheet metal Fasteners Wire Finished product Total transportation costs Variable costs Facility overhead * Grand total (Exhibit 10.2)Transparency 10.5b ($.03/lb.)(100 lb./unit)(45,000 units) ($.04/lb.)(5lb./unit)(45,000 units) ($.04/lb.)(4lb./unit)(45,000 units) ($20.00/unit)(45,000) $ 135,000 9,000 7, ,000 $1,051,200 $4,520,700 2,100,000 $6,620,700 *Some overhead costs can be variable, but to simplify the discussion in this case, we will assume all overhead costs are fixed.

Factors in Location Analysis (Slide 1 of 2) Transparency 10.6a LOCATION Country Distance in miles from: Los Angeles Chicago Memphis POPULATION City County MUNICIPAL SERVICES Type of local government Comprehensive city plan: Date completed Underway Under consideration Number of full-time fire department personnel: Number of full-time city policemen: Percent of city streets paved: %

Factors in Location Analysis (Slide 2 of 2) COMMERCIAL SERVICES Machine shop in city: Yes No Number Type of newspaper in city Daily Weekly Radio stations Yes No Number BANKING SERVICES TRANSPORTATION SERVICES Train Community served by railroad(s): Yes No Name(s) of railroad(s): Motor carrier Highway bus service available Yes No Number of highways serving city: Federal State Barge: City adjoins navigable river: Yes No Barge dock available Yes No Channel depth: feet. Length of season: Transparency 10.6b

Including the Qualitative Factors l Integrate qualitative factors »Determine which factors are relevant to the problem »Weigh each factor »Rate each site for each factor Transparency 10.7

Examples of Indianapolis and Lexington (Slide 1 of 2) Indianapolis Lexington Weight Raw Score Raw Score Recreational activities University research facilities Union activities Banking services Available labor pool Transparency 10.8a

Examples of Indianapolis and Lexington (Slide 2 of 2) Indianapolis Lexington Weighted score Weighted score Recreational activities University research facilities Union activities Banking services Available labor pool Total 1,620 1,520 Transparency 10.8b

Analyzing Spatial Relationships l Load-Distance Method measures proximity to customers, suppliers, interacting facilities l Transportation Problem relates to the cost of transporting materials to and from multiple facilities Transparency 10.9

Distance from Facility to Customer (Exhibit 10.3)Transparency 10.10

Health Care Unit Location Problem (Exhibit 10.4)Transparency 10.11

Locating a Health Care Center Using the “Load-Distance Method” (Slide 1 of 3) Population coordinates Code a i x i y i (a i )(x i ) (a i )(y i ) , ,000 60, , , , , ,500 60, , ,000 56, , ,000 90, , ,000 84, , ,000 75,000 Total 128, , ,500 Zip Transparency 10.12a

Locating a Health Care Center Using the “Load-Distance Method” (Slide 2 of 3) where xf = Distance along the x axis from the origin to the center of gravity yf = Distance along the y axis from the origin to the center of gravity a i = The activity level (load) from the i th location to the proposed facility X i = the coordinate on the x axis for the i th customer location y i = the coordinate on the y axis for the i th customer location Transparency 10.12b

Locating a Health Care Center Using the “Load-Distance Method” (Slide 3 of 3) The coordinates of the center of gravity are: xf = yf = 414, , , ,000 = 3.24 = 4.11 Transparency 10.12c

Transportation Problem l Cost of moving materials between multiple destinations l Vogel’s Approximation Method l To evaluate two locations, solve the transportation problem for each location OR Transparency 10.13

Transportation Matrix for Proton Consulting Service (Exhibit 10.5)Transparency 10.14

First Assignment for Proton Consulting Service (Exhibit 10.6)Transparency 10.15

Second Assignment for Proton Consulting Service (Exhibit 10.7)Transparency 10.16

(Exhibit 10.8)Transparency Third Assignment for Proton Consulting Service

Final Transportation Matrix for Proton Consulting Service (Exhibit 10.9)Transparency 10.18

Location Decision Affects Other Operating Decisions l Alternative to on-site expansion l On-site expansion is problematic »Material handling and storage »Complex production flow »Strained communication »New technology delayed »Use of old equipment »Layering of expanded responsibilities Transparency 10.19

International Dimensions of Location Decision l Reasons for locating in foreign countries »Comparative Advantage »Closeness to market »Political relationships »Availability of resources Transparency 10.20

Location Analysis for Service Operations l Concepts and techniques discussed so far apply to service operations l Service issues : »Minimize response time: Emergency medical services »Provide minimum coverage: Fire Protection »Mobile location: Police or security units Transparency 10.21