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? Skilled workforce Environmental laws / cost of compliance Cost of utilities, labor, taxes Suppliers close by – fast & cheap access Customers close by Competitors close by? Skilled labor pool International - control issues?

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 WinCo Office Max Toys Party

A Tale of Two Stores K W

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

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

Cost Focus Process Overview 1. Identify general region to locate in Usually based on mostly on transp. costs 2. Identify a list of candidate cities Choose cities with good transp. Access Estimate labor cost & availability, facilities costs 3. Select metro area, identify candidate properties. Find cost of building or leasing individual properties

Case Study: Importing from China to E. Coast

Customer Location

New Orleans $3, days NY / NJ $3, days Wilmington DE $3, days (door) Norfolk $3, days Charleston $3, days China to U.S. Container Rates Atlanta $3, days (door)

Roanoke Norfolk Philadelphia Baltimore Allentown Harrisburg Elizabeth, NJ Wilmington Drayage Rates

China to Long Beach

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

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?

Case Study: Retailer Location of a 5 th 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

Local Streets

Transportation Cost Approx. Current Pallets:205,254 Current Pallet Miles: 77.9m Cost / pallet-mile11.68 cents Pallet-Mile = 1 pallet traveling 1 mile Minimize average distance traveled

Current RCs

Dallas Realignment

Close 1 Existing RC

Location Methods Minimize demand-weighted distance  Center of Gravity – minimizing demand-weighted distances of one facility  Ardalan – minimize transportation of multiple facilities, but must locate by customers  (P-Median Problem, Maximum Covering) Factor Weighting – consider qualitative factors Break-even – Consider fixed & variable costs

Center of Gravity Compute X and Y coordinates separately d ix is the X coordinate of location i. d iy is the Y coordinate of i. W i is the X demand at i. C X and C Y 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

Center of Gravity Method CityLocationDemand Reno is at 17, Dallas is at 78, 2090 Chicago is at 110, Demand is TL/month

Center of Gravity

Center of Gravity – Ex 1, Map 2

Salina KS North Platte Sharon Springs 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

Ardalan Map 2

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

Center of Gravity Example 2 You need to decide where to locate a DC in South Dakota XYDemand Pierre Watertown Sioux Falls Rapid

Ardalan Map 2 - Detail

Center of Gravity

Final Location?

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. FactorWeightTXCO Transportation Plant Lease Cost Labor availability Quality of Life

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 TXCO FactorWtRawWtdRawWtd Transp Plant Labor Q Life TOTAL TX is best, but not by a huge amount

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.

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.

Max Covering

Max Covering 2

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

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 Use Ardalan to find out which general regions to locate in (state / county). Use factor weighting to choose city. Ardalan has disadvantage of choosing weights -- difficult to set levels.

Break-Even Analysis 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 A 10 B 10 C 10 D 2 E 4 F 12 G 11

Solving Transportation Problems Trial and Error Linear Programming – ooh, what’s that?! Tell me more! DEFG A10987 B 1145 C8748

Summary Center of Gravity Factor Rating