Facility Location

Location Decisions Long-term decisions (expand existing facilities, add new facilities, move) Difficult to reverse Affect fixed & variable costs Transportation cost As much as 25% of product price Other costs: Taxes, wages, rent etc. Objective: Maximize benefit of location to firm

Need for Location Decisions Marketing Strategy Cost of Doing Business Growth Depletion of Resources

Nature of Location Decisions Strategic Importance of location decisions Long term commitment/costs Impact on investments, revenues, and operations Supply chains Objectives of location decisions Profit potential No single location may be better than others Identify several locations from which to choose Location Options Expand existing facilities Add new facilities Move

Industrial Location Decisions Cost focus Revenue varies little between locations Location is a major cost factor Affects shipping & production costs (e.g., labor) 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 Traffic volume, good transportation, customer safety and convenience most important Affects amount of customer contact Affects volume of business

Comparison of Service and Manufacturing Considerations Manufacturing/Distribution Service/Retail Cost Focus Revenue focus Transportation modes/costs Demographics: age,income,etc Energy availability, costs Population/drawing area Labor cost/availability/skills Competition Building/leasing costs Traffic volume/patterns Customer access/parking

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 alternatives Identify important factors Develop location alternatives - identify the general region for a location - identify community alternatives - identify site alternatives Evaluate alternatives and make a selection

Factors That Affect Location Decisions Community Considerations Regional Factors Site-related Factors Multiple Plant Strategies

Regional Factors Location of raw materials Location of markets Labor factors Climate and taxes

Community Considerations Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support

Site Related Factors Land Transportation Environmental Legal

Plant Strategies Single Plant Strategy Multi-Plant Strategies * Product Plant Strategy * Market Area Plant Strategy * Process Plant Strategy

Location Decision Sequence Country © 1995 Corel Corp. Region/Community . Site Stress that the location decision process is basically another process in which one attempts to continuously narrow the range of alternatives considered.

Global Location Factors Government stability Government regulations Political and economic systems Economic stability and growth Exchange rates Culture Climate Export import regulations, duties and tariffs Raw material availability Number and proximity of suppliers Transportation and distribution system Labor cost and education Available technology Commercial travel Technical expertise Cross-border trade regulations Group trade agreements

Regional Location Factors (1 of 2) 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

Regional Location Factors (2 of 2) 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

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

Location Incentives Tax credits Relaxed government regulation Job training Infrastructure improvement Money

Location Evaluation Methods (Methods of Solving Location Problems) Factor-rating method Center of gravity method Load-distance method Locational break-even analysis Transportation model (a specialized linear programming method) This slide can be used to frame a discussion of methods to evaluate location decisions.

1. Factor Rating Method

Factor-Rating Method (1 of 4) Decision based on minimum distribution costs Most widely used location technique Useful for service & industrial locations Rates locations using factors Tangible (quantitative) factors Example: Short-run & long-run costs Intangible (qualitative) factors Example: Education quality, labor skills This technique might be viewed as an extension of the Critical Success Factors methodology where the factors are weighted and rated.

Steps in Factor Rating Method (2 of 4) Identify important relevant factors Assign importance weight to each factor (0.00 – 1.00) Develop scale for each factor (such as 1 – 100) Score each location along each factor Multiply scores by weights for each factor & sum weighted factors Select location with maximum total score One way to derive an example of this technique is to ask students to identify the factors which caused them to select your particular college or university, and work through the appropriate analysis.

Location Factor Rating (3 of 4) 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 (4 of 4) 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 Best one

2. Centre of Gravity Method

2. Center of Gravity (Centroid) Method (1 of 10) Decision based on minimum distribution costs Finds location of single distribution center serving several destinations Used primarily for services Considers Location of existing destinations Example: Markets, retailers etc. Volume to be shipped Shipping distances (or costs) Shipping cost/unit/mile is constant

Center-of-Gravity Method (2 of 10) 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

Center of Gravity Method: Steps (3 of 10) This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria Place existing locations on a coordinate grid Grid has arbitrary origin & scale Maintains relative distances Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Minimizes transportation cost

Grid-Map Coordinates (4 of 10)  n Vi i = 1 xiVi Cx = yiVi Cy = x1 x2 x3 x y2 y y1 y3 1 (x1, y1), V1 2 (x2, y2), V2 3 (x3, y3), V3 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 Technique (5 of 10) Example 1 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 (6 of 10) Example 1 700 500 600 400 300 200 100 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 (7 of 10) Example 1 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)

Centre of Gravity Method (8 of 10) Example 2 Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom X Y A (100,200) D (250,580) Q (790,900) (0,0) Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

Centroid Method (9 of 10) Example 2 Y A (100,200) D (250,580) Q (790,900) (0,0) To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates. You must also have the volume information on the business activity at the existing facilities.

Centroid Method (10 of 10) Example 2 You then compute the new coordinates using the formulas: You then take the coordinates and place them on the map: X Y A (100,200) D (250,580) Q (790,900) (0,0) Z New location of facility Z about (443,627)

Locational Break-even Analysis

Locational Break-Even Analysis Method of cost-volume analysis used for industrial locations Steps Determine fixed & variable costs for each location Plot total cost for each location (Cost on vertical axis, annual volume on horizontal axis) Select location with lowest total cost for expected production volume Must be above break-even Basically breakeven where costs depend upon location.

Location Break-Even Analysis Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved

Locational Break-Even Analysis Example 1(1 of 2) You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year? © 1995 Corel Corp. An example

Locational Break-Even Crossover Chart (2 of 2) 50000 100000 150000 200000 500 1000 1500 2000 2500 3000 Volume Annual Cost Akron Chicago Bowling Green Bowling Green lowest cost Chicago lowest cost Akron lowest cost Graphical solution to the example

Example 2: Cost-Volume Analysis (1 of 3) Fixed and variable costs for four potential locations

Example 2: Solution (2 of 3)

Example 2: Solution (3 of3) 800 700 600 500 400 300 200 100 Annual Output (000) $(000) 8 10 12 14 16 6 4 2 A B C B Superior C Superior A Superior D

Transportation Method

Transportation Model Decision based on movement costs of raw materials or finished goods Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Seeks to minimize costs of shipping n units to m destinations Type of linear programming model Objective: Minimize total production & shipping costs (shipping n units to m destinations) Constraints Production capacity at source (factory) Demand requirements at destinations Again, this method, while quantitative, is unable to handle many of the important factors.

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

Global Locations Reasons for globalization Benefits Disadvantages Risks Global operations issues

Globalization Facilitating Factors Benefits Trade agreements Technology Benefits Markets Cost savings Legal and regulatory Financial

Globalization Disadvantages Risks Transportation costs Security Unskilled labor Import restrictions Criticisms Risks Political Terrorism Legal Cultural

Telemarketing and Internet Industries Require neither face-to-face contact with customers (or employees) nor movement of material 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?