1. Facility Location

2. Learning Objectives U shd. be able to Identify or Define:
Objective of location strategy
International location issues
Clustering
Geographic information systems
3 methods of solving the location problem
Factor-rating method
Locational breakeven analysis
Center-of-gravity method

3. Your plant / facility may be ….
Near the Raw Material sources
(Steel, Cement Plants )
Volume Compression Ratio
(Higher the ratio, nearer to RM source)
Near to Market / Customers
(FMCG, Perishables Goods, Services)
Better facilities & infrastructure
(MIDC, Union Territories, SEZs, FTZs)

5. Country 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

6. Region / Community 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

7. Site Factors Site size and cost
Air, rail, highway, and waterway systems
Zoning restrictions
Nearness of services/ supplies needed
Environmental impact issues

8. Approach to Location Profit maximization (Service industry)
Cost minimization (Manufacturing)

9. Approach to Location Revenue Focus Cost Focus Volume/revenue
Service/Retail Location Goods Mfg. Location
Revenue Focus Cost Focus
Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking, Access; Security,
Lighting; Appearance, Image
Cost determinants
Rent, Management caliber
Operations policies
(hours, wage rates)
Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor;
Raw material; taxes, and so on
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local government

10. Approach to Location Techniques Techniques Center-of-gravity method
Service/Retail/Prof. Locn. Goods-mfg. Location
Techniques Techniques
Regression models to determine importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
Transportation methods
Locational break-even
analysis
Crossover charts

11. Clustering Industry Locations Reason for clustering Wine makers
Napa Valley (US); Bordeaux region (France)
Natural resources
Land, Climate
Software firms
Silicon Valley, Boston, Bangalore (India)
Talent resources of bright grads. in Sc./tech. areas, venture capitalists nearby
Electronic firms
Northern Mexico
Duty free export zones
Computer hardware manufacturers
Singapore, Taiwan
High tech penetration rate, Skilled/educated workforce with large pool of engineers

12. Point Rating Method ( for Facility Location)
Factor Rated
Max. Possible Points
Points assigned to
Location A
Location B
Availability of fuel
600
400
500
Labor availability
440
Water supply
200
160
140
Transportation
300
250
150
Topography
100 80 90
Total
1330
1280

13. Location B is Preferred to A
Factor rating method
Factors
Factor Rating (1 to 5)
Location Rating (1 to 10)
Rating Product
Location A
Location B
1) Proximity to Mkts 4 3 8 12 32
2) Tax advantage 5 6 7 30 35
3) Availability of power 21 2
4) Water availability 9 36 28
5) Community attitude
6) Infrastructure Development 10
7) Support industry 1
128
138
Location B is Preferred to A

14. Centre of Gravity Method – Problem
Retail Expected
Outlets Demand A
B 100
C 120
D 130
E 100
F 150 G
Total Demand
Q. : Where should we set up a
centralized warehousing facility?

15. Centre of Gravity Method16 B 14 G 12 10 A 8
Center-of-gravity E 6 C
Y-Distance (KM) F 4 D 2 4 8 12 16 20
X- Distance (KM)

16. Centre of Gravity Method
Retail Outlet
Xi Dist
Yi Dist
Volume (Vi) QTY
Vi Xi
Vi Yi A 4 10 80
320
800 B
3.5 15
100
350
1500 C 6
120
480
720 D 2
130
1300
260 E 16
1600
600 F 8 5
150
1200
750 G 14 13 90
1260
1170
∑ Vi = 770
∑ Vi Xi = 6510
∑ Vi Yi = 5800
Xc=6510/770
= 8.45
Yc = 5800 /770
= 7.53

17. Break Even method
Cost-volume analysis method used for industrial locations
3 Steps in the method –
Determine fixed and variable costs for each location
Plot the cost for each location
3. Select location with lowest total cost for expected production volume

18. Cost-Volume-Profit (or Br. Even Analysis)
Revenue
TCA
FCA
Cost
VCA Vo
Volume of Sales

19. Break Even Analysis Method
Location A : Annual fixed costs of Rs.3 L, Variable Costs - Rs. 63 / unit,
Revenues Rs. 68 per unit.
Location B : Annual fixed costs Rs. 8 L
Variable costs Rs. 32 per unit,
Revenues are Rs. 68 per unit.
Exp. Sales volume units per year.
Which location is more attractive?

20. Answer -Break Even Analysis Method
B E Volume = Fixed cost / (Contribution / unit)
VBE (A) = Rs 3 L / = 60,000 units
VBE (B) = Rs 8 L / = 22,222 units
At the expected demand of units,
A B
Revenue ,00, ,00,000
Variable Cost ,75, ,00,000
Fixed Cost ,00, ,00,000
Total Cost ,75, ,00,000
Profit (Loss) (1,75,000) ,00,000
Location B is more attractive, even if annual fixed cost is higher