1. Operations Management Dr. Ron Lembke
Facility Location
Operations Management
Dr. Ron Lembke

2. 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

3. What factors should we consider?
Suppliers close by – fast & cheap access
Customers close by
Skilled workforce
Competitors close by? Skilled labor pool
Cost of utilities, labor, taxes, insurance
Environmental laws / cost of compliance
“Business friendly” – ease of operating
Weather – odds of disruption
International - control issues?

4. Local consumption Potato chips – one-day trip Electronics – China
Coffee – one-way valves

5. Tesla Essentially tax free 10 years Invest $3.5B in mfg & bldgs.
$10B expected investment

6. 1.8m
1.6m

8. Jobs
50% from NV
June, 2016
Dec 2015 – 300
2019 – 4,000
2020 – 6,500

9. Production Capacity

10. Third Party Logistics Providers (3PL)
I don’t have a truck neither do you

11. 3PLs today – all the movements

12. 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?

13. 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

14. 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

15. Case Study: Retailer Location of a 5th 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

16. Current Returns Center Network

17. Local Streets

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

19. Dallas Realignment

20. Close 1 Existing RC

21. Output Factors
Minimize costs of deliveries to customers

22. Case Study: Importing from China to E. Coast

23. China to U.S. Container Rates
NY / NJ $3,600
36 days
Wilmington DE $3,950
36 days (door)
Norfolk $3,600
34 days
Charleston $3,600
35 days
Atlanta
$3,200
37 days (door)
New Orleans $3,200
36 days

24. Allentown
575
305
Drayage Rates
428
Elizabeth, NJ
850
Harrisburg
343
295
350
Philadelphia
305
265
850
375
Wilmington
656
750
Baltimore
825
305
375
750
780
950
1125
725
950
888
Roanoke
750
Norfolk

25. China to Long Beach

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

27. 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.

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

29. Location Methods Minimize demand-weighted distance
Center of Gravity – minimizing demand-weighted distances of one facility
(P-Median Problem – minimize demand-weighted, multiple facilities)
(Maximum Covering – facilities must be within 300 miels, etc.)
Factor Weighting – consider qualitative factors
Break-even – Consider fixed & variable costs

30. Center of Gravity Compute X and Y coordinates separately
Xi is the X coordinate of location i.
Yi is the Y coordinate of i.
Qi is the X demand at i.
XOPT and YOPT are the coordinates of the DC.

31. 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.

32. Center of Gravity – Ex 1
100 80 60 40 20

33. Center of Gravity Method
City Location Demand
Reno is at 17,
Dallas is at 78,
Chicago is at 112,
Sum 310
Demand is TL/month Cx
17*100
78*90
112*120
22,160
Cx=22,160/310 =71.5

34. Center of Gravity

35. Center of Gravity – Ex 1
100 80 60 40 20

36. North
Platte
Sharon
Springs
Salina KS
Ctr Grav. Ex 1 - Detail

37. 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

38. Center of Gravity – Ex 1
100 80 60 40 20

39. 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

40. Biggest Freight Lanes

41. Maps Mercator – North –South preserved
Robinson projection – less distortion

42. Center of Gravity Example 2
You need to decide where to locate a DC in South Dakota
X Y Demand
Pierre
Watertown
Sioux Falls
Rapid
Total 208

43. Center of Gravity- #2
100 80 60 40 20

44. Center of Gravity

45. Final Location?
100 80 60 40 20

46. Break Country Into Regions
Not optimal, but better than nothing, great if each division needs its own DC

47. Johannesburg, South Africa
Medical waste disposal candidate site
List of all medical waste generating pts

48. 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”

49. 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

50. Factor Rating Example
Using a scoring system we developed, we have the following.
Factor Weight TX CO
Transportation
Plant Lease Cost
Labor availability
Quality of Life
Sum 1.0

51. 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

52. Factor Rating Example TX CO Factor Wt Nrml Wtd Nrml Wtd
Transp
Plant
Labor
Q Life
TOTAL
TX is best, but not by a huge amount

53. 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

54. Northtowne Center
Wal-Mart
Toys
Party
Office
Max
WinCo

55. A Tale of Two Stores W K

56. 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

57. Wal-Mart Access

58. Give Me Convenience

59. How Many Dealerships? 925 Cadillac Nebr. 2009: 22 -> 8
4x Lexus & BMW
Reduce dealers
Who owns the cars?
When is GM paid?
Just like Tesla!
Virtual Reality?

60. VR?

62. Cadillac, 1994
"Research shows we lose 10% to 11% because the car's not available,“
cars will take about a day to arrive at a dealership.
Delivery handled by the lot, funded by Florida dealers as well as GM.
Earl Fields, a Cadillac dealer in Lake Wales, expects to cover the extra cost by having less inventory on his lot, 25 cars as opposed to 60.
In the long run, he says, "It could mean smaller dealerships."
GM expects dealership inventories to decline by about 25% at first and later by 50%.
Mr. Fields also owns Buick and Oldsmobile dealerships and says those GM divisions are seriously considering similar tests. Cadillac officials acknowledge other GM divisions are watching the test.

63. Max Covering - 10

64. Max Covering 20

65. 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.

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

67. Solving large problems

68. 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.

69. Possible Approach Break country into regions
Center of Gravity to find general area
Use factor weighting to choose city.
Transportation, labor, facility costs from 3PL
Finalize facility
Available real estate

70. Break-Even Analysis Hey – this sounds familiar!
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!

71. 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

72. 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.

73. Transportation Method
You have 3 DCs, and need to deliver product to 4 customers.
Find cheapest way to satisfy all demand
D 2
A 10
E 4
B 10
F 12
C 10
G 11

74. Solving Transportation Problems
Trial and Error
Linear Programming – ooh, what’s that?!
Tell me more! D E F G A 10 9 8 7 B 11 4 5 C

75. Summary
Center of Gravity
Factor Rating