1. Facility Location

2. 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

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

4. 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

5. 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.

6. 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

7. 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

8. 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

9. 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

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

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

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

13. Site Related Factors
Land
Transportation
Environmental
Legal

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

15. 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.

16. 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

17. 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

18. 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

19. 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

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

21. 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.

22. 1. Factor Rating Method

23. 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.

24. 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.

25. 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

26. 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

27. 2. Centre of Gravity Method

28. 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

29. 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

30. 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

31. 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

32. Center-of-Gravity Technique (5 of 10) Example 1
A B C D x y Vt y
700
500
600
400
300
200
100 x A B C D
(135)
(105)
(75)
(60)
Miles

33. 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)  n Wi
i = 1
yiWi
Cy = = = 444
(200)(75) + (500)(105) + (600)(135) + (300)(60)

34. Center-of-Gravity Technique (7 of 10) Example 1
A B C D x y Wt y
700
500
600
400
300
200
100 x A B C D
(135)
(105)
(75)
(60)
Miles
Center of gravity (238, 444)

35. 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?

36. Centroid Method (9 of 10) Example 2Y 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.

37. 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)

38. Locational Break-even Analysis

39. 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.

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

41. 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

42. 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

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

44. Example 2: Solution (2 of 3)

45. 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

46. Transportation Method

47. 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.

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

49. Global Locations Reasons for globalization Benefits Disadvantages
Risks
Global operations issues

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

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

53. 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.

54. 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?