1. Operations Management
Facility Location
Operations Management

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?
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?

4. 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

5. 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

6. 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

7. 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

8. 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?

9. 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
Factor Weighting – consider qualitative factors
Break-even – Consider fixed & variable costs

10. Center of Gravity Compute X and Y coordinates separately
dix is the X coordinate of location i.
diy is the Y coordinate of i.
Wi is the X demand at i.
CX and CY are the coordinates of the DC.

11. 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.

12. 100 80 60 40 20

13. Center of Gravity Method
City Demand
Reno is at 17,
Fort Worth is at 78, 20 90
Chicago is at 110,
Demand is TL/month

14. Center of Gravity

15. 100 80 60 40 20

16. 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

17. 100 80 60 40 20

18. Center of Gravity

19. 100 80 60 40 20

20. Ardalan Heuristic
Need a matrix of distances or costs from each customer location to every other location
Demand at each location
Weight – give higher weight to more important customers – their pain of traveling a longer distance is worth more.
Only consider locating where customers are
Identify the one best place to locate at, then the second one to add, then the third, etc.

21. Ardalan Heuristic Minimize weighted distance traveled To
From A B C D Dem. Weight A B C D

22. Ardalan Method Expected demand at each location.
Weight represents importance of serving location (bigger = more important)
Step 1: Multiply distances * weights * demand
A to B: 11 * 1.1 * 10 = 121

23. Ardalan Method Step 2. Add up values in columns From A B C D

24. Ardalan Method Choose smallest value as first site. From A B C D

25. Ardalan Method From A B C D A 0 88 88 88 B 112 0 112 78.4 C 0 0 0 0
3. If larger, set each cost equal to cost in same row in the chosen column
From A B C D A B C D

26. Ardalan Method Get rid of previously chosen column.
Sum, choose smallest sum.
From A B D A B
C 0 0 0 D

27. Ardalan Method Repeat 3 & 4 until enough sites chosen. From A B D

28. Ardalan Method Repeat 3 & 4 until enough sites chosen. From A B A 0 88

29. Ardalan Summary
What we decided is that if we only want to build one location, it should be in C.
If we want to build two, they should be in C and D. If we add a third one, it should be in A.

30. Ardalan Summary
Assumes that we have to locate in the same city as one of our customers, which is not always the case.
However, it can be used to find more than one location.
Center of Gravity does not try to locate in the same city as one of the customers, but can only set one site.
If we choose the same sites as customers A and X, we obviously don’t really have to put the warehouses in those exact cities.

31. 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

32. Factor Rating Example
Using a scoring system we developed, we have the following.
Factor Weight TX CO
Transportation ,023
Plant Lease Cost
Labor availability
Quality of Life

33. 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 less than 10

34. Factor Rating Example TX CO Factor Wt Raw Wtd Raw Wtd
Plant
Labor
Q Life
TOTAL
TX is best

35. 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.

36. 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

37. 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

38. 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.

39. 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

40. 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