Facility Location for Midterm Exam PDF

FACILITY LOCATION  What is Facility / Plant Location? Facility / Plant Location is the process of determining a geographical site for a firm’s operations achieving maximum operating economy and effectiveness. Need for Location Decision ▪ Location decision repr...

FACILITY LOCATION  What is Facility / Plant Location? Facility / Plant Location is the process of determining a geographical site for a firm’s operations achieving maximum operating economy and effectiveness. Need for Location Decision ▪ Location decision represents an integral part of the strategic planning process of every organization. ▪ It may appear to be the One-Time problem for organizations. ▪ Reasons for making Location decisions are: When business is newly started. When business firms want to expand. Firms need to relocate due to rising costs. Shift in markets. Social or economic reasons.  Objectives of Location Decision Maximize the benefits. Make balance between cost and level of customer service. Choose the best location out of acceptable locations. To have a competitive advantage. Importance of Location Decision Involve long-term commitment. A wrong choice might result in excessive transportation cost, shortage of labour, loss of competitive advantage etc.. For service, a poor location could result in lack of customers and / or high operating costs. General Procedure for Making Location Decision Decide on Criteria to Use. Identify Crucial Factors. Develop Location Alternatives Evaluate each alternatives.  Factors Affecting Location Decisions Deciding on International location. Selection of community. Political Stability. Availability of labour. Export and Import Quotas. Civic Amenities for Employees. Exchange Rates. Existence of Complementary, Ancillary and Competing Cultural and Economic Considerations. Industries. Availability of Natural Resources. Finance and Research Facilities. Cost of Labour. Availability of Water. Regional location decision. Availability of Fire Fighting Facilities. Local Taxes and Restrictions. Availability / Nearness of raw materials. Nearness to the market. Selection of Exact site. Area of Land Available, Soil, Topography and cost of Proximity to Suppliers. land. Availability of Power. Disposal of Waste. Transport Facilities. Community Attitude. Suitability of Climate. Government Policy. Competition Between States. Rural Site Urban Site ▪ Land is available at cheaper rate and additional vacant land can Good transportation and communication facilities. be purchased for expansion. Availability of skilled labour. ▪ Taxes are negligible. Availability of civic amenities for employees. ▪ Labour is cheaper. Availability of banking facilities. ▪ Land cost is low, single storey buildings can be constructed. Availability of complementary and ancillary industries for ▪ Less labour problems because of absence of strong labour outsourcing. unions. A large local market may be present. ▪ Lesser Municipal restrictions regarding emission of smoke, Availability of Water, Power etc. pollution standards, wastage etc. Availability of technical and educational institutions for ▪ Scarcity of supply of skilled labour because of lack of civic training and educating the employees. amenities to employees. ▪ Lack of good transportation and communication facilities.  Types of Facility Locations Manufacturing Facility Location: Focuses on minimizing production, transportation, and inventory costs. Often optimized based on proximity to raw materials or distribution centers. Service Facility Location: Prioritizes customer accessibility and convenience, especially in retail, banking, and healthcare sectors. Distribution Facility Location: Focuses on efficient delivery of products and optimizing transportation networks. Impact of Facility Location on Supply Chain 1. Transportation Costs: An optimized location can reduce transportation costs and delivery time. 2. Inventory Management: The right location ensures faster replenishment and reduces stockouts. 3. Customer Satisfaction: Proximity to markets leads to quicker response to customer demands. 4. Risk Management: Diversifying locations can mitigate risks associated with disruptions like natural disasters.  Example of Facility Location in the Indian Context Manufacturing Sector Example: Automotive Industry Location: Pune, Maharashtra Factors: Proximity to suppliers of auto components Access to skilled labour Well-developed transport infrastructure and industrial zones Government incentives for industrial investment Service Sector Example: Retail Sector Location: Mumbai Factors: High footfall and proximity to customers Established transportation network Dense population and high purchasing power  Location Decision Variable Regional – Climate and Competition Labour - Supply, Community Skills, Costs, Attitude and Housing, Unions Image Non-economic Raw material Impacts, Supply Costs, Ecological, Utilities, Energy, Environmental, water, Services Site social Capital, Equity Marketing and and debt, Distribution, Sources, Banking Storage, Facilities Transportation Zoning, Land costs, Construction Costs, Economic Waste Disposal, Impacts, Wages, Storage, Expansion taxes, profits  Methods for Evaluating Location Alternatives Selecting the best facility location requires using a combination of qualitative and quantitative methods. The appropriate method depends on the business context, available data, and decision-making criteria. Methods like Factor Rating and AHP are better for multi-criteria decisions, while quantitative techniques like Load-Distance and Center of Gravity are ideal for minimizing costs and optimizing operations. Advanced models such as Linear Programming or GIS analysis help companies handle complex scenarios efficiently.  Factor Rating Method List the most relevant factors in the location Decision. Rate each factor say from 1 for very low and 5 for very high) according to its relative importance, the higher the rating the more important is the factor. Rate each location (say 1 for very low and 10 for very high) according to its merit on each factor. Compute the product of ratings by multiplying the factor rating by the location rating for each factor. Compute the sum of the product of ratings for each location. Decision: Select the location alternative which has the maximum sum of the product rating as the choice. Example:  Centre of Gravity Method This method is used to find the optimal location for a distribution centre that minimizes total transportation costs. This method considers factors like markets, cost of goods and cost of transportation. This method aims at minimizing the total shipping cost i.e., cost incurred for shipping from the distribution centre to the different shipping points. If the shipping quantities for all destination points are equal, the location at which the transportation cost will be minimum can be identified by taking the A.M. of the X and Y coordinates of the destination. But if the shipping quantities are unequal, the location can be found using a weighted average approach (the quantities to be shipped are taken as weights). The centre of gravity of a geographical location can be identified by calculating the X and Y Coordinate values of the location that would minimize transportation costs. The coordinates of the centre of gravity can be identified by Xc = ∑(XiVi) / ∑Vi Yc = ∑(YiVi) / ∑Vi Where, Xc = X coordinate of the centre of gravity Yc = y coordinate of the centre of gravity Vi = Volume of items transported to and from location I Xi = X coordinate of location i Yi = Y coordinate of location i  Centre of Gravity Method Example No. 1: Retail Outlet X Y Volume A 4 10 80 B 3.5 15 100 C 4 6 120 D 10 2 130 E 16 6 100 F 8 5 150 G 14 13 90 The above table show the X and Y coordinates of seven retail locations of a retail chain. Information regarding the quantity to be shipped to each of the seven locations is also given in the table. Using the Centre of gravity method, identify the coordinates of the optimal location for the warehouse.  Load Distance Model The Load-Distance (LD) Method is a quantitative tool used to identify an optimal facility location based on the distance between the proposed location and demand points (customers or suppliers) and the load (or weight) of goods transported to or from those points. This method aims to minimize transportation costs by finding a location that reduces the weighted distance between the facility and its demand or supply points. Steps in Load-Distance Method 1. Identify Demand Points and Loads: 1. List all the potential customer locations, suppliers, or distribution points. 2. Identify the load (e.g., volume, weight, or frequency) associated with each demand point. 2. Determine the Distances: 1. Measure the distance between the proposed facility location and each demand point. 2. Use Euclidean Distance (straight-line distance) or Rectilinear Distance (city-block distance), depending on the geography. 3. Calculate the Load-Distance (LD) Score: 1. Multiply the load of each demand point by its distance from the facility. 2. Sum these products to get the total Load-Distance score. Where: Li​ = Load (demand or weight) at point i Di​ = Distance from facility to point i 4. Evaluate Potential Locations: 1. Calculate the total LD score for each candidate location. 2. The location with the lowest LD score is considered the best choice, as it minimizes transportation costs.  Key Considerations Advantages 1. Simplicity: Easy to understand and apply. Distance Measurement: Euclidean 2. Quantitative Analysis: Provides a clear numerical basis for distance works for open spaces, while decision-making. rectilinear distance is better for city 3. Flexible: Can be adapted to different types of loads (volume, grids. frequency, weight). Accuracy of Load Estimates: Ensure Limitations that load or demand data is accurate to 1. Ignores Costs: The method focuses only on distance, get meaningful results. without considering cost variations. Multiple Facilities: If managing 2. Assumes Static Data: Changes in demand or transportation multiple locations, additional infrastructure over time are not accounted for. optimization models may be needed, 3. Limited Scope: Works best for single-facility decisions; for such as the p-median model. more complex networks, advanced models may be required.  Qualitative Factor Analysis Method Develop a list of relevant factors. Assign a weight to each factor to indicate its relative importance (Weights may up to 100). Assign a common scale to each factor (say 0 to 100) and designate any minimum point to be scored by any location. Score each potential location according to the designated scale and multiply the scores by the weights to arrive at the weighted scores. Total the points for each location, and choose the location with the maximum points. Example No. 1: XYZ company is evaluating four locations for a new plant and has weighted the relevant scores as given below. Scores have been assigned with higher values indicative of preferred conditions. Using these scores, develop a qualitative factor comparison for the four locations.