Facility Location Decision PDF

FACILITY LOCATION DECISION  Location Decision  Facility location is the process of determining geographic sites for a firm’s operations.  Location decision is one of the most important decisions a firm makes.  Decisions made relatively infrequently.  The objective of locatio...

FACILITY LOCATION DECISION  Location Decision  Facility location is the process of determining geographic sites for a firm’s operations.  Location decision is one of the most important decisions a firm makes.  Decisions made relatively infrequently.  The objective of location strategy is to maximize the benefit of location to the firm  Location Decisions: Strategically Important  Location decisions:  Are long-term decisions  Are closely tied to an organization’s strategies  Low-cost  Convenience to attract market share  Effect capacity and flexibility  Are difficult to reverse  Represent a long-term commitment of resources  Effect investment requirements,  Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc)  Effect revenues,  Effect operations  Impact competitive advantage  Important to supply chains  Location and Cost Location decisions based on low cost require careful consideration Once in place, location-related costs are fixed in place and difficult to reduce Determining optimal facility location is a good investment  Need for Location Decision  Location decisions may arise for a variety of reasons:  Addition of new facilities  As part of a marketing strategy to expand markets  Growth in demand that cannot be satisfied by expanding existing facilities  Depletion of basic inputs requires relocation  Shift in markets  Cost of doing business at a particular location makes relocation attractive  Location Options  Expanding existing facilities  Building a new facility (for the beginners)  Moving to another facility  Addition of one or more facilities to the existing network in order to expand capacity  Closing of one or more facilities in order to shrink capacity General Procedure for Making Location Decisions  Decide on the criteria to use for evaluating location alternatives  Identify important factors (such as location of markets or raw materials)  Develop location alternatives - identify the country or countries for location - identify the general region for location - identify a small number of community alternatives - identify site alternatives among the cummunity alternatives  Evaluate the alternatives and make a selection  Industrial Location Decisions Cost focus Revenue varies little between locations Location is a major cost factor Location effects shipping & production costs (costs vary greatly between locations)  Service Location Decisions Revenue focus Costs vary little between market areas Location is a major revenue factor Factors such as traffic volume, good transportation, customer, safety and convenience most important  Location effects amount of customer contact  Locaiton effects volume of business  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  Factors That Affect Location Decisions  Managers must weigh many factors when assessing the desirability of particular locations.  The factor must be sensitive to location.  The factor must have a high impact on the company’s ability to meet its goals. Factors That Affect Location Decisions  Labor Productivity /Proximity to labor  Wage rates are not the only cost  Lower productivity may increase total cost  Local wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley)  Costs  Tangible - easily measured costs such as utilities, labor, materials, taxes  Intangible- less easy to quantify and include education, public transportation, community, quality-of-life  Factors That Affect Location Decisions  Political Risk, Values, and Culture National, state, local governments attitudes toward private and intellectual property, zoning, pollution Worker attitudes towards turnover, unions, absenteeism Globally cultures have different attitudes towards punctuality, legal, and ethical issues Factors That Affect Location Decisions  Proximity to Markets  Very important to services  JIT systems or high transportation costs may make it important to manufacturers  Proximity to Suppliers  Perishable goods, high transportation costs, bulky products  Reduce transportation costs of perishable or bulky raw materials  Proximity to competitors  Called clustering  Often driven by resources such as natural, information, capital, talent  Found in both manufacturing and service industries  Factors Affecting Location Decisions Exchange Rates and Currency Risks Can have a significant impact on costs Rates change over time Site considerations Local zoning & taxes, access to utilities, etc. Other Considerations Options for future expansion, local competition, etc  Location Decision Sequence  Country Decision  Region/ Community Decision  Site Decision  Globalization - Should Firm Go Global?  Globalization is the process of locating facilities around the world  Potential advantages:  Inside track to foreign markets, avoid trade barriers, gain access to cheaper labor  Potential disadvantages:  Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation  Other issues:  Language barriers, different laws & regulations, different business cultures  Key Success Factors in Country Decision 1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor talent, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks Key Success Factors in Region/ Community Decision 1. Corporate desires 2. Attractiveness of region 3. Labor availability and costs 4. Costs and availability of utilities 5. Environmental regulations 6. Government incentives and fiscal policies 7. Proximity to raw materials and customers 8. Land/construction costs  Key Success Factors in Site Decision 1. Site size and cost 2. Air, rail, highway, and waterway systems 3. Zoning restrictions 4. Proximity of services/ supplies needed 5. Environmental impact issues  Methods of Evaluating Location Alternatives  The Factor-Rating Method  Locational Break-Even Analysis  Center-of-Gravity Method  Transportation Model  Factor-Rating Method Popular because a wide variety of factors can be included in the analysis Six steps in the method 1. Develop a list of relevant factors called key success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score  Methods of Evaluating Location Alternatives  The Factor-Rating Method  Locational Break-Even Analysis  Center-of-Gravity Method  Transportation Model  Factor-Rating Method Popular because a wide variety of factors can be included in the analysis Six steps in the method 1. Develop a list of relevant factors called key success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score  Example Key Scores Success (out of 100) Weighted Scores Factor Weight France Denmark France Denmark Labor availability and attitude.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0 People-to- car ratio.05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0 Per capita income.10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0 Tax structure.39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3 Education and health.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7 Totals 1.00 70.4 68.0  Locational Break-Even Analysis Method of cost-volume analysis used for industrial locations Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost for expected production volume  Example Three locations: Selling price = $120 Expected volume = 2,000 units Fixed Variable Total City Cost Cost Cost Akron $30,000 $75 $180,000 Bowling Green $60,000 $45 $150,000 Chicago $110,000 $25 $160,000 Total Cost = Fixed Cost + (Variable Cost x Volume)  Example – $180,000 – – $160,000 – $150,000 – – $130,000 – Annual cost – $110,000 – – – $80,000 – – $60,000 – – – Akron Chicago $30,000 – lowest Bowling Green lowest – cost lowest cost cost $10,000 – | | | | | | | – 0 500 1,000 1,500 2,000 2,500 3,000 Volume  Example Total Cost A= 30,000+(75xQ) Total Cost B= 60,000+(45xQ) Total Cost C= 110,000+(25xQ) Total Cost A= Total Cost B 30,000+(75xQ)= 60,000+(45xQ) Q= 1,000 60,000+(45xQ)= 110,000+(25xQ) Q= 2,500  Center of Gravity Method Finds location of distribution center that minimizes distribution costs Considers  Location of markets  Volume of goods shipped to those markets  Shipping cost (or distance)  Center-of-Gravity Method Place existing locations on a coordinate grid  Grid origin and scale is arbitrary  Maintain relative distances Calculate X and Y coordinates for ‘center of gravity’  Assumes cost is directly proportional to distance and volume shipped  Center-of-Gravity Method ∑dixQi i x - coordinate = ∑Qi i ∑diyQi i y - coordinate = ∑Qi i where dix = x-coordinate of location i diy = y-coordinate of location i Qi = Quantity of goods moved to or from location i  Center-of-Gravity Method North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) 90 – 60 – 30 – Atlanta (60, 40) – | | | | | | East-West 30 60 90 120 150 Arbitrary origin  Center-of-Gravity Method Number of Containers Store Location Shipped per Month Chicago (30, 120) 2,000 Pittsburgh (90, 110) 1,000 New York (130, 130) 1,000 Atlanta (60, 40) 2,000 (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) x-coordinate = 2000 + 1000 + 1000 + 2000 = 66.7 (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 1000 + 2000 = 93.3  Center-of-Gravity Method North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) 90 – + Center of gravity (66.7, 93.3) 60 – 30 – Atlanta (60, 40) –| | | | | | East-West 30 60 90 120 150 Arbitrary origin  Load Distance Model  A mathematical model used to evaluate locations based on proximity factors.  A load may be shipments from suppliers, shipments between plants or to customers, or it may be customers or employees traveling to or from the facility.  The firm seeks to minimize its load–distance (ld) score, generally by choosing a location, so that large loads go short distances.  To calculate ld score for any potential location, we use the actual distance between any two points using a GIS system, and simply multiply the loads flowing to and from the facility by the distances traveled.  Example  Management is investigating which location will be best to poistion its new plant relative to four suppliers (A, B, C, D) and three market areas (MA1, MA2 and MA3). The following information has been collected. Which is best?  Solution Market Area Alternatives Suppliers X Y A B C D MA1 360 180 X 200 100 250 500 MA2 420 450 Y 200 500 600 300 MA3 250 400 Wt 75 105 135 60 Distances MA1 dA = (xA - x1)2 + (yA - y1)2 = (200-360)2 + (200-180)2 = 161.2 dB = (xB - x1)2 + (yB - y1)2 = (100-360)2 + (500-180)2 = 412.3 dC = (xC - x1)2 + (yC - y1)2 = (250-360)2 + (600-180)2 = 434.2 dD = (xC - x1)2 + (yD - y1)2 = (500-360)2 + (300-180)2 = 184.4  Solution MA 2 dA = (xA – x2)2 + (yA – y2)2 = (200-420)2 + (200-450)2 = 333 dB = (xB – x2)2 + (yB – y2)2 = (100-420)2 + (500-450)2 = 323.9 dC = (xC – x2)2 + (yC – y2)2 = (250-420)2 + (600-450)2 = 226.7 dD = (xD – x2)2 + (yD – y2)2 = (500-420)2 + (300-450)2 = 170 MA 3 dA = (xA – x3)2 + (yA – y3)2 = (200-250)2 + (200-400)2 = 206.2 dB = (xB – x3)2 + (yB – y3)2 = (100-250)2 + (500-400)2 = 180.4 dC = (xC – x3)2 + (yC – y3)2 = (250-250)2 + (600-400)2 = 200 dD = (xD – x3)2 + (yD – y3)2 = (500-250)2 + (300-400)2 = 269.3  Solution LOAD-DISTANCE n LD =  ld i i i=1 MA1= (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(184.4) = 125,063 MA2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791 MA3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555* * MA3  References  https://www.google.com.tr/url?sa=t&rct=j&q=&esrc=s&source=we b&cd=13&cad=rja&uact=8&ved=0CCcQFjACOAo&url=http%3A%2 F%2Fwww.baskent.edu.tr%2F~sureten%2F(location).ppt&ei=W2R sVN7YDYztaNK5gbgO&usg=AFQjCNGrH6ng5ZcolGu8M4qVW3f- JW6ClQ  https://www.google.com.tr/url?sa=t&rct=j&q=&esrc=s&source=we b&cd=8&cad=rja&uact=8&ved=0CEoQFjAH&url=http%3A%2F%2 Fwww.clt.astate.edu%2Fasyamil%2FReidSandersOM3rd%2FPPT% 2Fch09.ppt&ei=zFpsVObJHpLfasPwgtgI&usg=AFQjCNGT1bkxlhH N46t5oLSIm3Ng5ZUVIA  Krajewski, L. J., Ritzman, L. P. and Malhotra M. K., Operations Management: Processes and Supply Chains, Student Value Edition (10th Edition), 2012, Prentice Hall: US.  Heizer, J. and Render, B., Operations Management, 10th ed., 2011, Prentice Hall.