Facility Location 1 Location Options Ø Expanding

Facility Location 1

Location Options Ø Expanding existing facilities Ø Building a new facility (for the beginners) Ø Moving to another facility Ø Addition of one or more facilities to the existing network in order to expand capacity Ø Closing of one or more facilities in order to shrink capacity 2

The Need for Location Decisions Location decisions may arise for a variety of reasons: Ø Addition of new facilities Ø As part of a marketing strategy to expand markets Ø Growth in demand that cannot be satisfied by expanding existing facilities Ø Depletion of basic inputs requires relocation Ø Shift in markets Ø Cost of doing business at a particular location makes relocation attractive 3

Location Decisions: Strategically Important Ø Location decisions: Ø Are long-term decisions Ø Are closely tied to an organization’s strategies Ø Low-cost Ø Convenience to attract market share Ø Effect capacity and flexibility Ø Are difficult to reverse Ø Represent a long-term commitment of resources Ø Effect investment requirements, Ø Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc) Ø Effect revenues, Ø Effect operations Ø Impact competitive advantage 4 Ø Important to supply chains

Location Decisions: Objectives Ø Location decisions are based on: Ø Cost or profit potential and customer service Ø Finding a number of acceptable locations from which to choose (no single location may be better than others) Ø Position in the supply chain Ø End: accessibility, consumer demographics, traffic patterns, and local customs are important Ø Middle: locate near suppliers or markets Ø Beginning: locate near the source of raw materials Ø Supply chain management issues such as supply chain configuration 5 Ø Centralized vs. decentralized distribution

Industrial Location Decisions Ø Cost focus Ø Revenue varies little between locations Ø Location is a major cost factor Ø Location effects shipping & production costs (costs vary greatly between locations 6 © 1995 Corel Corp.

Service Location Decisions Ø Revenue focus Ø Costs vary little between market areas Ø Location is a major revenue factor Ø Factors such as Traffic volume, good transportation, customer safety and convenience most important Ø Location effects amount of customer contact Ø Locaiton effects volume of business 7

Organizations That Need To Be Close to Markets Ø Government agencies Ø Police & fire departments Ø Post Office Ø Retail Sales and Service Ø Fast food restaurants, supermarkets, gas stations Ø Drug stores, shopping malls Ø Bakeries Ø Other Services Ø Doctors, lawyers, accountants, barbers Ø Banks, auto repair, motels 8

General Procedure for Making Location Decisions Ø Decide on the criteria to use for evaluating location alternatives Ø Identify important factors (such as location of markets or raw materials) Ø 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 9 Ø Evaluate the alternatives and make a selection

Location Decision Sequence Region/Community Country Site. . 10

Factors That Affect Location Decisions Global Factors Regional Factors Community Considerations 11 Site-related Factors

Global Location: Facilitating Factors Key factors that have contributed to the attractiveness of globalization: Ø Trade Agreements such as Ø North American Free Trade Agreement (NAFTA) Ø General Agreement on Tarriffs and Trade (GATT) Ø U. S. -China Trade Relations Act Ø EU and WTO efforts to facilitate trade Ø Technology Ø Advances in communication and information technology 12

Global Location: Benefits ØA wide range of benefits have accrued to organizations that have globalized operations: Ø Markets Ø Cost savings Ø Legal and regulatory Ø Financial Ø Other 13

Global Location: Disadvantages ØThere a number of disadvantages that may arise when locating globally: Ø Transportation costs Ø Security costs Ø Unskilled labor Ø Import restrictions Ø Criticism for locating out-of-country 14

Global Location: Risks ØOrganizations locating globally should be aware of potential risk factors related to: Ø Political instability and unrest Ø Terrorism Ø Economic instability Ø Legal regulation Ø Ethical considerations Ø Cultural differences 15

Managing Global Operations ØManagerial implications for global operations: Ø Language and cultural differences Ø Risk of miscommunication Ø Development of trust Ø Different management styles Ø Corruption and bribery Ø Level of technology and resistance to technological change Ø Domestic personnel may resist locating, even temporarily 16

Location: Identifying a Country 17

Location: Identifying a Region Primary regional factors: ØLocating close to the raw materials Ø Necessity Ø Perishability Ø Transportation ØLocating Ø As costs close to the markets part of a profit-oriented company’s competitive strategy Ø So not-for-profits can meet the needs of their service users 18 Ø Distribution costs and perishability

Location: Identifying a Region ØLabor factors ØCost of labor ØAvailability of suitably skilled workers ØWage rates in the area ØLabor productivity ØAttitudes toward work ØWhether unions pose a serious potential problem ØOther factors ØClimate and taxes may play an important role in 19 location decisions

More on Regional Location Factors ü Labor (availability, education, cost and unions) ü Proximity of customers ü Number of customers ü Construction/leasing costs ü Land costs ü Modes and quality of transportation ü Transportation costs 20 ü Incentive packages ü Governmental, legal regulations, policies and barriers ü Environmental regulations ü Raw material availability ü Commercial travel ü Climate ü Infrastructure (cost and availability of utilities) ü Quality of life

More on Regional Location Factors ü ü ü ü Community government Local business regulations Government services Business climate Community services Taxes Environmental impact issues 21 ü ü ü Availability of sites Financial Services Community inducements Proximity of suppliers Education system Free trade zones

Geographic Information System (GIS) ØGIS Ø A computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps Ø Aids decision makers in Ø Targeting market segments Ø Identifying locations relative to their market potential Ø Planning distribution networks Ø Portraying relevant information on a map makes it easier for decision makers to understand 22

Location: Identifying a Community ØMany communities actively attempt to attract new businesses they perceive to be a good fit for the community ØBusinesses also actively seek attractive communities based on such factors such as: ØQuality of life ØServices ØAttitudes ØTaxes ØEnvironmental regulations ØUtilities ØDevelopment support 23

Location: Identifying a Site ØPrimary site location considerations are ØLand ØTransportation ØEnvironmental ØZoning ØLegal ØOther restrictions 24

Site Location Factors ü Customer base ü Construction/ leasing cost ü Site costs (land, expansion, parking, etc. ü Quality of life issues in the community (education, health care, sports, cultural activities etc. ) ü Site size ü Transportation ü Traffic 25 ü ü ü ü Zoning restrictions Safety/security Competition Area business climate Income level Host community Competitive advantage Utilities including gas, electric, water and their costs

Plant Strategies Ø Single Plant Strategy Ø Multiple Plant Strategy - Product Plant Strategy - Market Area Plant Strategy - Process Plant Strategy 26

Multiple Plant Strategies Ø Product plant strategy Ø Entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market Ø Market area plant strategy Ø Plants are designated to serve a particular geographic segment of the market Ø Plants produce most, if not all, of a company’s products 27

Multiple Plant Strategies Process plant strategy Ø Different plants focus on different aspects of a process Ø automobile manufacturers – engine plant, body stamping plant, etc. Ø Coordination across the system becomes a significant issue Ø General-purpose plant strategy Ø Plants are flexible and capable of handling a range of products Ø 28

Service and Retail Locations Ø Nearness to raw materials is not usually a consideration Ø Customer access is a ØPrime consideration for some: restaurants, hotels, etc. ØNot an important consideration for others: service call centers, etc. Ø Tend to be profit or revenue driven, and so are ØConcerned with demographics, competition, traffic/volume patterns, and convenience 29

Evaluating Location Alternatives Common techniques for location evaluation: Ø Locational cost-volumeprofit analysis Ø Factor rating method Ø Load-distance method Ø Center of gravity method Ø Transportation model (a specialized linear programming method) 30

Locational Cost-Profit-Volume Analysis 31

Locational Cost-Profit-Volume Analysis Locational Cost-Profit-Volume (Break-even)Analysis Ø A technique for evaluating location choices in economic terms Ø Steps: 1. Determine the fixed and variable costs for each alternative 2. Plot the total-cost lines for all alternatives on the same graph 3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of 32 output

Locational Cost-Profit-Volume Analysis Assumptions 1. Fixed costs are constant for the range of probable output 2. Variable costs are linear for the range of output 3. The required level of output can be closely estimated 4. Only one product is involved 33

Locational Cost-Profit-Volume Analysis For a cost analysis, compute the total cost for each alternative location: 34

Example: Cost-Profit-Volume Analysis Fixed and variable costs for four potential plant locations are shown below: Location Fixed Cost per Year Variable Cost per Unit A $250, 000 $11 B $100, 000 $30 C $150, 000 $20 D $200, 000 $35 35

Example: Cost-Profit-Volume Analysis Comparison of total costs at a production volume of 10, 000 36

Example: Cost-Profit-Volume Analysis Plot of total costs $(000) 800 700 600 500 400 300 200 100 0 D B C A 0 2 4 6 8 10 Annual Output (000) 37 12 14 16

Example: Solution $(000) 800 700 600 500 400 300 200 100 0 D B C A A Superior C Superior B Superior 0 2 4 6 8 10 12 Annual Output (000) 38 14 16

Example: Cost-Profit-Volume Analysis ¨ Range approximations ¨ B Superior (up to 4, 999 units) ¨ C Superior (>5, 000 to 11, 111 units) ¨ A superior (11, 112 units and up) 39

Factor Rating Method 40

Factor Rating Method A general approach to evaluating locations that includes quantitative and qualitative inputs Ø Most widely used location technique Ø Useful for service and industrial locations Ø Rates locations using both Ø Ø tangible (quantitative) factors such as short-run and long-run costs and Ø intangible (qualitative) factors such as education quality, labor skills. 41

Factor Rating Procedure: Ø Determine which factors are relevant Ø Assign a weight to each factor that indicates its relative importance compared with all other factors. Ø Weights typically sum to 1. 00 Ø Decide on a common scale for all factors (such as 1100), and set a minimum acceptable score if necessary Ø Score each location alternative along each factor Ø Multiply the factor weight by the score for each factor, and sum the results for each location alternative Ø Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable 42 score

Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Factor Weight Alt 1 Alt 2 Proximity to existing source . 10 100 60 Traffic volume . 05 80 80 Rental costs . 40 70 90 Size . 10 86 92 Layout . 20 40 70 Operating Cost . 15 80 90 43 1. 00

Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Factor Weighted Scores Weight Alt 1 Alt 2 Proximity to existing source . 10 100 60 . 10(100) = 10. 0 . 10(60) = 6. 0 Traffic volume . 05 80 80 . 05(80) = 4. 0 Rental costs . 40 70 90 . 40(70) = 28. 0 . 40(90) = 36. 0 Size . 10 86 92 . 10(86) = 8. 6 . 10(92) = 9. 2 Layout . 20 40 70 . 20(40) = 8. 0 . 20(70) = 14. 0 Operating Cost . 15 80 90 44 . 15(80) = 12. 0 . 15(90) = 13. 5 70. 6 82. 7 1. 00 Alt 1 Alt 2

Centre of Gravity Method 45

Center of Gravity Method Ø A method for locating a distribution center that minimizes distribution costs Ø Finds location of a single distribution center serving several destinations Ø Used primarily for services Ø Treats distribution costs as a linear function of the distance and the quantity shipped Ø The quantity to be shipped to each destination is assumed to be fixed Ø The method necessitates to identify coordinates and weights shipped for each location and includes the use of a map that shows the locations of destinations Ø The map must be accurate and drawn to scale 46 Ø A coordinate system is overlaid on the map to determine relative locations

Center of Gravity Method Considers • Location of existing destinations eg. Markets, retailers etc. • Volume to be shipped • Shipping distances (or costs) • Shipping cost/unit/mile is constant 47

Center of Gravity Method If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates 48

Center of Gravity Method Suppose you are attempting to find the center of gravity for the problem. Destination x y D 1 2 2 D 2 3 5 D 3 5 4 D 4 8 5 18 16 Here, the center of gravity is (4. 5, 4). This is slightly west of D 3 from the Figure 49

Center of Gravity Method When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates 50

Grid-Map Coordinates n y xi. Qi 2 (x 2, y 2), Q 2 y 1 n y 3 x 1 i=1 Cx = n Vi i=1 1 (x 1, y 1), Q 1 x 2 yi. Qi i=1 Cy = n Vi i=1 where, 3 (x 3, y 3), Q 3 Cx, Cy =coordinates of the new facility at center of gravity xi, yi =coordinates of existing facility i Vi =annual volume shipped 51 from or to the ith x 3 x location

Center of Gravity Method: Example 1 Suppose the shipments for the problem depicted in Figure are not all equal. Determine the center of gravity based on the following information. Destination x y Weekly Quantity D 1 2 2 800 D 2 3 5 900 D 3 5 4 200 D 4 8 5 100 18 16 52 1, 000

Center of Gravity Method: Example 1 The coordinates for the center of gravity are (3. 05, 3. 7). You may round the x-coordinate down to 3. 0, so the coordinates for the center of gravity are (3. 0, 3. 7). This south of destination D 2 (3, 5). 53

Center of Gravity Method: Example 1 54

Center-of-Gravity Technique: Example 2 y 700 600 Miles 500 C (135) B (105) 400 300 200 x y Vt A 200 75 D (60) A (75) 100 0 100 200 300 400 500 600 700 x 55 Miles B 100 500 105 C 250 600 135 D 500 300 60

Center-of-Gravity Technique: Example 2 y n 700 i xi. W Cx = C (200)(75) + (100)(105) + (250)(135) + (500)(60) = (135) 75 + 105 + 135 + 60 B i=1 600 n Wi 500 (105) Miles i=1 400 D n 300 A yi. Wi i = 1 200 Cy = n Wi 100 = (60) (200)(75) + (500)(105) + (600)(135) + (300)(60) (75) = 444 75 + 105 + 135 + 60 i=1 0 = 238 100 200 300 400 500 600 700 x 56 Miles

Center-of-Gravity Technique: Example 2 y 700 600 Miles 500 C (135) B (105) 400 300 200 A x y Wt A 200 75 Center of gravity (238, 444) D (60) (75) 100 0 B 100 500 105 100 200 300 400 500 600 700 x 57 Miles C 250 600 135 D 500 300 60

Worldwide Distribution of Volkswagens and Parts 58

Telemarketing and Internet Industries Ø Require neither face-to-face contact with customers (or employees) nor movement of material Ø Web based retail organizations are effectively location dependent Ø Presents a whole new perspective on the location problem 59

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. 60