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Facility Location

2014.07.06
Objectives:
1. Learn how to select location for a facility
2. Learn the different techniques on
Location Analysis
3. Describe the factors affecting location
decisions


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Federal Express
Stresses hub concept
Advantages:
enables service to more locations with fewer aircraft
enables matching of aircraft flights with package loads
reduces mishandling and delay in transit because
there is total control of packages from pickup to
delivery


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Objective of Location Strategy
Maximize the benefit of location to the firm


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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.


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Service Location Decisions
Revenue focus
Costs vary little between market areas
Location is a major
revenue factor
Affects amount of
customer contact
Affects volume of
business


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In General - Location Decisions
Long-term decisions
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


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Location Decision Sequence
Country
1995
Corel
Corp.
Region/Community
1995 Corel Corp.
Site
1995
Corel
Corp.


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Factors That Affect Location Decisions


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Factors Affecting Country
Government rules, attitudes,
political risk, incentives
Culture & economy
Market location
Labor availability, attitudes,
productivity, and cost
Availability of supplies,
communications, energy
Exchange rates and currency
risks
1995 Corel Corp.


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Region Location Decisions
Corporate desires
Attractiveness of region (culture,
taxes, climate, etc.)
Labor, availability, costs, attitudes
towards unions
Costs and availability of utilities
Environmental regulations of state
and town
Government incentives
Proximity to raw materials &
customers
Land/construction costs
1995 Corel Corp.


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Factors Affecting Site
Site size and cost
Air, rail, highway, and
waterway systems
Zoning restrictions
Nearness of
services/supplies
needed
Environmental
impact issues
1995 Corel Corp.


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Location Decision Example
BMW decided to
build its first major
manufacturing plant
outside Germany in
Spartanburg, South
Carolina.
1995 Corel Corp.


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Country Decision Factors
Market location
U.S. is worlds largest luxury
car market
Growing (baby boomers)
Labor
Lower manufacturing labor
costs
$17/hr. (U.S.) vs. $27
(Germany)
Higher labor productivity
11 holidays (U.S.) vs.
31 (Germany)
Other
Lower shipping cost
($2,500/car less)
New plant & equipment
would increase
productivity (lower
cost/car $2,000-3000)


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Region/Community Decision
Factors
Labor
Lower wages in South Carolina (SC)
Government incentives
$135 million in state & local tax breaks
Free-trade zone from airport to plant
No duties on imported components or on exported cars


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CSF in Location Analysis - Continued
Critical Success Factors
Country
1
Country
2
Country
3
Country
4
Total Rating Points
50 43 35 48
Social and Cultural Aspects

Similarity in language
Work ethic
5
4
1
2
5
3
4
1
Economic factors

Tax rates
Inflation
Availability of raw

materials

Interest rates
3
3
2
3
3
5
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4
2
5
3
2
5
5
5
5


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Global Competitiveness of
Countries
Finland...
United States ...
Netherlands...
Germany...
Canada .

Japan ....

Brazil .. ..

Russia ..

Ecuador .....
Bangladesh ...
Honduras ..
Bolivia.....
1
2
3
4
11

15

35

58

72
73
74
75

2001 Ranking


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Ranking Corruption
Rank Score
1 Finland 9.9
2 Denmark 9.5
3 New Zealand 9.4
4 Singapore 9.2
16 Israel & U.S.A
(Tied)
7.6
21 Japan 7.1
57 China 3.5
79 Russia 2.3
90 Nigeria 1.0
91 Bangladesh 0.4
A score of 10
represents
corruption free


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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
Services
Doctors, lawyers, accountants, barbers
Banks, auto repair, motels


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Location Evaluation Methods
Factor-rating method
Locational break-even
analysis
Center of gravity method
Transportation model
1995 Corel Corp.


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1

Factor-Rating Method
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
Factor Rating Method
A location method that instills objectivity into the process of
identifying hard to evaluate costs.

Steps:
1. Develop a list of relevant factors called critical success
factors
2. Assign a weight to each factor to reflect its relative
importance in the companys objectives.
3. Develop a scale for each factor (1 to 10 , 1 to 100points)
4. Have management score each location for each factor,
using scale in step 3
5. Multiply the score by the weights for each factor and total
the score for each location.
6. Make a recommendation based on the maximum point
score, considering the results of quantitative approaches
as well.
Example
A U.S. chain of 10 family-oriented theme parks, has decided to
expand overseas by opening its first theme park in Europe.
The rating sheet in table 18.4 lists critical success factors that
management has decided are important; their weights and
their rating for the two possible sites Dijon, France, and
Copenhagen, Denmark.
Solution
Given the option of 100 points assigned each factor, the
French Location is preferable. For instance, we can change the
scores for the labor availability and attitude by 10 points can
change the decision
When decision is sensitive to minor changes, further analysis
of either the weights of the points assigned may be
appropriate.
Note: The numbers used in factor weighting can be subjective
and the models result are not exact even though this is a
quantitative approach.


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Factors Affecting Location
Selection
Labor costs (including wages, unionization,
productivity)
Labor availability (including attitudes, age,
distribution, and skills)
Proximity to raw materials and suppliers
Proximity to markets
Government fiscal policies (including incentives,
taxes, unemployment compensation)


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Factors Affecting Location
Selection - Continued
Environmental regulations
Utilities (including gas, electric, water, and
their costs)
Site costs (including land, expansion, parking,
drainage)
Transportation availability (including rail, air,
water, and interstate roads)


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Factors Affecting Location
Selection - Continued
Quality-of-life issues in the community (including
all levels of education, cost of living, health care,
sports, cultural activities, transportation, housing,
entertainment, religious facilities)
Foreign exchange Including rates and stability
Quality of government (including stability, honesty,
attitudes toward new business - whether overseas
or local)


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Steps in Factor Rating Method
List relevant factors
Assign importance weight to each factor (such
as 0 1)
Develop scale for each factor (such as 1 100)
Score each location using factor scale
Multiply scores by weights for each factor &
total
Select location with maximum total score


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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
Locational Break-Even Analysis


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1

Locational Break-Even Analysis
Example
Youre an analyst for AC Delco. Youre 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.
Solution:
Total Cost = Fixed Cost + Variable Cost(Quantity)

For Akron,
TC = $30,000 + $75,000(2,000units) = $180,000

For Bowling Green,
TC = $60,000 + $45,000(2,000units) = $150,000

For Chicago,
TC = $110,000 + $25,000(2,000units) = $160,000


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Locational Break-Even
Crossover Chart
0
50000
100000
150000
200000
0 500 1000 1500 2000 2500 3000
Volume
A
n
n
u
a
l

C
o
s
t

Bowling Green
lowest cost
Chicago
lowest
cost
Akron
lowest cost


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Center of Gravity Method
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 distance (or cost)
Shipping cost/unit/mile is constant


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Center of Gravity Method Steps
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


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Center of Gravity Method
Equations
d
ix
= x coordinate of
location i
W
i
= Volume of goods
moved to or from location i
d
iy
= y coordinate of
location i
X Coordinate
Y Coordinate

=
i
i
i
i ix
x
W
W d
C

=
i
i
i
i iy
y
W
W d
C
Example
Quains Discount Department Store has four large target type
outlets. The firms store location s are in Chicago, Pittsburgh,
New York and Atlanta; they are currently being supplied out of
an old and inadequate warehouse in Pittsburgh, the site of the
chains first store. Below are the data on demand rates at each
outlet.






Solution:
X-coordinate of COG
= (30)(2000)+(90)(1000)+(130)(1000)+(60)(2000) = 400,000
2000+1000+1000+2000 6,000
= 66.7

Y-coordinate of the COG
= (120)(2000)+(110)(1000)+(130)(1000)+(140)(2000) = 560,000
2000+1000+1000+2000 6,000
= 93.3

Answer: (66.7,93.3)


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Coordinate Locations of Four
Quains Department Stores and
the Center of Gravity
Load Distance Technique
A variation of the center-of-gravity method for determining the
coordinates of a facility location.
Method of evaluating different locations based on the load
being transported and the distance.
n
LD= l
i
d
i

i=1


Where, LD= Load Distance value
l
i
= Load expressed as a weight, no. of trips or units being
shipped from the proposed site to location i
d
i
= the distance between the proposed site and location I
d
i
= ((x
i
-x)
2
+(y
i
-y)
2
)
Where, (x,y) = coordinates of the proposed site
(x
i
,y
i
) = coordinates of the existing facility
Example
Burger Doodle wants to evaluate three different sites it has
identified for its new distribution center relative to the location
of its four suppliers. The coordinates of the three sites are as
follows:
Suppliers:
Site 1: x1=360, y1=180 A = (200,200), W=75
Site 2: x2=420, y2=450 B = (100,500), W=105
Site 3: x3=250, y3=400 C = (250,600), W=135
D = (500,300), W=60

Solution:
Site 1: dA = ((x
A
-x
1
)
2
+(y
A
-y
1
)
2
)
= ((200-360)
2
+(200-180)
2
)
=161.2
Site 1: d
B
= ((x
B
-x
1
)
2
+(y
B
-y
1
)
2
)
= ((100-360)
2
+(500-180)
2
)
= 412.3
d
C
= ((x
C
-x
1
)
2
+(y
C
-y
1
)
2
)
= ((250-360)
2
+(600-180)
2
)
= 434.2
d
A
= ((x
D
-x
1
)
2
+(y
D
-y
1
)
2
)
= ((500-360)
2
+(300-180)
2
)
= 184.4
Site 2: d
A
=333, d
B
=323.9, d
C
=226.7, d
D
=170
Site 3: D
A
=206.2, d
B
=180.3, d
C
=200, d
D
=269.3



LD (site 1) = 75(161.2) + (105)(412.3) + (135)(434.2) + (60)(184.4)
= 125,063

LD (site 2) = 75(333) + (105)(323.9) + (135)(226.7) + (60)(170)
= 99,789

LD (site 2) = 75(206.2) + (105)(180.3) + (135)(200) + (60)(269.3))
= 77,555

Since Site 3 has the lowest load-distance value, it would be
assumed that this location would also minimize transportation
costs.


2
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R
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N
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0
7
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8

8
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4
4

Components of Volume and
Revenue for a Service Firm
1. Purchasing power of customer drawing area
2. Service and image compatibility with demographics of
the customer drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firms and competitors locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management


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R
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5

Location Strategies Service
vs. Industrial
Service/Retail/Professional
Revenue Focus
Volume/revenue
Drawing area, purchasing power
Competition;
advertising/pricing
Physical quality
Parking/access; security/
lighting; appearance/image
Cost determinants
Rent
Management caliber
Operations policies (hours,
wage rates)

Goods-Producing Location
Cost Focus
Tangible costs
Transportation cost of raw
materials
Shipment cost of finished
goods
Energy and utility cost; labor;
raw material; taxes, etc.
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by
state
Quality of state and local
government


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b
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a
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I
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U
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R
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N
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8
-
4
6

Location Strategies
Service vs. Industrial
Service/Retail/Professional
Techniques
Regression models to determine
importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing
area
Purchasing power analysis of
drawing area
Center of gravity method
Geographic information systems
Goods Producing Location
Techniques
Linear Programming
(Transportation method)
Factor-rating method
Locational breakeven
analysis
Crossover charts


2
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b
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p
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R
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N
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J
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0
7
4
5
8

8
-
4
7

Location Strategies
Service vs. Industrial
Service/Retail/Professional
Assumptions
Location is a major determinate
of revenue
High customer-contact issues
are critical
Costs are relatively constant for
a given area; therefore, the
revenue function is critical
Goods-Producing Location
Assumptions
Location is a major
determinate of cost
Most major costs can be
identified explicitly for each
site
Low customer contact
allows focus on identifiable
costs
Intangible costs can be
evaluated


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8

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


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R
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,

N
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J
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0
7
4
5
8

8
-
4
9

Geographic Information
Systems
New tool to help in location analysis
Enables combination of many parameters


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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.
1995 Corel Corp.