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POM
SESSION IV
FACILITY LOCATION

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Facility Location

Various factors need to be considered

before selecting a facility location
Location Analysis Techniques are
used for selecting the location

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Facility Location
Objectives:
1.Describe the concept of Facility
Location
2.Describe the factors affecting location
analysis
3.Describe the location analysis
techniques

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Concept of Facility Location

There’s a structured process of

identifying the best geographical
location for a service/production facility
Location plays an important role
Long-term consequences need to be
considered

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Concept of Facility Location

Some problems that may arise due to

inappropriate location:
a. high production cost
b. marketing difficulties
c. dissatisfaction among employees

* Costs of shifting is PROHIBITIVE

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Factors Affecting Location Analysis

All factors can be categorised into :
Regional  proximity to markets, raw
material sources, transportation, govt.
policy
Community  availability of labour,
behaviour of worker, social environment
Site  availability of land, cost of land

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Factors Affecting Location Analysis

1. Location of market

if distance from market is less

Timely delivery
Low cost of distribution (e.g. if product
is fragile OR transportation cost is high)
Easier to recover payment!

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Factors Affecting Location Analysis

2. Location of raw material sources

if distance from market is less

i.Smooth flow of raw material  smooth
production
E.g. perishable raw material  distance
MUST be less
ii.Cost of sourcing is less/cost of
replacement of defective material
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Factors Affecting Location Analysis

2. Location of raw material sources
Two categories of raw material
Gross materials : they lose weight
with time until they are converted into
output
E.g. Iron ore, lime stone, sugarcane, coal
Steel mills are close to iron ore &
coal deposits
Sugar industry is close to …….
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Factors Affecting Location Analysis

2. Location of raw material sources

Two categories of raw material

Pure material : they gain weight
during conversion process
e.g. cotton textiles, silks, bakeries
*Factory should be close to raw material
to keep the transportation cost low

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Factors Affecting Location Analysis

3. Infrastructure

major factor
Power intensive industries MUST be
located close to power generation site
Increase in power cost or decrease in
power supply can seriously compromise
the survival of a company

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Factors Affecting Location Analysis

3. Infrastructure

Availability of Financial Institutions,

Strength of Financial Institutions
Environmental regulations,
And finally, Competitors’ size, strength
and attitude in that region.

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Factors Affecting Location Analysis

4. Transportation

Industries should be established at

locations which provide cheap and apt
transportation service

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Factors Affecting Location Analysis

5. Availability
Good location is where of labour
labour is easily
available
Importing labour from far is costly, also
creates administrative problems.
E.g. Facility location in a backward area
 cut off from city  labour
productivity??
Living costs/wage patterns should be
considered
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Factors Affecting Location Analysis

6. Govt. policies
related to licence, labour law & building
structure
Taxes/duties affect costs
Some states + central govt. offer
incentives  e.g. excise duty exemption,
subsidised electricity, soft loans

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Factors Affecting Location Analysis

7. Climate factors

Textile mills require high humidity

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8. Community attitude

People of a community may not be in

favour of a particular industry

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Factors Affecting Location Analysis

9. Safety measures
E.g. nuclear power plants  radiation

leakage

E.g. airport  accidents

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10. Social infrastructure
Accommodation – easily available,
cheap
Communication – connectivity,
transportation
Education – schools, college, institute
Medical facilities

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Factors Affecting Location Analysis

11. Supporting industry

Proximity to supporting units/ancillary

affects cost & delivery time

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12. Topography of land

Soil should be capable to sustain the

load of plant foundation
E.g. Sandy soil X heavy manufacturing

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13. Availability of land

Site should have enough space for

current requirement + parking facility
Size of plant should be according to
future expansion plans
Normally, actual plant size is 5 times
the conceptual plant size

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Factors related to the market

Proximity to
the consumer
markets, size
of the market,
potential
needs of the
market.

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Location Analysis Techniques

Identify a region for the plant

identify the best AVAILABLE plant site in

accordance with tangible & intangible
production costs

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 Location Analysis Techniques
Cost oriented location analysis
techniques can be used for deciding upon
plant from available set of sites:
1. Dimensional Analysis
2. Factor Rating Method
3. Point Rating Method
4. Cost-Profit-Volume analysis
5. Center of Gravity Method, and
6. Transportation and Simulation Models
 1. Dimensional Analysis

Relative merits of different costs

(transportation, cost) are considered
*it’s easy to select a plant site if all cost
are tangible & quantifiable
Plant with L1 is selected
In case of intangible costs, evaluation
in absolute terms is difficult. E.g. skill
level of labour
 1. Dimensional Analysis
However, we can measure relative
merit of labour skill among the 2 sites
To rank one plant over another, ratio of
EACH cost is taken  each cost ratio is
given an appropriate weightage by using
an index to which it is raised
Weighted ratios are multiplied to
obtain the final figure on relative merit of
2 plant sites
 1. Dimensional Analysis
Site A – costs are C1A, C2A, C3A, …….CNA

Site B – costs are C1B, C2B C3B,……….CNB

Weights: W1, W2,W3,………WN

Value of relative merit of plant sites A & B is
given by:

(C1A/C1B) W1 X (C2A/C2B) W2 X (C3A/C3B) W3 …..X (CNA/CNB) WN

IF VALUE OF RELATIVE MERIT IS > 1,

SITE B IS SUPERIOR
 2. Factor Rating Method

Frequently used
Enables managers to consider
various locations in the evaluation
process
 2. Factor Rating Method

Steps

list all favourable factors

rate each factor from high value to low

(1 to 10 respectively) + rate the location
for each factor

multiply Factor Rating x Location Rating

= Product Ratings
 2. Factor Rating Method
Factor Facto Locati Product
r on of ratings
rating rating
Inter-company integration 4 8 32
Availability & cost of labour 3 2 6

Availability & cost of 3 6 18

services
Availability & cost of 5 2 10
materials
Availability of transport 1 3 3
Availability of car parking 5 4 20
Expansion potential 4 1 4
Zoning & legal regulations 3 10 30
Cost of land 2 7 14
 3. Point Rating Method
Simple and practical approach for
calculating the factors

Inspect the importance of each factor

each location factor is assigned a relative weight out of a

maximum of 100 points

no. of points are assigned to each factor

location having highest score is rated as most suitable

location
 3. Point Rating Method
Location factor Unfavourable Average Favourable Total points
(0-33) (34-66) (67-100)
  A B A B A B A B
Inter-company 20         80 20 80
integration
Availability & cost of 30     50     30 50
labour
Availability & cost of     50     70 50 70
services
Availability & cost of     60 40     60 40
materials
Availability of   20 40       40 20
transport
Availability of car 30         80 30 80
parking
Expansion potential   30 40       40 30
Zoning & legal   20 50       50 20
regulations
Cost of land   30     70   70 30
New development     40 50     40 50
areas
Living conditions 20     50     20 50
4. Cost-Profit-Volume Analysis

When the fixed and variable costs

for each site differ, Cost-profit-
volume analysis can be used to
identify the location with the
lowest cost.
 Example

Foster Paper Ltd. is considering three alternative

sites for its new production facility.

The Annual Production Cost associated with each

alternative is a linear function of the production
volume. That is:
 Example

Total Production Cost = (Fixed Cost) +

(variable unit cost) x (annual production
volume)

• Assume that the expected annual

production volume is 250,000 units.
 Example

A. For Site A: Prod. Cost = 10.000.000 + 250 x

B. For Site B: Prod. Cost = 25.000.000 + 150 x
C. For Site C: Prod. Cost = 60.000.000 + 50 x

 Based on these information, Which site has the

lowest cost?
 Example

At a production volume of 250.000 units,

site B has the lowest cost, because

A.For Site A: Prod. Cost = 10.000.000 + 250

(250.000) = 72.500.000

B.For Site B: Prod. Cost = 25.000.000 + 150

(250.000) = 62.500.000

C.For Site C: Prod. Cost = 60.000.000 + 50

(250.000) = 72.500.000
 Example

100 400
 Example
 The graph shows that annual production cost changes with
different production volumes

 -If the expected annual production volume is below 150k

units, then choose site A

 -If the expected annual production volume is between 150k

and 350k units, then choose site B

 -If the expected annual production volume is over 350k

units, then choose site C
 5. Center of Gravity Method

 This method is used to find a location that

Minimizes the Sum of Transportation Cost
in between new facility and old facilities
 Assumption : Transportation cost is a
linear function of the Number of Units
Shipped AND the Traveling Distance
 5. Center of Gravity Method

 The location of the firm’s existing facilities

are converted into x and y coordinates
 The following center of gravity equations
are then used for calculating the x and y
coordinates for the new facility:
 5. Center of Gravity Method

n n

Σ xiVi Σ y iV i
Cx =------------------
i =1
Cy =------------------
i =1
n n

Σi=1
Vi Σi=1
Vi
 5. Center of Gravity Method

Here, Cx : x coordinate for new location

Cy : y coordinate for new location

i: index for existing locations

n: total number of existing locations

xi : x coordinate of existing ith location , and

yi: y coordinate of existing ith location

 Example

Aldrich Manufacturing Company plans to

build a Warehouse to serve its Distribution
Centers in Columbus (Ohio), Frankfort
(Kentucky), Nashville (Tennessee), and
Richmond (Virginia)
 Example

y
Harrisburg

Columbus
New facility Richmond

Frankfort

Nashville

x
 Example

The number of units to be shipped monthly from

Harrisburg to the Distribution Centers are shown in
the following table:

(Weighted Coordinates are calculated as: (Annual

Shipping Volume) (x or y coordinate))
Example
 Example

Using the equations of center of gravity:

Cx = 2,040,000 / 10,000 = 204 (x

coordinate for new facility)

Cy = 1,185,000 / 10,000 = 118.5 (y

coordinate for new facility)
The nearest city to (204, 118.5) is
Charleston at West Virginia
 Example

This method only considers the distances

traveled
It DOES NOT consider the other factors
such as the availability of roads on the
selected location
Therefore, applying solely this method
may not be applicable in every cases.
 5. Transportation Model

 It’s a form of linear

programming

 It can be used to compare

the total transportation
cost associated with each
alternative site
 5. Transportation Model

Finally we determine how many units

should be shipped from each plant to
each warehouse to minimize total
transportation cost
 Example

Straub Ltd. has 3 plants running at full capacity in Des

Moines, Racine, and Gary

These plants supply 4 Distribution centers in St.

Paul, Milwaukee, Chicago, and Detroit
 Example

 Straub plans to build a new plant. It has

narrowed down the choice of sites to two
possibilities: Kalamazoo and Duluth.

 We will now determine which site results in the

lowest transportation cost by using the unit
transportation costs, warehouse demands, and
plant capacities shown in the following:
 Example

Plant Annual Warehous Demand

production e (in
capacity units)
(supply)
Des 500 St. Paul 225
Moines
Racine 300 Milwaukee 175
Gary 200 Chicago 325
Kalamazoo 225 Detroit 350

Duluth 225
 Example

Shipment cost, $
per unit
Distribution warehouse
Plant St. Paul Milwauk Chicago Detroit
ee
Des Moines 15 20 20 30

Racine 20 3 5 20
Gary 25 8 3 13
Kalamazoo 28 11 6 6

Duluth 7 12 17 11
 Example

 We will approach this problem in the following

manner:

 First, Kalamazoo plant is selected and total

transportation cost is calculated

 Then, Duluth is selected & total transportation

cost is calculated

 Finally, the transportation costs are compared

 Example

Now, the first step is to find the Optimal

number of units to ship between each plant-
warehouse combination

This also gives the optimal transportation

cost for the problem
 Example

 We can use any of the computerized LP tools for

finding the optimum values for this problem.

 Some of these include WINQSB, Lindo, OM Expert, and

Excel.

 We use WINQSB to solve this transportation model. The

result is as follows:
 Example

 The total transportation cost comes to

$10,225 if the new plant is built in
Kalamazoo
 Example

The optimal number of units to ship between each plant

and Duluth Warehouse

 The total transportation cost comes to

$13,825 if the new plant is built in Duluth
 Simulation Models

Firms often consider many variables and factors

when they choose a facility location
 Simulation Models

These variables are often difficult to

estimate and they also change in time

In these kinds of Dynamic Situations,

Simulation may be the best modeling
technique
 Simulation Models

Simulation models allow managers to examine a

range of Scenarios AND are well suited to open-
ended problems

However, determination of parameters in a

simulation is also a challenging task!

Also, developing a simulation model may take

considerable time and effort
 Break-Even Analysis

Q. What is Break-even?

A. A company breaks-even when its

revenues equal its costs

 Break-Even Analysis

COSTS
1.Fixed (rent, salary, insurance, etc.)
2.Variable (inventory carrying costs,
shipping & handling, labour cost, etc.)
*Break-even analysis specifies the level of
output that must be reached in order to
recover all the cost of operations through
revenues
 Break-even analysis
LOCATION A :

TOTAL
REVENUE
Region of profit

TOTAL COST

VC

Rs.

FC

O VBE