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Facilities Location

Dr. R K Singh
Professor (Operations) 1
MDI, Gurgaon
Location Strategy

 One of the most important decisions a


firm makes
 Increasingly global in nature
 Significant impact on fixed and
variable costs
 Decisions made relatively infrequently
 The objective is to maximize the
benefit of location to the firm
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Competitiveness of a location
Three tier model

Country Competitiveness
Govt. budget & regulation Quality of judicial &
political institutions

Labour Sector Competitiveness Qlty of


Mkt. Flexibility Infrastructure Openness to
Quality Intl. trade &
Company Competitiveness of Tech. finance
Ability to design, produce, & mkt products
superior to competitors, Qlty. of business mgmt.

Extent to which a business sector offers potential for growth


and attractive return on investment

Development
of financial Mkt. Extent to which a national environment is
Conducive or detrimental to business
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Location Decision
Relevant Factors

Market related issues Cost related issues


Market for products and services Wage rates
Raw Material availability Transportation costs
Number and proximity of suppliers Taxes and other tariff issues
Availability of skilled labour
Quality of Infrastructure
Regulatory & Policy issues Other issues
Government & Economic stability Culture
Quality of legal and other institutions Climate
Trading blocks and trading agreements Quality of Life

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Location Planning Methods
 One facility – Multiple Candidates
 Location factor rating
 Centre of Gravity Method
 Load Distance Method
 Multiple Facility – Multiple Candidates
 Transportation Model

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Location factor rating
Steps
 Identify and list down all the relevant
factors for the location decision
 Establish the relative importance of each
factor in the final decision
 Rate the performance of each candidate
location using a rating mechanism
 Compute a total score for each location
based on its performance against each
factor and rank them in the decreasing
order of the score
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Example
 A manufacturer of garments is actively considering five alternative
locations for setting up its factory. The locations vary in terms of
the advantages that it provides to the firm. Hence the firm
requires a method of identifying the most appropriate location.
Based on a survey of its senior executives the firm has arrived at
six factors to be considered for final site selection. The ratings of
each factor on a scale of 1 to 100 provide this information.
Further, based on some detailed analysis of both the qualitative
and quantitative data available for each of the location, the rating
for the locations against each factor has also been arrived at (on a
scale of 0 to 100). Using this information obtain a ranking of the
alternative locations.

Factor Ratings Rating of each locations against the factors

Factors Rating
Availability of infrastructure 90 Factors Location 1 Location 2 Location 3 Location 4 Location 5
Size of the market 60 Availability of infrastructure 20 40 60 35 55
Size of the market 30 30 40 60 80
Industrial relations climate 50
Industrial relations climate 80 30 50 60 50
Tax benefits and concessions 30 Tax benefits and concessions 80 20 10 20 20
Availability of cheap labour 30 Availability of cheap labour 70 70 45 50 50
Nearness to port 65 Nearness to port 20 40 90 50 60
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Solution to Example.
Relative
Factors Rating weights
Availability of infrastructure 90 0.28
Overall rating for location 3 = 60*0.28 +
Size of the market 60 0.18
Industrial relations climate 50 0.15
40*0.18 + 50*0.15 + 10*0.09 +
Tax benefits and concessions 30 0.09 45*0.09 + 90*0.20 = 54.77
Availability of cheap labour 30 0.09
Nearness to port 65 0.20

Sum of all factor ratings 325 1.00

Relative
Factors weights Location 1 Location 2 Location 3 Location 4 Location 5
Availability of infrastructure 0.28 20 40 60 35 55
Size of the market 0.18 30 30 40 60 80
Industrial relations climate 0.15 80 30 50 60 50
Tax benefits and concessions 0.09 80 20 10 20 20
Availability of cheap labour 0.09 70 70 45 50 50
Nearness to port 0.20 20 40 90 50 60

Overall score for the locations 41.23 37.54 54.77 46.46 56.15
Ranking of the locations 4 5 2 3 1
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Centre of Gravity Method
 All the demand points (or the supply points, if raw material is
supplied from several locations) are represented in a Cartesian
coordinate system
 Each demand (or the supply point) will also have weight indicating
the quantum of shipment
 Therefore it is possible to identify the centre of gravity of the
various demand (or supply) points
 Notations:
 The number of demand (or supply) points in the grip map: n
 Co-ordinates of location i in the grid map: (xi,yi)
 Quantum of shipment between existing demand (or supply) point i
and proposed facility: Wi
 Co-ordinates of the center of gravity in the grip map: (XC,YC)
n n

 ( x ) *W
i 1
i i  ( y ) *W i i
i 1
XC  n
YC  n

W
i 1
i W i
9
i 1
Example.
 A manufacturer of certain industrial component is interested in
locating a new facility in a target market and would like to know
the most appropriate place in the target market to locate the
proposed facility. The manufacturer feels that there are no location
constraints in the target market (i.e. any point in the target
market is good enough).
 There are four supply points A, B, C and D in the locality that will
provide key inputs to the new facility.
 The annual supply from these four points to the proposed facility is
200, 450, 175 and 150 tonnes respectively.
 The situation is graphically shown in the two-dimensional plot in
the figure. While the coordinates in the parentheses show the
distance from the origin of the target map of each of the supply
point, the number that follows is the annual shipment (in tonnes)
from these points to the proposed facility.
 Identify the most appropriate point in the grid map to locate the
new facility.

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Solution to Example.
Grid Map

600
Distance in Kilometres

A (125,550), 200
500
B (350,400), 450
400

300
D (700,300), 150
200
C (450,125), 175
100

100 200 300 400 500 600 700


Distance in Kilometres 11
Load Distance Method
 Enables a location planner to evaluate two or more potential
candidates for locating a proposed facility vis-à-vis the demand (or
supply) points
 Provides an objective measure of total load-distance for each candidate
 Notations
 Number of demand (or supply) points in the grid map: n
 Index used for demand (or supply) points: i
 Co-ordinates of demand (or supply) point i in the grid map: (xi,yi)
 Quantum of shipment between demand (or supply) point i and
proposed facility: Wi
 Number of candidates for the proposed facility: m
 Index used for the candidates for the proposed facility: j
 Co-ordinates of candidate j in the grid map: (Xj,Yj)
 Distance measure for Cartesian coordinates between demand (or
supply) point i and a candidate j for the proposed facility: Dij
Dij  ( xi  X j ) 2  ( yi  Y j ) 2
 The load – distance for candidate j for the proposed facility: LDj
n
LD j  D
i 1
ij *Wi
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Example
 Based on an initial survey of possible sites for the proposed facility, the
manufacturer identified four candidates.
 The figure has the location coordinates of the four candidates
(numbered 1 to 4).
 What is the best location for the proposed new facility?

Existing Supply Points Candidates for proposed facility


xi yi Wi Xj Yj
A 125 550 200 1 300 500
B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200

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Solution to Example.
DA1  ( x A  X 1 ) 2  ( y A  Y1 ) 2  (125  300 ) 2  (550  500 ) 2  (175 2  (50 ) 2  182 .00

Dij values
1 2 3 4
A 182.00 90.14 425.00 445.11
B 111.80 180.28 158.11 206.16
C 403.89 450.69 230.49 90.14
D 447.21 538.52 206.16 316.23

LDj values
1 2 3 4
224474.41 258801.57 227410.05 245000.8

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Using
Break-Even Analysis
Break-even analysis can help a
manager compare location alternatives on the
basis of quantitative factors that can be
expressed in terms of total cost.
1. Determine the variable costs and fixed
costs for each site.
2. Plot the total cost lines—the sum of
variable and fixed costs—for all the sites
on a single graph
3. Identify the approximate ranges for which
each location has the lowest cost.
4. Solve algebraically for the break-even
points over the relevant ranges. 15
Break-Even Analysis

 An operations manager has narrowed the search for a


new facility location to four communities.
 The annual fixed costs (land, property taxes, insurance,
equipment, and buildings) and the variable costs (labor,
materials, transportation, and variable overhead) are
shown below.
 Total costs are for 20,000 units.
Fixed Costs Variable Costs Total Costs
Community per Year per Unit (Fixed + Variable)

A $150,000 $62 $1,390,000


B $300,000 $38 $1,060,000
C $500,000 $24 $ 980,000
D $600,000 $30 $1,200,000

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Step 1.Plot the total cost curves for all
Fixed Costs Total Costs
the communities on a single graph.
Community per Year (Fixed + Variable)
Identify on the graph the approximate
range over which each community A $150,000 $1,390,000
provides the lowest cost. B $300,000 $1,060,000
Annual cost (thousands of dollars) C $500,000 $ 980,000
D $600,000 $1,200,000

1600 A
(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800
Break-even point
600

400 Break-even
point
200
A best B best C best
0
2 4 6 8 10 12 14 16 18 20 22
6.25 14.3
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© 2007 Pearson Education Q (thousands of units)
Break-Even Solution

 Step 2. Using break-even analysis, calculate the


break-even quantities over the relevant ranges. If
the expected demand is 15,000 units per year, what
is the best location?

(A) (B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units

(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units
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Multi-facility location problem
Transportation Model
 Locating distribution centers for nation-wide
distribution of products is one typical example
belonging to this category
 Decisions variables in a multiple location – multiple
candidate problem
 Identifying k out of n candidates for locating facilities
 Which of the demand points will be served by each of
these locations and to what extent
 the problem is one of managing network flows of
satisfying a set demand points using a combination of
supply points
 The transportation model is ideally suited for solving
this combinatorial optimisation problem

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Multiple facilities location problem
Transportation table (Example)
Market 1 Market 2 Market 3 Market 4 Market 5 Supply
100 70 50 30 40
Warehouse A 2900 Problem
30 95 40 125 50
Warehouse B 2300

75 20 65 40 30
Warehouse C 3700

20 40 95 85 80
Warehouse D 1100

Demand 2000 1500 1200 2800 2500 10000

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Location Strategies

Service/Retail/Professional Location Goods-Producing Location


Revenue Focus Cost Focus
Volume/revenue Tangible costs
Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw
Physical quality material; taxes, and so on
Parking/access; security/lighting; Intangible and future costs
appearance/image Attitude toward union
Quality of life
Cost determinants Education expenditures by state
Rent Quality of state and local
Management caliber government
Operations policies (hours, wage rates)

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Location Strategies

Service/Retail/Professional Location Goods-Producing Location


Techniques Techniques
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Locational break-even analysis
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems

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Location Strategies

Service/Retail/Professional Location Goods-Producing Location


Assumptions Assumptions
Location is a major determinant of Location is a major determinant of
revenue cost
High customer-contact issues are Most major costs can be identified
critical explicitly for each site
Costs are relatively constant for a
given area; therefore, the revenue Low customer contact allows focus
function is critical on the identifiable costs

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How Hotel Chains Select Sites
 Location is a strategically important
decision in the hospitality industry
 A five star Hotel started with 35
independent variables and worked to
refine a regression model to predict
profitability
 The final model had only four variables
r2 = .51
 Price of the inn 51% of the
profitability is
 Median income levels predicted by
 State population per inn just these four
variables! 24
 Location of nearby colleges
The Call Center Industry

 Requires neither face-to-face


contact nor movement of materials
 Has very broad location options
 Traditional variables are no longer
relevant
 Cost and availability of labor may
drive location decisions
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Geographic Information
Systems (GIS)
 Important tool to help in location analysis
 Enables more complex demographic
analysis
 Available data bases include
 Detailed census data
 Detailed maps
 Utilities
 Geographic features
 Locations of major services
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Other issues in location planning
 Recent trends in the international markets point to a
shift towards fewer facilities that could serve markets
worldwide
 Example HP Desk Jet Printer, Dell PC
 These developments point to two areas which could
affect the location planning problem very significantly
 availability of good transportation infrastructure
 use of Internet and IT infrastructure
 Location planning in the overall context of just-in-time
manufacturing philosophy (suppliers located in the
vicinity (20 – 40 Km radius) of the manufacturer)
 Service quality depends on responsiveness of service
delivery system. Locating service outlets, close to the
demand point is an important requirement in a service
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system
Concluding Points
 Location issues have become more prominent in
recent years on account of globalisation of markets
 Multi-national Corporations have more opportunities
to identify candidate locations for their manufacturing
facilities.
 Factor cost advantages and expanding market in
developing countries have made these nations
attractive for locating new facilities
 Simple qualitative methods are useful for quickly
screening an initial set of candidates and narrowing
down the choice to one or two

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Facilities Location

 Load-Distance method and centre of gravity method


helps evaluate the suitability of candidate solutions from
a perspective of distance and quantum of items to be
transported between a location and the demand points
 Transportation method helps in optimally identifying a
set of k locations out of n candidate solutions
 Availability of good transport infrastructure and recent
developments in the Internet technology suggests that it
is possible to have fewer locations and still provide
better customer service
 Location decisions in service systems must address the
requirement of speed of responsiveness. Therefore
locating service outlets as close to the demand points
may be highly desirable in service systems
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