1 Lamar University Facility Location Adapted from: Facilities Planning, Tompkins, White, Bozer, Frazelle, Tanchoco, Trevino, Wiley, New York, 1996

2 Lamar University Importance of Location Up to 25% of the product’s selling cost Once a company commits to a location, many costs are fixed and difficult to change Energy Labor Location depends on the type of business Manufacturing – minimizing cost Retail and professional services – maximizing revenue Warehouse – cost and speed of delivery

3 Lamar University 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

4 Lamar University Location Options Expand the existing facility instead of moving Maintain current sites while adding another facility Closing the existing facility and moving to another

5 Lamar University Factors The Affect Location Decisions Country Decisions Government rules, attitudes, stability, incentives Cultural and economic issues Location of markets Labor availability, attitudes, productivity, costs Availability of supplies, communications, energy Exchange rates

6 Lamar University Factors The Affect Location Decisions Region/Community Decisions Corporate desires Attractiveness of region (culture, taxes, climate, etc…) Labor availability, costs, attitudes towards unions Cost and availability of utilities Environmental regulations of state and town Government incentives Proximity to raw materials and customers Land/construction costs

7 Lamar University Factors The Affect Location Decisions Site Decisions Site size and cost Air, rail, waterway systems Zoning restrictions Nearness of services/supplies needed Environmental impact issues

8 Lamar University Location Decision Example - BMW In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

9 Lamar University Location Decision Example – BMW Country Decision Factors Market location U.S. is world’s 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, )

10 Lamar University Location Decision Example – BMW Region/Community Decision Factors Labor Lower wages in South Carolina (SC) –About $17,000/yr (SC) vs. $27,051/yr (US) Based on 1993 metropolitan averages for all workers 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

11 Lamar University 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

12 Lamar University Ranking of the Business Environment in 20 Countries, Netherlands 2 Britain 3 Canada 4 Singapore 5 U.S. 6 Denmark 7 Germany 8 France 9 Switzerland 10 Sweden 11 Finland 12 Belgium 13 New Zealand 14 Hong Kong 15 Austria 16 Australia 17 Norway 18 Ireland 19 Italy 20 Chile

13 Lamar University Labor Productivity Low wage rates often heavily influence location choices What about productivity? Example: Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day: Labor cost per day/Productivity (units per day) = Cost per unit

14 Lamar University Labor Productivity - Example: Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day: Labor cost per day/Productivity (units per day) = Cost per unit Case 1: Texas Plant $70 per day/60 units per day = $70/60 = $1.17 per unit Case 2: Mexican Plant $25 per day/20 units per day = $25/20 = $1.25 per unit Lesson: Employees with poor training, poor education, or poor work habits may not be a good buy even at low wages.

15 Lamar University Costs: Tangible Vs. Intangible Tangible costs – those that are readily identifiable and precisely measured –Utilities –Labor –Material –Taxes –Depreciation –Other costs that accounting can easily identify Intangible costs – not easily quantifiable –Quality of education –Public transportation facilities –Community attitudes toward the industry and the company –Quality and attitude of prospective employees –Climate

16 Lamar University Proximity To Markets Service organizations (drug stores, restaurants, post offices) find proximity to market is the primary location factor Manufacturing – useful to be close to customers when transporting finished goods is expensive or difficult

17 Lamar University Proximity To Suppliers Firms locate near their raw materials and suppliers because: Perishability Transportation costs Bulk

18 Lamar University Proximity To Competitors Clustering – the location of competing companies near each other, often because of a critical mass of information, talent, venture capital, or natural resources

19 Lamar University Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method Transportation model

20 Lamar University Factor-Rating Method Most widely used location technique Useful for service & industrial locations Rates locations using factors –Intangible (qualitative) factors Example: Education quality, labor skills –Tangible (quantitative) factors Example: Short-run & long-run costs

21 Lamar University 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 State and local government fiscal policies (including incentives, taxes, unemployment compensation) Utilities (including gas, electric, water, and their costs)

22 Lamar University Factors Affecting Location Selection - continued Site costs (including land, expansion, parking, drainage) Transportation availability (including rail, air, water, and interstate roads) Quality-of-life issues (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)

23 Lamar University Steps in Factor Rating Method State relevant factors in terms of “max” or “min” Assign weights to each factor (should add to 100%) Assign rating to each factor (1-5) (1=poor, 5=excellent) Multiply scores by weights for each factor & total Calculate percent of total Compare top 2 alternatives (using percent as a basis of comparison)

24 Lamar University Steps in Factor Rating Method Alternative AAlternative B FactorWeightRatingScoreRatingScore Min. Operating Cost Max. Flexibility Max. Space utilization Min. Payback period Total Percent240/330 = /330 = 1.00

25 Lamar University Locational Break-Even Analysis Method of cost-volume analysis used for industrial locations Steps –Determine fixed & variable costs for each location –Plot total cost for each location –Select location with lowest total cost for expected production volume Must be above break-even

26 Lamar University Locational Break-Even Analysis Example You’re an analyst for AC Delco. You’re 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?

27 Lamar University Locational Break-Even Analysis Example Akron: Total cost = $30,000 + $75(2000) = $180,000 Bowling Green: Total Cost = $60,000 + $45(2000) = $150,000 Chicago: Total Cost = $110,000 + $25(2000) = $160,000 With an expected volume of 2000 units per year, Bowling Green provides the lowest cost location. The expected profit is: Total Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per year

28 Lamar University Locational Break-Even Analysis Example The crossover point for Akron and Bowling Green: 30, (x) = 60, (x) 30(x) = 30,000 X = 1,000 And the crossover point or Bowling Green and Chicago: 60, (x) = 110, (x) 20(x) = 50,000 X = 2,500 Thus, for a volume o less than 1,000, Akron would be preferred, and for a volume greater than 2,500, Chicago would yield the greatest profit.

29 Lamar University Locational Break-Even Analysis Example

30 Lamar University 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

31 Lamar University 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

32 Lamar University Center of Gravity Method Steps

33 Lamar University Center of Gravity Method - Example Consider the case of Ryan’s discount Department stores, a chain o four large K-Mart type outlets. The firm’s store locations 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 chain’s first store. Store LocationNumber of containers shipped pre month Chicago2000 Pittsburgh1000 New York1000 Atlanta2000

34 Lamar University Center of Gravity Method - Example Chicago (30,120) New York (130,130) Pittsburgh (90,110) Atlanta (60,40) Center of gravity (66.7, 93.3)

35 Lamar University Center of Gravity Method - Example X-coordinate of the center of gravity: = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) = 400,000/6000 =66.7 Y-coordinate of the center of gravity: = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) = 560,000/6000 =93.3

36 Lamar University Transportation Model Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Type of linear programming model –Objective: Minimize total production & shipping costs –Constraints Production capacity at source (factory) Demand requirement at destination

37 Lamar University General Transportation Model

38 Lamar University 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 firm’s and competitor’s locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management

39 Lamar University 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)

40 Lamar University Location Strategies – Service vs. Industrial Industrial Revenue 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

41 Lamar University Location Strategies – Service vs. Industrial Service/Retail/Professional Techniques Correlation analysis to determine importance of factors for a particular type of operation Traffic counts Demographic analysis of drawing area Purchasing power analysis of drawing area Assumptions Location is a major determinate of revenue Issues manifesting from high customer contact dominate Costs are relatively constant for a given area; therefore, revenue function is critical

42 Lamar University Location Strategies – Service vs. Industrial Industrial Techniques Linear Programming (Transportation method) Weighted approach to intangibles Breakeven analysis Crossover charts Assumptions Location is a major determinate of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on costs Intangible costs can be objectively evaluated

43 Lamar University Major Methods of Solving Location Problems Weighted methods which: –Assign weights and points to various factors –Determine tangible costs –Investigate intangible costs Center of Gravity Method –Find best distribution center location Location breakeven methods –Special case of breakeven analysis Transportation method –A specialized linear programming method

44 Lamar University 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

45 Lamar University 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