1. Facility Location Part 1
by Anita Lee-Post
This is the first part of a 3-part series on facility location. It is designed to give you an overview of what you are about to learn in this topic.
© Anita Lee-Post

2. Learning objectives
Define facility location decision and its strategic impacts.
Describe the procedure for making facility location decisions.
Identify the criteria for selecting appropriate locations for a plant or service facility.
After you finish the first part of this series, you should be able to first define what is facility location and why is it a strategic decision to an organization. Secondly, you should be able to describe the process involved in making this decision, and finally you should be able to identify the key factors affecting location decisions.
© Anita Lee-Post

3. Learning objectives continued
Apply the center-of-gravity method to evaluate location alternatives based on load-distance.
Apply the transportation method to evaluate the cost impact of adding new sites to the network of existing facilities.
Apply the break-even analysis to evaluate different location alternatives based on costs.
The second part of the series will discuss two technical methods in evaluating location alternatives. You will learn a distanced based approach called center-of-gravity method and a cost-based technique called transportation method. The last part of the series will demonstrate the workings of another cost-based method called break-even analysis to evaluate location alternatives.
© Anita Lee-Post

4. Facility location Facility Location Decision is:
determining the best geographical location for a company’s facility (which can be an entire organization, a division, or any form of establishment for manufacturing and/or service activities).
Have you ever wondered why most fast-food restaurants locate near one another? Where is Silicon Valley? Why are automakers centered in Michigan? These organizations know about the importance of a good location to business success. Here we are going to take a closer look at first what is a facility and then what is facility location. A facility can be defined as any establishment for manufacturing and/or service activities. So it can be an entire organization or just a division. In making the facility location decision, we will learn how to find the best geographical location for that company’s facility.
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5. Strategic impacts In terms of long-term impacts, location decision:
Requires long-term commitments in buildings and facilities.
Requires sizable financial investment in setting up a new facility.
Why do we consider facility location a strategic decision? We can answer this question from two perspectives. In terms of long term impacts, location decision requires long term commitments in buildings and facilities. It also requires a sizable financial investment in setting up new facilities.
© Anita Lee-Post

6. Strategic impacts continued
In terms of competitive imperatives, location decision allows for:
Time-based competition if located near customers and/or suppliers.
Lowering of shipping costs if located near customers and/or suppliers.
Lowering wage costs if located near the appropriate labor pool.
Adequate supply of skilled labor if located near the appropriate labor pool.
In terms of competitive advantages, a good location enables a company to excel in time-based competition, lowering its shipping and labor costs, as well as providing an adequate supply of skilled labor.
© Anita Lee-Post

7. Procedure for making facility location decisions
Identify dominant location criteria:
What are the distinctive location factors that have a critical impact on the company’s strategic goal?
Develop location alternatives:
What are the acceptable locations that satisfy the selected factors?
Evaluate location alternatives:
Which is the best location among the acceptable alternatives?
We can follow a three-step procedure when making facility location decisions. The first step is to identify a set of distinctive location factors that provides the company with the most competitive advantages. The second step is to come up with a number of locations that satisfy these factors. The last step is to select the best location among these alternatives.
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8. Location factors Free Trade Zones Proximity to Customers
Market Opportunity
Total Costs
Infrastructure
Quality of Labor
Suppliers
Free Trade Zones
Political Risk
Government Incentives
Environmental Regulation
Community Attitude
Cultural Issues
We will discuss in further detail the first step in making facility location decisions, which is to identify location factors that are of strategic importance to an organization. We listed in this slide 12 factors that affect location decisions.
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9. Dominating location factors
Proximity to customers at First Security
An organization needs to consider its dominating factors which are factors that have a critical impact on its strategic goals in deciding on a location. For example, in this advertisement, First Security Bank calls attention to its convenient locations to attract new customers.
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10. Dominant locating factors continued
Market opportunity at Wal-Mart
opening of first Wal-Mart in Rogers, Arkansas
Wal-mart’s decision to locate in small towns initially to capture the under-served markets was often cited as the key to its subsequent success. The location decisions made by First Security and Wal-mart clearly demonstrate the importance of knowing your location factors. These factors are useful in guiding you through the next step in making facility location decisions, which is to develop location alternatives. After this you will be ready to learn how to select the best location among these alternatives.
© Anita Lee-Post

11. Location alternatives evaluation methods
Distance-based: center-of-gravity method
Given the locations of existing facilities (distance) and the volume of goods to be shipped between them (load)
Find the location of a single facility (e.g., a warehouse) that gives the best load-distance score (i.e., minimizes the total amount of loads moved weighted by the distance traveled)
Assuming inbound & outbound transportation costs are equal & irrespective of load size
We will learn three quantitative methods to help evaluate location alternatives. The first one is based on distance and is called center-of-gravity method. It is used to find the best location of a facility in terms of load-distance score. A load represents the volume of goods moved in or out of a facility. The idea is to determine the location of a facility that will minimize the distance that large loads need to travel. You have data on first the location of existing facilities, and second, the volume of goods to be shipped between these facilities.
© Anita Lee-Post

12. Location alternatives evaluation methods
Cost-based: transportation method
Given the supply availability of each factory (or source), the demand of each warehouse (or destination), and the costs per unit of goods to be shipped between them
Find a minimum-cost shipping schedule that satisfies demand requirements without exceeding supply
Assuming no cost on excess supply
The second quantitative method to help evaluate location alternatives is based on cost and is called transportation method. This method evaluates the cost impact of adding a potential site to a network of existing facilities. The idea is to determine a shipping schedule that will minimize the cost of shipping a specific amount of goods among these facilities. You have data on first, the amount of goods to be shipped in and out of the facilities and second, the unit shipping costs between each facility.
© Anita Lee-Post

13. Location alternatives evaluation methods
Cost-based: break-even analysis
Given the fixed and variable costs at each location alternatives
Identify ranges of ouptut for which each location has the lowest total cost
Select the location that gives the lowest cost for the design capacity of the new facility
The third quantitative method to help evaluate location alternatives is also based on cost and is called break-even analysis. You have learnt earlier how to use break-even analysis for new product screening, process selection, and make-or-buy decision. Here you will learn how to use break-even analysis to evaluate different location alternatives. You have data on first, the fixed and variable costs at each facilities and second, the design capacity of the new facility.
© Anita Lee-Post