1. Facility Location Strategies Eng. R. L. Nkumbwa ™ www.nkumbwa.weebly.com

2. 2 © 2010 Nkumbwa™. 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. 3 © 2010 Nkumbwa™. 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. 4 © 2010 Nkumbwa™. 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. 5 © 2010 Nkumbwa™. Factors The Affect Location Decisions Country Decisions Government rules, attitudes, stability, incentives Government rules, attitudes, stability, incentives Cultural and economic issues Cultural and economic issues Location of markets Location of markets Labor availability, attitudes, productivity, costs Labor availability, attitudes, productivity, costs Availability of supplies, communications, energy Availability of supplies, communications, energy Exchange rates Exchange rates

6. 6 © 2010 Nkumbwa™. Factors The Affect Location Decisions Region/Community Decisions Corporate desires Corporate desires Attractiveness of region (culture, taxes, climate, etc…) Attractiveness of region (culture, taxes, climate, etc…) Labor availability, costs, attitudes towards unions Labor availability, costs, attitudes towards unions Cost and availability of utilities Cost and availability of utilities Environmental regulations of state and town Environmental regulations of state and town Government incentives Government incentives Proximity to raw materials and customers Proximity to raw materials and customers Land/construction costs Land/construction costs

7. 7 © 2010 Nkumbwa™. Factors The Affect Location Decisions Site Decisions Site size and cost Site size and cost Air, rail, waterway systems Air, rail, waterway systems Zoning restrictions Zoning restrictions Nearness of services/supplies needed Nearness of services/supplies needed Environmental impact issues Environmental impact issues

8. 8 © 2010 Nkumbwa™. Location Decision Example - BMW In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

9. 9 © 2010 Nkumbwa™. Location Decision Example – BMW Country Decision Factors Market location U.S. is world’s largest luxury car market U.S. is world’s largest luxury car market Growing (baby boomers) Growing (baby boomers)Labor Lower manufacturing labor costs Lower manufacturing labor costs $17/hr. (U.S.) vs. $27 (Germany) $17/hr. (U.S.) vs. $27 (Germany) Higher labor productivity Higher labor productivity 11 holidays (U.S.) vs. 31 (Germany) 11 holidays (U.S.) vs. 31 (Germany)Other Lower shipping cost ($2,500/car less) Lower shipping cost ($2,500/car less) New plant & equipment would increase productivity (lower cost/car $2,000-3000) New plant & equipment would increase productivity (lower cost/car $2,000-3000)

10. 10 © 2010 Nkumbwa™. Location Decision Example – BMW Region/Community Decision Factors Labor Lower wages in South Carolina (SC) Lower wages in South Carolina (SC) About $17,000/yr (SC) vs. $27,051/yr (US) About $17,000/yr (SC) vs. $27,051/yr (US) Based on 1993 metropolitan averages for all workers Based on 1993 metropolitan averages for all workers Government incentives $135 million in state & local tax breaks $135 million in state & local tax breaks Free-trade zone from airport to plant Free-trade zone from airport to plant No duties on imported components or on exported cars No duties on imported components or on exported cars

11. 11 © 2010 Nkumbwa™. Organizations That Need To Be Close to Markets Government agencies Police & fire departments Police & fire departments Post Office Post Office Retail Sales and Service Fast food restaurants, supermarkets, gas stations Fast food restaurants, supermarkets, gas stations Drug stores, shopping malls Drug stores, shopping malls Bakeries BakeriesServices Doctors, lawyers, accountants, barbers Doctors, lawyers, accountants, barbers Banks, auto repair, motels Banks, auto repair, motels

12. 12 © 2010 Nkumbwa™. Ranking of the Business Environment in 20 Countries, 1997 - 2001 1 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. 13 © 2010 Nkumbwa™. Labor Productivity Low wage rates often heavily influence location choices Low wage rates often heavily influence location choices What about productivity? What about productivity? Example: 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: 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 Labor cost per day/Productivity (units per day) = Cost per unit

14. 14 © 2010 Nkumbwa™. 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: 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 Labor cost per day/Productivity (units per day) = Cost per unit Case 1: Texas Plant Case 1: Texas Plant $70 per day/60 units per day = $70/60 = $1.17 per unit $70 per day/60 units per day = $70/60 = $1.17 per unit Case 2: Mexican Plant Case 2: Mexican Plant $25 per day/20 units per day = $25/20 = $1.25 per unit $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. Lesson: Employees with poor training, poor education, or poor work habits may not be a good buy even at low wages.

15. 15 © 2010 Nkumbwa™. Costs: Tangible Vs. Intangible Tangible costs – those that are readily identifiable and precisely measured Tangible costs – those that are readily identifiable and precisely measured Utilities Utilities Labor Labor Material Material Taxes Taxes Depreciation Depreciation Other costs that accounting can easily identify Other costs that accounting can easily identify Intangible costs – not easily quantifiable Intangible costs – not easily quantifiable Quality of education Quality of education Public transportation facilities Public transportation facilities Community attitudes toward the industry and the company Community attitudes toward the industry and the company Quality and attitude of prospective employees Quality and attitude of prospective employees Climate Climate

16. 16 © 2010 Nkumbwa™. Proximity To Markets Service organizations (drug stores, restaurants, post offices) find proximity to market is the primary location factor 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 Manufacturing – useful to be close to customers when transporting finished goods is expensive or difficult

17. 17 © 2010 Nkumbwa™. Proximity To Suppliers Firms locate near their raw materials and suppliers because: Perishability Perishability Transportation costs Transportation costs Bulk Bulk

18. 18 © 2010 Nkumbwa™. Proximity To Competitors Clustering – the location of competing companies near each other, often because of a critical mass of information, talent, ventire capital, or natural resources

19. 19 © 2010 Nkumbwa™. Location Evaluation Methods Factor-rating method Factor-rating method Locational break-even analysis Locational break-even analysis Center of gravity method Center of gravity method Transportation model Transportation model

20. 20 © 2010 Nkumbwa™. Factor-Rating Method Most widely used location technique Most widely used location technique Useful for service & industrial locations Useful for service & industrial locations Rates locations using factors Rates locations using factors Intangible (qualitative) factors Intangible (qualitative) factors Example: Education quality, labor skills Example: Education quality, labor skills Tangible (quantitative) factors Tangible (quantitative) factors Example: Short-run & long-run costs Example: Short-run & long-run costs

21. 21 © 2010 Nkumbwa™. Factors Affecting Location Selection Labor costs (including wages, unionization, productivity) Labor costs (including wages, unionization, productivity) Labor availability (including attitudes, age, distribution, and skills) Labor availability (including attitudes, age, distribution, and skills) Proximity to raw materials and suppliers Proximity to raw materials and suppliers Proximity to markets Proximity to markets State and local government fiscal policies (including incentives, taxes, unemployment compensation) State and local government fiscal policies (including incentives, taxes, unemployment compensation) Utilities (including gas, electric, water, and their costs) Utilities (including gas, electric, water, and their costs)

22. 22 © 2010 Nkumbwa™. Factors Affecting Location Selection - continued Site costs (including land, expansion, parking, drainage) Site costs (including land, expansion, parking, drainage) Transportation availability (including rail, air, water, and interstate roads) 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) 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 Foreign exchange Including rates and stability Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local) Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local)

23. 23 © 2010 Nkumbwa™. Steps in Factor Rating Method State relevant factors in terms of “max” or “min” State relevant factors in terms of “max” or “min” Assign weights to each factor (should add to 100%) Assign weights to each factor (should add to 100%) Assign rating to each factor (1-5) (1=poor, 5=excellent) Assign rating to each factor (1-5) (1=poor, 5=excellent) Multiply scores by weights for each factor & total Multiply scores by weights for each factor & total Calculate percent of total Calculate percent of total Compare top 2 alternatives (using percent as a basis of comparison) Compare top 2 alternatives (using percent as a basis of comparison)

24. 24 © 2010 Nkumbwa™. Steps in Factor Rating Method Alternative A Alternative B FactorWeightRatingScoreRatingScore Min. Operating Cost 20480360 Max. Flexibility 30390260 Max. Space utilization 10330550 Min. Payback period 401404160 Total240330 Percent 240/330 =.7272 330/330 = 1.00

25. 25 © 2010 Nkumbwa™. Locational Break-Even Analysis Method of cost-volume analysis used for industrial locations Method of cost-volume analysis used for industrial locations Steps Steps Determine fixed & variable costs for each location Determine fixed & variable costs for each location Plot total cost for each location Plot total cost for each location Select location with lowest total cost for expected production volume Select location with lowest total cost for expected production volume Must be above break-even Must be above break-even

26. 26 © 2010 Nkumbwa™. Locational Break-Even Analysis Example You’re an analyst for AgileWorld Manufacturing Group Plc. You’re considering a new manufacturing plant in Ndola, Kitwe, or Solwezi. You’re an analyst for AgileWorld Manufacturing Group Plc. You’re considering a new manufacturing plant in Ndola, Kitwe, or Solwezi. Fixed costs per year are $30k, $60k, & $110k respectively. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year? What is the best location for an expected volume of 2,000 cases per year?

27. 27 © 2010 Nkumbwa™. Locational Break-Even Analysis Example Ndola: Total cost = $30,000 + $75(2000) = $180,000 Total cost = $30,000 + $75(2000) = $180,000Kitwe: Total Cost = $60,000 + $45(2000) = $150,000 Total Cost = $60,000 + $45(2000) = $150,000Solwezi: Total Cost = $110,000 + $25(2000) = $160,000 Total Cost = $110,000 + $25(2000) = $160,000 With an expected volume of 2000 units per year, Kitwe provides the lowest cost location. The expected profit is: With an expected volume of 2000 units per year, Kitwe provides the lowest cost location. The expected profit is: Total Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per year Total Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per year

28. 28 © 2010 Nkumbwa™. Locational Break-Even Analysis Example The crossover point for Ndola and Kitwe: 30,000 + 75(x) = 60,000 + 45(x) 30(x) = 30,000 X = 1,000 And the crossover point between Kitwe and Solwezi: 60,000 + 45(x) = 110,000 + 25(x) 20(x) = 50,000 X = 2,500 Thus, for a volume o less than 1,000, Ndola would be preferred, and for a volume greater than 2,500, Solwezi would yield the greatest profit. Thus, for a volume o less than 1,000, Ndola would be preferred, and for a volume greater than 2,500, Solwezi would yield the greatest profit. Now let: Akaron = Ndola Bowling Green = Kitwe Chicago = Solwezi

29. 29 © 2010 Nkumbwa™. Locational Break-Even Analysis Example

30. 30 © 2010 Nkumbwa™. Center of Gravity Method Finds location of single distribution center serving several destinations Finds location of single distribution center serving several destinations Used primarily for services Used primarily for services Considers Considers Location of existing destinations Location of existing destinations Example: Markets, retailers etc. Example: Markets, retailers etc. Volume to be shipped Volume to be shipped Shipping distance (or cost) Shipping distance (or cost) Shipping cost/unit/mile is constant Shipping cost/unit/mile is constant

31. 31 © 2010 Nkumbwa™. Center of Gravity Method Steps Place existing locations on a coordinate grid Place existing locations on a coordinate grid Grid has arbitrary origin & scale Grid has arbitrary origin & scale Maintains relative distances Maintains relative distances Calculate X & Y coordinates for ‘center of gravity’ Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Gives location of distribution center Minimizes transportation cost Minimizes transportation cost

32. 32 © 2010 Nkumbwa™. Center of Gravity Method Steps

33. 33 © 2010 Nkumbwa™. 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 Ndola, Kitwe, Luanshya, and Mufulira; they are currently being supplied out of an old and inadequate warehouse in Luanshya, the site of the chain’s first store. 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 Ndola, Kitwe, Luanshya, and Mufulira; they are currently being supplied out of an old and inadequate warehouse in Luanshya, the site of the chain’s first store. Store Location Number of containers shipped pre month Ndola2000 Kitwe1000 Luanshya1000 Mufulira2000

34. 34 © 2010 Nkumbwa™. Center of Gravity Method - Example 30 60 90 120 30 60 90 120 150 Ndola (30,120) Luanshya (130,130) Kitwe (90,110) Mufulira (60,40) Center of gravity (66.7, 93.3)

35. 35 © 2010 Nkumbwa™. Center of Gravity Method - Example X-coordinate of the center of gravity: = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) 2000 + 1000 + 1000 + 2000 = 400,000/6000 =66.7 Y-coordinate of the center of gravity: = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) 2000 + 1000 + 1000 + 2000 = 560,000/6000 =93.3

36. 36 © 2010 Nkumbwa™. Transportation Model Finds amount to be shipped from several sources to several destinations Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Used primarily for industrial locations Type of linear programming model Type of linear programming model Objective: Minimize total production & shipping costs Objective: Minimize total production & shipping costs Constraints Constraints Production capacity at source (factory) Production capacity at source (factory) Demand requirement at destination Demand requirement at destination

37. 37 © 2010 Nkumbwa™. 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

38. 38 © 2010 Nkumbwa™. Location Strategies – Service vs. Industrial Service/Retail/Professional Revenue Focus Volume/revenue Volume/revenue Drawing area, purchasing power Drawing area, purchasing power Competition; advertising/pricing Competition; advertising/pricing Physical quality Physical quality Parking/access; security/ lighting; appearance/image Parking/access; security/ lighting; appearance/image Cost determinants Cost determinants Rent Rent Management caliber Management caliber Operations policies (hours, wage rates) Operations policies (hours, wage rates)

39. 39 © 2010 Nkumbwa™. Location Strategies – Service vs. Industrial Industrial Revenue Focus Tangible costs Tangible costs Transportation cost of raw materials Transportation cost of raw materials Shipment cost of finished goods Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, etc. Energy and utility cost; labor; raw material; taxes, etc. Intangible and future costs Intangible and future costs Attitude toward union Attitude toward union Quality of life Quality of life Education expenditures by state Education expenditures by state Quality of state and local government Quality of state and local government

40. 40 © 2010 Nkumbwa™. Location Strategies – Service vs. Industrial Service/Retail/Professional Techniques Correlation analysis to determine importance of factors for a particular type of operation Correlation analysis to determine importance of factors for a particular type of operation Traffic counts Traffic counts Demographic analysis of drawing area Demographic analysis of drawing area Purchasing power analysis of drawing area Purchasing power analysis of drawing areaAssumptions Location is a major determinate of revenue Location is a major determinate of revenue Issues manifesting from high customer contact dominate Issues manifesting from high customer contact dominate Costs are relatively constant for a given area; therefore, revenue function is critical Costs are relatively constant for a given area; therefore, revenue function is critical

41. 41 © 2010 Nkumbwa™. Location Strategies – Service vs. Industrial Industrial Techniques Linear Programming (Transportation method) Linear Programming (Transportation method) Weighted approach to intangibles Weighted approach to intangibles Breakeven analysis Breakeven analysis Crossover charts Crossover chartsAssumptions Location is a major determinate of cost Location is a major determinate of cost Most major costs can be identified explicitly for each site Most major costs can be identified explicitly for each site Low customer contact allows focus on costs Low customer contact allows focus on costs Intangible costs can be objectively evaluated Intangible costs can be objectively evaluated

42. 42 © 2010 Nkumbwa™. Major Methods of Solving Location Problems Weighted methods which: Weighted methods which: Assign weights and points to various factors Assign weights and points to various factors Determine tangible costs Determine tangible costs Investigate intangible costs Investigate intangible costs Center of Gravity Method Center of Gravity Method Find best distribution center location Find best distribution center location Location breakeven methods Location breakeven methods Special case of breakeven analysis Special case of breakeven analysis Transportation method Transportation method A specialized linear programming method A specialized linear programming method

43. 43 © 2010 Nkumbwa™. Telemarketing and Internet Industries Require neither face-to-face contact with customers (or employees) nor movement of material Require neither face-to-face contact with customers (or employees) nor movement of material Presents a whole new perspective on the location problem Presents a whole new perspective on the location problem