1. Facility Location

2. Location Options Expanding existing facilities
Building a new facility (for the beginners)
Moving to another facility
Addition of one or more facilities to the existing network in order to expand capacity
Closing of one or more facilities in order to shrink capacity

3. The Need for Location Decisions
Location decisions may arise for a variety of reasons:
Addition of new facilities
As part of a marketing strategy to expand markets
Growth in demand that cannot be satisfied by expanding existing facilities
Depletion of basic inputs requires relocation
Shift in markets
Cost of doing business at a particular location makes relocation attractive

4. Location Decisions: Strategically Important
Are long-term decisions
Are closely tied to an organization’s strategies
Low-cost
Convenience to attract market share
Effect capacity and flexibility
Are difficult to reverse
Represent a long-term commitment of resources
Effect investment requirements,
Effect operating costs (fixed and variable), (such as transportation costs, taxes, wages, rent etc)
Effect revenues,
Effect operations
Impact competitive advantage
Important to supply chains

5. Location Decisions: Objectives
Location decisions are based on:
Cost or profit potential and customer service
Finding a number of acceptable locations from which to choose (no single location may be better than others)
Position in the supply chain
End: accessibility, consumer demographics, traffic patterns, and local customs are important
Middle: locate near suppliers or markets
Beginning: locate near the source of raw materials
Supply chain management issues such as supply chain configuration
Centralized vs. decentralized distribution

6. Industrial Location Decisions
Cost focus
Revenue varies little between locations
Location is a major cost factor
Location effects shipping & production costs (costs vary greatly between locations
© 1995 Corel Corp.

7. Service Location Decisions
Revenue focus
Costs vary little between market areas
Location is a major revenue factor
Factors such as Traffic volume, good
transportation, customer
safety and convenience
most important
Location effects amount of customer contact
Locaiton effects volume of business

8. 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
Other Services
Doctors, lawyers, accountants, barbers
Banks, auto repair, motels

9. General Procedure for Making Location Decisions
Decide on the criteria to use for evaluating location alternatives
Identify important factors (such as location of markets or raw materials)
Develop location alternatives
- identify the country or countries for location
- identify the general region for location
- identify a small number of community alternatives
- identify site alternatives among the cummunity alternatives
Evaluate the alternatives and make a selection

10. Location Decision Sequence
Country .
Region/Community
Site

11. Factors That Affect Location Decisions
Global Factors
Regional Factors
Community Considerations
Site-related Factors

12. Global Location: Facilitating Factors
Key factors that have contributed to the attractiveness of globalization:
Trade Agreements such as
North American Free Trade Agreement (NAFTA)
General Agreement on Tarriffs and Trade (GATT)
U.S.-China Trade Relations Act
EU and WTO efforts to facilitate trade
Technology
Advances in communication and information technology

13. Global Location: Benefits
A wide range of benefits have accrued to organizations that have globalized operations:
Markets
Cost savings
Legal and regulatory
Financial
Other

14. Global Location: Disadvantages
There are a number of disadvantages that may arise when locating globally:
Transportation costs
Security costs
Unskilled labor
Import restrictions
Criticism for locating out-of-country

15. Global Location: Risks
Organizations locating globally should be aware of potential risk factors related to:
Political instability and unrest
Terrorism
Economic instability
Legal regulation
Ethical considerations
Cultural differences

16. Managing Global Operations
Managerial implications for global operations:
Language and cultural differences
Risk of miscommunication
Development of trust
Different management styles
Corruption and bribery
Level of technology and resistance to technological change
Domestic personnel may resist locating, even temporarily

17. Location: Identifying a Country

18. Location: Identifying a Region
Primary regional factors:
Locating close to the raw materials
Necessity
Perishability
Transportation costs
Locating close to the markets
As part of a profit-oriented company’s competitive strategy
So not-for-profits can meet the needs of their service users
Distribution costs and perishability

19. Location: Identifying a Region
Labor factors
Cost of labor
Availability of suitably skilled workers
Wage rates in the area
Labor productivity
Attitudes toward work
Whether unions pose a serious potential problem
Other factors
Climate and taxes may play an important role in location decisions

20. More on Regional Location Factors
Labor (availability, education, cost and unions)
Proximity of customers
Number of customers
Construction/leasing costs
Land costs
Modes and quality of transportation
Transportation costs
Incentive packages
Governmental, legal regulations, policies and barriers
Environmental regulations
Raw material availability
Commercial travel
Climate
Infrastructure (cost and availability of utilities)
Quality of life

21. More on Regional Location Factors
Community government
Local business regulations
Government services
Business climate
Community services
Taxes
Environmental impact issues
Availability of sites
Financial Services
Community inducements
Proximity of suppliers
Education system
Free trade zones

22. Geographic Information System (GIS)
A computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps
Aids decision makers in
Targeting market segments
Identifying locations relative to their market potential
Planning distribution networks
Portraying relevant information on a map makes it easier for decision makers to understand

23. Location: Identifying a Community
Many communities actively attempt to attract new businesses they perceive to be a good fit for the community
Businesses also actively seek attractive communities based on such factors such as:
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Development support

24. Location: Identifying a Site
Primary site location considerations are
Land
Transportation
Environmental
Zoning
Legal
Other restrictions

25. Site Location Factors Customer base Zoning restrictions
Construction/ leasing cost
Site costs (land, expansion, parking, etc.
Quality of life issues in the community (education, health care, sports, cultural activities etc.)
Site size
Transportation
Traffic
Zoning restrictions
Safety/security
Competition
Area business climate
Income level
Host community
Competitive advantage
Utilities including gas, electric, water and their costs

26. Plant Strategies - Product Plant Strategy - Market Area Plant Strategy
Single Plant Strategy
Multiple Plant Strategy
- Product Plant Strategy
- Market Area Plant Strategy
- Process Plant Strategy

27. Multiple Plant Strategies
Product plant strategy
Entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market
Market area plant strategy
Plants are designated to serve a particular geographic segment of the market
Plants produce most, if not all, of a company’s products

28. Multiple Plant Strategies
Process plant strategy
Different plants focus on different aspects of a process
automobile manufacturers – engine plant, body stamping plant, etc.
Coordination across the system becomes a significant issue
General-purpose plant strategy
Plants are flexible and capable of handling a range of products

29. Service and Retail Locations
Nearness to raw materials is not usually a consideration
Customer access is a
Prime consideration for some: restaurants, hotels, etc.
Not an important consideration for others: service call centers, etc.
Tend to be profit or revenue driven, and so are
Concerned with demographics, competition, traffic/volume patterns, and convenience

30. Evaluating Location Alternatives
Common techniques for location evaluation:
Locational cost-volume-profit analysis
Factor rating method
Load-distance method
Center of gravity method
Transportation model (a specialized linear programming method)

31. Locational Cost-Profit-Volume Analysis

32. Locational Cost-Profit-Volume Analysis
Locational Cost-Profit-Volume (Break-even)Analysis
A technique for evaluating location choices in economic terms
Steps:
Determine the fixed and variable costs for each alternative
Plot the total-cost lines for all alternatives on the same graph
Determine the location that will have the lowest total cost (or highest profit) for the expected level of output

33. Locational Cost-Profit-Volume Analysis
Assumptions
Fixed costs are constant for the range of probable output
Variable costs are linear for the range of output
The required level of output can be closely estimated
Only one product is involved

34. Locational Cost-Profit-Volume Analysis
For a cost analysis, compute the total cost for each alternative location:

35. Example: Cost-Profit-Volume Analysis
Fixed and variable costs for four potential plant locations are shown below:
Location
Fixed Cost
per Year
Variable Cost
per Unit A
$250,000
$11 B
$100,000
$30 C
$150,000
$20 D
$200,000
$35

36. Example: Cost-Profit-Volume Analysis
Comparison of total costs at a production volume of 10,000

37. Example: Cost-Profit-Volume Analysis
Plot of total costs
800
700
600
500
400
300
200
100
Annual Output (000)
$(000) 8 10 12 14 16 6 4 2 A B C D

38. Example: Solution 800 700 600 500 400 300 200 100 Annual Output (000)
Annual Output (000)
$(000) 8 10 12 14 16 6 4 2 A B C
B Superior
C Superior
A Superior D

39. Example: Cost-Profit-Volume Analysis
Range approximations
B Superior (up to 4,999 units)
C Superior (>5,000 to 11,111 units)
A superior (11,112 units and up)

40. Factor Rating Method

41. Factor Rating Method
A general approach to evaluating locations that includes quantitative and qualitative inputs
Most widely used location technique
Useful for service and industrial locations
Rates locations using both
tangible (quantitative) factors such as short-run and long-run costs and
intangible (qualitative) factors such as education quality, labor skills.

42. Factor Rating Procedure: Determine which factors are relevant
Assign a weight to each factor that indicates its relative importance compared with all other factors.
Weights typically sum to 1.00
Decide on a common scale for all factors (such as 1-100), and set a minimum acceptable score if necessary
Score each location alternative along each factor
Multiply the factor weight by the score for each factor, and sum the results for each location alternative
Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score

43. Example: Factor Rating
A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?
Scores
(Out of 100)
Factor
Weight
Alt 1
Alt 2
Proximity to existing source
.10
100 60
Traffic volume
.05 80
Rental costs
.40 70 90
Size 86 92
Layout
.20 40
Operating Cost
.15
1.00

44. Example: Factor Rating
A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?
Scores
(Out of 100)
Weighted Scores
Factor
Weight
Alt 1
Alt 2
Proximity to existing source
.10
100 60
.10(100) = 10.0
.10(60) = 6.0
Traffic volume
.05 80
.05(80) = 4.0
Rental costs
.40 70 90
.40(70) = 28.0
.40(90) = 36.0
Size 86 92
.10(86) = 8.6
.10(92) = 9.2
Layout
.20 40
.20(40) = 8.0
.20(70) = 14.0
Operating Cost
.15
.15(80) = 12.0
.15(90) = 13.5
1.00
70.6
82.7

45. Centre of Gravity Method

46. Center of Gravity Method
A method for locating a distribution center that minimizes distribution costs
Finds location of a single distribution center serving several destinations
Used primarily for services
Treats distribution costs as a linear function of the distance and the quantity shipped
The quantity to be shipped to each destination is assumed to be fixed
The method necessitates to identify coordinates and weights shipped for each location and includes the use of a map that shows the locations of destinations
The map must be accurate and drawn to scale
A coordinate system is overlaid on the map to determine relative locations

47. Center of Gravity Method
Considers
Location of existing destinations eg. Markets, retailers etc.
Volume to be shipped
Shipping distances (or costs)
Shipping cost/unit/mile is constant

48. Center of Gravity Method
If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates

49. Center of Gravity Method
Suppose you are attempting to find the center of gravity for the problem .
Destination x y D1 2 D2 3 5 D3 4 D4 8 18 16
Here, the center of gravity is (4.5,4). This is slightly west of D3 from the Figure

50. Center of Gravity Method
When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates

51. Grid-Map Coordinates  x1 x2 x3 x y2 y y1 y3 1 (x1, y1), Q1Vi
i = 1
xiQi
Cx =
yiQi
Cy = x1 x2 x3 x y2 y y1 y3
1 (x1, y1), Q1
2 (x2, y2), Q2
3 (x3, y3), Q3
where,
Cx, Cy = coordinates of the new facility at center of gravity
xi, yi = coordinates of existing facility i
Vi = annual volume shipped from or to the ith location

52. Center of Gravity Method: Example 1
Suppose the shipments for the problem depicted in Figure are not all equal. Determine the center of gravity based on the following information.
Destination x y
Weekly
Quantity D1 2
800 D2 3 5
900 D3 4
200 D4 8
100 18 16
1,000

53. Center of Gravity Method: Example 1
The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7). This south of destination D2 (3, 5).

54. Center of Gravity Method: Example 1

55. Center-of-Gravity Technique: Example 2
A B C D x y Vt y
700
500
600
400
300
200
100 x A B C D
(135)
(105)
(75)
(60)
Miles

56. Center-of-Gravity Technique: Example 2
700
500
600
400
300
200
100 x A B C D
(135)
(105)
(75)
(60)
Miles
Cx = = = 238 n  Wi
i = 1
xiWi
(200)(75) + (100)(105) + (250)(135) + (500)(60)  n Wi
i = 1
yiWi
Cy = = = 444
(200)(75) + (500)(105) + (600)(135) + (300)(60)

57. Center-of-Gravity Technique: Example 2
A B C D x y Wt y
700
500
600
400
300
200
100 x A B C D
(135)
(105)
(75)
(60)
Miles
Center of gravity (238, 444)

58. Worldwide Distribution of Volkswagens and Parts
Which of the methodologies discussed should Volkswagen use to choose a new location?

59. Telemarketing and Internet Industries
Require neither face-to-face contact with customers (or employees) nor movement of material
Web based retail organizations are effectively location dependent
Presents a whole new perspective on the location problem
Given the significant impact of the World Wide Web, this slide should be discussed in detail.

60. Final Thought
The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.
Students should asked to consider:
- is this the ultimate in “locations”?
- what are the implications of this idea?