Facility Location

By

Dr. Debadyuti Das, Reader

Faculty of Management Studies
University of Delhi
 Overview
 Involves the long-term commitment of large amount of
capital under conditions of considerable uncertainty.

 Determines a permanent framework of operating

constraints.

 Significant impact on investment requirements,

operating costs, revenues and operations.

 Has significant consequences on the competitive

position of the firm.
 Need for location decision
 Significant changes in the level of demand.

 Significant changes in the geographical distribution of

demand.

 Changes in the costs or quality requirement of critical

production inputs.

 Significant changes in the real-estate value of existing or

adjacent sites.

 Depletion of resources.
 Strategic importance of location decision

 To become the low cost producer of final products.

 To increase profits by planning to capture the

increased market share.

 To base location of the facilities based on customer

convenience.

 To base location of a facility based on where it fits in

the entire supply chain. (Beginning, Middle or end of
the chain)
Location options
 Expand existing facilities

 Add new facilities while retaining the

existing ones.

 Move to a new location

 Doing nothing
Making Location Decisions

 Decide on the criteria

 Identify the important ones

 Develop location alternatives

 Evaluate the alternatives

 Make selection
Factors influencing Location Decision
Regional Factors Community
Considerations

Multiple Plant Site-related

Strategies Factors
Regional Factors

 Location of raw materials

 Location of markets
 Labor factors
 Infrastructure
 Climate and taxes
Community Considerations

 Quality of life
 Services (Medical, police, fire services etc.)
 Attitude of the people
 Taxes
 Environmental regulations
 Utilities (cost and availability)
Site Related Factors

 Land (cost, degree of development required,

soil characteristics etc.)
 Transportation
 Environmental
 Legal
Multiple Plant Strategies

 Product plant strategy

 Market area plant strategy
 Process plant strategy
 Comparison of Service and
Manufacturing Considerations
Manufacturing/Distribution Service/Retail

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking
 Issues in global locations
 Trading Blocs
 Political Risk
 Foreign Government
-Policies on foreign ownership of production facilities
-Import restrictions
-Currency restrictions
-Local product standards
-Environmental Regulations
 Cultural differences
 Resources
 Labour
-Possible regulation limiting no. of foreign employees
-Language differences
 Evaluating Locations
 Transportation Model
 Decision based on movement costs of raw materials or
finished goods

 Cost-Profit-Volume Analysis
- Decision based on fixed cost, variable cost and the level of
output produced at a particular location.

 Center of Gravity (or Centroid) Method

 Decision based on minimum distribution costs

 Factor Rating
 Decision based on quantitative and qualitative inputs

 Analytic Hierarchy Process

Evaluating Locations

 Cost-Profit-Volume Analysis
 Determine fixed and variable costs at each
location alternative
 Plot total cost lines for all location alternatives on
the same graph
 Determine the lowest total costs for the expected
level of output.
Location Cost-Volume Analysis
 Assumptions
 Fixed costs are constant for the range of probable
output
 Variable costs are linear for the range of probable
output
 Output can be closely estimated
 Only one product is involved
Example 1: Cost-Volume Analysis
Fixed and variable costs for
four potential locations (for 10,000 units)

L o c a tio n F ix e d V a r ia b le
C o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5
Example 1: Solution

F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts

A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0
Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

Plant Location Methodology: Centroid
Method

 The centroid method is used for locating

single facilities that considers existing
facilities, the distances between them, and the
volumes of goods to be shipped between
them.
 This methodology involves formulas used to
compute the coordinates of the two-
dimensional point that meets the distance and
volume criteria stated above.
Plant Location Methodology: Centroid
Method Formulas

Cx =
∑d V ix i
Cy =
∑d V iy i

∑V i ∑V i

Where:
Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
Plant Location Methodology: Example of
Centroid Method
 Centroid method example
 Several mobile phone showrooms are located according to the
following grid which represents coordinate locations for each
showroom
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X

Question: What is the best location for a new Z-Mobile

warehouse/temporary storage facility considering only
distances and quantities sold per month?
Plant Location Methodology: Example of Centroid Method
(Continued): Determining Existing Facility Coordinates

Y
To begin, you must identify the Q
existing facilities on a two- (790,900)

dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You must also have the
volume information on the
business activity at the
existing facilities.
s o ld p e r mo nth
A 1250
D 1900

Q 2300
Plant Location Methodology: Example of Centroid Method
(Continued): Determining the Coordinates of the New Facility
You then compute the new coordinates using the formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000
Cx = = = 443.49
1250 + 1900 + 2300 5,450
200(1250) + 580(1900) + 900(2300) 3,422,000
Cy = = = 627.89
1250 + 1900 + 2300 5,450

You then take the coordinates and place them on the map:
Y
S ho wro o m No o f Z-Mo b ile s
Q New s o ld p e r mo nth
(790,900)
location
Z
D
(250,580) of facility A 1250
Z about
A D 1900
(100,200) (443,627)
(0,0) X Q 2300