Logistics and Facility Location

Dr. Jiten Sharma

@imt, nagpur

Lecture Outline
Logistics
Types of Facilities
Site Selection: Where to Locate
Location Analysis Techniques
Location Factor Rating
Center - of - Gravity
Load Distance
Transportation Method

Logistics
The movement of goods through the supply chain
Logistics - the art and science of obtaining, and distributing
material and product in the proper place and in proper quantities
How to best transport goods
Modes of transportation
Road, Rail, Airways, Ships, Pipelines, Hand delivery

Facility Location
Location of facilities can have a very significant impact on the success
Long detailed process of selection and usually an irrevocable decision
Strategic decision affecting firms profitability & long term survival
Location can be used as a means of achieving competitive advantage
Important part of overall marketing strategy delivery and supply chains
As operations globalize or are carried out on larger scale the facility

location decision becomes more complex

Location Decisions
MANUFACTURING
Cost minimization
High cost/investments
Proximity of supplier
Varies from ind. to ind.
Location is not the part

SERVICES
Profit maximization
Medium to Low
Customer
Customer-contact
Its very much a part of
the product

Global Location Factors

Government stability

Raw material availability

Government regulations

Labor cost and education

Political and economic systems

Available technology

Economic stability and growth

Technical expertise

Exchange rates

Cross-border trade regulations

Culture

Group trade agreements

Climate

Number and proximity of

suppliers

Export import regulations, duties

and tariffs

Transportation and distribution

system

Regional Location Factors

Labor (availability, education, cost, and unions)
Proximity to the customers

Number of customers
Construction / Leasing / Renting cost
Land cost
Modes and quality of transportation
Transportation costs
Local business regulations
Government services

Regional Location Factors (cont.)

Business climate

Infrastructure

Incentive packages

Quality of life

Government regulations

Taxes

Environmental regulations

Availability of sites

Raw material availability

Financial services

Commercial travel
Climate / Weather

Proximity of suppliers
Education system

Location Incentives

Tax credits
Relaxed government regulation
Job training
Infrastructure improvement
SEZs

Location Analysis Techniques

Location Factor Rating :

Method of identifying and
weighting important location
factors
Center - of - Gravity: The
center of movement in a
geographical area based on
transport weight and distance
Load - Distance: Method of
evaluation based on the load
being transported and the
distance

Location Rating Factor

Location Factor Rating :

Identify the potential sites

List out the location factors for the business purpose
Prioritize these factors by assigning them weights
Score each site on various location factors (say out of 100)
Take the product of score and the weight for each factor for
all the sites
Sum up the product values
Select the site with maximum sum total

Location Rating Factor: Example

Location Factor Rating :
ABC Manufacturing company is going to build a
new plant for manufacturing ring bearings. The
site selection team is evaluating three sites, and
they have scored the important factors for each
as follows. They want to use these ratings to
compare locations.

Location Factor Rating: Example

SCORES (0 TO 100)
LOCATION FACTOR

Labor pool and climate

Proximity to suppliers
Wage rates
Community environment
Proximity to customers
Shipping modes
Air service

WEIGHT

Site 1

Site 2

Site 3

.30
.20
.15
.15
.10
.05
.05

80
100
60
75
65
85
50

65
91
95
80
90
92
65

90
75
72
80
95
65
90

Weighted Score for Labor pool and climate for

Site 1 = (0.30)(80) = 24

Location Factor Rating

WEIGHTED SCORES
Site 1

Site 2

Site 3

24.00
20.00
9.00
11.25
6.50
4.25
2.50
77.50

19.50
18.20
14.25
12.00
9.00
4.60
3.25
80.80

27.00
15.00
10.80
12.00
9.50
3.25
4.50
82.05

Site 3 has the

highest factor
rating

Center-of-Gravity Technique
Center - of - Gravity (Weight Center Technique):
The center of movement in a geographical area
based on transport weight and distance
Transportation costs are a function of distance, weight & time
Locate facility at center of geographic area
Based on weight and distance traveled establish grid-map of
area on a Cartesian Plane
Identify coordinates and weights shipped for each location
Coordinates for the location of the new facility are computed
using following formula:

Grid-Map Coordinates
y

y1

x=

i=1

1 (x1, y1), W1
3 (x3, y3), W3

x1

x2

x3

yiWi

i=1
y=

y3

xiWi

i=1

2 (x2, y2), W2

y2

Wi

Wi

i=1

where,
x, y = coordinates of new
facility at center of gravity
xi, yi = coordinates of existing
facility i
Wi = annual weight shipped
from facility i

Center-of-Gravity Technique: Example

Center - of - Gravity (Weight Center Technique):
XYZ Restaurant chain purchases ingredients from four different food
suppliers. The company wants to construct a new central distribution
center to process and package the ingredients before shipping them
to their various restaurants. The suppliers transport ingredients items
in 40 foot truck trailers, each with a capacity of 38,000 kgs. The
location of four suppliers , and the annual number of trailer loads that
will be transported to the center are as given below. Using centre of
gravity method, determine a possible location for the distribution
center.

Center-of-Gravity Technique: Example

y
700
600

Miles

500

C
(135)

B
(105)

400

300
200

x
y
Wt
D

(60)

A
(75)

100
0

100 200 300 400 500 600 700 x

Miles

200
200
75

100
500
105

250
600
135

500
300
60

Center-of-Gravity Technique: Example

n

x=

xiWi

i=1
n

(200)(75) + (100)(105) + (250)(135) + (500)(60)

=
75 + 105 + 135 + 60

(200)(75) + (500)(105) + (600)(135) + (300)(60)

=
75 + 105 + 135 + 60

= 238

Wi

i=1

i=1

y=

yiWi

i=1

Wi

= 444

Center-of-Gravity Technique: Example

y

x
y
Wt

700

C
600

Miles

500

(135)

A
200
200
75

(105)
Center of Gravity (238, 444)

400
300
200

D
(60)

A
(75)

100
0

100 200 300 400 500 600 700 x

Miles

B
100
500
105

C
250
600
135

D
500
300
60

Load-Distance Technique
Load - Distance:

Method of evaluation based on the load being

transported and the distance

Several locations are evaluated using load - distance

value that is measure of weight and distance

Load Distance value is calculated for all the sites and

the lowest value is selected as this incurs minimum cost of
transportation

Compute (Load x Distance) for each site

Choose site with lowest (Load x Distance)
Distance can be actual or straight-line

Load-Distance Technique
n

LD =

li di

i=1
where,
LD =

load-distance value

li

load expressed as a weight, number of trips or units

being shipped from proposed site to location i

di

di

distance between proposed site and location i

(xi - x)2 + (yi - y)2

where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility

Load-Distance Technique: Example

Load - Distance:
PQR wants to evaluate three different sites it has
identified for its new distribution center relative to
the four suppliers given in earlier example. The
coordinates of the three sites under consideration
are as follows:
Site 1: x1 = 360, y1 = 180
Site 2: x2 = 420, y2 = 450
Site 3: x3 = 250, y3 = 400

Load-Distance Technique: Example

Potential Sites
Site
1
2
3

X
360
420
250

Y
180
450
400

Suppliers
A
200
200
75

X
Y
Wt

B
100
500
105

C
250
600
135

D
500
300
60

Compute distance from each site to each supplier

Site 1 dA =
dB =

(200-360)2 + (200-180)2 = 161.2

(xB - x1)2 + (yB - y1)2 =

(100-360)2 + (500-180)2 = 412.3

(xA - x1)2 + (yA - y1)2

dC = 434.2

dD = 184.4

Load-Distance Technique: Example

Site 2 dA = 333

dB = 323.9 dC = 226.7 dD = 170

Site 3 dA = 206.2 dB = 180.4 dC = 200

dD = 269.3

Compute Load - Distance

LD =

ld
i

i=1

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(184.4) = 125,063

Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791

Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*

* Choose site 3