CHAPTER 11- FACILITY LOCATION

DECISIONS

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

 Learning Objectives

You should be able to:

– Explain the impact of facility decisions on a supply chain.
– Identify the factors influencing facility location.
– Understand the impact of the Regional Trade Agreements on
facility decisions.
– Use several location evaluation models.
– Understand the advantages of business clusters.

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 Chapter Eleven Outline
Location Strategies Labor Issues
Critical Location Factors Right–to-work Laws
Access to Suppliers
Regional Trade Agreements & the
Utility Availability & Cost
World Trade Organization
Quality-of-Life Issues
Competitiveness of Nations
Land Availability & Cost
Government Taxes & Incentives
Facility Location Models
Currency Stability
The Weighted-Factor Model
Access & Proximity to Markets
Customers
The Break-Even Model
The Center-of-Gravity Model
Environmental Issues
Labor Issues
Helpful On-Line Information for
Location Analysis
Right-to-work Laws
Business Clusters
Access to Suppliers & Cost
Environmental Issues
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 Introduction

Why is facility location so important?

– Facility location has a long-term impact on the supply chain &

must be part of the firm’s strategy.
– Companies can locate anywhere in the world due to increased
globalization, technology infrastructure, transportation,
communications, & open markets,
– Location still matters- clusters in many industries show that
innovation & competition are geographically concentrated.

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 Location Strategies

Dr. Kasra Ferdows suggests 6 location strategy roles:

• Offshore factory- low cost investment & labor costs.
• Source factory- plant mgmt involved in supplier selection &
production planning.
• Server factory- Firm uses government incentives & low exchange
risk & tariff barriers to reduce taxes & logistics costs.
• Contributor factory- Firm involved in product development,
production planning, procurement decisions, & developing suppliers.
• Outpost factory- Embedded network of suppliers, competitors,
research facilities for materials, components & products.
• Lead factory- Firm is source of product & process innovation &
competitive advantage of the entire organization.

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 Critical Location Factors

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 Critical Location Factors- Cont.
World Trade Organization & Regional Trade Agreements
World Trade Organization (WTO) Regional Trade Agreements:
successor to the General – European Union (EU),
Agreement on Tariffs/Trade – North American Trade
(GATT). Functions include:
Agreement (NAFTA),
– Administering agreements, – Southern Common
– Forum for trade Market (MERCOSUR),
negotiations, – Association of Southeast
– Trade disputes, Asian Nations (ASEAN),
– Monitor trade policies, – Common Market of
– Aid for Developing countries Eastern & Southern Africa
– International organizations. (COMESA).

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 Critical Location Factors- Cont.

Competitiveness of Nations- Degree to which a country, under free &

fair market conditions, produces goods & services which meet the
needs of the rest of international markets, while maintaining/expanding
personal real income over time. Made up of 314 criteria, grouped into 4
factors:
1.Economic performance: Domestic economy, international trade,
international investment, employment, prices
2.Government efficiency: Public finance, fiscal policy, institutional
framework, business legislation, education
3.Business efficiency: Productivity, labor market, finance,
management practices, impact of globalization
4.Infrastructure: Basic infrastructure, technology infrastructure,
scientific infrastructure, health & environment, value system

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Critical Location Factors- Cont.

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 Critical Location Factors- Cont.

Government Taxes & Incentives

– Several levels of government must be considered when
evaluating potential locations.
– Countries with high tariffs discourage companies from importing
goods into the country.
– High tariffs encourage multinational corporations to set up
factories to produce locally.
– Many countries have set up foreign trade zones (FTZs) where
materials are imported duty-free as long as the imports are used
as inputs to production of goods.

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 Critical Location Factors- Cont.
Currency Stability
– Impacts business costs & consequently
location decisions.
Access & Proximity to
Markets/Customers
– “The trend in manufacturing is to be
within delivery proximity of your
customers. Logistics timelines &
costs are the concerns, so that
reinforces a clustering effect of
suppliers & producers to places that
offer lower cost labor & real estate.”
– In the service industry, proximity to
customers is even more critical.

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 Critical Location Factors- Cont.
Environmental Issues
– Global warming, air pollution, & acid rain are increasingly
debated as the price of industrialization.
– Trade liberalization creates need for environmental cooperation.
Labor Issues
– Labor availability, productivity, & skill.
– Unemployment & underemployment rates.
– Wage rates; turnover rates; labor force competitors.
Right-to-Work Laws
– The right of employees to decide whether or not to join or
support a union.

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 Critical Location Factors- Cont.
Access to Suppliers & Cost
– Supplier proximity influences the delivery of materials &
effectiveness of the supply chain.
Utility Availability & Cost
– Supply of electricity has not kept pace with the high speed of
development.
– In heavy industries the availability & cost of energy are critical
considerations.
– Telecommunication costs have dropped dramatically. Many
organizations now have back office operations & call centers
internationally to serve the U.S. market.

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 Critical Location Factors- Cont.
Quality-of-Life Issues- Defined as “a
feeling of well-being, fulfillment, or
satisfaction resulting from factors in the
external environment.”
– Education
– Economy
– Natural Environment
– Social Environment
– Culture/recreation
– Health
– Government/politics
– Mobility
– Public Safety
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 Critical Location Factors- Cont.
Land Availability & Costs
– As land & construction
costs in big cities continue
to escalate, the trend is to
locate in the suburbs &
rural areas.

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 Facility Location Models

The Weighted-Factor Rating Model- A method used to compare the

attractiveness of several locations along a number of quantitative &
qualitative dimensions.
– Identify the factors
– Assign weights to each factor. The weights sum to 1.
– Determine a score for each factor.
– Multiply the factor score by the weight, then sum the weighted
scores
– The location with the highest total weighted score is the
recommended location.

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Facility Location Models- Cont.

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 Facility Location Models- Cont.

Break-even model- useful location analysis technique when fixed &

variable costs can be determined. Involves the following steps;
– Identify the locations to be considered.
– Determine the fixed cost of land, property taxes, insurance,
equipment, & buildings.
– Determine the unit variable cost, materials, utilities, &
transportation costs.
– Construct the total cost lines.
– Determine the break-even points on the graph.
– Identify the range over which each location has the lower cost.

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 Facility Location Models- Cont.

Break-even model- Example

Location Annual Fixed Cost Unit Variable Breakeven

Cost Q

A $500,000 $300 $2,500

B $750,000 $200 $1,500

C $900,000 $100 $2,000

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Facility Location Models- Cont.

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 Facility Location Models- Cont.

The Center-of-Gravity
Model-
Involves mapping all of
the market locations on
an x, y-coordinate grid &
then finding a central
location that is closest to
the markets with the
highest demand.

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 Helpful Online Information for Location
Analysis
Several Web sites are available that provide useful information for use
in location analysis:
– http://www.FacilityCity.com: provides direct links to Business
Facilities: the Location Advisor & Today’s Facility Manager.
– http://www.bizsitesDATA.com: “provide decision support tools
to corporate real state directors, site selectors, consultants,
commercial realtors, & economic development professionals.”
– http://www.developmentalliance.com: developed by the
International Economic Development council & Conway Data,
Inc.

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 Business Clusters
Business Clusters
– Geographic concentrations of interconnected companies &
institutions. Clusters encompass an array of linked industries &
other entities important to competition.
– Research parks & special economic/industrial zones serve as
magnets for business clusters.
– Reasons for success-
• close cooperation, coordination, & trust among clustered
companies
• fierce competition among rival companies
• companies recruit from local pool of skilled workers

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