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7/29/2019 5d. Facility Location
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Facility Location
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Learning Objectives
U shd. be able to Identify or Define: Objective of location strategy
International location issues
Clustering
Geographic information systems
3 methods of solving the location problem
Factor-rating method Locational breakeven analysis
Center-of-gravity method
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Facility set upwithout properlocation planning
Problems
Problems
Problems
Problems
Relocate facility
to a new location
Continue
operations at the
existing location
Sell off the
facility to other
companies
(Divestment)
Close down the
operations
completely and
liquidate the assets
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Operations Strategies with Multiple Facilities
1. Separate facilities for different products/services
2. Separate facilities to serve differentgeographical areas
3. Separate facilities for different processes inthe manufacture of a product or in providinga service
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REASONS FOR LOCATION CHANGES
Different situations for location change could be (i) a new plant is just beingstarted, (ii) a new branch of an existing plant is to be located, or (iii) anew location for an existing plant is being sought.
In addition to the need for greater capacity, there are other reasons for
changing or adding locations:Changes in resources may occur. The cost or availability of labor, rawmaterials, and supporting resources (such as subcontractors) may change.
The geography of demand may shift. As product markets change, it maybe desirable to change facility location to provide better service to
customers. Some companies may merge, making facilities locationredundant.
New products may be introduced, changing the availability of resourcesand markets. Political and economic conditions may change.
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GENERAL PROCEDURES FOR FACILITY LOCATION
Preliminary Screening
--Sources of Information (Chambers of commerce)
--Detailed Analysis
Selection of exact siteTransportation facilities ---Availability of water, power, gas and
sewerage ---Soil characteristics----Drainage----Parking space
Space for expansion----Accessibility by workers
Cost of land----Existing buildings
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Location Decision Process
Facility Location is typically conducted hierarchically and
involves the following basic decisions where appropriate .
1)Global Location
2)Regional Location
3)District or community Location
4)Local Site Selection
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Behavioral impact in facility Location
Cultural Differences
Job Satisfaction
Consumer Considerations
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GENERAL FACTORS INFLUENCING LOCATION
Proximity to Good Highways
Abundant Labor Supply
Proximity to Markets
Availability of Suitable Land and Land Cost Adequate Water Supply
Nearness to Raw Materials and Suppliers
Nearness to an Existing Plant
Transportation
Power SupplyClimate
Water Disposal and Pollution---Taxes
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Factors that Affect Location Decisions
Regional Factors
Location of Raw Materials (necessity, perishability, and
transportation costs)
Location of Markets (locate near the markets, distributioncosts, the perishability of a finished product, GIS)
Labor Factors (cost and availability of labor, wage rates in an
area, labor productivity and attitudes toward work, and
unions)
Climate and Taxes
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Goodtransportation
facilities
Close
Proximity
to the raw
material
Close
Proximit
y to
Markets
Residential
complexes,
schools,
hospitals,clubs, etc.
Availability
of cheap &
skillful
labor
Less
construction
costs
Easy
availability
of cheap
land
Proximity
to sub-contractors
Environment
and
community
Government
policies
Basicamenitie
s
Availability
of powersupply
FacilityLocatio
nPlannin
g
Factors in Facility Location Planning
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Your plant / facility may be .
Near the Raw Material sources
(Steel, Cement Plants )
Volume Compression Ratio
(Higher the ratio, nearer to RM source)
Near to Market / Customers
(FMCG, Perishables Goods, Services) Better facilities & infrastructure
(MIDC, Union Territories, SEZs, FTZs)
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Country Factors
1. Political risks, governmentrules, attitudes, incentives
2. Cultural and economicissues
3. Location of markets4. Labor availability, attitudes,productivity, costs
5. Availability of supplies,communications, energy
6. Exchange rates andcurrency risks
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Region / Community Factors
1. Corporate desires2. Attractiveness of region
3. Labor availability, costs,
attitudes towards unions
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
8. Land/construction costs
MN
WI
MI
IL INOH
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Site Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Nearness of services/
supplies needed
5. Environmental impact
issues
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Offensive incompetitors
home
country
Power &
prestige
Synergy
Economies
of scale
Exploitation
of firm
specific
advantages Incentives
Low costs
Additional
resources
Regulations
International
competition
International
customers
Trade
barriers
InternationalFacility
LocationPlanning
Factors in International Location Planning
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Approach to Location
Profit maximization (Service industry)
Cost minimization (Manufacturing)
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Approach to Location
Service/Retail Location Goods Mfg. LocationRevenueFocus CostFocus
Volume/revenue
Drawing area; purchasing powerCompetition; advertising/pricing
Physical qualityParking, Access; Security,
Lighting; Appearance, Image
Cost determinants
Rent, Management calibre
Operations policies
(hours, wage rates)
Tangible costs
Transportation cost of raw materialShipment cost of finished goods
Energy and utility cost; labor;
Raw material; taxes, and so on
Intangible and future costs
Attitude toward unionQuality of life
Education expenditures by state
Quality of state and localgovernment
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Approach to Location
Service/Retail/Prof. Locn. Goods-mfg. Location
Techniques Techniques
Regression models to determine
importance of various factorsFactor-rating method
Traffic counts
Demographic analysis of drawingarea
Purchasing power analysis of area
Center-of-gravitymethodGeographic information systems
Transportation methods
Factor-ratingmethod
Locationalbreak-even
analysis
Crossover charts
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Clustering
Industry Locations Reason for clustering
Wine makers Napa Valley (US);
Bordeaux region (France)
Natural resources
Land, Climate
Softwarefirms Silicon Valley, Boston,Bangalore (India) Talent resources of brightgrads. in Sc./tech. areas,
venture capitalists nearby
Electronic firms Northern Mexico Duty free export zones
Computer hardwaremanufacturers
Singapore, Taiwan High tech penetration rate,Skilled/educated workforce
with large pool of engineers
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Location Decision Process
Facility Location is typically conducted hierarchically and
involves the following basic decisions where appropriate .
1)Global Location
2)Regional Location
3)District or community Location
4)Local Site Selection
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Cost Volume Break even Analysis of Location
Revenues and costs are affected by facility location .Break
even analysis helps relate costs and revenues to facility
location .Revenue minus total cost at each location .
1)Estimate the fixed and variable cost associated with each
location
2)Graph them for a representative volume
3)If revenues vary from one location to another ,the
comparison should be made on the basis of total Revenue
minus total cost at each location
Different breakeven volumes for four location options for
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Location 1
Cost/
Revenue
(Rs)
Cost/
Revenue
(Rs)
Cost/
Revenue
(Rs)
Cost/
Revenue
(Rs)
VC (High)
VC (Low)
FC (Low)
FC (High)
VBE VBE
VBE VBE
Volume of Production (units) Volume of Production (units)
Volume of Production (units) Volume of Production (units)
TR
TC
TC
Different breakeven volumes for four location options for
different FC and VC values
Location 2
Location 3 Location 4
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Cost/Revenue
(Rs)
Volume of Production
(units)
0
FC (X)
VBE (X)
TCDS(X)
VMAX (X) VMAX (X)DS
FC (X)EXP
TC (X)
TCDS, EXP (X)
VMAX (X)DS,
EXP
FC (Y)
TC[(X) DS, EXP +(Y)]
VMAX [(X)DS,
EXP+(Y)]VBE [(X)DS,
EXP+(Y)]
TR
TC[(X) DS, EXP+ (Y)DS]
Break-evenanalysis for afacilityexperiencingvery high
demandincreasing at ahigh rate
VMAX [(X)DS, EXP+(Y)DS]
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Fixed Costs and Variable costs
In economics, fixed costs are business expenses that are not
dependent on the level of goods or services produced by the
business. They tend to be time-related, such as salaries or
rents being paid per month, and are often referred to as
overhead costs.
In management accounting, fixed costs are defined as
expenses that do not change as a function of the activity of a
business, within the relevant period. For example, a retailer
mustpay rentand utility bills irrespective of sales.
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The Effect of Location on Fixed Costs
New or additional facilities entail fixed Costs .
Normally Fixed costs are incurred only once .
To be recovered from revenues over a period of Time New facilities involve costs for new construction ,purchase
,renovation .
Once acquired more money is spent on fixtures and
equipments . The magnitude of these costs depend on the Location .
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The Effect of Location on Revenues
In business, revenue is income that a company receives from
its normal business activities, usually from the sale of goods
and services to customers.
Facilities location affects the revenue in both Goods and
Services industry .
Delivery Time and distance plays a crucial role in revenue
Generation
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Reasons for Location Changes
Changes in resources may occur .The cost or availability of
labor ,raw materials and supporting resources (Such as sub
contractors)may change .
The geography of demand may change
Companies may merge ,making facilities redundant
New products may be introduced ,changing the availability of
resources and markets
Political and economic conditions may change
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Labour and Demand factors
Labor supply
Labor management Relations
Ability to retain Labor force Availability of adequate labor skills
Labor rates
Location of competitors
Volume of traffic around location .
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Climate and Environment factors
Climate and Living conditions
School facilities
Universities and research facilities Community attitudes
Health care facilities
Property costs
Cost of Living
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State and Local Legal and Political Factors
Taxation climate and Policies
Local and Tax structures
Opportunity for highway advertising Tax incentives and Abatements
Health and safety laws
Regulatory agencies and policies .
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Utilities Factor
Adequate water supply
Waste Disposal
Power supply
Fuel Availability Communications Capability
Price/Cost
Utility Regulatory Laws and Practices .
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Transportation Factors
Closeness to sources of supply
Closeness to markets
Adequacy of transportation modes (Air,truck,train ,water) Costs of transportation
Visibility of the facility from the highway
Parking Capability
Response time for emergency services .
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Methods Of Evaluating Location Alternatives
1. The Factor-Rating Method
2. Locational Break-Even Analysis
3. Center-of-Gravity Method
4. The Transportation Method
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Factors Ratings
Factor ratings are used to evaluate location alternativesbecause
(i) their simplicity helps decide why one site is better thananother;
(ii) they enable managers to bring diverse locationalconsiderations into the evaluation process; and
(iii) they foster consistency of judgement about locationalternatives.
The following steps are involved in factor rating:
Develop a list of relevant factors. Assign a weight to each factor to indicate its relativeimportance (weights may total 1.00).
Assign a common scale to each factor (e.g., 0 to 100 points),and designate any minimums.
Score each potential location according to the designated scale,and multi l the scores b the wei hts.
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Example
A Automobile manufacturing company intends
to open a new facility . The following table
contains information on two potential
locations. Which is the better alternative?
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Factor-Rating Example
Critical ScoresSuccess (out of 100) Weighted ScoresFactor Weight Sanand Singur Sanand Singur
Laboravailability
and attitude .25 70 60People-to
car ratio .05 50 60
Per capitaincome .10 85 80
Tax structure .39 75 70Education
and health .21 60 70
Totals 1.00
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Factor-Rating Example
Critical ScoresSuccess (out of 100) Weighted ScoresFactor Weight Sanand Singur Sanand Singur
Laboravailability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0People-to
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capitaincome .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0
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Center-of-Gravity Method
Place existing locations on a coordinategrid
Grid origin and scale is arbitrary
Maintain relative distances
Calculate X and Y coordinates for center
of gravity Assumes cost is directly proportional to
distance and volume shipped
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Centre of Gravity Method
The Center of gravity Method determines X and Y Coordinates (Location ) fora single facility .
1. Place the locations to be supported on a coordinate system (like agraph).
2. Calculate the center of gravity:Cx= Xi Wi / Wi & Cy= Yi Wi / Wi
Where:
Cx =x coordinate of the center of Gravity
Cy=y coordinate of the center of Gravityxi = x-coordinate of location i.
yi = y-coordinate of location i.Wi= quantity (load) of goods moved to/from location i.
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Centre of Gravity Method Problem
Retail Expected
Outlets DemandA 80
B 100
C 120
D 130
E 100
F 150
G 90
Total Demand 770
Q. : Where should we set up a
centralized warehousing facility?
C t f G it M th d
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Centre of Gravity Method
Y-Distance(KM)
04
2
4
6
8
10
12
1416
8 12 16 20
X- Distance (KM)
B
G
Center-of-gravity
D
F
A
C E
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Centre of Gravity Method
Retail
Outlet
Xi
Dist
Yi Dist Volume
(Vi) QTY
Vi Xi Vi Yi
A 4 10 80 320 800
B 3.5 15 100 350 1500
C 4 6 120 480 720
D 10 2 130 1300 260
E 16 6 100 1600 600
F 8 5 150 1200 750
G 14 13 90 1260 1170
Vi = 770 Vi Xi = 6510 Vi Yi = 5800
Xc=6510/770
= 8.45
Yc = 5800 /770
= 7.53
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Break Even method
Cost-volume analysis method used for industrial locations
3 Steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the cost for each location
3. Select location with lowest total cost for expectedproduction volume
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Cost-Volume-Profit (or Br. Even Analysis)
C
ost
Volume of Sales
TCA
FCA
Vo
Revenue
VCA
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Break Even Analysis Method
Location A : Annual fixed costs of Rs.3 L,
Variable Costs - Rs. 63 / unit,
Revenues Rs. 68 per unit.
Location B : Annual fixed costs Rs. 8 L
Variable costs Rs. 32 per unit,
Revenues are Rs. 68 per unit.
Exp. Sales volume 25000 units per year.
Which location is more attractive?
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Answer -Break Even Analysis Method
B E Volume = Fixed cost / (Contribution / unit)
VBE (A) = Rs 3 L / 68-63 = 60,000 units
VBE (B) = Rs 8 L / 68-32 = 22,222 units
At the expected demand of 25000 units,
A B
Revenue 17,00,000 17,00,000
Variable Cost 15,75,000 8,00,000
Fixed Cost 3,00,000 8,00,000
Total Cost 18,75,000 16,00,000
Profit (Loss) (1,75,000) 1,00,000
Location B is more attractive, even if annual fixed cost is higher
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Service Location Strategy
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 firms and competitors locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm8. Quality of management