Facility Location

1
Facility Location

• Relevance of Facility Location Decisions.
• Types Causes of Facility Location.
• General Process for Facility Location.
• Trends and Future Strategies.
• Methods for Facility Location Selection.

2
Location Case Studies

• Case 1 Ikea has not open a center in Valencia.
• Case 2 After a fire at its painting facilities
  in Stutgart, Schefenacker AG, the biggest rear
  view mirror manufacturer in the world, decides to
  open a new facility in Mosonmagyorovar (Hungary).
  It will be the thrid painting facility of this
  type after (USA and South Korea).
• Case 3 Grupo F Segura, following the
  requirements of their clients (mainly VW group)
  opens a factory at Hungary.
• Case 4 Ford Motor Company is to decide where to
  assemble the next generation of Ford Focus and
  Ford Fiesta.
• Case 5 Zara UK is opening a new store in Canary
  Wharf

3
Importance of Facility Location

• Facility Location decisions are part of the
  companys strategy. Infrequent but expensive.
• Reasons for the importance
• Facility Location requires large investment that
  can not be recovered.
• Facility Location decisions affect the
  competitive capacity of the company.
• All areas of the company are affected by Facility
  Location Operations, but also Business
  Development, Human Resources, Finance, etc.
• The facility location decisions affect not only
  costs but the companys income
• For a service business, market proximity is
  critical to determine the capacity to attract
  customers.
• For a manufacturing business, facility location
  affects product delivery time and level of
  customer service, which affects sales.
• Regarding costs, facility location affects a
  great variety of them
• Land costs.
• Labor costs.
• Raw materials.
• Transportation and distribution

4
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

5
Causes that originate Location decision problems

• An expanding market.
• It will require the addition of more capacity at
  a certain geographic point, either in an existent
  facility or in a new one.
• Introduction of new products or services.
• A contracting demand, or changes in the location
  of the demand.
• It may require the shut down and/or relocation of
  operations.
• The exhaustion of raw materials in a certain
  area.
• Example Extraction companies.
• Obsolescence of a manufacturing facility due to
  the appearance of new technologies.
• It means the creation of a new modern plant
  somewhere else.
• The pressure of the competence.
• To increase the level of service, it can force
  the company to increase capacity of certain
  plants or relocate some of them.
• Change in other resources, like labor conditions
  or subcontracted components, or change in the
  political or economic environment in a certain
  region.
• Mergers and acquisitions.
• Some facilities may appear as redundants, or bad
  located with respect to others.

6
Location Alternatives

• Expansion of an existent facility.
• Only possible if exists enough space.
• Attractive alternative when the current facility
  location is good enough for the company.
• Lower costs than other options
• Start a new facility in a new area.
• Sometimes is a more advantageous option than the
  previous one (if there are problems related to
  lose of focus on the companys objectives).
• Shut down of a facility and (or not) starting of
  a new one somewhere else.
• Moving production from one plant to other.

7
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

8
Issues in Facility Location

• Proximity to Customers
• Business Climate
• Total Costs
• Infraestructure
• Quality of Labor
• Suppliers
• Other Facilities
• Political Risks
• Government Barriers
• Trading Blocks
• Environmental Regulation
• Host Community
• Competitive Advantage

9
Plant Location Methods
If the Boss likes Bakersfield, I like Bakersfield
10
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

11
GLOBAL COMPETITION
Competitive STRATEGY
PHASE I Supply Chain Strategy
INTERNAL CONSTRAINTS Capital, growth
strategy, existing network
TARIFFS AND TAX INCENTIVES
PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact,
support required, flexibility
REGIONAL DEMAND Size, growth, homogeneity, local
specifications
PHASE II Regional Facility Configuration
COMPETITIVE ENVIRONMENT
POLITICAL, EXCHANGE RATE AND DEMAND RISK
PHASE III Desirable Sites
AVAILABLE INFRASTRUCTURE
PRODUCTION METHODS Skill needs, response time
PHASE IV Location Choices
FACTOR COSTS Labor, materials, site specific
LOGISTICS COSTS Transport, inventory, coordination
12
Levels of Decisions.
Market Potential Market Share Operating Cost
Market Region
Subregion
Transport Cost (RM) Taxes Raw material
costs Labor Cost and Availability
Access to market/materials Material Cost Labor
Cost and Availability Taxes Availability of
public services Availabilty of sites Community
amenities
Community
Access to transport Network Site
Characterics Taxes Availability of public
services Land and acquisition costs Construction
Costs
Sites
13
General Process for Facility Location

• Creation of a multifunctional team to perform the
  study.
• Preliminary analysis.
• Study of the companys strategies and the
  policies of the company to translate them into
  Facility Location requirements.
• Due to the big quantity of factors affecting
  Facility Location, the company should determine
  which is the criteria to evaluate the different
  alternatives (transportation needs, land,
  supplies, labor, infrastructures, services,
  environmental conditions).
• The multifunctional team must distinguish
  between Dominant factors (essential) Secondary
  factors (desirable).
• Search of Location Alternatives.
• Establishment of a group of location candidates.
• Evaluation of Alternatives (detailed analysis).
• Information gathering from each location to be
  measured against each of the factors considered.
• Selection of Facility Location.
• Through qualitative and quantitative analysis,
  the different alternatives will be compared
  against each other, to determine several valid
  locations.
• Objective Look for several acceptable locations,
  to let senior management to decide taking into
  account subjective factors.

14
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

15
Trends Future Strategies

• Most of the Facility Location factors vary with
  time
• The accelerated changes in the economic
  environment are impacting the frequency of
  Facility Location decisions.
• Changes in the economic environment
• International level competition among companies.
• Location in countries different than the origin
  of the company are a common situation for big
  companies.
• Appearance of new markets and unification of
  others.
• Increase of competition pressure.
• Logistics factors are more important and complex.
• Companies are reviewing their facility locations
  in order not to loose competitiveness.

16
Trends Future Strategies

• Changes in the economic environment
• Industry processes automation.
• Labor costs become less important countries with
  lower labor costs become less attractive.
• Labor qualification, flexibility and mobility
  become more important factors.
• However, labor costs are still a main factor in
  some industries and in certain manufacturing
  processes of others Relocation to Mexico,
  Taiwan, Singapore, etc.

17
Trends Future Strategies

• Changes in the economic environment
• Transportation and IT development.
• Helps in the internationalization of the
  operations higher geographical diversity in
  location decisions.
• Tendency to localize close to the markets
  emphasis in customer service, direct customer
  contact, fast development of new products, fast
  delivery
• Due to flexible technologies, companies have the
  possibility of starting up more plants at a
  smaller size.
• J.I.T. Systems.
• Some industries are forcing their suppliers and
  customers to locate their facilities in a close
  area to reduce transportation costs and supply at
  a higher frequency.

18
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

19
Locating service facilities

• Because of the variety of service firms and the
  relatively low cost of establishing a service
  facility compared to one for manufacturing, new
  service facilities are far more common than new
  factories and warehouses.
• Services typically have multiple sites to
  maintain close contact with customers. The
  location decision is closely tied to the market
  selection decision.
• Market affects the number of sites to be built
  and the size and characteristics of the sites.
• Whereas manufacturing location decisions are
  often made by minimizing costs, many service
  location decision techniques maximize the profit
  potential of various sites.

20
Cost vs Response TIme
Hi
Local FG
Mix
Regional FG
Local WIP
Cost
Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Low
Hi
Low
Response Time
21
Response Time 1 week-gt 1 Distribution Center
Clientes
Centro distribución
22
Response Time 5 days-gt 2 Distribution Center
Clientes
Centro distribución
23
Response Time 3 days-gt 5 Distribution Center
Clientes
Centro distribución
24
Response Time 1 day-gt 13 Distribution Center
Clientes
Centro distribución
25
Same Day Response --gt 26 Distribution Centers
Customer
DC
26
Response time vs. Number of facilities
Response Time
Number of Facilities
27
Cost vs Number of Facilities
28
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

29
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

30
Centroid Method
Transport cost are related to volume
Cx , Cy Gravity Center dix , diy coordinates
de la ubicación i Vi Volume of goods
moved from/to i
31
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

32
Factor-Rating Method

• Popular because a wide variety of factors can be
  included in the analysis
• Six steps in the method
• Develop a list of relevant factors called
  critical success factors
• Assign a weight to each factor
• Develop a scale for each factor
• Score each location for each factor
• Multiply score by weights for each factor for
  each location
• Recommend the location with the highest point
  score

33
Factor-Rating Example
Table 8.3
34
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

35
Locational Break-Even Analysis Example
Three locations
Total Cost Fixed Cost Variable Cost x Volume
36
Locational Break-Even Analysis Example
37
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

38
Network Optimization Models

• Allocating demand to production facilities
• Locating facilities and allocating capacity

• Key Costs
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Which plants to establish? How to configure the
network?
39
Conventional Network
40
Demand Allocation Model

• Which market is served by which plant?
• Which supply sources are used by a plant?
• xij Quantity shipped from plant site i to
  customer j

41
Plant Location with Multiple Sourcing

• yi 1 if plant is located at site i, 0 otherwise
• xij Quantity shipped from plant site i to
  customer j

42
Multi-echelon
43
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

44
Set Covering Models

• Define
• cj cost of locating facility at site j
• aij
• xj

• if facility located at site j can cover customer
  i
• 0 Otherwise

• if facility located at site j
• 0 Otherwise

• The set covering problem is to

45
The set covering problem is to
46
Greedy Heuristic for Set Covering Problem

• Step 1 If cj 0, for any j 1, 2, ..., n, set
  xj 1 and remove all constraints in which xj
  appears with a coefficient of 1.
• Step 2 If cj gt 0, for any j 1, 2, ..., n and
  xj does not appear with a 1 coefficient in any
  of the remaining constraints, set xj 0.
• Step 3 For each of the remaining variables,
  determine cj/dj, where dj is the number of
  constraints in which xj appears with a 1
  coefficient. Select the variable k for which
  ck/dk is minimum, set xk 1 and remove all
  constraints in which xj appears with a 1
  coefficient. Examine the resulting model.
• Step 4 If there are no more constraints, set all
  the remaining variables to 0 and stop. Otherwise
  go to step 1.

47
Example

• A rural country administration wants to locate
  several medical emergency response units so that
  it can respond to calls within the county within
  eight minutes of the call. The county is divided
  into seven population zones. The distance
  between the centers of each pair of zones is
  known and is given in the matrix below.
• Imagine that the one that has to make the
  decision does not want to place a emergency unit
  on B or D

48
Example

• 1 2 3 4 5 6 7
• 1 0 4 12 6 15 10 8
• 2 8 0 15 60 7 2 3
• 3 50 13 0 8 6 5 9
• 4 9 11 8 0 9 10 3
• 5 50 8 4 10 0 2 27
• 6 30 5 7 9 3 0 27
• 7 8 5 9 7 25 27 0

dij
49
Example 4

• The response units can be located in the center
  of population zones 1 through 7 at a cost (in
  hundreds of thousands of dollars) of 100, 80, 120
  110, 90, 90, and 110 respectively. Assuming the
  average travel speed during an emergency to be 60
  miles per hour, formulate an appropriate set
  covering model to determine where the units are
  to be located and how the population zones are to
  be covered and solve the model using the greedy
  heuristic.

50
Solution
Defining

1 if zone is center can be reached from
center of zone j within 8 minutes
aij
0 otherwise

• and noting that dij gt 8, dij lt 8 would yield aij
  values of 0, 1, respectively the following aij
  matrix can be set up.

51
Solution
Minimize Subject to
100x180x2120x3110x490x590x6110x7 x1 x2
x4 x7 1 x1 x2 x5 x6 x7
1 x3 x4 x5 x6
1 x3 x4 x7 1 x2 x3 x5
x6 1 x2 x3 x5 x6 1 x1
x2 x4 x7 1 x1 , x2 , x3 , x4 ,
x5 , x6 , x7 0,1
52
Greedy Heuristic

• Step 1 Since each cj gt 0, j 1, 2, ..., 7, go
  to step 2.
• Step 2 Since xj appears in each constraint with
  a 1 coefficient, go to step 3.

53
Greedy Heuristic
Step 3
c1
c5
100
90


33.3


22.5
d1
d5
3
4
c2
c6
80
90


16


22.5
d2
d6
5
4
c3
c7
120
110


30


27.5
d3
d7
5
4
c4
110


27.5
d4
4
54
Greedy Heuristic
Since the minimum ck/dk occurs for k 2, set x2
1 and remove the first two and the last three
constraints. The resulting model is shown below.
Minimize Subject to
100x1120x3110x490x590x6110x7 x3 x4 x5
x6 1 x3 x4 x7 1 x1
, x3 , x4 , x5 , x6 , x7 0,1
55
Greedy Heuristic

• Step 4 Since we have two constraints go to step
  1.
• Step 1 Since c1 gt 0, j 1, 3, 4, ..., 7, go to
  step 2
• Step 2 Since c1 gt 0 and x1 does not appear in
  any of the constraints with a 1 coefficient, set
  x1 0.

56
Greedy Heuristic
Step 3
c3
c7
120
110


60


110
d3
d7
2
1
c4
110


55
d4
2
c5
90


90
d5
1
c6
90


90
d6
1
57
Greedy Heuristic

• Since the minimum ck/dk occurs for k 4, set x4
  1 and remove both constraints in the above
  model since x4 has a 1 coefficient in each. The
  resulting model is shown below.
• Minimize Subject to
• 120x390x590x6110x7
• x3 , x5 , x6 , x7 0

58
Greedy Heuristic
Step 4 Since there are no constraints in the
above model, set x3 x5 x6 x7 0 and
stop. The solution is x2 x4 1 x1 x3 x5
x6 x7 0. Cost of locating emergency
response units to meet the eight minute response
service level is 80 110 190.