Section Objectives

1

• Section Objectives
• After completing this section, you should be able
  to
• 1. List the main reasons organizations become
  involved in location decisions.
• 2. Explain why location decisions are important.
• 3. Discuss the options that are generally
  available in location decisions.
• 4. Describe the major factors that affect
  location decisions.
• 5. Outline the decision process that is
  generally followed in making facility location
  decisions.
• 6. Use the techniques presented to solve typical
  problems such as
• centre-of-gravity
• economic(cost) analysis
• factor rating

2

• The Need for Location Decisions
• 1. Newly formed organization - the need to find
  the right location as a critical element in the
  success of a start-up operation.
• 2. Demand exceeds existing capacity - outgrowing
  an existing location
• 3. Single facility becomes too massive and
  inefficient - big is not always beautiful, nor
  manageable.
• 4. Technology developments in the production
  process - a change in process may require new
  equipment and facilities at a new location.
• 5. Geographical shift in customer market - the
  need to be where your market is now.
• 6. Addition of new product / service line - does
  this new product/service need new facilities?
• 7. Depletion of basic inputs - exhausting raw
  material supply means moving to anew source of
  supply.
• 8. Marketing strategy to expand markets - need to
  have a presence in a market to maximize sales
  opportunities.

3

• Significance of Location Decisions
• 1. Major impact on revenues and / or costs of the
  organization
• construction costs
• operating costs
• distribution costs
• customer service / market area
• 2. Impact on the firms competitive position in
  the industry.
• 3. Location decisions are made infrequently
• they are not easy to reverse
• future costs of location are the critical ones
  for consideration

4

• Difficulties of Making Facility Location
  Decisions
• 1. Rarely is a location clearly superior to all
  others.
• 2. There are an overwhelming number of decision
  alternatives
• expand capacity at one or more existing
  facilities
• move to a larger, new facility
• keep current facilities and one or more new
  facilities
• 3. When locating a new facility, there are an
  infinite number of possible sites from
• which to choose. It is unlikely that the
  optimal site will ever be chosen.
• 4. Many tangible and intangible factors are not
  quantifiable. e.g. customer service,
• politics, labour relations.
• A manager must subjectively trade off these
  factors when analyzing different sites.
• 5. Difficult to forecast future costs.

5

• Factors That Influence Location
• 1. Market
• size / growth
• need for proximity
• 2. Labour
• availability
• quality / skills
• wage rates
• union activity
• transportation(public)
• 3. Inputs
• availability
• proximity
• complementary industries
• cost of inputs
• alternative sources

6

• 4. Utilities
• availability and dependability of power / fuel /
  gas
• water and waste treatment capacity
• 5. Site Alternatives
• industrial zoning locations
• competition for sites
• land and construction costs
• regulation and tax structure / incentives
• environmental / soil characteristics
• 6. Transportation Infrastructure and Services
• highway, waterway, railroad, airport
• availability and cost
• 7. Local Environment
• cost of living / housing / taxes
• community services
• attitudes
• recreational, educational and medical facilities

7
Factor Affecting The Heavy Light Ware-
Customer Government Location
Decision Manuf. Manuf. housing Retailing Services
Services Nearness to customers C
C B A A A
Labour availability and costs B A
B B A A Degree of
unionization A A B B
B C Construction and land costs
A B B B B
B Nearness to transport facilities A B
A B C C Incoming
transport costs A B A B
C C Outgoing transport costs B
B A C C C Utilities
availability and cost A B C
C C C Proximity to raw
materials and supply A B C
C C C Zoning restrictions and
environmental impact A B C
C B C Note A very
important, B important, C less important
8

• Trends in the Location of Manufacturing
  Operations
• 1. Centralization
• integrated industrial complexes
• malls, super stores
• 2. Decentralization
• smaller, dispersed service facilities
• mini-plants(e.g. brewery)
• flexible manufacturing systems
• 3. Single level facilities
• 4. Movement away from urban centres
• 5. Industrial parks
• 6. Competition to attract industry

9

• Single Facility Location - the Sequence
• Economic Decisions
• 1. Selection of market region
• market share / potential
• operating / transportation costs
• raw material availability and cost
• sales tax / income tax / incentives(federal
  provincial)
• 2. Selection of community
• labour cost and availability
• property taxes(municipal control)
• public / community services
• Engineering Decisions
• 3. Selection of site
• access to transportation
• site characteristics
• utilities
• construction costs
• 4. Facility layout, design and construction

10

• Techniques For Single Facility Location
• 1. Centre-of-Gravity Model
• selects geometrically optimal site based on
  volume and transport cost
• exact location model is slightly more accurate
• 2. Factor-Rating Systems
• assigns points to each major factor at each site
• involves a considerable amount of judgment
• 3. Economic Analysis
• detailed cost analysis of operating in different
  locations
• 4. Linear Programming
• finds optimal location to minimize cost by
  substituting each location into a transportation
  matrix.
• 5. Heuristics
• various heuristics(rules of thumb) are available
  - e.g. transportation method
• 6. Simulation
• simulation of various sites may be useful to
  evaluate impacts of uncertainty
• involves the use of simultaneous equations

11

• Centre-of-Gravity Model
• The concept - a useful starting point in the
  process of determining an appropriate location
  for a facility where transport costs are
  important.
• The Centre-of-Gravity solution is given as Cx and
  Cy coordinates on a grid map
• Cx Si(Vi x Ri x Xi) / Si(Vi x Ri) CY
  Si(Vi x Ri x Yi) / Si(Vi x Ri)
• where X, Y coordinates of the warehouse
• Vi volume to(from) point i
• Ri transport rate to(from) point i, in dollars
  per ton-mile(or per cwt)
• Xi, Yi coordinates of demand or supply
  point i
• Given that Vi volume to be moved
• Ri transport cost per unit
  of weight per unit of distance
• Di distance to be moved
• then transport cost Si(Vi x Ri x Di) volume
  rate distance, and
• total transport cost TC SiVi x Ri x (Xi - X)2
  (Yi - Y)21/2
• sum of all volume rate distance
  combinations

12

Centre-of Gravity - Illustration 1
Island Limited Distributors processes two
different fish products in Rustico (P1) and St.
Peters (P2) to supply markets in Summerside
(M1), Charlottetown( M2) and Montague( M3). The
company has determined that it should have a
warehouse to receive shipments from the two
plants and to handle orders from the three
markets.
100 90 80 70 60 50 40 30 20 10
St. Peters
p2
Rustico
p1
m3
Montague
m1
Summerside
m2
Charlottetown
10 20 30 40
5 0 60 70 80
90 100 110 120
130 140 150
13
Origin/Dest. P1 P2 M1 M2 M3
Product A B A B A B A B
Volume(tons) 2,000 3,000 1,500 2,500 1,000
Transport Cost(/ton-mile.) 1.50 1.50 2.25
2.25 2.25
(2000 x 1.50 x 60) (3000 x 1.50 x
110) (1500 x 2.25 x 20) (2500 x 2.25 x 90)
(1000 x 2.25 x 130)
(2000 x 1.50) (3000 x 1.50) (1500 x 2.25)
(2500 x 2.25) (1000 x 2.25)
(180000 495000 67500 506250 292500) /
(3000 4500 3375 5625 2250) 82.20
(2000 x 1.50 x 50) (3000 x 1.50 x 70)
(1500 x 2.25 x 20) (2500 x 2.25 x 10) (1000 x
2.25 x 50) (2000 x
1.50) (3000 x 1.50) (1500 x 2.25) (2500 x
2.25 ) (1000 x 2.25) (150000
315000 67500 56250 112500) / (3000 4500
3375 5625 2250) 37.40 Point Volume Transp
ort Cost Distance Product P1 2000
1.50 25.52 76,560 P2 3000
1.50 42.84 192,780 M1 1500
2.25 64.59 217,992 M2
2500 2.25 28.49 160,256 M3
1000 2.25 49.43
111,218 758,806
X
Y
Where did these values come from?
14

• Factor Rating
• Frequently, factors that are important to retail
  location are difficult, if not impossible, to
  quantify. Judgment remains an important part of
  the location decision. Yet it is difficult to
  make comparisons among sites unless the analysis
  can be quantified in some fashion.
• One approach is to develop a list of weighted
  factors and to score each factor for
  potential sites. The sum of the factor weights
  time the factor scores yields an index number for
  each site. Sites with high index values would be
  preferable to sites with low index values.
• Factor rating is a general approach for
  evaluating alternatives by establishing a
  composite value for each alternative that
  summarizes all related factors. The technique
  allows decision makers to incorporate personal
  opinions as well as quantitative information into
  the decision process.

15
The following procedures are used to
develop a factor rating a. Determine the factors
that are relevant (e.g. location of market,
utilities, parking facilities, revenue
potential). b. Assign a weight to each factor
that indicates its relative importance compared
to all other factors. Typically, weights sum to
1.00 c. Decide on a common scale for all factors
(e.g. 0 to 100). d. Score each location
alternative. e. Multiply the factor weight by the
score for each factor, and sum the results for
each location alternative. f. Choose the
alternative with the highest composite score.
Select relevant factors
Assign weights to factors
Score each alternative
Multiply factors by scores
Select highest score
This procedure is illustrated in the example on
the next page.
16
Factor Rating - Illustration 1
A small wholesaler has recently decided to expand
its operations to include several new lines,
which it hopes to store in a separate location
because of space limitations in its existing
warehouse. The following rating sheet
illustrates relevant factors, factor ratings and
actual ratings for two alternative locations,
along with the necessary calculations to obtain
composite scores for each alternative.
Scores out of 100
Factor Weight Alt. 1 Alt. 2 Alternative
1 Alternative 2 Nearness to supplier .10
100 60 .10(100) 10.0 .10(60) 6.0 Labour
costs .05 80 80 .05(80)
4.0 .05(80) 4.0 Transport availability
.40 70 90 .40(70) 28.0 .40(90)
36.0 Transport costs .10 86
92 .10(86) 8.6 .10(92) 9.2 Climate
.20 40 70 .20(40) 8.0 .20(70)
14.0 Taxes .15 80 90 .15(80)
12.0 .15(90) 13.5 1.00
70.6 82.7 Therefore,
alternative 2 is better because it has the higher
composite score.
Weighted Scores
17

• Locational Cost-Volume Analysis
• The procedure for locational cost-volume analysis
  involves the following steps
• 1. Determine the fixed and variable costs for
  each location alternative.
• 2. Plot the total cost lines for all location
  alternatives on the same graph.
• 3. Determine which location has the lowest total
  cost for the expected level
• of output.
• This method assumes the following
• 1. Fixed costs are constant for the range of
  probable output.
• 2. Variable costs are linear (i.e., variable
  costs per unit are constant) for the
• range of probable output.
• 3. The required level of output can be closely
  estimated.
• 4. Only one product is involved.

18
Locational Cost-Volume Analysis - Illustration 1
Fixed and variable costs for four potential
plant locations are shown below Fixed
cost Variable cost Location
per year
per unit A
250,000 11 B 110,000
30 C 150,000 20
D 200,000 35 a. Plot the
total cost lines for these locations on a single
graph. b. Identify the range of output for
which each alternative is superior (i.e., has the
lowest total cost. c. If the expected output is
8,000 units per year, which is the preferred
location? Solution a. To plot total cost
lines, select an output slightly larger than the
expected output e.g., 10,000. Compute the
total cost for each location at that level.
Fixed cost
Variable cost Total cost
A.. 250,000 11(10,000)
360,000 B.. 100,000
30(10,000) 400,000
C.. 150,000 20(10,000)
350,000 D.. 200,000
35(10,000) 550,000
19
Locational Cost-Volume Analysis - Illustration
1 Solution Continued
Plot each locations fixed cost at output 0 and
the total cost at 10,000 units.
B superior
C superior
A superior
b. The approximate ranges for which the various
alternatives will yield the lowest costs are
shown on the graph. Note that location D
is never superior. c. We can see that for 8,000
units per year, location C would provide the
lowest total cost.
Question How would you find the exact ranges?