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Facility Location

Suhas Rane

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

Facility Location is a Strategic Decision

One time decisions
Difficult to reverse

Affect fixed, variable and distribution costs

Affect sales

Your plant / facility may be .

Near the Raw Material sources (Steel, Cement Plants ) Near to Market / Customers (FMCG, Perishables Goods, Services) Best facilities & infrastructure (MIDC, Union Territories, SEZs)

Country Factors
1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor availability, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks

Country Factors

Region / Community Factors

1. Corporate desires 2. 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

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

Approach to Location
Profit maximization (Service industry) Cost minimization (Manufacturing)

Approach to Location
Service/Retail Location Goods Mfg. Location

Revenue Focus
Drawing area; purchasing power Competition; advertising/pricing

Cost Focus
Tangible costs
Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; Raw material; taxes, and so on

Physical quality
Parking, Access; Security, Lighting; Appearance, Image

Intangible and future costs

Attitude toward union Quality of life Education expenditures by state Quality of state and local government

Cost determinants
Rent, Management caliber Operations policies (hours, wage rates)

Approach to Location
Service/Retail/Prof. Locn. Techniques
Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of area

Goods-mfg. Location Techniques

Transportation methods

Factor-rating method
Locational break-even analysis Crossover charts

Center-of-gravity method
Geographic information systems

Hotel Location
( Case : To open Chain of Hotels across the country )

Location is a strategically important decision in the hospitality industry

Finally, the model considered only four variables - Property Prices of the inn - Median income levels

- State population per inn

- Location of nearby businesses / industries/ colleges

Telemarketing Location
Require neither face-to-face contact nor movement of materials Have very broad location options

Traditional variables are no longer relevant

Cost and availability of labor may drive location decisions

Wine makers

Napa Valley (US); Bordeaux region (France)
Silicon Valley, Boston, Bangalore (India) Northern Mexico

Reason for clustering

Natural resources of land and climate
Talent resources of bright graduates in sc./tech. areas, venture capitalists nearby Duty free export zones

Software firms

Electronic firms

Computer hardware manufacturers

Singapore, Taiwan

High tech penetration rate and per capita GDP, Skilled/educated workforce with large pool of engineers


Surat, Ludhiana, Tirupur Pune- Chakan, Pithampur, Manesar Kanpur, Agra, Chennai Mind-space

Reason for clustering

Automobiles & Ancillaries Leather


Methods for Location

1. 2. 3. 4. 5. 6. Factor Rating Transportation model Centroid Method Load Distance Break-even Analysis Qualitative Factor Analysis


Factor Rating (1 to 5) 4 5 3 4 2 2 1

Location Rating (1 to 10) Location A 3 6 7 9 6 6 5 Location B 8 7 8 7 3 5 3

Rating Product Location Location A B 12 30 21 36 12 12 5 128 32 35 2 28 6 10 3 138

1) Proximity to Mkts 2) Tax advantage 3) Availability of power 4) Water availability 5) Community attitude 6) Infrastructure Development 7) Support industry

Location B is Preferred to A

Centre of Gravity Method Problem

Retail Outlets Expected Demand
80 100 120 130 100 150 90 770

A B C D E F G Total Demand

Q. : Where should we set up a centralized warehousing facility?

Centre of Gravity Method

16 14 12 10
Y-Distance (KM)


8 6 4 2 0 4 C





X- Distance (KM)

Centre of Gravity Method

Retail Xi Yi Volume Outlet Dist Dist (Vi) QTY
A B C D E F G 4 3.5 4 10 16 8 14 10 15 6 2 6 5 13 80 100 120 130 100 150 90

Vi Xi
320 350 480 1300 1600 1200 1260

Vi Yi
800 1500 720 260 600 750 1170 Vi Yi = 8500 Yc = 5800 /770 = 7.53

Vi = 770 Vi Xi = 6510 Xc=6510/770 = 8.45

Load Distance method

Used to minimise the load distance product for pre selected locations

Matrix Manufacturing is considering where to locate its warehouse in order to service its four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered; Mansfield and Springfield, Ohio. Use the load-distance model to make the decision.

Load Distance method

Computing the Load-Distance Score for Springfield City Load Distance ld Cleveland 15 20.5 307.5 Columbus 10 4.5 45 Cincinnati 12 7.5 90 Dayton 4 3.5 14 Total Load-Distance Score(456.5) Computing the Load-Distance Score for Mansfield City Load Distance ld Cleveland 15 8 120 Columbus 10 8 80 Cincinnati 12 20 240 Dayton 4 16 64 Total Load-Distance Score(504)

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 expected production volume

Cost-Volume-Profit (or Br. Even Analysis)





Vo Volume of Sales

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?

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 Fixed Cost Total Cost Profit (Loss) 15,75,000 3,00,000 18,75,000 (1,75,000) 8,00,000 8,00,000 16,00,000 1,00,000

Location B is more attractive, even if annual fixed cost is higher

Transportation method
Finds amount to be shipped from several points of supply to several points of demand

Solution will minimize total production and shipping costs

A special class of linear programming problems

Transportation method

Analytical Delphi Method

(for complex multi-location decisions)

1. Coordinating Team (comprising Co-Employees &

External. Consultants ) uses questionnaire to illicit information from Forecasting Panel. 2. Forecasting Panel - to identify Future Trends in environment, threats, opportunities. Process is repeated several times till consensus is reached. 3. This information is given to Strategic Panel to identify Long Term Strategic Goals & Objectives. 4. Various ALTERNATIVES are developed. 5. These alternatives are then prioritized

Thank You

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