Facility Location and Layout

Prof. B.V.N. Sachendra

The main objective of any hospital is to treat the patients well by utilizing all the required resources effectively, efficiently, economically, and quickly.

This is possible when the hospital is of the right size, right design, and at a place where all kinds of economies are available.

Facility Location and Layout play a key role in enhancing the efficiency and effectiveness.

 Layout affects
the speed of operations The operational flexibility Location is both affected by and affects many economic and non-economic factors (ex: environment impact, suitability to community and so on).

Outline
GLOBAL COMPANY PROFILE: FEDERAL EXPRESS

Federal Express
Stresses hub concept Advantages:
enables service to more locations with fewer aircraft enables matching of aircraft flights with package loads reduces mishandling and delay in transit because there is total control of packages from pickup to delivery

Objective of Location Strategy

Maximize the benefit of location to the hospital

Location Decisions
Cost focus
Revenue varies little between locations

Location is a major cost factor

Affects shipping & service providing costs (e.g., labor) Costs vary greatly between locations
1995 Corel Corp.

Location Decisions
Revenue focus
Costs vary little between market areas

Location is a major revenue factor

Affects amount of customer contact Affects volume of business

Significance of Location
Selection of a location is a strategic decision. It requires a thorough analysis.

Location Decisions
Will fix the technology and cost structure. Require large financial investment. Are not easily reversible in short-term. Affect the hospitals ability to serve the patients quickly and conveniently. Are important to withstand competition.

Locations Decisions Influence the hospitals

Finance decisions Employment decisions Marketing decisions
and so on

Factors Influencing Location Decisions

Many factors - can be classified into three.

1. Market Related Factors 2. Tangible or Cost Factors 3. Intangible or Qualitative Factors

Location Factors
1. Market Proximity
Transportation Costs Customer Service Response to change in demand (Primary for Pure Service Organization like hospital)

2.

Integration

with Other Organization

Parts

of

Easy for Material Sharing Managing the Group as an Entity

3. Availability of Quality Labor

(Knowledge, Skill and Attitude)

4. Availability of Amenities
(Housing, Shops, Community Services, Communication Systems, etc.,)

5. Availability of Infrastructure

Adequate road, rail, air transportation Energy & Telecommunication

&

sea

6. Availability of Inputs
Help Reduce Costs Help Staff Meet Suppliers Easily

7. Availability of Services
Electricity Water Gas Drainage Disposal of Wastes Communications and so on.

8. Suitability of Land and Climate

Humidity, Temperature, Atmosphere Geology

9. Regional Regulations
Disposal of Wastes Hiring Regulations Free Trade Zones Legislative / Non Legislative / Cultural Barriers / Incentives Special Environmental Regulations

10. Room for Expansion 11. Safety Requirements 12. Site Cost 13. Political, Cultural and Economical Situations 14. Regional Grants, Special Grants, EXIM Barriers, and so on.

Location Decision Sequence

Country Region / Community Site

Location Decision Sequence

Country

Region/Community

Site
1995 Corel Corp. 1995 Corel Corp.

1995 Corel Corp.

Factors That Affect Location Decisions

Factors Affecting Country

Government rules, attitudes, political risk, incentives Culture & economy Market location Labor availability, attitudes, productivity, and cost Availability of supplies, communications, energy Exchange rates and currency risks

1995 Corel Corp.

 Corporate desires Attractiveness of region (culture, taxes, climate, etc.) Labor: availability, costs, attitudes towards unions Costs and availability of utilities Environmental regulations of state and town Government incentives Proximity to raw materials & customers Land/construction costs

Region Location Decisions

1995 Corel Corp.

Factors Affecting Site

Site size and cost Air, rail, highway, and waterway systems Nearness of services/supplies needed Environmental impact issues
HOSPITAL
HOSPITAL

1995 Corel Corp.

Location Decision Example

BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

1995 Corel Corp.

 Market location

Country Decision Factors

Other
Lower shipping cost ($2,500/car less) New plant & equipment would increase productivity (lower cost/car $2,000-3000)

U.S. is worlds largest luxury car market Growing (baby boomers)

Labor
Lower manufacturing labor costs
$17/hr. (U.S.) vs. $27 (Germany)

Higher labor productivity

11 holidays (U.S.) vs. 31 (Germany)

Region/Community Decision Factors

Labor
Lower wages in South Carolina (SC)

Government incentives
$135 million in state & local tax breaks Free-trade zone from airport to plant
No duties on imported components or on exported cars

Facility Location Methods

If boss likes Bombay, I like Bombay

Political decisions may occasionally override systematic analysis

Location Evaluation Methods

A number of diverse factors affect the location decisions Developing a formal, generic location model is very difficult. A complete study of all the sites available and identifying the optimal one is expensive and time consuming.

People generally go for satisfying decisions instead of optimum decisions.

Entrepreneurs may exercise their choice.

choose

to

One choice is to have a single central hospital that meets the health care requirements all the target customers.

Advantages
Economies of Scale Reduced unit cost by better utilization of equipment Dispersion of fixed costs over more units

Disadvantages
Highly Dispersed Suppliers Highly Dispersed Customers / Patients Transportation Costs Strike Disaster - Fire / Flood

The other choice is to have different small hospitals.

Systematic Methods of Facility Location

1. 2. 3. Factor Rating Systems Transportation Method Centroid Method / Load Distance Model

Factor Rating Systems

Most widely used of general location techniques Provides a mechanism to combine diverse factors Easy to understand format

 In a simple point-rating scheme, there may be about 10 factors that influence the location decision. However, each of the 10 may not be accounting for the costs in a similar manner. The difference between best and the worst in one factor might result in crores of rupees and the same in another might not even result in thousands. Hence, it is advisable to allocate a weighting scale based on standard deviations of costs rather than simply total costs amounts. In this way relative costs can be considered

Steps
Varies with Size and Scope of Operations

Define the Location Objectives and Associated Constraints

Objectives of Owners, Employees, Suppliers, Customers and Others. Constraints on Finances, Material and Other Inputs etc.

Identify the Relevant Decision Criteria Economic or Noneconomic.

Relate the Objectives to the Criteria

Do Field Research to Generate Relevant Data and Use the Models to Evaluate Alternative Decisions.

Use Either Primary or Secondary Data.

Select the Location that Best Fits the Criteria

Critical Success Factors

Technology

CSF in Location Analysis Country Country Country

1 3 5 2 5 3 3 2 1

Country 4 1 5

Rate of technology change Innovations in process design

Level of education
Number of skilled workers National education rate 5 4
5 4 4

4 1
5 3 3

3 1
2 3 3

4 2
5 5 1

Political and Legal Aspects

Stability of government Product liability laws Import restrictions

Critical Success Factors

Similarity in language Work ethic

CSF in Location Analysis Continued

Country 1 5 4 Country 2 1 2 5 3

Social and Cultural Aspects

Country 3

Country 4 4 1

Economic factors
Tax rates Inflation Availability of materials Interest rates 3 3 2 3
50

3 5 4 4
43

2 5 3 2
35

5 5 5 5
48

Total Rating Points

Global Competitiveness of Countries

Ranking (hypothetical)
Finland... United States ... Netherlands... Germany... Canada . Japan .... Brazil .. .. Russia .. Ecuador ..... Bangladesh ... Honduras .. Bolivia..... 1 2 3 4 11 15 35 58 72 73 74 75

Ranking Corruption (hypothetical)

A score of 10 represents corruption free

Rank 1 Finland 2 Denmark 3 New Zealand 4 Singapore 16 Israel & U.S.A (Tied) 21 Japan 57 China 79 Russia 90 Nigeria 91 Bangladesh

Score 9.9 9.5 9.4 9.2 7.6 7.1 3.5 2.3 1.0 0.4

Factors Affecting Hospital Location Selection

Skilled Labor costs (including wages, unionization, productivity) Labor availability (including attitudes, age, education, and skills) Proximity to materials and suppliers
Proximity to target markets Government fiscal policies (including incentives, taxes, etc.)

Factors Affecting Hospital Location Selection - Continued

Environmental regulations Utilities (including gas, electricity, water, and their costs) Site costs (including land, scope for expansion, parking, drainage) Transportation availability (including rail, air, water, and interstate roads)

Factors Affecting Hospital Location Selection - Continued

Quality-of-life issues in the community (including all levels of education, cost of living, sports, cultural activities, transportation, housing, entertainment, religious facilities) Foreign exchange including Rates and Stability Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local)

Steps in Factor Rating Method

List relevant factors Assign importance weight to each factor (such as 0 1) Develop scale for each factor (such as 1 100) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score

S.No .

Description of Factor

Weightage
Scores A B

Alternate Locations
Weighted Scores C A B C

1.

Availability of skilled and qualified doctors

2.

Availability of skilled and qualified nursing staff

Income level of the host region population Power availability and reliability Labour climate Living conditions Transportation Infrastructure Climate Tax Policies and Laws Govt./Legislative Policies

3. 4. 5. 6. 7. 8. 9. 10. 11.

Transportation Method

Ship products from several sources to destinations 2 Objectives

1. 2. 3. Minimize the cost or Maximize the profit N- W Corner Rule Least Cost Method Vogels Approximation Technique

Centroid Method or ( Load Distance Model )

Used to locate single facility (intermediate or distribution warehouse) considering the existing facilities, the distances between them and the volumes of goods to be shipped.

Assumptions
1. I/b transportation cost & o/b transportation cost are equal 2. No special shipping costs for PTL 3. Cx = xi Vi / Vi; Cy = yi Vi / Vi
Where xi : x coordinate of ith location (existing) yi: y coordinate of ith location (existing) Vi: Vol.of goods moved in / out of ith location

Location of service facility should primarily take care of the target market into consideration

Pharma Outlet Considerations

Convenience to the Customer Location decision is more market oriented than supply oriented.

Factors for Pharmaceutical Store Location

Types and nearness of competing stores Presence of other establishments that can help or hurt the business. Availability of a building or site in the location to establish the outlet. The visibility of the store and a convenient entry and exit for customers

 Availability of Parking area and nearness to public transport Other factors

Regulations regarding constructions and sign boards in the area. Support of police Fire protection Banking support

Locational Break-Even Analysis

Method of cost-volume analysis used for hospital locations Basically breakeven where costs depend upon location Steps
Determine fixed & variable costs for each location Plot total cost for each location (Cost on vertical axis, Annual Volume on horizontal axis) Select location with lowest total cost for expected production volume
Must be above break-even

Locational Break-Even Analysis Example

Youre an analyst for CARE. Youre considering a new hospital in Ahmedabad, Bangalore, or Calcutta. Fixed costs per year are Rs. 30L, Rs. 60L, & Rs.110L respectively. Variable costs per patient are Rs. 75, Rs. 45, & Rs. 25 respectively. The revenue generated per patient is Rs.120. What is the best location for an expected volume of 2,000 patients per year?

Locational Break-Even Crossover Chart

200 L Annual Cost 150 L 100 L

50 L
0 0

Ahmedabad lowest cost

Bangalore lowest cost

Calcutta lowest cost

500 1000 1500 2000 2500 3000

Volume

Worldwide Distribution of Volkswagens and Parts

Final Thought
The ideal location for many hospitals in the future will be a floating ship that will go from port to port, from country to country wherever cost per patient is lowest.
1995 Corel Corp.

Shoot out
Is this the ultimate in locations? What are the implications of this idea?