Facility Location

Prof Amal Roy

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

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)

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

Region / Community Factors

1. Corporate desires
2. Attractiveness of region
MN

3. Labor availability, costs,

attitudes towards unions

WI
MI
IL

IN

4. Costs and availability of utilities

OH

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
Revenue Focus

Goods Mfg. Location

Cost Focus

Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing

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

Intangible and future costs

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

Approach to Location
Service/Retail/Prof. Locn.
Techniques

Goods-mfg. Location
Techniques

Regression models to determine

importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing
area
Purchasing power analysis of area

Transportation methods

Center-of-gravity method
Geographic information
systems

Factor-rating method
Locational break-even
analysis
Crossover charts

Clustering
Industry

Locations

Reason for
clustering

Wine makers

Napa Valley (US);

Bordeaux region
(France)

Natural resources
Land, Climate

Software firms

Silicon Valley, Boston,

Bangalore (India)

Talent resources of bright

grads. in Sc./tech. areas,
venture capitalists nearby

Electronic firms

Northern Mexico

Duty free export zones

Computer
hardware
manufacturers

Singapore, Taiwan

High tech penetration rate,

Skilled/educated workforce
with large pool of engineers

Point Rating Method ( for Facility Location)

Factor Rated Max.

Possible
Points

Points assigned to
Location A

Location B

Availability of fuel

600

400

500

Labor availability

500

440

400

Water supply

200

160

140

Transportation

300

250

150

Topography

100

80

90

Total

1330

1280

Factor rating method

Factors

Factor
Rating
(1 to 5)

Location Rating
(1 to 10)
Location
A

Location
B

Rating Product
Location Location
A
B

1) Proximity to Mkts

12

32

2) Tax advantage

30

35

3) Availability of
power

21

4) Water availability

36

28

5) Community
attitude

12

6) Infrastructure
Development

12

10

7) Support industry

128

138

Location B is Preferred to A

Centre of Gravity Method Problem

Retail
Outlets

Expected
Demand

A
B
C
D
E
F
G
Total Demand

80
100
120
130
100
150
90
770

Q. : Where should we set up a

centralized warehousing facility?

Centre of Gravity Method

16

14

12

Y-Distance (KM)

10

8
6

Center-of-gravity
E

C
F

4
D

2
0

8
X- Distance (KM)

12

16

20

Centre of Gravity Method

Retail Xi
Yi
Volume
Outlet Dist Dist (Vi) QTY

Vi Xi

Vi Yi

10

80

320

800

3.5

15

100

350

1500

120

480

720

10

130

1300

260

16

100

1600

600

150

1200

750

14

13

90

1260

1170

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

Vi Yi = 5800
Yc = 5800 /770
= 7.53

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)

Revenue

TCA

Cost

FCA
VCA

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