FACILITY LOCATION

AGENDA
• Importance of Facility Location.

• Causes & Types of Facility Location.

• Issues in Facility Location

• Methods for Facility Location Selection.

– Centroid Methods
– Economic Analysis.
– Factors Rating Analysis.
– Transportation Method (Mathematical
Programming Methods).
– Locating Service Facilities
 AGENDA
• Importance of Facility Location.

• Causes & Types of Facility Location.

• Issues in Facility Location

• Methods for Facility Location Selection.

– Centroid Methods
– Factors Rating Analysis.
– Economic Analysis.
– Transportation Method (Mathematical Programming Methods).
– Locating Service Facilities
 Importance of Facility Location
• Facility Location decisions are part of the company’s
strategy. Infrequent but expensive.

• Reasons for the importance:

– large investment that cannot be recovered.
– affects the competitive capacity of the company.
– affects not only costs but the company’s income

• Costs include..
Land, Labor, RM, SCM
 Causes that compel Location decision
• An expanding market.

• Introduction of new products or services.

• A contracting demand, or changes in the location of the demand.

• The exhaustion of raw materials in a certain area.

• Obsolescence of a manufacturing facility due to the appearance of new

technologies.

• Mergers and acquisitions.

 Location Alternatives
• Expansion of an existent facility.

• Start a new facility in a new area.

• Shut down of a facility and (or not) starting of

a new one somewhere else.

• Moving production from one plant to other.

 Issues in Facility Location
• Proximity to Customers
• Business Climate
• Total Costs
• Infrastructure
• Quality of Labor
• Suppliers
• Political Risks
• Government Barriers
• Trading Blocks
• Environmental Regulation
• Competitive Advantage
• Other???
Levels of Decisions for Facility Location
Market Potential
Market Region Market Share
Operating Cost

Transport Cost (RM)

Taxes
Subregion
Raw material costs
Labor Cost and Availability

Access to market/materials
Material Cost
Labor Cost and Availability
Community Taxes
Availability of public services
Availability of sites
Community amenities

Access to transport Network

Site Characteristics
Sites Taxes
Availability of public services
Land and acquisition costs
Construction Costs
 AGENDA
 Importance of Facility Location.

 Causes & Types of Facility Location.

 Issues in Facility Location

• Methods for Facility Location Selection.

– Centroid Method
– Factor Rating Analysis.
– Economic Analysis.
– Transportation Method (Mathematical
Programming Methods).

 Locating Service Facility

 Plant Location Methods
Methods:

• Centroid Method

• Factor Rating method

• Economic Analysis

• Transportation Method

If the Boss likes Bakersfield, I like Bakersfield

Centroid Method
 Center-of-Gravity Method

1. Place the locations to be supported on a coordinate

system (like a graph).
2. Calculate the center of gravity:

Xcg  coordinate 
 li x i
Ycg  coordinate 
 li y i
 li  li
Where:
xi = x-coordinate of location i.
yi = y-coordinate of location i.
li = quantity (load) of goods moved to/from location i.
 The Center of Gravity Approach
• This approach requires that the analyst find the center of gravity of the
geographic area being considered

Computing the Center of Gravity for Matrix Manufacturing

Coordinates Load
Location (X,Y) (li) lixi liyi
Cleveland (11,22) 15 165 330
Columbus (10,7) 10 165
100
100 70
Cincinnati (4,1) 12 165
4848 12
Dayton (3,6) 4 16512 24
Total 41 325 436
• Computing the Center of Gravity for Matrix Manufacturing

Xc.g. 
 lX
i i

325
 7.9 ; Yc.g. 
l Y
i i

436
 10.6
l i 41 l i 41
 Four Factories

Co-ordinates Units Produced

Mumbai (10,30) 10

Delhi (15,40) 15

Kolkata (40,30) 10

Chennai (30,5) 20

Ideal Location of Central Warehouse ??

(24,24)
ECONOMIC ANALYSIS
Response Time 1 week-> 1 Distribution Center

Clientes
Centro
distribución
Response Time 5 days-> 2 Distribution Center

Clientes
Centro
distribución
Response Time 3 days-> 5 Distribution Center

Clientes
Centro
distribución
Response Time 1 day-> 13 Distribution Center

Clientes
Centro
distribución
Same Day Response --> 26 Distribution Centers

Customer
DC
Response time vs. Number of facilities

Response
Time

Number of Facilities
Cost vs Number of Facilities

Optimum
Number Total Costs
(Inv, Trans, Labor)

Percent Service
Cost of Operations

Level Within
Promised Time

Facilities
Inventory
Transportation
Labor

Number of Facilities
 Economic Analysis
Locational Break-Even Analysis Example

Choice of Three locations for Production:

Fixed Variable
City Cost Cost
Mumbai Rs.30,000 Rs.75
Kolkata Rs.60,000 Rs.45
Chennai Rs.110,000 Rs.25

Selling price = Rs.120

Expected volume = 2,000 units

 Economic Analysis
Locational Break-Even Analysis Example

Choice of Three locations for Production:

Fixed Variable Total
City Cost Cost Cost
Mumbai Rs.30,000 Rs.75 Rs.180,000
Kolkata Rs.60,000 Rs.45 Rs.150,000
Chennai Rs.110,000 Rs.25 Rs.160,000

Selling price = Rs.120

Expected volume = 2,000 units

Total Cost = Fixed Cost + Variable Cost x Volume

 Locational Break-Even Analysis Example

e
st curv
co
nai
Annual cost (Rs)

en
Ch
t
c os
l k a ta v e
Ko cur
i
ba ve
um cur
M t
s
coMumbai Chennai
Kolkata lowest
lowest lowest
cost
cost cost
| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000

Volume
 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
 Factor-Rating Example
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight Mumbai Delhi Mumbai Delhi
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Total 1.00 70.4 68.0
 ree
Factor-Rating Exampleom th
f r
ny
Critical Scores pa t
Success (out of 100) om gh Scores
Weighted
Factor Weight France Denmark r C ei
France Denmark
u
o nd w
Labor y
r a
availability T fo rs
n to
and attitude .25 70 EN60 tio (.25)(70)
a c = 17.5 (.25)(60) = 15.0
People-to N M c ef a
I G l o at
car ratio .05 50
S S e a 60pri (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita A o s ro
income
P ho pp 80
.10 OU 85 (.10)(85) = 8.5 (.10)(80) = 8.0
c a
Tax structure .39GR hod 75ith 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education et ns w
and health i s m tio 60
.21 70 (.21)(60) = 12.6 (.21)(70) = 14.7
t h o p
Totals n 1.00
g le 70.4 68.0
s i ib
U ss
po
 TRANSPORTATION METHOD
Transportation models deals with the transportation of a
product manufactured at different plants or factories (supply
origins (O)) to a number of different warehouses (demand
destinations (D) ).
The objective is to satisfy the destination requirements within
the plant’s capacity constraints at the minimum
transportation cost. Transportation models thus typically arise
in situations involving physical movement of goods from
plants to warehouses, warehouses to wholesalers,
wholesalers to retailers and retailers to customers. Solution of
the transportation models requires the determination of how
many units should be transported from each supply origin to
each demand destination, in order to satisfy all the
destination demands while minimising the total associated
cost of transportation
Consider a soft drink manufacturing
firm, which has m plants located in m
different cities. The total production is to
be supplied to the retail shops in ‘n’
different cities. We want to determine
the transportation schedule that
minimizes the total cost of transporting
soft drinks from various plants to various
retail shops. This situation can be
formulated as a linear programming
problem.
Let us consider the m-plant locations
(origins) as O1, O2… Om and the n-
retail markets (destination) as D1, D2…
Dn respectively.

Let ai ≥ 0, i= 1, 2 ….m, be the amount

available at the ith plant-Oi.

Let bj ≥ 0, j= 1,2,….n,be the amount

required at the jth market-Dj
De
sti Amount
na
tio
Or

n Available
igi

D D1 D2 D3 D4………………..Dn at Oj
n
O

O1 a1

O2 a2

O3 a3
…
… ---
---
… am
Om
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
Let the cost of
transporting one unit of
soft drink from ith origin
to jth destination be Cij,
i= 1, 2 ….m, j=1, 2….n.
De
sti Amount
na
tio
Or

n Available
igi

D D1 D2 D3 D4………………..Dn at Oj
n
O

O1 C11 C12 C13 C14……………….C1n a1

O2 a2
C21 C22 C23 C24………………..C2n

O3 C31 C32 C33 C34 ………………..C3n a3

…
… ---
---
… am
Om Cm1 Cm2 Cm3 Cm4………………Cmn

Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
 If Xij ≥ 0 be the amount
of soft drink to be
transported from ith
origin to jth destination 
De TRANSPORTATION METHOD
sti Amount
na
tio
Or

n Available
igi

D
at Oj
n

D1 D2 D3 D4………………..Dn
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
Objective is to determine each Xij so as to minimize the
total cost of transportation, which is denoted as Z.

Z = Xij * Cij ( i=1 to m, j=1 to n)

These problems require a special method of

solution called Linear Programming formulation which
is also called Transportation Method
We first find an initial feasible solution and then make
step by step improvements until an optimal solution is
reached.

Solutions will minimize total production and

shipping costs
De TRANSPORTATION METHOD
sti Amount
na
tio Total Cost Z = ???
Or

n Available
igi

D
at Oj
n

D1 D2 D3 D4………………..Dn
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
De TRANSPORTATION METHOD
sti Amount
na
tio Total Cost Z = Xij * Cij ( i=1 to m, j=1 to n)
Or

n Available
igi

D
at Oj
n

D1 D2 D3 D4………………..Dn
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
De TRANSPORTATION METHOD
sti Amount
na
tio ( b1=??? a1= ??? )
Or

n Available
igi

D D1 D2 D3 D4………………..Dn at Oj
n
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
De TRANSPORTATION METHOD
sti Amount
na
tio ( b1=x11+x21..xm1 a1= x11+x12…x1n )
Or

n Available
igi

D D1 D2 D3 D4………………..Dn at Oj
n
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
De TRANSPORTATION METHOD
sti Amount
na
tio a1+a2+a3…..+am = ??????
Or

n Available
igi

D D1 D2 D3 D4………………..Dn at Oj
n
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
De TRANSPORTATION METHOD
sti Amount
na
tio a1+a2+a3…..+am = b1+b2+b3….+bn
Or

n Available
igi

D D1 D2 D3 D4………………..Dn at Oj
n
O

O1 C11 C12 C13 C14 C1n a1

(x11) (x12) (x13) (x14)……………(x1n)

O2 a2
C21 C22 C23 C24 …………… C2n
(x21) (x22) (x23) (x24)………………(x2n)

O3 C31 C32 C33 C34 ………………C3n a3

… (x31) (x32) (x33) ( x34) ………… (x3n)
… ---
---
… Cm1 Cm2 Cm3 Cm4……………..Cmn) am
Om (xm1) (xm2) (xm3) (xm4) …………..(xmn)
………………
Amt reqd
at Dj b1 b2 b3 b4 ……………..bn
 Solution of The Transportation Problem
• Basic Feasible Solution (B.F.S.):
• A feasible solution to a m-origin and n-destination problem is said to be
basic feasible solution if the number of positive allocations are (m + n – 1).
• There are three different methods to obtain the initial basic feasible solution
viz.
• North-West Corner Rule, Row Minima Method, Column Minima, Matrix
Minima and Vogel’s Approximation Method:

• Optimal Solution :
• A feasible solution (not basically basic) is said to be optimal if it minimises
the total transportation cost.
 AGENDA
 Importance of Facility Location.

 Causes & Types of Facility Location.

 Issues in Facility Location

 Methods for Facility Location Selection.

– Centroid Method
– Factor Rating Analysis.
– Economic Analysis.
– Transportation Method (Mathematical
Programming Methods).

 Locating Service Facility

 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.
FACTORS for Facility Planning..GPI
LOCATION
……. Vicinity to Market, Ports, Suppliers etc

………Ease of doing business/mfg ( labor, govt)

………Fixed and recurring costs ( labor, electricity etc)

Fire Safety
DESIGN…….Systems…….. Electricity
Lighting
Water, Sanitation etc

……Layout ----Flow important

……Handling Systems
 Objective of Facility Planning..GPI

TECHNOLOGY GOVT
C
U
S Optimize relationship
T within the organisation
O
M
E Suppliers
R Vendors ENVIRONMENT
S

Otimize relationship
With outside factors
To satisfy
customers
MAIN FEATURES of FACILITIES…GPI
• Flexibility …….Handle variety of reqts w/o alteration

• Modularity …… Helps phasewise expansion

• Upgradability .. Advantage in eqpt technology

• Adaptability .. Handle demand peaks/valleys

• Selective operability ..Only sectional operational

 SUMMARISE
 Importance of Facility Location.

 Causes & Types of Facility Location.

 Issues in Facility Location

 Methods for Facility Location Selection.

– Centroid Methods
– Economic Analysis.
– Factors Rating Analysis.
– Transportation Method (Mathematical Programming Methods).
– Locating Service Facilities
THANK YOU