CHAPTER 2

L O C AT I N G FA C I L I T I E S

LECTURER: DR. NGUYEN HANG GIANG ANH

LEARNING OBJECTIVES
• Understand the importance of location decisions.
• Discuss factors that affect the choice of location.
• Describe a hierarchical approach to locating facilities.
• Use an infinite set approach, such as the centre of gravity
• Compare locations using costing and scoring models.
• Use models for locating facilities on networks.
• Combine location decisions into a broader approach to planning.

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MAIN CONTENT
1. Location decisions

2. Choosing geographical region

3. Approaches to location decisions

4. Network models

5. Location planning

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1 . L O C AT I O N
DECISIONS

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 IMPORTANCE OF LOCATION DECISIONS
• Location decisions are needed when an organisation opens new facilities → Affect
organization’s performance over many years.
• A poor facility location leads to poor performance → low productivity, unreliable suppliers,
poor materials, low quality products and high costs.
• Right location does not guarantee success, but wrong location certainly guarantee failure.
• To make location decisions, organisations have to consider many factors:
– Quantifiable factors: operating costs, wage rates, currency exchange rates, etc.
– Nonquantifiable factors: quality of infrastructure, political stability, etc.

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ALTERNATIVES TO LOCATING NEW FACILITIES
Reasons for considering location:
• The end of lease/premises.
• Geographical expansion, reorganization, M&A or changes of ownership.
• Change to operations/transport mode/transport network.
• Changes in location of customers/suppliers.
• Upgrading facilities.

Alternatives to locating new facilities:

• Expand or change existing facilities at an existing site.
• Open additional facilities at another site while keeping operations at the existing sites.
• Close down existing operations and move all operations to a new site.

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EXPANSION OPTIONS WITH A NEW MARKET
1. Licensing or franchising: local companies make and supply the company’s
products in return for a share of the profit.
2. Exporting: company makes the product in its existing facilities and sells it to a
distributor working in the new market.
3. Local distribution and sales: company makes the product in its existing facilities,
but sets up its own distribution and sales force in the new market.
4. Local assembly and finishing: company makes most of the product in existing
facilities, but opens limited facilities in the new market to finish or assemble the final
product.
5. Full local production: the company opens complete facilities in the new market.

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 BREAK-EVEN MODEL
• The break-even model is a useful location analysis technique when fixed and variable costs
can be determined for each potential location.
• This method involves the following steps:
Step 1. Identify the locations to be considered.
Step 2. Determine the fixed cost for each facility.
Step 3. Determine the unit variable cost for each facility.
Step 4. Construct the total cost lines for each location on a graph.
Step 5. Determine the break-even points on the graph. Alternatively, the break-even points
can be solved algebraically.
Step 6. Identify the range over which location has the lowest cost.

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 EXAMPLE
Three locations have been identified as suitable candidates for building a new
factory. The fixed and unit variable costs for each of three potential locations have
been estimated and are shown in the following table.

If the annual demand forecast is 3,000 units/year, which location should be chosen?
How about when the annual demand forecast is 1,000 units/year?

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 SOLUTION (1/3)
• Given a forecasted demand of 3,000 units/year, the best location can be found by first
plotting the three total cost curves, represented by
𝑇𝐶𝐴 = 500,000 + 300Q
𝑇𝐶𝐵 = 750,000 + 200Q
𝑇𝐶𝐶 = 900,000 + 100Q
• Based on the cost curves shown in the Figure:
– location C has the lowest total cost when the forecasted quantity of 3,000 units/year.
– location A would be preferred if the annual demand forecast was 1,000 units/year.
– location B would never be the preferred location when comparing the costs of all three
sites simultaneously.

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 SOLUTION
BREAK-EVEN
GRAPH (2/3)
SOLUTION (3/3)

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2. CHOOSING
GEOGRAPHIC
REGION

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HIERARCHY OF LOCATION DECISION

Bitexco, Vincom (1st dist.)

Crescent Mall (7th dist.)
Estella Place (2nd dist.)
Giga Mall (Thu Duc dist.)
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IMPORTANT FACTORS FOR CHOOSING A REGION
• Location of customers (low value density goods: soft drinks, brewers, dairies..).
• Location of suppliers and materials (natural resources..).
• Culture (ex: hot pot franchise restaurants).
• Government attitudes (ex: Apple moving to Vietnam).
• Direct costs (wages, materials, overheads and utilities).
• Indirect costs (local taxes, social insurance, pension and social costs, permits).
• Exchange rates.
• Social attitudes (ex: social welfare & employee union).
• Organization.
• Operations.

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3. APPROACHES
T O L O C AT I O N
DECISIONS

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 TWO APPROACHES
(1) Infinite set approach: which uses geometric arguments to find the best
location, assuming that there are no restrictions on site availability
→ find the best location in principle and then looks for a site nearby.
(2) Feasible set approach: where there are only a small number of feasible sites,
and an organisation has to choose the best.
→ compare sites that are currently available and then chooses the best.
➔ Combine both approaches: finding the best location by (1), and then comparing
available sites nearby by (2).

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 INFINITE SET APPROACH - SIMPLE MODEL

Figure 1: Alternative Choices of Location Figure 2: Variation in transport cost with location

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 THE BEST COMPROMISE LOCATION
• Centre of gravity: find the best map coordinates (𝑋, 𝑌) of the location that best
compromises weighted supply and demand.
• The co-ordinates of the centre of gravity are:

where
(𝑋0 , 𝑌0 ): co-ordinates of the centre of gravity which gives the facility location
(𝑋𝑖 , 𝑌𝑖 ): co-ordinates of each customer or supplier, 𝑖
𝑊𝑖 : expected demand at customer 𝑖, or expected supply from supplier 𝑖

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 EXAMPLE
𝑿, 𝒀 Supply or
Location
co-ordinates demand
• Van Hendrick Industries is building a
Supplier 1 (91, 80) 40
central logistics centre that will collect
Supplier 2 (93, 35) 60
components from three suppliers, and send
finished goods to six regional warehouses. Supplier 3 (3, 86) 80
• The locations of these and the amounts Warehouse 1 (83, 26) 24
supplied or demanded are shown in the Warehouse 2 (89, 54) 16
next table. Warehouse 3 (63, 87) 22
• Where should they start looking for a site? Warehouse 4 (11, 85) 38
Warehouse 5 (9, 16) 52
Warehouse 6 (44, 48) 28

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SOLUTION - CENTRE OF GRAVITY

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 LOCATIONS FOR
VAN HENDRICK INDUSTRIES

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DRAWBACKS OF INFINITE SET APPROACH
• Infinite set approaches need approximated data.
• Chosen location of infinite set approach may be not practical:
– no suitable site available anywhere near the solution.
– available sites may be too expensive.
– further development may be prohibited.
– no roads or workforce.
– solution might be at the top of a mountain or in the sea.
→ To deal with such problems, the alternative approach is used to identify
available sites and choose the best.

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FEASIBLE SET APPROACH – COSTING MODEL
• The approach finds the total cost from each location and chooses the cheapest.
• In practice, many of the costs of running a facility are fixed regardless of its
location → we concentrate on varying costs, particularly the transport and
operating costs.
• Assume that the operating costs in nearby locations are virtually the same → we
only concentrate of transport costs.
• The transport cost is proportional to the distance moved → Rectilinear distance
between points will be found.
→ Identify the location with the lowest Load-distance value.

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COSTING MODEL – RECTILINEAR DISTANCE
• When distance between two facilities is measured along path that is orthogonal
to each other → the distance is called Rectilinear Distance.
• Suppose two facilities are located at points represented by (𝑋1 , 𝑌1 ) and (𝑋2 , 𝑌2 ),
→ the rectilinear distance between the facilities will be calculated as:
Rectilinear Distance = Difference in X co-ordinates + Difference in Y co-ordinates
= 𝑋1 − 𝑌1 + 𝑋2 − 𝑌2

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COSTING MODEL – LOAD-DISTANCE VALUE
Load-Distance value (𝐿𝐷) is calculated as:
𝑛

𝐿𝐷 = ෍ 𝑙𝑖 ∗ 𝑑𝑖
𝑖=1
where
𝑙𝑖 : load expressed as a weight or units being shipped to location 𝑖.
𝑑𝑖 : rectilinear distance between the proposed site and location 𝑖.
𝑛: total number of locations considered for each site.

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 EXAMPLE
• Bannerman Industries want to build a depot to serve seven major customers
with different loads. Three alternative locations A, B and C are available.
Which is the best site if operating costs and inward transport costs to its
suppliers are the same for each location?

Customer X Y Load Potential

X Y
Location/Site
1 100 110 20
2 120 130 5 A 120 90
3 220 150 9
4 180 210 12 B 160 170

5 140 170 24
C 180 130
6 130 180 11
7 170 80 8
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SOLUTION

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MAP FOR BANNERMAN INDUSTRIES

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 DRAWBACKS OF COSTING MODEL
Difficulty of finding:
• accurate costs,
• data that depends on accounting conventions,
• costs that vary over time,
• customer locations not being known in advance,
• order sizes not known in advance,
• factors that cannot be costed, and so on.
→ To avoid these problems, other method for comparison is used.

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 FEASIBLE SET APPROACH – SCORING MODEL
• Scoring model: assigns a range of factors, weighted scores to compare locations.
• Scoring model emphasizes the factors that are important for locations, but cannot
easily be costed or quantified.
• Even if we cannot quantify the important factors, we still need to identify them.

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FACTORS IN LOCATION DECISIONS (1/3)
In the region and country
● availability, skills and productivity of workforce.
● local and national government policies, regulations, grants and attitudes.
● political stability.
● economic strength and trends.
● climate and attractiveness of locations.
● quality of life – including health, education, welfare and culture.
● location of major suppliers and markets.
● infrastructure – particularly transport and communications.
● culture and attitudes of people.

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 FACTORS IN LOCATION DECISIONS (2/3)
In the city or area
● population and population trends.
● availability of sites and development issues.
● number, size and location of competitors.
● local regulations and restrictions on operations.
● community feelings.
● local services, including transport and utilities.

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FACTORS IN LOCATION DECISIONS (3/3)
In the site
● amount and type of passing traffic.
● ease of access and parking.
● access to public transport.
● organizations working nearby.
● total costs of the site.
● potential for expansion or changes.

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 PROCEDURE OF SCORING MODEL
Although we cannot quantify these factors directly → giving each a score. The
scoring model procedure is discussed as:

Step 1: Decide the relevant factors for a location decision.

Step 2: Give each factor a Maximum possible score (usually 0-100) or a Weight
(0.00-1.00) that shows its importance.
Step 3: Consider each location in turn and give an actual score for each factor, up to
this maximum.
Step 4: Calculate the Total score or Total weighted score (= Site Score x Factor
Weight) for each location and find the highest.
Step 5: Discuss the result and make a final decision.

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 EXAMPLE 1
• Williams-Practar considered five alternative locations for a new warehouse for their
music distribution business. After many discussions they compiled a list of important
factors, their maximum scores, and actual scores for each site.
• What is the relative importance of each factor? Which site would you recommend?

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SOLUTION 1

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 EXAMPLE 2
• Rather than changing the maximum score for each factor, some people prefer to give
each factor the same maximum score, but multiply the actual score by a weight to
show its importance.
• Suppose you want to open a vegetarian hot pot store, choose 3 possible locations to
consider. Also, suggest 5 important factors in considering location decision.

Factors Weight Location 1 Location 2 Location 3

1.
2.
3.
4.
5.
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Total weighted score
IMPORTANT FACTORS FOR SCORING MODELS
Location for a new Factory Location for a new Shop (Service)
● availability of workforce with appropriate ● population density.
skills. ● socio-economic characteristics of the nearby
● labour relations and community attitudes. population.
● environment and quality of life for ● location of competitors and other services.
employees. ● location of other attractions such as retail
● closeness of suppliers and services. shops.
● quality of infrastructure. ● convenience for passing traffic and public
● government policies toward industry. transport.
● ease of access and convenient parking.
● visibility of site.

→ The objectives in locating factories and services are different, which is why town
centers have shops but no factories, and industrial zone have factories but no shops.
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4. NET WORK
MODELS

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 ANOTHER APPROACH TO LOCATION
• Sometimes it is difficult to relate the costing model and the scoring model to actual
road layout and geographic features.
• Thus, another approach to location which is based on actual road layouts/networks
is proposed. Two standard models are illustrated for the approach:
– Single median problem.
– Covering problem.

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 SINGLE MEDIAN
PROBLEM

• Suppose a network of towns connected by roads. There are demands for some
products in each town, and you want to locate a depot to deliver to these towns
→ a standard analysis shows that the best location is always in a town.
• We only have to compare locations in each town and identify the one that gives
the best value for some measure of performance.
• A common measure is average travel distance or time, and finding the shortest is
called the single median problem.

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 HOW TO FIND THE SINGLE MEDIAN
• Starts with a matrix of the shortest distances between towns.
• To find the shortest average distance, we have to combine these distances
with the loads carried.
• Multiply the distances by the demands at each town, to get a matrix of the
weight-distances.
• Add these for each town, and find the lowest overall value.

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 EXAMPLE
• Ian Bruce delivers goods to eight
towns, with locations and demands
as shown in the next figure.
• He wants to find the location for a
logistics centre that minimises the
average delivery time to these towns.
Where should he start looking?

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SOLUTION

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 COVERING PROBLEM
• Sometimes the average distance or time to a facility is less important than the
maximum time.
• Classic example of this is fire engines and ambulances which try to respond to
emergencies within a maximum time. This is an example of the covering problem.
• There are two versions of the covering problem:
– Look for the single location that gives the best service to all towns → To solve this
problem, we compare the longest journey times from each location, and choose the
location with the shortest of these.
– specifies a level of service that must be achieved → Find the number of facilities
needed to achieve a level of service and their best locations.

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 EXAMPLE
• The next figure shows part of
a road network, with the travel
time (in minutes) shown on
each link.
• Where would you locate a
depot to give best customer
service?
• How many depots would be
needed to give a maximum
journey of 15 minutes?

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SOLUTION

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5 . L O C AT I O N
PLANNING

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 FORMAL PROCEDURE TO LOCATION
Step 1. Identify the features needed in a new location, determined by the business
and logistics strategies, structure of the supply chain, aims, customers, and
other factors. Look for regions and countries that can best supply these.
Step 2. Within the identified region, use an infinite set approach – such as the centre
of gravity or similar model – to find the best area for locations.
Step 3. Search around this area to find a feasible set of available locations.
Step 4. Use a feasible set approach – such as a costing model or scoring model – to
compare these alternatives.
Step 5. Discuss all available information and come to a decision.

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 PROCEDURE CO-ORDINATING LOCATION
DECISIONS WITH SUPPLY CHAIN DECISIONS
1. Examine the overall aims, identify the aims and goals of logistics
2. Do a logistics audit, describe the details of the current logistics system.
3. Identify mismatches, recognize differences between the aims (from step 1) and actual
performance (from step 2).
4. Examine alternatives for overcoming the mismatch, look in general terms to see where
and how the structure of the supply chain can be improved.
5. Location decisions, find the facilities needed and use appropriate models to find the best
locations and sizes for these facilities.
6. Confirm the locations, make sure that the locations identified in step 5 really are best,
and work with the structure identified in step 4.
7. Implement and monitor the solutions, do whatever is needed to execute the changes and
continuing to check performance.
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