Facility Location Methods

1. Method of Rating Plan

In this method, the rating is given to different factors that influence the plant location
decisions. This rating is based on the management’s perception. Once all factors have been
given a rating, then the location obtaining the highest rating is considered for locating a
manufacturing unit.

For example, a car manufacturing company wants to start its manufacturing unit in India. For
this, it selects three appropriate cities i.e. X, Y and Z. To choose the best location for its
manufacturing plant, the company adopts a rating plan method according to its business
requirements. For this, the company made a list of important factors of its business
requirement. The same is shown in the table below:

Sr.No. Factors Proportional X Y Z

values
1 Labour availability 20 15 10 10
2 Raw material
20 10 10 15
availability
3 Market availability 15 10 10 10
4 Government policy 10 10 10 10
5 Infrastructure
15 10 5 10
facility
6 Expansion
10 10 10 10
possibilities
7 Site visibility 10 5 5 10
Total 100 70/100 60/100 75/100

The manufacturing company further allotted proportional values for each factor in the form
of percentages as per the Rating plan method. The above table shows the approach of a rating
plan that the car manufacturing company has used.

Once the rating is given to each factor and for each city (as shown in the above table), then,
the rating of Z comes to the maximum one i.e. 75 out of 100. So, accordingly, the company
has selected the Z location for establishing its manufacturing plant.

2. Method of Factor Rating

These methods are considered the most common methods for selecting the location of a plant
as it is easy to analyze different factors through this method. The factor rating method
includes rating each factor of location. It also considers ratings given to competitive
locations. After determining these ratings, products of rating are calculated by multiplying
factor rating with location rating. Finally, that location will be selected which receives the
maximum product of rating.

This method includes the below steps in its selection process for a new location:

1) Identification of the location factors according to the importance.

2) Rating each factor as per its appropriate importance, like prominent factors will be
given the higher ratings.

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 3) Assigning each location as per each factor’s location-based merits.
4) Calculation of each location’s rating
5) Determining the product of rating and its total to select the best suitable location that
gets the maximum total score.
6) The below example represents the method of factor rating. The table listed below
indicates three locations, factor rating, location rating, and final product of rating.

Sr.No. Factors Factor Location Rating Factor Rating x

Rating Location Rating

X Y X Y
1 Labour availability 7 6 7 42 49
2 Raw material availability 5 5 4 25 20
3 Market availability 4 3 4 12 16
4 Government policy 8 7 6 56 48
5 Infrastructure facility 5 5 3 25 15
6 Expansion possibilities 3 3 2 9 6
7 Site visibility 4 3 4 12 16
8 Climate condition 5 4 5 20 25
201 195

The manager of a manufacturing company gives a rating to each suitable factor as shown in
the column of factor rating in the above table. The location rating includes the rating or
ranking of each location which is again determined by the company. The last column is the
product of the rating values of all three locations. The value of this column is obtained by
multiplying factor rating with location rating. After summing up the product rating of each
location, the company can determine the location with the maximum product rating. In the
above example, the maximum product rating is 201 for location X as compared to location
195 for Y. So, the most suitable location is location X.

3. Method of Weighted Factor Rating/ Point Rating

This method includes merging both qualitative and quantitative factors and for this; weights
are assigned to factors according to their importance. These relative weights that a company
allots to each location factor may be displayed by the number of points. These points are
those that are given to the perfect location in each factor. Further, through the preference
matrix, each site’s weightage score is determined.

In other words, the evaluation of each potential location is done based on each factor that an
organization considers, and points are given to each factor.
The selection of the location is based on the site having a maximum weighted score.

For example, a manufacturing company of auto spare parts is looking to expand its business
in new locations in the Punjab region i.e. X and Y. The below table represents different
possible factors, the weights/ points of each factor, and each location's ratings through the
point or weighted rating method.

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 Sr.No. Factors Weights Ratings Weighted Ratings

X Y X Y
1 Labour availability 20 4 5 80 100
2 Raw material availability 15 2 4 30 60
3 Market availability 25 3 2 75 50
4 Government policy 20 5 3 100 60
5 Infrastructure facility 20 3 2 60 40
345 310

The weighted score is calculated by using the below formula:

The weighted score of each location and each factor= Weights * Rating
So, the total weighted rating of X will be: 20 *4+15*2+25*3+20*5+20*3= 345.
Similarly, the total weighted ratings of the other locations are determined. By comparing the
final score of weighted ratings, the score of X location is the higher i.e. 345.

4. Break-even Analysis
This is considered a technique to evaluate the choices of location from the economic aspect.
Break-even analysis explains that the break-even point is the one where total revenue and
total cost are the same. So, this method is related to locating the point where both revenue
and costs are equal. This point is termed as a break-even point. In other words, the break-
even point is a no-profit and no-loss situation.

There are three main heads in cost in every manufacturing organization i.e.

Cost in the form of investments that are made for equipment, machinery, land, plant, etc. This
cost is termed a fixed cost. These investments are associated with interest and depreciation.
Recurring cost (part of the fixed cost)
Costs that change according to the quantities of product i.e. variable cost.
Steps in break-even analysis

To calculate each location’s fixed and variable costs.

To determine the indifference point for each alternate location pair.
Identifying the output ranges
Selecting the location that has the lowest cost in terms of design capacity related to the new
facility.
For example, an electronic company has two options for potential sites to launch its new
manufacturing plant. Both fixed and variable costs on an annual basis for each potential site
are as given below:
Location Fixed Cost Variable Cost
X 10,00,000 6
Y 15,00,000 4

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Let’s say the annual demand for the company’s products is estimated to be 50,000 units, then
break-even analysis is used to determine the best location among the two locations mentioned
in the above table.

Below are the steps to determine the best location:

Calculation of fixed and variable costs
The total cost for each potential location will be calculated through the below formula:
Total cost (TC) = Fixed cost (FC) + Variable cost (VC) * Q
Q is considered the volume of output or demand of the product
So, as per the above formula, the total cost of Delhi, Banglore is as under:

Total cost (X) = 10,00,000 + 6Q

Total cost (Y) = 15,00,000 + 4Q
The next step is to determine the indifference points among location pairs i.e.

Let’s say, Q1 is the indifference demand, so:

Total cost (Y) = Total cost (X) at Q1
15,00,000 + 4Q1= 10,00,000 + 6Q1
Q1= 5,00,000/2= 2,50,000 units

Further, the range of output is calculated to determine each location’s lowest total costs:
Let’s say Q=0, then
Total cost (X) = 10,00,000
Total cost (Y)= 15,00,000

5. Center of Gravity Method

A mathematical method which is utilized to find a distribution centre’s location aiming at
minimizing distribution cost is termed as the “center of gravity method”. This method
considers market location, the shipping cost of products, the volume of products delivered to
markets, etc. to find out the most appropriate location for a distribution setup.

In other words, the center of gravity is termed as an average location where the weighted
distance between the warehouse and its distribution centers is minimized. The weighted
distance is determined by the supply or consumption of the number of tones.

Cost considerations are the prime factor on which the center of gravity method is based.
Managers can balance costs and objectives related to the service by using this method. This
methodology can be utilized in the following circumstances:

In case of high production rates

1) The huge weights and volume of materials that are being shifted
2) The main criteria for product distribution of material gathering from various suppliers
are the transportation cost
3) The time that is consumed in receiving material from vendors or delivering the goods
to customers is crucial.
4) The below table shows the supply of tonnages from five different locations to a
specific plant:

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 Locations Load Coordinates
X Y
A 1500 50 200
B 2000 100 400
C 3500 450 620
D 3100 640 350
E 2500 460 140

Now, we have to first locate the above five locations in a graph and for this, the value of X
and Y coordinates needs to be determined. Further, the center of gravity point (G) will be
located. While calculating the X and Y coordinates, the minimum cost should be obtained.

The formula for calculating X and Y is as under:

So, according to the above formula, calculations of the above terms will be as under:

Locations Load Coordinates LX LY

L X Y
A 1500 50 200 75000 300000
B 2000 100 400 200000 800000
C 3500 450 620 1575000 2170000
D 3100 640 350 1984000 1085000
E 2500 460 140 1150000 350000
12600 4984000 4705000

(1) Solved example on Factor Rating Method:

A manager has received expert feedback on several locations being considered for a new
factory location. Using the factor rating method, determine the best location for the factory.

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Answer:
(a) The best location based on the expert is location 5 since it has the highest composite
weights.

(2) unsolved example on Factor Rating Method:

A manager has received an analysis of several locations being considered for a new
warehouse location. Using the factor rating method, determine;
(a) which location alternative should be chosen based on the maximum composite
score.
(b) If transportation costs and operating costs are given weights that are double the
weights of the others, should the locations be ranked differently?
(c) If the manager weights the factors equally, how would the locations be ranked?

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Facility Layout of OPD

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