Facility Location: Dr. Mohammed Shamim Uddin Khan Professor and Chairman Department of Finance University of Chittagong

ِ‫الرحيم‬
َ ّ ‫حم ِن‬ َ ّ ‫ِبس ِم الل َّ ِه‬

ٰ ‫الر‬
Facility Location
Dr. Mohammed Shamim Uddin Khan

Professor and Chairman
Department of Finance
University of Chittagong
FACILITY LOCATION
1. Facility location is the process of determining geographic
sites for a firm’s operations. It is a problem composed of two
parts that interact.
2. First is the facility location problem and second the specific
facility (site) that is chosen.
3. Location choices can be critically important for firms and
have a profound impact on a firm’s value chain.
4. Nonetheless when manufacturing facilities are off-shored,
locating far from one’s suppliers can lead to higher
transportation costs and coordination difficulties.
5. The customer relationship process can also be affected by the
firm’s location decisions.
6. The location of a business’s facilities has a significant impact
on the company’s operating costs, the prices it charges for
services and goods and its ability to compete in the market
place and penetrate new customer segments.
THE NEED FOR LOCATION DECISIONS
Existing organizations become involved in location decisions for a variety of

reasons:
 Marketing Strategy: Firms such as banks, fast-food chains, super-
markets, and retail stores view locations as a marketing strategy, and they
look for locations that will help them to expand their markets.
 Growth in Demand: Firms involve in location decisions when it
experiences a growth in demand for its products or services that cannot be
satisfied by an expansion at an existing location.
 Depletion of Basic Inputs: Some firms become involved in location
decision through depletion of basic inputs. For example, mining operations
are often forced to relocate due to the exhaustion at a given location.
 Shift in Market:For some firms, a shift in their markets causes them to
consider relocation or the costs of doing business at a particular location
reach a point where other locations begin to look more attractive.
 Change in Political or Economic Conditions: Some times firms relocate
facilities for political or economic changes.
GENERAL PROCEDURE FOR MAKING LOCATION DECISION
 Describe on the criteria to use for evaluating

location alternatives such as increased revenues or
community service.
 Identify important factors such as location of
markets or raw materials.
 Develop location alternatives:
 Identify the general region for a location
 Identify a small number of community alternatives
 Identify site alternatives among the community
alternatives.
 Evaluate the alternatives and make a selection.
LOCATION FACTORS
1. Process inputs
2. Process outputs
3. Process requirements
4. Personal preferences
5. Tax and legal factors
6. Site and plant availabilities
DOMINANT FACTORS IN MANUFACTURING
1. Favorable labour climate

2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Proximity to the parent company’s facilities
6. Utilities, taxes, and real estate costs
DOMINANT FACTORS IN
SERVICES
1. Proximity to customers
2. Transportation costs and proximity to markets
3. Location of competitors
4. Site-specific factors
LOCATING A SINGLE FACILITY
COMPARING SEVERAL SITES
The process of selecting a new facility location involves a series of steps:
 Identify the important location factors and categories them as dominant or
secondary.
 Consider alternative regions; then narrow the choices to alternative
communities and finally to specific sites.

 Collect data on the alternatives from location consultants, state development
agencies, city and country planning departments, chambers of commerce,

land developers, electric power companies, banks, and onsite visits. Some of
these data and information may also be contained inside the GIS.
 Analyze the data collected beginning with the quantitative factors – factors
that can be measured in dollars, such as annual transportation costs or taxes.

 Bring the qualitative factors pertaining to each site into the evaluation. A
qualitative factor is one that cannot be evaluated in dollar terms, such as

community attitudes, or quality of life. To merge qualitative and quantitative
factors some managers review the expected performance of each factor,
while others assign each factor a weight of relative importance and calculate
a weighted score for each site, using a preference matrix. The site with the
highest weighted score is best.
EVALUATING LOCATION ALTERNATIVES
There are a number of techniques that are
helpful in evaluating location alternatives:
 Locational cost-profit-volume analysis
 Location factor rating
 Centre of gravity method
PROCEDURE FOR LOCATIONAL
COST-PROFIT-VOLUME ANALYSIS
Step 1: Determine the fixed and variable costs
associated with each location alternative.
Step 2: Plot the total-cost lines for all location
alternatives on the same graph.
Step 3: Determine which location will have the lowest
total cost for the expected level of output.
Alternatively, determine which location will have the
highest profit.
Step 4: Solve algebraically for the breakeven points
over the relevant ranges.
ASSUMPTIONS OF COST-PROFIT-VOLUME ANALYSIS
This method assumes the following:

 Fixed costs are constant for the range of profitable
output.
 Variable costs are linear for the range of profitable
output.
 The required level of output can be closely
estimated.
 Only one product is involved.
PROCEDURE OF LOCATION FACTOR RATING
1. Determine which factors are relevant (e.g. location of

market, water supply, parking facilities, revenue
potential)
2. Assign a weight to each factor that indicates its relative
importance compared with all other factors. Typically
weights sum to 1.00.
3. Decide on a common scale for all factors (e.g. 0 to 100).
4. Score each location alternative.
5. Multiply the factor weight by the score for each factor,
and sum the results for each location alternative.
6. Choose the alternative that has the highest composite
score.
CENTER OF GRAVITY METHOD
 Finds location of single distribution center serving
several destinations
 Used primarily for services
 Considers
 Location of existing destinations
 Example: Markets, retailers etc.
 Volume to be shipped
 Shipping distance (or cost)
 Shipping cost/unit/mile is constant

CENTER OF GRAVITY METHOD
STEPS
1.Placeexisting locations
on a coordinate grid
 Grid has arbitrary origin &
scale
 Maintains relative distances
2.CalculateX&Y
coordinates for ‘center of
gravity’
 Gives location of
distribution center
 Minimizes transportation
cost
CENTER OF GRAVITY METHOD EQUATIONS
X Coordinate
dix = x coordinate
 d W ix i
of location i
Cx  i
W i
i
Wi = Volume of
goods moved to or
Y Coordinate from location i
 d W iy i diy = y coordinate
Cy  i
W i
i of location i
GRAVITY METHODS FOR
LOCATION-MINIMIZING COST
 Gravity models are used to find locations that
minimize the cost of transporting raw materials from
suppliers and finished goods to the markets served.
 Assumption:
 Single facility will serve all
 Both markets and supply sources can be located as grid
points on a plane
 The transportation cost grows linearly with the quantity
shipped
16 16
GRAVITY METHODS FOR
LOCATION
 Ton Mile-Center Solution
 X,Y: Warehouse Coordinates
( X  x n)  (Y  y n)
2 2
 xn , yn : Coordinates of delivery d n

location n k
Dn Fn X n
 dn : Distance to delivery  dn
X n 1
k
location n Dn Fn
 Fn
 dn
: Annual tonnage to delivery n 1
k
location n
 Dn= Demand /volume at
D F Y n n n
dn
Y n 1
k
Dn Fn
location n  dn
Min  d nDnF n n 1
17
LOAD-DISTANCE METHOD
 Euclidean distance: Euclidean distance is the straight line distance or
the shortest possible path between two points. To calculate this distance
we create a graph. The distance between two points say points A and B is
d AB  ( x A  x B ) 2  ( y A  y B ) 2
 Rectilinear distance: Rectilinear distance measures distance between
two points with a series of 90-degree turns as along city blocks. The
distance traveled in the x-direction is the absolute value of the difference
in x-coordinates. Adding this result to the absolute value of the difference
in the y-coordinates gives
d AB  xA  xB  y A  yB
ld   li d i
GLOBAL LOCATION: FACILITATING FACTORS
Trade Agreements Technology

 NAFTA (North American  Technological
Free Trade Agreement) advances in
 GATT (General Agreement communication and
on Tariffs and Trade) information sharing is
 US-China Trade Relations helpful
Act
 EU
 WTO
GLOBAL LOCATIONS: MERITS AND DEMERITS
Merits Demerits
1. Market 1. Transportation cost

2. Cost Savings 2. Unskilled labor
3. Legal and Regulatory 3. Import restrictions
4. Financial 4. Criticisms
5. Others
RISKS IN GLOBAL LOCATIONS
Political
Terrorism
Economic
Legal
Cultural
FACTORS OF FOREIGN LOCATION-1
Factors Potential Issues
Foreign 1. Policies on foreign ownership of
government production facilities
Local content requirements
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
Liability laws
2. Stability issues
Cultural 1. Living circumstances for foreign workers and their

Differences dependents
2. Religious holidays/traditions
Customer Possible ‘buy locally’ sentiment

Preferences
FACTORS OF FOREIGN LOCATION-2
Factors Potential Issues
Labour 1. Level of training and education of workers
2. Work ethic
3. Possible regulations limiting number of foreign
employees
4. Language differences
Resources Availability and quality of raw materials, energy,

transportation infrastructure
Financial Financial incentives, tax rates, inflation rates, interest

rates
Technological Rate of technological change, rate of innovations
Market Market potential, competition

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ِ‫الرحيم‬

َ ّ ‫حم ِن‬ َ ّ ‫ِبس ِم الل َّ ِه‬

Dr. Mohammed Shamim Uddin Khan

Existing organizations become involved in location decisions for a variety of

 Describe on the criteria to use for evaluating

1. Favorable labour climate

communities and finally to specific sites.

agencies, city and country planning departments, chambers of commerce,

that can be measured in dollars, such as annual transportation costs or taxes.

qualitative factor is one that cannot be evaluated in dollar terms, such as

This method assumes the following:

1. Determine which factors are relevant (e.g. location of

 Shipping cost/unit/mile is constant

Trade Agreements Technology

1. Market 1. Transportation cost

Cultural 1. Living circumstances for foreign workers and their

Customer Possible ‘buy locally’ sentiment

Resources Availability and quality of raw materials, energy,

Financial Financial incentives, tax rates, inflation rates, interest

Technological Rate of technological change, rate of innovations

Market Market potential, competition

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