CHAPTER 4

Facility Location Decision

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 1. INTRODUCTION
• Facilities:
– Places where products are stored, assembled or fabricated
– Types of Facilities
• Plants
• Retail and service facilities
• Warehouses
– Two decisions
• Facility location
• Facility layout
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 2. Facility Location Decision
• It is the process of determining a geographical site for a
company’s operations
• It is among the strategic operations decisions areas
• It answer for the question
–“Where should locate the plant and/or facility?”

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3. Nature of Facility Location Decisions
– is strategic and long-term in nature
– is not reversible in short-term and made infrequently
– Once committed to a location, many resource and cost issues are difficult to change
– Affects operational costs such as
• Costs of raw materials, transportation, labor, energy, land,
– Limits future expansion and growth potentials
– Limits the marketing effectiveness of an organization

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 4. Need for Facility Location Decision
The impetus to embark up on a facility location study can usually be attributed to various reasons:
• It may arise when a new facility is to be established
• In some cases, the facility or plant operations and subsequent expansions are restricted by a poor site,
there for necessitating the setting up of the facility at a new site.
• the growing volume of the business makes it advisable to establish additional facilities in new
territories(branch expansion)
• It could happen that the original advantages of the plant have been outweighed due to new
development.
• New economic, social, legal or political factors could suggest a change of location of the existing plant.
• Decentralization and dispersal of industries reflected in the industrial policy resolution so as to achieve
an overall development of a developing country would necessitate a location decision at a macro level.
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 5. Facility Location options
The Operation Managers of a business firm, when confronted with problems
leading to a decision on plant location, have several alternatives:
– Continuing operating on the present location and subcontract for the additional
demand when demand is instable
– Expand the present plant on the present site provided that there is available site.
– Keeping the present plant and at the same time build new plant/plants elsewhere.
– Sell the present plant and relocate the entire operation.

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 6. Considerations/Factors in Location Decisions

Management is involved in selecting

– the region or general area, then
– the community within the region, and
– the particular site at which the plant should be located.
• Therefore, factors in Location Decisions are
– Regional Selection Considerations
– Community Selection Considerations
– Site Selection Considerations
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 Considerations/Factors in Location Decisions
Regional Considerations/Factors
– Proximity to markets
– Proximity to materials
– Adequate transportation facilities
– Labor supply
– Climates
Community Considerations/Factors
– Managerial preference
– Community facilities
– Community attitudes
– Community government and taxation
– Availability and cost of sites

Site Considerations/Factors
– Size and cost of the site
– Drainage and soil condition:
– Water supply
– Utilities:
– environmental considerations:
– Land and development costs:
– Transportation facilities:

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i) Regional Considerations/Factors

–Proximity to markets
–Proximity to materials
–Adequate transportation facilities
–Labor supply
–Climates

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 Considerations/Factors in Location Decisions

Proximity to markets
• possible reasons to locate plants near their market can be:
– perishable products
– risk of long shipment
– volume/ bulk product's
– large transportation space
– When the product is a service.

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 Considerations/Factors in Location Decisions

Proximity to materials:
• relates to the location of
– raw materials,
– supplies,
– semi-finished goods,
– parts, equipment, tools etc.
• Possible reasons to locate near source of raw materials can be:
– When the weight or bulk of the product largely decreases by further processing. e.g sugar cane
– When the perishability of products decrease by further processing. e.g, freezing, canning, pasteurizing ....
– If the product needs a number of raw materials or components

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 Considerations/Factors in Location Decisions

Adequate transportation facilities

–for the economical operations of production systems
–raw materials and finished products types of transportation
facilities:
• water, railroad, road, pipelines, and airlines transports.

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 Considerations/Factors in Location Decisions

Labor supply:
labor-related questions require answers:
– The availability of potential employees
– The level of skill and education of potential employees
– Productivity of potential employees
– Their degree of unionization
– Costs of labor (including fringe benefits)
– Costs of living as related to labor cost
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 Considerations/Factors in Location Decisions

Climates
–favorable climate is important in order to acquire and
maintain productive workforce.
–Certain industries like agricultural business require specific
climatic conditions.

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ii) Community Considerations/Factors

–Managerial preference
–Community facilities
–Community attitudes
– Community government and taxation

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 Considerations/Factors in Location Decisions
• Managerial preference:
– relates to the personal preference of owners and managers.
• Community facilities:
– is concerned with the availability of
• schools, churches, medical facilities, residential housing,
• recreational opportunities, police and fire protection, highways, etc.
• Community attitudes:
– to assure the long-term existence in that community
– interest, enthusiasm, and cooperation of the society.
– poor relations with local government, labor, customers
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 Considerations/Factors in Location Decisions

• Community government and taxation

– stable, competent, honest and cooperative government officials are great
assets to a newly located company.

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iii) Site Considerations/Factors

The following are some of the considerations:

– Size of the site
– Drainage and soil condition:
– Water supply
– Utilities:
– Land and development costs:
– Transportation facilities:

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 Considerations/Factors in Location Decisions
• Size of the site:
– the size of the site must be large enough to satisfy some requirements such as
• employee parking requirement,
• future expansion plan, etc.

• Drainage and soil condition:

– Poor drainage
– Soil load bearing capacity
• Water supply:
– all enterprises require getting access to safe and pure water.
– Some organizations like breweries need water even with some extraordinary quality.

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 Cont’d

• Utilities:
– costs of acquiring and using utilities like
– electricity, natural gas, water, etc.
• Transportation facilities:
– relates to getting access to highways, railroads, pipelines, water, and air transport as the
case may be.
• Land and development costs:
– costs related to excavation, grading, filling, construction of roads, siding etc.
•

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8) Where do we get such Information for Plant Location Analysis?
– Investment office (both federal and regional),
– Municipalities,…………. Sub cities,
– Addis Ababa Chamber of Commerce (AACC) ………….. Ethiopia Chamber of
Commerce (ECC),
– Commercial banks (both governmental and private),
– Industrial development corporations,
– Ethiopian Road Authority (ERA) or Addis Ababa Road Authority Administration,
– Ethiopian Electric Power Corporation (EEPC),
– Addis Ababa Water and Sewerages Authority (AAWSA),
– Ethio telecom, etc
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 9) Methods/Approaches of Location Analysis

 Location break-even Analysis

 Location factor rating
 Center-of-gravity
 Load-distance model

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 Location Break-even Analysis
• Examines cost trade-offs associated with demand volume for different locations
• Cost
– Fixed costs
• constant over predictable period regardless of the number of units produced
– Variable costs
• vary with the volume of units produced

There are two methods in Location Break-even Analysis- graphical and

profit analysis

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 i) Location Break-even Analysis-graphical method
Four Steps
– Step 1: Determine the fixed and variable cost for each location
– Step 2: Plot the Total Cost Line for each location
• Total cost = Fixed cost + Total variable cost
– TC = FC + (VC/unit X Volume)
– Step 3: Determine the BEP
– Step 4: Select the location with lowest total cost for the expected production or
demand volume

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 Cont’d

Example:
There are three location options as shown below. Using the location break-
even analysis method, determine the range of demand that each location is
preferred:
Fixed Variable
Location Cost Cost/unit
A $30,000 $75
B $60,000 $45
C $110,000 $25
Total Cost = Fixed Cost + (Variable Cost/unit x Volume)
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 Cont’d
Step 1: Determine Total Cost line (by taking out put=0 and large Q, say output=2000 units) and Plot
It Graphically
Total Cost (TC) = Fixed Cost + (Variable Cost x Volume)
• TC for Q = V= 0 unit
– L-A= 30,000 + 75V = 30,000 + 75 (0) = $30,000
– L-B= 60,000 + 45V = 60,000 + 45(0) = $60,000
– L-C = 110,000 + 25V = 110,000 + 25(0) = $110,000
• TC for Q= V = 5,000 units
– L-A = 30,000 + 75(5,000) = $405,000
– L-B = 60,000 + 45(5,000) = $285,000
– L-C = 110,000 + 25(5,000) = $235,000
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 Cont’d

–
$180,000 –
–
$160,000 –
$150,000 –
– e
s t curv
$130,000 – co
L-C
Annual cost

–
$110,000 –
ur ve
– c
o st
– Bc
-
$80,000 –L
– ost
$60,000 – Ac e
v
– L- cur
–
$30,000 –
–
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Volume
 Cont’d
Step 2 Find BEP of Locations
• BEP for locations A and B
= TC at A = TC at B
Location A = Location B
$30,000 + $75v = $60,000 + $45v
$30v = $30,000
v = 1,000 units
• BEP for Locations B and C
TC at A = TC at B
Location B = Location C
$60,000 + $45v = $110,000 + $25v
$20v = $50,000
v = 2,500 units
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Location Break-even Analysis

–
$180,000 –
–
$160,000 –
$150,000 –
– e
s t curv
$130,000 – co
L-C
Annual cost

–
$110,000 –
ur ve
– c
o st
– Bc
-
$80,000 –L
– o st
$60,000 – Ac e
v
– L- cur
–
L-A L-C lowest
$30,000 – L-B lowest cost
lowest cost
– cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Volume
 Cont’d
• Step 3: Determine the range of demand each location is preferred
– If demand is below 1,000 units, choose location A
– If demand is above 1000 units and less than 2,500 units, choose
location B
– If demand is above 2,500 units, choose location C

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 ii) Location Break-even Analysis-profit method
• Which Location is best for expected demand of 5000 units given prices
of the finished product are birr 100, 75 and 50 at locations A, B, and C
respectively?
Steps
– Calculate profit for each location
• Profit = Total Revenue – Total Cost
– Select the location with the highest profit for the expected demand

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 Cont’d
• Profit At L-A = TR – TC
» PV –(FC + ( VC/unit X V)
» 100 (5000) – (30,000 + (75 X 5000)
» 500,000 – 405,000 = $95,000
• Profit at L-B = TR- TC
• PV – (FC + (VC/unit X V)
• 75 (5000) – (60,000 + (45 X 5000)
• 375,000-285,000 = $90,000
• Profit at L-C = TR- TC
• PV – (FC + (VC/unit X V)
• 50 (5000) – (110,000 + (25 X 5000)
• 250,000-235,000 = $15,000

So site A is preferable
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 B. Location Factor Rating
 Popular because a wide variety of factors can be included in the analysis
 Six steps in the method
1. Develop a list of relevant factors called critical success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each location and sum weighted scores
6. Recommend the location with the highest point score

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 Location Factor Rating: Example
SCORES (0 TO 100)
Location Factor Weight Site 1 Site 2 Site 3
Labor availability .30 80 65 90
Proximity to suppliers .20 100 91 75
Wage rates .15 60 95 72
Community environment .15 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
Air service .05 50 65 90

Weighted Score for “Labor availability” for

Site 1 = (0.30)(80) = 24

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 Location Factor Rating: Example (cont.)

WEIGHTED SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
Site 3 has the
20.00 18.20 15.00
highest factor
9.00 14.25 10.80 rating and
11.25 12.00 12.00 considered to be
6.50 9.00 9.50 the best of the
4.25 4.60 3.25 three locations
2.50 3.25 4.50
77.50 80.80 82.05

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 C. Center-of-Gravity Technique
• Center of Gravity Technique:
– is a quantitative method for locating facility at the center of movement in
geographic area based on weight and distance traveled
– establishes a grid-map of area and finds location of distribution center that
minimizes distribution costs
– Considers
• Location of markets
• Volume of goods shipped to those markets
• Shipping cost (or distance)
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 Grid-Map Coordinates
y n n
 xiWi  yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
 Wi  Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of new
3 (x3, y3), W3 facility at center of gravity
y3 xi, yi = coordinates of
existing facility i
Wi = annual weight
shipped from facility i

x1 x2 x3 x
Center-of-Gravity Technique: Example
Example:
 A food processor purchases
ingredients from four different food
suppliers. The company wants a new
central distribution center to process
and package the ingredients before
shipping them to various restaurants.
The suppliers transport ingredient
items in 40-foot truck trailers, each
with a capacity of 19,000 kg. The
locations of the four suppliers, A, B, C,
and D, the X & Y coordinates of the
location of each supplier, and the
annual number of trailer loads that
Center-of-Gravity Technique: Example

Supplier A B C D
X-coordinate 200 100 250 500
(kilometer)
Y-coordinate 200 500 600 300
(kilometer)
Number of trailer 75 105 135 60
loads
 Using the-center-of-gravity method,
determine the possible location of the
new distribution center
 Center-of-Gravity Technique:
Example
y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
kilometers

500 (105)
400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

Kilometers
 Center-of-Gravity Technique: Example (cont.)

n
 xiWi
i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
x= = = 238
n 75 + 105 + 135 + 60
 Wi
i=1

n
 yiWi
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
y= n
= = 444
75 + 105 + 135 + 60
 Wi
i=1
 Center-of-Gravity Technique: Example (cont.)

y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
kilometers

500 (105)
Center of gravity (238, 444)
400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

kilometers
 D. A Load-Distance Model

 Load-distance model evaluate the location decision based

on distance
 Load-distance model
 Compute (Load x Distance) for each site
 Choose site with lowest summation of (Load x Distance)

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 Load-Distance----cond

LD = ∑ li di
i=1
where:
- LD = load-distance value
- li = load expressed as a weight, number of trips or units being shipped
from proposed site and location i
- di = distance between proposed site and location i

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 E.g. Load-Distance Score for Springfield vs. Mansfield

Computing the Load-Distance Score for Springfield

 City Load Distance ld
Clev eland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)

Computing the Load-Distance Score for Mansfield

City Load Distance ld
Clev eland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

The load-distance score for Mansfield is higher than for Springfield. The
warehouse should be located in Springfield.
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