Facility Location1revised

Manufacturing Management
K S Sangwan
BITS Pilani
Pilani Campus
BITS Pilani
Pilani Campus
Facility location
Facility location
 What is facility location?

 Where facilities should be located (location)?
 What kind of decisions required?
 Which location is best suited?
 How facilities location should be evaluated?
BITS Pilani, Pilani Campus

Facility location
Three most important factors in real estate:

1. Location
2. Location
3. Location
Facility location is the process of identifying the best
geographic location for a service or production
facility

Facility location
Three situation require an answer to the question of

facility location
1. A new plant
2. A new branch of an existing plant
3. A new location for an existing plant

Importance of facility location
• Facility Location decisions are part of the company’s strategy. Infrequent
but expensive.
• Reasons for the importance:
• Facility Location requires large investment that can not be recovered.
• Facility Location decisions affect the competitive capacity of the company.
• All areas of the company are affected by Facility Location: Operations, but also
Business Development, Human Resources, Finance, etc.
• The facility location decisions affect not only costs but the company’s
income:
• For a service business, market proximity is critical to determine the capacity to
attract customers.
• For a manufacturing business, facility location affects product delivery time and
level of customer service, which affects sales.
• Regarding costs, facility location affects a great variety of them:
• Land costs.
• Labor costs.
• Raw materials.
• Transportation and distribution

Location planning
Before a location for a plant is sought, long range

forecasts should be made anticipating the future needs
of the company.
These should be based on:
• Companies expansions policy
• The anticipated diversification of products
• The changing market
• The changing source of raw material, and
• Any other foreseeable influences

Selection of facility location
One large company follows seven basic steps in locating

and building every new plant:
1. Establish the need for a new plant
2. Determine the best geographic area for the plant on the
basis of the company’s business needs
3. Established the requirements
4. Screen many communities within the general area
decided on
5. Pinpoint a few communities for detailed studies
6. Selecting the best locations
7. Build the plant

Selection of facility location
The selection of an appropriate plant location usually

results from a three-steps process involving
• The region in which the factory should be situated
• The community in which it should be placed
• The exact site where facility is located

Factors influencing location
• Proximity to good highways
• Access to a major airport
• Labour supply
• Nearness to market
• Nearness to raw materials
• Nearness to an existing plant
• Availability of land and land cost
• Transportation
• Water supply
• Power supply
• Pollution control
• Taxes
• Climate
• Community administration and attitude
• Schools, churches, parks, and residential areas
Factors influencing location
Factors Region Community Site
•Proximity to good highways X X X

•Access to a major airport X X
•Labour supply X
•Nearness to market X
•Nearness to raw materials X X
•Nearness to an existing plant X
•Availability of land and land cost X X
•Transportation X X
•Water supply X X
•Power supply X
•Pollution control X
•Taxes X
•Climate X
•Community administration and attitude X

•Schools, churches, parks, and residential areas X
•Zoning restriction X X
•Space for expansion X

A framework for global site
location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX
Capital, growth strategy, INCENTIVES
existing network
PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination
Source: Utdallas.edu/~metin
Evaluation of Plant locations
It is Very difficult to make a final decision as to the choice for a
plant Location.
• One Location may have the advantage from a market standpoint
• Another may be closer to the material supply
• Third may provide a better labour supply
Four methods are commonly used:

• Locations rating plans
• Centre of Gravity technique
• Load-distance technique
• Cost analysis

Location rating plan
Factors Maximum City A City B City C
possible
points
Nearness to raw materials 400 300 250 150
Nearness to raw materials 300 150 200 250
Labour supply 275 150 225 175
Transportation 125 125 100 125
Water supply 200 100 150 175
Power 200 150 150 100
Waste disposal 100 50 75 75
Land and constructions costs 70 60 50 50
Climate 40 35 25 40
Taxes and laws 40 35 25 40
Local site 40 40 30 35
Total 1800 1185 1295 1210

Centre-of-gravity technique
In general, transportation costs are a function of distance,

weight, and time.
The centre-of-gravity, or weight centre, technique is a
quantitative method for locating a facility such as a
warehouse at the centre of movement in a geographic
area based on weight and distance.
This method identifies a set of coordinates designating a
central location on a map relative to all other locations.
The starting point for this method is a grid map set up on a
Cartesian plane.

Centre-of-gravity technique
The coordinates for the location

of the new facility are computed
using the following formulas:
where
Wi = annual weight shipped from facility i
xi, yi = coordinates of existing facility i
x, y = coordinates of the new facility at centre of gravity

Load-distance technique
A variation of the centre-of-gravity method for determining the
coordinates of a facility location is the load-distance
technique.
In this method, a single set of location coordinates is not
identified.
Instead, various locations are evaluated using a load-distance
value that is a measure of weight and distance.
For a single potential location, a load-distance value is
computed as follows:
where
LD the load-distance value
li the load expressed as a weight, number of trips, or units being shipped
from the proposed site to location i
di the distance between the proposed site and location i
Load-distance technique
The distance di in this formula can be the travel distance, if

that value is known, or can be determined from a map.
It can also be computed using the following formula for the
straight-line distance between two points, which is also the
hypotenuse of a right triangle:
Where
1xi, yi2 = coordinates of existing facility
1x, y2 = coordinates of proposed site
The load-distance technique is applied by computing a load-
distance value for each potential facility location.
The implication is that the location with the lowest value
would result in the minimum transportation cost and thus
would be preferable.
Cost analysis
Present Site A Site B Cite C

factory
Labour $13,106,000 $11,054,000 $11,548,000 $11,934,000
Overhead 1,190,000 618,000 602,000 636,000
Freight costs 507,000 432,000 366,000 360,000
Utilities 204,000 248,000 214,000 236,000
Total $15,007,000 $12,352,000 $12,730,000 $13,166,000
Estimated yearly saving $2,655,000 $2,277,000 1,841,000
Saving as percentage of 17.7% 15.2% 12.3%
costs at present factory

Port location
for rice export

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Manufacturing Management

 What is facility location?

BITS Pilani, Pilani Campus

Three most important factors in real estate:

BITS Pilani, Pilani Campus

Three situation require an answer to the question of

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

Before a location for a plant is sought, long range

BITS Pilani, Pilani Campus

One large company follows seven basic steps in locating

BITS Pilani, Pilani Campus

The selection of an appropriate plant location usually

BITS Pilani, Pilani Campus

•Proximity to good highways X X X

•Community administration and attitude X

BITS Pilani, Pilani Campus

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

FACTOR COSTS PHASE IV LOGISTICS COSTS

Four methods are commonly used:

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

In general, transportation costs are a function of distance,

BITS Pilani, Pilani Campus

The coordinates for the location

BITS Pilani, Pilani Campus

The distance di in this formula can be the travel distance, if

Present Site A Site B Cite C

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

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