3. plant location

8/7/2019 3. Plant location

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FACILITY LOCATION


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FACILITY LOCATIONOnce a firm has decided to open a newfacility OR relocate an existing facility, It

must decide where that facility should belocated.


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FACILITY LOCATION Facility locationproblem involves the

evaluation ofvarioussitesfor a newfacility.

There areseveralfactors that influencethe Facility Location Decision:


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Factors Related to Resources Labor Availability, Labor cost, Labor Skills;

Materials Availability, Material cost,material

quality;

Equipment Availability, Equipment Cost;

Land Availability, Land suitability, Land cost;

Energy Availability,energy cost; Water Availability,water quality,water cost.


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Factors Related to the

Infrastructure Availability of Financial Institutions, Strength

of Financial Institutions

Government Stability, Government taxes,Import and Export restrictions.

Quality of life, Culturalissues,

Environmental regulations,Transportation

availability,Transportation cost And finally, Competitorssize, strength and

attitudein that region.


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FACILITY LOCATION Therearemanyanalyticaltechniques

thatcanbeusedinfacilitylocation

decision. Someoftheseare:

1) FactorRating

2) Cost-Profit-Volumeanalysis3) CenterofGravity Method,and

4) Transportationand Simulation Models.


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Methodof Factor Rating Infactorratingmethod,firstwemust

identifythe MostImportantFactorsinevaluatingalternativesitesforthenewfacility.

Thenweshouldassignaweight

between 0 and 100 toeachofthesefactors.


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Methodof Factor RatingEachalternativelocationwillthenberated

basedonthesefactorweights.

Themostweightedalternativeisselectedasthebestalternative.


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Example Samson Ltd.isconsideringthreealternative

sitesforitsnewfacility.

Afterevaluatingthefirms Needs,theManagershave NarrowedthelistofImportantSelection Criteriadownintothreemajor Factors.

- Availabilityofskilledlabor- AvailabilityofRawmaterials,and

- Proximitytothefirmsmarkets.


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Example Weightsreflectingtherelativeimportance

ofeachfactorhavebeenassignedas

follows:


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Example Basedonthesecriteria,thethree

Alternativesiteswerescored

between 0 and 100 points:


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Example Nowwewillmultiplyeachscorebyits

correspondingfactorweight:

Weightedscoresarecalculatedas: (SiteScore)x(Factor Weight)


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Example Fromtheseresults,thelargesttotal

weightisfor Site A. Itappearstobethebestlocation.


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Example Whathappensifwechangethefactor

weights. Letsusethefollowingfactorweights:

Skilledlabor: 0.45; Raw Materials:0.40; and Market: 0.15

Thenthefollowingresultsareobtained:


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Example


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Example In this case, Site C appears to be the best

choice with largest weight score.

Therefore, factor rating method is verysensitive to the weights assigned to eachfactor.


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Example Sincefactorweights,selectedfactors,

andassignedscoresarealldeterminedsubjectively,themanagersshouldbeverycarefulinselectingtheseitemsandnumbers.


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Cost-Profit-Volume

Analysis

Whenthefixedand

variablecostsforeachsitediffer,Cost-profit-volumeanalysis canbe used

toidentifythelocationwiththelowestcost.


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Example Foster Paper Ltd.isconsideringthree

alternativesitesforitsnewproductionfacility.

The Annual Production Costassociatedwitheachalternativeisalinearfunction

oftheproduction volume.Thatis:


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ExampleTotal Production Cost = (Fixed Cost) +

(variableunitcost) x (annualproduction

volume)

AssumethatTheexpectedannual

production volumeis250.000 units. Andfurtherassumethat:

(x: production volume = 250.000)


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ExampleFor Site A: Prod. Cost= 10.000.000 + 250 x

For SiteB: Prod. Cost= 25.000.000 + 150 x

For Site C: Prod. Cost= 60.000.000 + 50 x

Basedontheseinformation, Whichsitehasthelowestcost?


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Example Ataproduction volumeof250.000 units,siteBhasthelowestcost,because

For Site A: Prod. Cost= 10.000.000 + 250(250.000) = 72.500.000

For SiteB: Prod. Cost= 25.000.000 + 150(250.000) = 62.500.000

For Site C: Prod. Cost= 60.000.000 + 50(250.000) = 72.500.000


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Example


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Example Thisgraphicshowsthatannualproduction

costchangeswithdifferentproductionvolumes.

-Iftheexpectedannualproduction volumeisbelow 150.000 units,thenchoosesite A.

-Iftheexpectedannualproduction volumeisbetween 150.000 and350.000 units,then

choosesiteB. -Iftheexpectedannualproduction volumeis

over350.000 units,thenchoosesite C.


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Centerof Gravity Method Thecenterofgravitymethodisusedto

findalocationthatMinimizesthe Sum

ofTransportation Costinbetweennewfacilityandoldfacilities.

Transportationcostisassumedtobea

linearfunctionofthe NumberofUnitsShipped AND theTraveling Distance.


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TransportationModel Thetransportationmodeltechniquecan

beusedtodeterminehowmanyunits

shouldbeshippedfromeachplanttoeachwarehouseTo MinimizeTotalTransportation Cost.


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SimulationModels

Firmsoften Considermany variablesandFactorswhentheychooseafacilitylocation.


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SimulationModelsThese variablesareoftendifficultto

estimateandtheyalsochangeintime.

Inthese kindsofDynamic Situations,Simulation maybethebestmodelingtechnique.


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SimulationModelsSimulationmodelsallowmanagersto

examinearangeofScenariosandare

wellsuitedtoopen-endedproblems.However,thedeterminationofthe

parametersinasimulationisalsoachallengingtask.

Also,developingasimulationmodelmaytakeconsiderabletimeandeffort.

3. plant location

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