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FACILITY LOCATION
Prepared by Şevkinaz GümüşoğluPrepared by Şevkinaz Gümüşoğlu using different references about POMusing different references about POM
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Facility Location Concept • Facility location, also known as location
analysis or center problem, is a branch of operations research and computational geometry concerning itself with mathematical modeling and solution of problems concerning optimal placement of facilities in order to minimize transportation costs, avoid placing hazardous materials near housing, outperform competitors' facilities, etc. Although originated from location problems, the study also applies to data clustering, which in turn is related to unsupervised learning, classification, databases, spatial range-searching, data-mining etc. .
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• Facility location is the process of determining a geographic site for a firm’s operations. Managers of both service and manufacturing organizations must weigh many factors when assessing the desirability of a particular site, including proximity to customers and suppliers, labour costs, and transportation costs.
• The selection of location is a key-decision as large investment is made in building plant and machinery. It is not advisable or not possible to change the location very often. So an improper location of plant may lead to waste of all the investments made in building and machinery, equipment.
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-3
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Location Strategy
The objective of location strategy is to The objective of location strategy is to maximize the benefit of location to the maximize the benefit of location to the
firmfirm..
Strategic location of an optimal number Strategic location of an optimal number of physical facilities is vital to success in of physical facilities is vital to success in
our business.our business.
We need to understand how each of We need to understand how each of profitability compenents depend on profitability compenents depend on
where the facility is situated.where the facility is situated.
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location Strategy
One of the most important decisions a firm makes
Increasingly global in nature
Significant impact on fixed and variable costs
Decisions made relatively infrequently
The objective is to maximize the benefit of location to the firm
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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
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Causes that originate Location decision problems• An expanding market.
• It will require the addition of more capacity at a certain geographic point, either in an existent facility or in a new one.
• Introduction of new products or services.• A contracting demand, or changes in the location of the demand.
• It may require the shut down and/or relocation of operations.• The exhaustion of raw materials in a certain area.
• Example: Extraction companies.• Obsolescence of a manufacturing facility due to the appearance of
new technologies.• It means the creation of a new modern plant somewhere else.
• The pressure of the competence.• To increase the level of service, it can force the company to increase
capacity of certain plants or relocate some of them.• Change in other resources, like labor conditions or subcontracted
components, or change in the political or economic environment in a certain region.
• Mergers and acquisitions.• Some facilities may appear as redundants, or bad located with
respect to others.
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Location decisions goal is;
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location Decisions
Long-term decisions
Decisions made infrequently
Decision greatly affects both fixed and variable costs
Once committed to a location, many resource and cost issues are difficult to change
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PHASE ISupply Chain
Strategy
PHASE IIRegional Facility
Configuration
PHASE IIIDesirable Sites
PHASE IVLocation Choices
Competitive STRATEGY
INTERNAL CONSTRAINTSCapital, growth strategy,existing network
PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility
COMPETITIVEENVIRONMENT
PRODUCTION METHODSSkill needs, response time
FACTOR COSTSLabor, materials, site specific
GLOBAL COMPETITION
TARIFFS AND TAXINCENTIVES
REGIONAL DEMANDSize, growth, homogeneity,local specifications
POLITICAL, EXCHANGERATE AND DEMAND RISK
AVAILABLEINFRASTRUCTURE
LOGISTICS COSTSTransport, inventory, coordination
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Levels of Decisions.
Market Region
Subregion
Community
Sites
Market PotentialMarket Share
Operating Cost
Transport Cost (RM)Taxes
Raw material costsLabor Cost and Availability
Access to market/materialsMaterial Cost
Labor Cost and AvailabilityTaxes
Availability of public servicesAvailabilty of sites
Community amenities
Access to transport NetworkSite Characterics
TaxesAvailability of public services
Land and acquisition costsConstruction Costs
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© 2011 Pearson Education, Inc. publishing as Prentice Hall© 2011 Pearson Education
Location DecisionLocation DecisionKey Success Factors:Key Success Factors:1. Strategic Plan1. Strategic Plan2. Global Conditions2. Global ConditionsThe other reasonsThe other reasons
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location Decisions
Country DecisionCountry Decision Key Success FactorsKey Success Factors
1. Political risks, government rules, attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes, productivity, costs
5. Availability of supplies, communications, energy
6. Exchange rates and currency risks
Figure 8.1
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location Decisions
Region/ Region/ Community Community
DecisionDecision
Key Success FactorsKey Success Factors
1. Corporate desires
2. Attractiveness of region
3. Labor availability and costs
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives and fiscal policies
7. Proximity to raw materials and customers
8. Land/construction costs
MN
WI
MI
IL INOH
Figure 8.1
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Location Incentives
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-15
• Tax credits• Relaxed government regulation• Job training• Infrastructure improvement• Money
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location Decisions
Site DecisionSite Decision Key Success FactorsKey Success Factors
1. Site size and cost
2. Air, rail, highway, and waterway systems
3. Zoning restrictions
4. Proximity of services/ supplies needed
5. Environmental impact issues
Figure 8.1
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Site Selection: Where to Locate
• Infrequent but important• being “in the right place at the
right time”
• Must consider other factors, especially financial considerations
• Location decisions made more often for service operations than manufacturing facilities
• Location criteria for service• access to customers
• Location criteria for manufacturing facility• nature of labor force• labor costs• proximity to suppliers and
markets• distribution and transportation
costs• energy availability and cost• community infrastructure• quality of life in community • government regulations and
taxes
Copyright 2011 John Wiley & Sons, Inc. R.Taylor Supplement 7-17
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Facility location problem involves the evaluation of various sites for a new facility or relocate an existing facility.
• Location decisions are strategic nature. Once a firm has decided to open a new one or relocated an existing one ,it must be decides where that facilitiy should be located. Decisions like :• New plant ( continent, country,region, city, land)• Expansion• Decentralisation• Shut down plant• To run partial capacities• To run over time capacities .
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You can handle them with using some analytical &mathematical model.
• How you would determine the best facilities
Location.• Finding best location manufacturing plant is
related with long term decision and these activity too expensive
• Seting up the machine & equipment facilities are related with mid term & short term decision.
We must carry out to determine optimal decision among the possible locations with relevent factors.
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location and Costs
Location decisions based on low cost require careful consideration
Once in place, location-related costs are fixed in place and difficult to reduce
Determining optimal facility location is a good investment
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Cost vs Response TIme
Local FG
Mix
Regional FG
Local WIP
Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Cost
Response Time HiLow
Low
Hi
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Clientes
Centro distribución
Response Time 3 days-> 5 Distribution CenterResponse Time 3 days-> 5 Distribution Center
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Customer
DC
Same Day Response --> 26 Distribution CentersSame Day Response --> 26 Distribution Centers
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Response time vs. Number of facilities
Number of Facilities
Res
pons
eT
ime
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Cost vs Number of Facilities
Percent Percent Service Service Level Level
Within Within Promised Promised
TimeTimeTransportationTransportation
Cos
t of
Op
erat
ion
sC
ost
of O
per
atio
ns
Number of FacilitiesNumber of Facilities
InventoryInventory
FacilitiesFacilities
Total CostsTotal Costs
LaborLabor
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Different facilities lacations
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Federal Express
• Central hub concept• Enables service to more locations with
fewer aircraft
• Enables matching of aircraft flights with package loads
• Reduces mishandling and delay in transit because there is total control of packages from pickup to delivery
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location and Costs
Location decisions based on low cost require careful consideration
Once in place, location-related costs are fixed in place and difficult to reduce
Determining optimal facility location is a good investment
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location and Innovation Cost is not always the most important
aspect of a strategic decision
Four key attributes when strategy is based on innovation High-quality and specialized inputs
An environment that encourages investment and local rivalry
A sophisticated local market
Local presence of related and supporting industries
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Facilities Location Decision for Natural Gas
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http://www.youtube.com/watch?v=YNI0K1TkjI8
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-31
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Types of Facilities
• Heavy-manufacturing facilities• large, require a lot of space, and are expensive
• Light-industry facilities• smaller, cleaner plants and usually less costly
• Retail and service facilities• smallest and least costly
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-32
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Factors in Heavy Manufacturing Location
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-33
• Construction costs• Land costs• Raw material & finished goods shipment modes• Proximity to raw materials• Utilities• Means of waste disposal• Labor availability
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Factors in Light Industry Location
• Land costs• Transportation costs• Proximity to markets
• depending on delivery requirements including frequency of delivery required by customer
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-34
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Global Supply Chain Factors
• Government stability• Government regulations• Political & economic systems• Economic stability & growth• Exchange rates• Culture• Export/import regulations,
duties & tariffs• Raw material availability
• Climate • Number & proximity of
suppliers• Transportation & distribution
system• Labor cost & education• Available technology• Commercial travel• Technical expertise• Cross-border trade
regulations• Group trade agreements
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-35
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LOCATION PROBLEM TYPES
Location problems can be characterized by choice among multiple sites.
Each location decision tends to be different. In some cases, the decision criterion is cost. In others it is revenue, vehicle response time, or multiple criteria.
Some location problem include distribution costs from multiple plants and warehouses, other do not.
Since there are many different types of location problems, the following classification framework has been developed.
1.Single-facility location
A factory or warehouse
Government facilities
Hospital
Electric power plant
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2.Location of multiple factories and warehouse
( min. prod. and distribution cost )
Multiple factories
Multiple warehouses
Multiple factories and warehouses
3.Location of competitive retail stores
Banks
Department stores
Supermarkets
Restaurants
4.Emergency-services location
(minimize response time)
Ambulance
Fire station
Police station
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Location decisions are crucial to both new and existing facilities because they interest to organize the long-term cost, employment, and marketing patterns. Location (and relocation) opportunities should be reviewed as •labor conditions•raw-material supplies (pure, weight losing,ubiquities material)•market demands change
especially to in the manufacturing plant.
Firms can respond to the change by maintaining their status-quo, by expanding or closing existing facilities, or by developing new ones.
No locational procedures can ensure that an optimal location is chosen.
Avoiding a some trouble location is perhaps more important than finding an ideal site
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Numerous firms have encountered unexpected problems withzoning restrictionswater supplywaste disposallabor unionstransportation coststax lawscommunity attitudes about pollution
In order to avoide some important problems , a systematic analysis (including the use of comprehensive checklist) is strongly recommended.
Firms often do a quantitative analysis first to establish the alternative locations, then follow with an exhaustive review of qualitative (less tangible) factors.
.
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Single Facility Location
Many location require the selection of a site for a single facility. These include the location of a factory, a warehouse, and a government office. A crucial assumption in these problem is that the revenue, costs or other facility characteristics.
Most facility location problems involve multiple criteria. Multiple decision criteria can be simplified into two types: cost and non-cost factors. The most factors can be measured objectively. The non-cost factors include various intangible.
The types of tangible costs usually involved in a location problem include:
1.Cost of land, buildings, and equipment
2.Transportation costs
3.Utilities costs
4.Taxes and insurance
5.Labor cost
.
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The non-cost factors which should be considered include:
1.Supply of labor
2.Labor and union relations
3.Community attitudes
4.Goverment regulations
5.Quality of life(climate, schools, living, recreation)
6.Environmental impact
7.Corporate strategy
These factors may be intangible, they can be systematically evaluated and logically considered together with the tangible factors. One way to combine all these factors is to develop a rating scale for each one which reduces management judgment to a quantifiable score.
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Location Factor Rating :Return on investment is normalized to a ten-point maximum scale, the some as the subjective ratings.
The next step is to develop a weighting scheme among the factors by rating, subjectively, the importance of each factors in relation to the others. In this one,100 points have been assigned to all the factory. However, it is not necessary. If an additive scale is used, it is appropriate to multiply the weight by the factor scores to arrive at a total score for each factor.
The procedure which has been described can be summarized as follows:
Where
Sj : Total score for location j
Wi : Weight for factor i
Fij : Factor score for factor i on location j
n : Number of locations
m : Number of factors
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Example 1: we are considering two different cities Richmond, Birmingham for the location of a medium-sized Red Bakery Firm. The bakery will produce an assortment of bakery goods on site and will sell directly to retail customers as well as whole sale do grocery stores, restaurants, etc. The factors shown in Table-1 have been evaluated for two cites.
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The total score can be computed for each site. This is done by first converting the rating for each non-cost factor to a numerical score.
The conversion for the example is shown in Table-2 using a 10-point scale
.
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The location with the highest total score is then the best choice.
The total scores are as follows:
S1 =15(8)+5(6)+5(10)+5(2)+10(8)+60(6)
S2 =15(10)+5(4)+5(8)+5(6)+10(6)+60(10)
S1 =650 S2 =900
This scoring system, therefore, indicates that alternative 2, Birmingham, is preferred.
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Location Factor Rating Example 2:
Key ScoresSuccess (out of 100) Weighted ScoresFactor Weight France Denmark France Denmark
Labor availability and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0People-to- car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3Education and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0
Table 8.4
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Location Factor RatingExample 3:
Copyright 2011 John Wiley & Sons, Inc., R.Taylor Supplement 7-47
Labor pool and climateProximity to suppliersWage ratesCommunity environmentProximity to customersShipping modesAirport service
LOCATION FACTOR
.30
.20
.15
.15
.10
.05
.05
WEIGHT
80100
6075658550
Site 1
65919580909265
Site 2
90757280956590
Site 3
SCORES (0 TO 100)
Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24
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Location Factor Rating
Copyright 2011 John Wiley & Sons, Inc.,R.Taylor Supplement 7-48
24.0020.00
9.0011.25
6.504.252.50
77.50
Site 1
19.5018.2014.2512.00
9.004.603.25
80.80
Site 2
27.0015.0010.8012.00
9.503.254.50
82.05
Site 3
WEIGHTED SCORES
Site 3 has the highest factor rating
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Locational Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Three steps in the method
1. Determine fixed and variable costs for each location
2. Plot the cost for each location
3. Select location with lowest total cost for expected production volume
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Locational Break-event analysis:
Example 1: Potential locations at Albany, Baker and Casper have the cost structures shown in Table for a product expected to sell for $130.
a)Find the most economical location for an expected to sell volume of 6.000 units per year.
b)What is the expected profit if the site selected in (a) is used ?
c)For what output range is each location best?
.
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a)
A: TC:$150.000+$75(6.000) =$600.000
B: TC:$200.000+$50(6.000) =$500.000 *
C: TC:$400.000+$25(6.000) =$550.000
Therefore the most economical location is B
b) Expected profit (using B )
P=$130 (6.000)-$500.000=$280.000/Yr
c) From the graph, use A for volumes up to 2000, B for 2000-8000 and C for volumes greater than 8000 units.
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Locational Break-Even Analysis Example 2
Three locations:
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Fixed Variable TotalCity Cost Cost Cost
Total Cost = Fixed Cost + (Variable Cost x Volume)
Selling price = $120Expected volume = 2,000 units
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© 2011 Pearson Education, Inc. publishing as Prentice Hall
Locational Break-Even Analysis Example
–$180,000 –
–$160,000 –$150,000 –
–$130,000 –
–$110,000 –
––
$80,000 ––
$60,000 –––
$30,000 ––
$10,000 ––
An
nu
al c
ost
| | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
Akron lowest
cost
Bowling Green lowest cost
Chicago lowest cost
Chicago cost curve
Akron co
st
curv
e
Bowling Green
cost curve
Figure 8.2
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Transportation Model
Finds amount to be shipped from several points of supply to several points of demand
Solution will minimize total production and shipping costs
A special class of linear programming problems
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Worldwide Distribution of Volkswagens and Parts
Figure 8.4
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Applications - Operations
• Stores and Warehouses– Where do we build our
warehouses so that they are close to our stores?
– And how many should we build to attain efficiency?
• Here, accuracy far outweighs speed
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Location of Multiple Factories and Warehouses
Transportation Linear Programming
Transportation adds no value to a product other than place utility.
However, the transportation costs for raw materials and finished goods are often significant and merit special analysis.
Before deciding on a plant location, management may want to know which plants will be used to produce what quantities and to which distribution warehouses all quantities should be shipped.
If the location problem can be formulated as one of minimizing a transportation cost, subject to satisfying overall supply and demand requirements.
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Facilities Location for the source-destination problem
n
i
n
j
ijijXCMinZ1 1
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To use the transportation linear-programming format, the demand requirements and supply availabilities are formulated in a rectangularmatrix. The transportation costs between the supply and demand points are placed in the upper corner of each cell.
Supply is allocated to meet demand. The solution procedure is an iterative one that begins which an initial solution that is feasible but not necessarily optimal.The solution is progressively tested and improved upon until an optimal solution is reached.The optimal solution satisfies demand at the lowest total cost. Several methods of obtaining initial and optimal solution have been developed:
Copyright 2011 John Wiley & Sons, Inc.
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Example 1:Rent’R Cars is a multi-site car rental company in the city. Its trying out a new ”return the car to the location most convenient for you” policy to improve costumer service. But this means that the company has to constantly move cars around the city to maintain required levels of the vehicle availabilty. The supply and demand for economy cars , and the total cost of moving these vehicle between sites are shown below:
From Supply (car)
1.Cincinati 300
2.Atlanta 200
3.Pittsburg 200
To Demand (car)
A.New York 150
B.Dallas 250
C.Detroit 300
Unit Cost Table
A B C
1 $16 $18 $11
2 $14 $12 $13
3 $13 $15 $17
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Linear Programming Model Xij i=1,2,3 j=A,B,C
Objective Function
Minimize Z=16X1A+16X1B+11X1C+14X2A+12X2B+13X2C+13X3A+15X3B+17X3C
Subject to:
X1A+X1B+X1C ≤300
X2A+X2B+X2C ≤200 Supply Constraints
X3A+X3B+X3C≤200
X1A+X2A+X3A=150
X1B+X2B+X3C=250 Demand Constraints
X1C+X2C+X3C=300
Xij≥0
n
i
n
j
ijijXCMinZ1 1
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FOR EACH ROW AND COLUMN REMAıNıNG UNDER
CONSıDERATıON, CALCULATE ıTS DİFFERENCES
• BETWEEN SMALLEST AND NEXT-TO- THE-SMALLEST UNıT COST(CİJ) STıL REMAıNıNG ıN THAT ROW OR COLUMN (opportunity cost)
• In that row or column having the largest difference, select the variable having the smalest remaining unit cost.
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Example 2:
• Warehouse• Factory 1 2 3 4 Supply• 1 19 30 50 10 7• 2 70 30 40 60 9• 3 40 8 70 20 18• Demand 5 8 7 14 34
Solving: Nort-west: $1015
VAM : $779
Steping stone : $743
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The Single Facility Rectilinear Distance Location Problem
• Goal: locate n facilities to minimize the weighted sum of rectilinear distances from the new facility to existing facilities.
• Solution: locate the new facility at the median location of the existing facilities. This is accomplished by taking the median location component by component of existing locations.
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The Gravity Problem
• The objective is to minimize the weighted sum of the squared Euclidean distances of the new facility to the current facilities. It is an uncommon problem but has a simple solution.
• The optimal solution is that both the x and y coordinates of the new facility are the ratio of the weighted x and y coordinates of the existing facilities divided by the sum of the weights.
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Service Location Strategy
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management
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Location Strategies
Table 8.6
Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus
Volume/revenueDrawing area; purchasing powerCompetition; advertising/pricing
Physical qualityParking/access; security/lighting; appearance/image
Cost determinantsRentManagement caliberOperations policies (hours, wage rates)
Tangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; raw material; taxes, and so on
Intangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and local government
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Location Strategies
Table 8.6
Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques
Regression models to determine importance of various factors
Factor-rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systems
Transportation methodFactor-rating methodLocational break-even analysisCrossover charts
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Geographic Information Systems (GIS)
Important tool to help in location analysis
Enables more complex demographic analysis
Available data bases include Detailed census data
Detailed maps
Utilities
Geographic features
Locations of major services
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Geographic Information Systems (GIS)
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• http://www.youtube.com/watch?v=gxCIooxvch8
Copyright 2011 John Wiley & Sons, Inc. Supplement 7-71