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Facility location

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Facility location

  1. 1. Facility Location By Dr. Debadyuti Das, Reader Faculty of Management Studies University of Delhi
  2. 2. Overview <ul><li>Involves the long-term commitment of large amount of capital under conditions of considerable uncertainty. </li></ul><ul><li>Determines a permanent framework of operating constraints. </li></ul><ul><li>Significant impact on investment requirements, operating costs, revenues and operations. </li></ul><ul><li>Has significant consequences on the competitive position of the firm. </li></ul>
  3. 3. Need for location decision <ul><li>Significant changes in the level of demand. </li></ul><ul><li>Significant changes in the geographical distribution of demand. </li></ul><ul><li>Changes in the costs or quality requirement of critical production inputs. </li></ul><ul><li>Significant changes in the real-estate value of existing or adjacent sites. </li></ul><ul><li>Depletion of resources. </li></ul>
  4. 4. Strategic importance of location decision <ul><li>To become the low cost producer of final products. </li></ul><ul><li>To increase profits by planning to capture the increased market share. </li></ul><ul><li>To base location of the facilities based on customer convenience. </li></ul><ul><li>To base location of a facility based on where it fits in the entire supply chain. (Beginning, Middle or end of the chain) </li></ul>
  5. 5. Location options <ul><ul><li>Expand existing facilities </li></ul></ul><ul><ul><li>Add new facilities while retaining the existing ones. </li></ul></ul><ul><ul><li>Move to a new location </li></ul></ul><ul><ul><li>Doing nothing </li></ul></ul>
  6. 6. Making Location Decisions <ul><li>Decide on the criteria </li></ul><ul><li>Identify the important ones </li></ul><ul><li>Develop location alternatives </li></ul><ul><li>Evaluate the alternatives </li></ul><ul><li>Make selection </li></ul>
  7. 7. Factors influencing Location Decision Regional Factors Site-related Factors Multiple Plant Strategies Community Considerations
  8. 8. <ul><li>Location of raw materials </li></ul><ul><li>Location of markets </li></ul><ul><li>Labor factors </li></ul><ul><li>Infrastructure </li></ul><ul><li>Climate and taxes </li></ul>Regional Factors
  9. 9. <ul><li>Quality of life </li></ul><ul><li>Services (Medical, police, fire services etc.) </li></ul><ul><li>Attitude of the people </li></ul><ul><li>Taxes </li></ul><ul><li>Environmental regulations </li></ul><ul><li>Utilities (cost and availability) </li></ul>Community Considerations
  10. 10. <ul><li>Land (cost, degree of development required, soil characteristics etc.) </li></ul><ul><li>Transportation </li></ul><ul><li>Environmental </li></ul><ul><li>Legal </li></ul>Site Related Factors
  11. 11. <ul><li>Product plant strategy </li></ul><ul><li>Market area plant strategy </li></ul><ul><li>Process plant strategy </li></ul>Multiple Plant Strategies
  12. 12. Comparison of Service and Manufacturing Considerations Customer access/parking Traffic volume/patterns Building/leasing costs Competition Labor cost/availability/skills Population/drawing area Energy availability, costs Demographics: age,income,etc Transportation modes/costs Revenue focus Cost Focus Service/Retail Manufacturing/Distribution
  13. 13. Issues in global locations <ul><li>Trading Blocs </li></ul><ul><li>Political Risk </li></ul><ul><li>Foreign Government </li></ul><ul><li>-Policies on foreign ownership of production facilities </li></ul><ul><li>-Import restrictions </li></ul><ul><li>-Currency restrictions </li></ul><ul><li>-Local product standards </li></ul><ul><li>-Environmental Regulations </li></ul><ul><li>Cultural differences </li></ul><ul><li>Resources </li></ul><ul><li>Labour </li></ul><ul><li>- Possible regulation limiting no. of foreign employees </li></ul><ul><li>-Language differences </li></ul>
  14. 14. Evaluating Locations <ul><li>Transportation Model </li></ul><ul><ul><li>Decision based on movement costs of raw materials or finished goods </li></ul></ul><ul><li>Cost-Profit-Volume Analysis </li></ul><ul><li>- Decision based on fixed cost, variable cost and the level of output produced at a particular location. </li></ul><ul><li>Center of Gravity (or Centroid) Method </li></ul><ul><ul><li>Decision based on minimum distribution costs </li></ul></ul><ul><li>Factor Rating </li></ul><ul><ul><li>Decision based on quantitative and qualitative inputs </li></ul></ul><ul><li>Analytic Hierarchy Process </li></ul>
  15. 15. Evaluating Locations <ul><li>Cost-Profit-Volume Analysis </li></ul><ul><ul><li>Determine fixed and variable costs at each location alternative </li></ul></ul><ul><ul><li>Plot total cost lines for all location alternatives on the same graph </li></ul></ul><ul><ul><li>Determine the lowest total costs for the expected level of output. </li></ul></ul>
  16. 16. Location Cost-Volume Analysis <ul><li>Assumptions </li></ul><ul><ul><li>Fixed costs are constant for the range of probable output </li></ul></ul><ul><ul><li>Variable costs are linear for the range of probable output </li></ul></ul><ul><ul><li>Output can be closely estimated </li></ul></ul><ul><ul><li>Only one product is involved </li></ul></ul>
  17. 17. Example 1: Cost-Volume Analysis <ul><li>Fixed and variable costs for four potential locations (for 10,000 units) </li></ul>
  18. 18. Example 1: Solution
  19. 19. Example 1: Solution 800 700 600 500 400 300 200 100 0 Annual Output (000) $(000) 8 10 12 14 16 6 4 2 0 A B C B Superior C Superior A Superior D
  20. 20. Plant Location Methodology: Centroid Method <ul><li>The centroid method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them. </li></ul><ul><li>This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above. </li></ul>
  21. 21. Plant Location Methodology: Centroid Method Formulas Where: C x = X coordinate of centroid C y = Y coordinate of centroid d ix = X coordinate of the ith location d iy = Y coordinate of the ith location V i = volume of goods moved to or from ith location
  22. 22. Plant Location Methodology: Example of Centroid Method <ul><li>Centroid method example </li></ul><ul><ul><li>Several mobile phone showrooms are located according to the following grid which represents coordinate locations for each showroom </li></ul></ul>Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month? X Y A (100,200) D (250,580) Q (790,900) (0,0)
  23. 23. Plant Location Methodology: Example of Centroid Method (Continued): Determining Existing Facility Coordinates To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates. You must also have the volume information on the business activity at the existing facilities. X Y A (100,200) D (250,580) Q (790,900) (0,0)
  24. 24. Plant Location Methodology: Example of Centroid Method (Continued): Determining the Coordinates of the New Facility You then compute the new coordinates using the formulas: You then take the coordinates and place them on the map: X Y A (100,200) D (250,580) Q (790,900) (0,0) Z New location of facility Z about (443,627)

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