This document discusses facility location analysis and provides examples of location decision methods. It defines facility location as determining a geographic site for a firm's operations. Key factors influencing location decisions are discussed as tangible/quantitative and intangible factors. Methods covered include the factor rating technique, break-even point analysis, and location break-even analysis. Examples of each method are provided to illustrate how they are used to evaluate potential locations.

1. CHAPTER 5
LOCATION DECISION

2. Learning Objectives
1. Able to define facility location.
2. Identify objectives and importance of location
decision.
3. Describe factors Influencing Location Decisions:
- Tangible Factors
- Intangible Factors
4. Understand Plant Location Models:
- Factor Rating Technique
- Break-Even Point Analysis
- Location Break-Even Point Analysis

3. Introduction
 Location has a major impact on the overall risk and profit of the
company. Firms throughout the world are using the concepts and
techniques of this chapter to address the location decision because
location greatly affects both fixed and variable costs.
 Company need location that can provide abundant, skills, productive
and low cost labors.
The location decision often depends on the type of business
The objective of location strategy is to maximize the benefit of location
to the firm.

4. Definition of facility location
Facility location is the process of determining
a geographic site for a firm’s operation.
@
Facility location is a place where a factory,
warehouse , office or any other business
enterprise is built.

5. Importance of facility location
1. Profitability & Long-term Survival
- Location decision involves large amounts of capital. Once decision is
made and implemented, it cannot be changed without substantial
cost. The cost is large and difficult to be reduced.
2. Impact on operating costs
- Location decisions often to have an impact on operating costs(fixed
cost and variable cost) and revenues.
3. Competition
- A firm’s location affect its ability to compete and many other aspects
of its operation.
4. Hidden Effects
- The effects of location can be risky since they are not directly
observable. The management should always be alert to the need to
evaluate location effectively.

6. Importance of facility location
5. Improve customer service by locating near customers
- service providers like fast food restaurants locate near one another
to draw customers to one location, while retail stores to attract a
higher volume of customer.
6. Better working environment for workers
- management should consider employees’ interest as well. Location
of the factories or outlets should have an access to all amenities such
as housing, education, shopping and other service.
7. To balance costs through choosing the best location
8. Reduce investment costs & maximize the benefit of location.

7. Factors Influencing Location Decision
1. Tangible/Quantitative/Economic
Factors.
2. Intangible/Qualitative Factors.

8. Tangible/Quantitative/Economic Factors
1. Facility costs (Land/Building/Office).
2. Proximity to Suppliers & Resources.
3. Labour Costs.
4. Distribution Costs.
5. Utilities and Taxes Costs.

9. Intangible/Qualitative Factors
1. Worker education, skills & attitude.
2. Local & government policies.
3. Attractiveness of location.
4. Quality of life issues.
5. Economic/Political sentiment.
6. Community acceptance/feelings.

10. Methods of evaluating Location Analysis
1. Factor rating technique
2. Break-Even Point Analysis
3. Location Break-Even Analysis
4. The Center of Gravity Method
5. The Load Distance Model
6. The Transportation Method
Our syllabus concentrates on the first three
methods

11. 1. Factor rating technique
March 2004 (QA1)
A company is planning on expanding and building a
new plant in one of the three Southeast Asian
countries. Harris Baker, the manager in charge of
the decision making,has determined that five
factors can be used to evaluate the prospective
countries. Baker used a rating system of 1 (least
desirable country) to 5 (most desirable) to evaluate
each factor

12. 1. Factor rating technique
Intangible Factors Weight
Ratings
Thailand Malaysia Vietnam
Technology 0.2 4 5 2
Level of education 0.1 3 4 2
Political and legal
aspects
0.4 2 3 2
Social and cultural
aspects
0.1 4 4 3
Economic factors 0.2 3 3 2

13. 1. Factor rating technique
Intangible
Factors Weight
Weighted Scores (WS)
Thailand Malaysia Vietnam
Techn 0.2 4x0.2=0.8 5x0.2=1.0 2x0.2=0.4
Edu 0.1 3x0.1=0.3 4x0.1=0.4 2x0.1=0.2
Politic 0.4 2x0.4=0.8 3x0.4=1.2 2x0.4=0.8
Social 0.1 4x0.1=0.4 4x0.1=0.4 3x0.1=0.3
Eco 0.2 3x0.2=0.6 3x0.2=0.6 2x0.2=0.4
Total WS =2.9 =2.1=3.6

14. 1. Factor rating – Intangible Factors
Weighted Scores
Thailand Malaysia Vietnam
Total WS 2.9 3.6 2.1
Based on the total weighted scores,
Malaysia is chosen as the prefered
location because of its highest score.
Ranking 2 3 1

15. 1. Factor rating – Tangible/Costs
Cost Factors
RM
Thailand Malaysia Vietnam
Fixed Costs 30,000 60,000 110,000
Variable Costs 150,000 90,000 50,000
Ranking 1 3 2
Total Costs 180,000 150,000 160,000

16. 1. Factor rating – Integrated Table
Factors
Weigh
t
Weighted Scores (WS)
Thailand Malaysia Vietnam
Tangible 2 1x2=2 3x2=6 2x2=4
Intangible 1 2x1=2 3x1=3 1x1=1
Total WS = 4 = 9 = 5
Ranking 1 3 2

17. 2.Break-Even Point Analysis (Contribution
Margin (CM) Concept)
CM = Selling Price (SP) – Variable Cost (VC)/unit
(This amount is used to cover Fixed Costs)
It is important to achieve break-even (BE)
BE Point (BEP) in unit = Total Fixed Costs
CM
BEP in RM = BEP(unit) x SP

18. 2.Break-Even Point Analysis (Contribution
Margin (CM) Concept)
Oktober 2004 (QA1)
A manufacturing firm is operating with a fixed cost
of RM40,000 per month and a variable cost made
up of raw materials of RM 4 per unit, direct labor
cost of RM12 per unit and overhead cost of RM4
per unit. The firm sells its product at RM40 per unit.
FC = RM40K/mth
SP = RM40/unit
VC = (RM4 + RM12 + RM4)= RM20/unit

19. 2.Break-Even Point Analysis (Contribution
Margin (CM) Concept)
FC = RM40K/mth; SP = RM40; VC = RM20/unit
a) Calculate the breakeven point.
BEP (unit) = RM40,000 ÷ (RM40 – RM20)
= 2,000 units
b) Determine the total revenue required to
breakeven.
BEP(RM) = 2,000 units x RM40 = RM80,000

20. 2. Break-Even Point Analysis (Contribution
Margin (CM) Concept)
FC = RM40K/mth; SP = RM40; VC = RM20/unit
c) Calculate the profit if sales volume is 3000 units.
Sales Volume = FC + Profit
CM
3,000 units = RM40,000 + Profit
RM20
Profit = (RM20 x 3000 units) -RM40000
= RM20,000

21. 2. Break-Even Point Analysis (Contribution
Margin (CM) Concept)
FC = RM40K/mth; SP = RM40; VC = RM20/unit
d) Determine the production volume if the firm's
target profit is RM40,000 per month.
Sales Volume = FC + Profit
CM
Sales Volume = RM40,000 + RM40,000
RM20
Sales Volume = RM80,000
RM20
= 4,000 units

22. 2. Break-Even Point Analysis (Contribution
Margin (CM) Concept)
FC = RM40K/mth; SP = RM40; VC = RM20/unit
e) If the contribution margin increased by 5%, calculate the new
breakeven point assuming the price remains the same.
CM (new) = RM20 x 1.05 = RM21
BEP (unit) = RM40,000 ÷ RM21
= 1,904.76 @ 1,905 units
BEP(RM) = 1,905 units x RM40 = RM76,200

23. 2.Break-Even Point Analysis (Contribution
Margin (CM) Concept)
FC = RM40K/mth; SP = RM40; VC = RM20/unit
f) Illustrate your findings in a, b, c and d with a graph.
(a) BEP (unit) = 2,000 units
(b)BEP(RM) = RM80,000
(c) Profit = RM20,000 (3,000 units)
(d) Sales = 4,000 units

24. 2.Break-Even Point Analysis (Contribution
Margin (CM) Concept)
Profit
(b)RM80,000
(c) RM20,000
(a) BEP = 2,000
(d) 4,000
3,000 Volume (units)
Fixed
Cost
Variable
Cost
Total
costs
Total Revenue
BEP
40,000RM
0
Loss

25. Past Year Exam Question
April 2010 (QA1)
Okt 2009 (QA1)
April 2009 (QA5)
April 2008 (QA1)
April 2007 (QA1)
Okt 2006 (QA1)
April 2006 (QA1)
Nov 2005 (QA1)
Okt 2004 (QA1)