2[1]. facility location[1]

Facility Location

Adapted from:Facilities Planning 3rd Ed. by Tompkins, White, Bozer, TanchocoOperations Management by William Stevenson

Mapua Institute of TechnologySchool of Industrial Engineering

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What is a facility location? Refers to the

placement of facility with which it interfaces

It includes placement and orientation on a specific plot of land

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Factors involved with location decisions

Demand growth Market shifts Depletion of raw materials Introduction of new products and services

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Importance of Location Decisions

they entail a long term commitment which makes mistakes difficult to overcome

location decisions often have an impact on operating cost both fixed and variable ( e.g. transportation costs, taxes, wages, rent etc.) and revenues as well as on operation.

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Objectives of location decisions

Maximize benefit of location to a firm Depend on the type of business

- Manufacturing – minimizing cost- Retail and professional services –

maximizing revenue- Warehouse – cost and speed of

dlivery

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Location Options

Expand an existing facility Add new location while retaining the

existing ones Shut down one location and move to

another Do nothing – maintain the status quo

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General procedure for making location decision

Determine the criteria that will be used to evaluate location alternatives.

Identify factors that are important, such as location of raw materials.

Develop location alternatives.- identify the region for a location-identify a small number of community- site alternatives

Evaluate the alternatives and make a selection

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Factors that affect location decisions:

Country Considerations Regional Factor Community Considerations Sire-related factor

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Factors that affect location decisions

Country Decisions Government rules, attitudes, stability,

incentives Culture Economic/ political issues Location of markets Labor availability, attitudes, productivity, costs Availability of supplies, communications, energy

etc. Exchange rates

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Region/ Community Decisions Attractiveness of region ( culture, taxes, climate,

etc) Labor availability, costs, attitudes towards unions Cost and availability of utilities Environmental regulations Government incentives Proximity to raw materials and customers Land/ Construction costs Size of community Community resistance to industrial operations

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Site-Related Factors Site size and cost Air, rail, waterway system Zoning restrictions Nearness of services/supplies needed Environmental impact issues

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Location Evaluation Methods

Locational-cost-profit volume analysis Factor-rating method Center of gravity method Transportation model

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Location Evaluation Method: Locational cost-profit-volume analysis

Locational cost-profit-volume analysis – a

technique for evaluating location choices in economic terms.

Steps:1. Determine the fixed and variable costs

associated with each location alternative2. Plot the total cost lines for all location

alternatives on the same graph3. Determine which location will have the lowest

total cost for the expected level of output. Alternatively which location will have the highest profit.

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Assumptions:1. Fixed costs are constant for the range of

probable output.2. Variable costs are linear for the range of

probable output3. The required level of output can be closely

estimated4. One one product is involved


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Example 1:Four location options are being considered for a new

facility with a minimum target output of 10,000 unit/ year. The cost data are given as:

Location Fixed cost /year Variable cost/unitA $250,000 $11B $100,000 $30C $150,000 $20D $200,000 $35 a. Identify the range of output for which each alternative

is superior ( I.e. has the lowest total costs).b. Which location is best for an output of 8,000? , 10,000?


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Solution:TC = FC + VC X QWhere: TC = Total Costs VC = Variable Costs

FC = Fixed Costs Q = Output ( volume) level

Location FC VC TC ( Q = 0) TC ( Q = 10,000)A 250,000 11 250,000 360,000 B 100,000 30 100,000 400,000 C 150,000 20 150,000 350,000 D 200,000 35 200,000 550,000


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Cost-Volume Graph

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1 2Level of Output ( Q)

To

ta

l C

osts D

BCA

B C A

0Level Of Output ( Q)

5,000 11,111

Tota

l C

ost

s

10,000


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Example 2:Four location options are being considered for a new

facility with an estimate annual output of 100,000 units. Using Profit-volume analysis, find the range of output for which each alternative is best.

Location Fixed cost /year Variable cost/unit

Revenue/UnitA $100,000 $10

$15B $150,000 $6

$12C $200,000 $6

$12D $250,000 $4

$10


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Solution:P = TR – TC where: = RQ – (FC + VCQ) TR = total revenue = (R – VC)Q – FC R = revenue/unit

P = profit

Location FC Rev VC P (Q=0) P( Q=100,000)A 100,000 15 10 (100,000) 400,000 B 150,000 12 6 (150,000) 450,000 C 200,000 12 6 (200,000) 400,000 D 250,000 10 4 (250,000) 350,000


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(300,000)

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

500,000

1 2

Profit-Volume Chart

Pro

fit

Level of Output (Q)

A BB

C

DA


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Factor Rating – general approach to evaluating

locations that includes quantitative and qualitative inputs.

Steps:1. Determine which factors are relevant.2. Assign weight to each factor that indicates its relative

importance compared with all other factor. Typically weights sum to 1.00

3. Decide common scale for all factors ( e.g. 0 to 100)4. Score each location alternative5. Multiply the factor weight by the score for each factor and

sum the results for each location alternative.6. Choose the alternative with the highest composite score.

Location Evaluation Method: Factor Rating

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Example:A photo processing company intends to open a new branch store. The table below contains information on two important locations. Determine which of the location is a better alternative.

Location Evaluation Method: Factor Rating

Alternative 1 Alternative 2 Alternative 1 Alternative 2

Proximity to existing store

Trafic Volume

Rental Cost

Size

Layout

Operating Costs

Total

SCORES ( 0 TO 100 ) WEIGHTED SCORESFACTOR WEIGHT

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Location Evaluation Method: Center of gravity method

Center off gravity method – is a method to determine the location of a distribution center that will minimize distribution costs.

Assumptions:1. Distribution costs is assumed to be a linear function of

the distance and quantity shipped.2. The quantity to be shipped will not changed ( will not

change overtime)3. An acceptable variation is that quantities are allowed

to change, as long as their relative amounts remain the same ( e.g. seasonal variation)

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Steps:

1. Map the locations of the destinations ( should be accurate and drawn to scale)

2. Coordinate system is overlaid on the map to determine relative locations

3. Find the coordinates of the the center of gravity ( x, y)Case 1: The quantities to be shipped to every locations are equal

x = xi / n y = yi / ni=1

n

i=1

n

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Where:

xi = x coordinate of destination iyi = y coordinate of destination in = number of destination

Case 2: Quantities to be shipped are not equal

x = xiQi/Qi y = yiQi/Qi

i=1

n

i=1

n

i=1

n

i=1

n

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Example 1:A centralized warehouse is to be built to supply raw

materials to four manufacturing plants. Determine the coordinate location of the warehouse that will minimize transportation costs. a. Assume that the quantities to be shipped from the warehouse to the four plants are equal.b. Assume that the quantities to shipped are

Plant Shipment / Day A 2 tons B 1 ton C 3 tons D 4 tons

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8

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A

B

CD

2[1]. facility location[1]

Documents

location evaluation

raw materials

location decisions

location options

volume analysis

variable costs

locational

facility location