chapter 2b- facility location-condensed

8/18/2019 Chapter 2B- Facility Location-Condensed

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von Thunen

Agricultural activity occurs in a “limitless plain ofequal fertility” with a city in the middle

Theorized that: City price = origin price + transport costs Transport costs = f {weight & distance}

As a result Products having high weight/value ratio should be

produced near the city (see next slide)

Other Contributions Land values decrease as move from city More intense land utilization near cities

Weber

Classification of Materials as:

Localized vs. Ubiquitous (available everywhere) Pure vs. Weight-Losing

Calculate MI:

Implications:

if MI > 1.0, locate plant nearer to raw materials

if MI = 1.0, indifferent

if MI < 1.0, locate plant nearer to markets

How does a raw material’s status as pure,weight-losing, or weight-gaining influence the

facility location decision?

A pure raw material is one that loses no weightin manufacturing and, because of this, theprocessing point can be anywhere, near the rawmaterial source and the market.

Weight-losing products lose weight duringprocessing; the processing point should be neartheir source in order to avoid payment ofunnecessary transportation charges.

Weight-gaining products gain weight during

processing; the processing point should be closeto the market.

When to plan?

No distribution network currently exists

There has been no re-evaluation in 5 years

When costs are changing rapidly, especially

transport & inventory When markets have shifted.

When current distribution economics encourageshifts

When there has been a major policy shift inlogistics such as in price, customer service, orinvestment level.

Logistics Strategy

• The objectives of logistics strategy are :

Maximize Return on Logistics Assets

• Minimize Cost

• Minimize Investments

• Maximize Customer Service

AssetsCostsRevenueROLA −=


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TRANSPORT

DECISIONSLOCATIONDECISIONS

INVENTORY

DECISIONS

Network Design Decisions

Facility role

Facility location Capacity allocation

Market and supply allocation

Methods of Evaluating Location Alternatives Locational Break-Even Analysis

Center-of-Gravity Method

The Transportation Method

The Factor-Rating Method

Simulation

Objective of Location Strategy

Maximize the benefit oflocation to the firm

Industrial Location Decisions

Cost focus

Revenue varies little between locations

Location is a major cost factorAffects shipping & production costs (e.g., labor)

Costs vary greatly between locations

Service Location Decisions

Revenue focus

Costs vary little between market areas

Location is a major revenue factorAffects amount of customer contact

Affects volume of business

Factors Influencing NetworkDesign Decisions

Strategic

Technological

Political

Infrastructure

Competitive

Logistics and facility costs


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Location Decision Sequence

COUNTRYRegion/Community

Site

Global Location Factors

Government stability

Government regulations

Political and economicsystems

Economic stability andgrowth

Exchange rates

Culture

Climate

Export import regulations,duties and tariffs

Raw material availability

Number and proximity of

suppliers Transportation and

distribution system

Labor cost and education

Available technology

Commercial travel

Technical expertise

Cross-border traderegulations

Group trade agreements

Regional Location Factors

Business climate

Community services

Incentive packages

Government regulations

Environmental regulations

Raw material availability

Labor (availability,education, cost, andunions)

Government services (e.g.,Chamber of Commerce)

Commercial travel Climate

Infrastructure (e.g., roads,water, sewers)

Quality of life Taxes Availability of sites Financial services Community inducements Proximity of suppliers Proximity of customers Construction/leasing

costs Land Cost

Education system

Factors Affecting Site

Site size and cost

Air, rail, highway, and waterway systems

Zoning restrictions

Nearness of services/supplies needed

Environmental impact issues

Location Decision Example

Location Decision Example

In 1992, BMWdecided to build its

first majormanufacturingplant outsideGermany inSpartanburg, SouthCarolina.

© 1995 Corel Corp.


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Country Decision Factors

Market location

U.S. is world’s largest

luxury car market

Growing market

Labor

Lower manufacturing laborcosts $17/hr. (U.S.) vs. $27

(Germany)

Higher labor productivity 11 holidays (U.S.) vs.

31 (Germany)

Other

Lower shipping cost($2,500/car less)

New plant &equipment wouldincreaseproductivity (lowercost/car $2,000-3000)

Region/Community Decision Factors

Labor

Lower wages in South Carolina (SC)About $17,000/yr. (SC) vs. $27,051/yr. (US)

Based on 1993 metropolitan averages forall workers

Government incentives$135 million in state & local tax breaksFree-trade zone from airport to plant

No duties on imported components or onexported cars

Customer Service and Cost Build-up as a function of facilities

Customer

DC

Where inventory needs to be for a one week orderWhere inventory needs to be for a one week order

response timeresponse time -- typical resultstypical results ----> 1 DC> 1 DC

Customer

DC

Where inventory needs to be for a same day / nextWhere inventory needs to be for a same day / next

day order response timeday order response time -- typical resultstypical results ----> 26> 26 DCsDCs Service and Number of Facilities

Number of Facilities

Response

Time


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Costs and Number of Facilities

Costs

Number of facilities

Inventory

Transportation

Facility costsPercent ServicePercent ServiceLevel WithinLevel Within

Promised TimePromised Time

TransportationTransportation

Cost Build-up as a function of facilities

C o s t o f O p e r a t i o n

s

C o s t o f O p e r a t i o n

s

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs

LaborLabor

Discuss the factors that influence the numberof service facilities that a firm chooses tooperate.

Organizations should be thinking about theoptimal number of facilities in the system.

The need for additional facilities oftenarises when an organization’s serviceperformance from existing facilities dropsbelow “acceptable” levels.

The general trend in recent years hasbeen for companies to reduce the number

of facilities in their distribution networks.

Types of Facilities

Heavy-manufacturing facilities

large, require a lot of space, and areexpensive

Light-industry facilities

smaller, cleaner plants and usually less costly

Retail and service facilities- smallest andleast costly

Proximity to customers

Location is everything

Location Incentives

Tax credits

Relaxed government regulation

Job training

Infrastructure improvement

Money

Briefly describe the general factorsinfluencing facility location. The cost and availability of natural resources may be a factor,

particularly for manufacturing facilities. An area’s population is also important; population serves as a

market for goods as well as a source of labor.

Taxes and subsidies are yet another general factor, as is the costand availability of transportation. Over the past two decades, many organizations have identified

proximity to key suppliers as an important determinant when locatinga facility.

Trade patterns, such as commodity flows, can be studied todetermine changes occurring in the movement of raw materials andfinished goods.

An increasingly important locational factor can be broadly calledquality-of-life considerations and can include access to commercialair travel, an area’s cost of living, and its crime, among others.


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Steps in Factor Rating Method

List relevant factors

Assign importance weight to each factor(0 - 1)

Identify potential locations

Develop scale for each factor (1 - 100)

Score each location using factor scale

Multiply scores by weights for eachfactor & total

Select location with maximum totalscore

Example:

Solution:

84

74

68

Problem

Labor cost is twice as important as utility cost,which is in turn is twice as important asclimate.Assign importance weight to each factor (0 - 1)

A. Labor CostB. Utility CostC. Climate

WEIGHTWEIGHT

??

??

??

“Grid” Method for Facility Location

Procedure – Raw material and/or finished goods points on a grid – Equation to find Center of Gravity

Advantages

– Simplicity – Heuristic, but excellent “first cut” solution

Limitations – Assumes demand, etc. at “points” – Assumes linear rate structure – Assumes straight-line routes – Based on variables costs only – Static approach - not dynamic – Not an “optimizing” approach 0 100 200 300 400 500 600 700

Grid Location


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Center of Gravity Method Finds location of single distribution

center serving several destinations Used primarily for services

Considers

Location of existing destinations

Example: Markets, retailers etc.

Volume to be shipped

Shipping distance (or cost)

Shipping cost/unit/mile is constant

Center of Gravity Method Steps

Place existing locations on acoordinate gridGrid has arbitrary origin & scale

Maintains relative distances

Calculate X & Y coordinates for‘center of gravity’Gives location of distribution center

Minimizes transportation cost

Center of Gravity Method Equations

ddixix = x coordinate of= x coordinate of

location ilocation i

WWii == Volume ofVolume of

goods moved to or fromgoods moved to or from


ddiyiy = y coordinate of= y coordinate of


X CoordinateX Coordinate

Y CoordinateY Coordinate

∑

∑

=

ii

iiix

xW

Wd

C

∑

∑

=

ii

iiiy

yW

Wd

C

Grid-Map Coordinates

where,where,x x ,, yy == coordinates of new facilitycoordinates of new facility

at center of gravityat center of gravityx x i i ,, y y i i == coordinates of existingcoordinates of existing

facilityfacility i i W W i i == annual weight shipped f romannual weight shipped f rom

facilityfacility i i

∑∑∑∑∑∑∑∑n n

W W i i i =i = 11

∑∑∑∑∑∑∑∑ x x i i W W i i i =i = 11

n n

x = x =

∑∑∑∑∑∑∑∑n n

W W i i i =i = 11

∑∑∑∑∑∑∑∑ y y i i W W i i i =i = 11

n n

y = y =

x x 11 x x 22 x x 33 x x

y y 22

y y

y y 11

y y 33

1 (1 (x x 11,, y y 11),), W W 11

2 (2 (x x 22,, y y 22),), W W 22

3 (3 (x x 33,, y y 33),), W W 33

Center-of-Gravity Technique:Example

AA BB CC DD

x x 200200 100100 250250 500500

y y 200200 500500 600600 300300Wt Wt 7575 105105 135135 6060

y y

700700

500500

600600

400400

300300

200200

100100

00 x x 700700500500 600600400400300300200200100100

AA

B B

C C

D D

(135)(135)

(105)(105)

(75)(75)

(60)(60)

MilesMiles

M i l e s

M i l e s

Center-of-Gravity Technique:Example (cont.)

x = = = 238n

∑∑∑∑ W i i = 1

∑∑∑∑ x i W i i = 1

n

∑∑∑∑n

W i i = 1

∑∑∑∑ y i W i i = 1

n

y = = = 444(200)(75) + (500)(105) + (600)(135) + (300)(60)

75 + 105 + 135 + 60

(200)(75) + (100)(105) + (250)(135) + (500)(60)

75 + 105 + 135 + 60


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Center-of-Gravity Technique: Example(cont.)

AA BB CC DD

x x 200200 100100 250250 500500y y 200200 500500 600600 300300Wt Wt 7575 105105 135135 6060

y y

700700

500500

600600

400400

300300

200200

100100

00 x x 700700500500 600600400400300300200200100100

AA

B B

C C

D D

(135)(135)

(105)(105)

(75)(75)

(60)(60)

MilesMiles

M i l e s

M i l e s Center of gravityCenter of gravity (238, 444)(238, 444)

Break-Even Analysis Break-even analysis can be used for location analysis especially

when the costs of each location are known

Step 1: For each location, determine the fixed andvariable costs

Step 2: Plot the total costs for each location on one graph Step 3: Identify ranges of output for which each location

has the lowest total cost

Step 4: Solve algebraically for the break-even pointsover the identified ranges

Remember the break even equations used for calculation totalcost of each location and for calculating the breakeven quantity Q. Total cost = F + cQ Total revenue = pQ

Break-even is where Total Revenue = Total Cost

Problem

The US Navy is considering four ports for theirsubmarine service: San Diego, Bremerton,Virginia Beach and Tulsa. The fixed andvariable cost at each location are given below.Which location can most economically servicethe four submarines per year?

Location Fixed Cost Variable Cost/submarine

A. San Diego $500,000 $300,000B. Bremerton $700,000 $200,000C. Virginia Beach $1,000,000 $100,000D. Tulsa $250,000 $1,000,000

Method of cost-volume analysis usedfor industrial locations

Steps

Determine fixed & variable costs for eachlocation

Plot total cost for each location

Select location with lowest total cost forexpected production volume

Must be above break-even

Locational Break-Even Analysis

Locational Break-Even AnalysisExample-1

You’re an analyst for AC Delco. You’reconsidering a new manufacturing plant inAkron, Bowling Green, or Chicago. Fixed

costs per year are $30k, $60k, & $110krespectively. Variable costs per case are$75, $45, & $25 respectively. The price percase is $120. What is the best location foran expected volume of 2,000 cases peryear?

© 1995 Corel Corp.

Locational Break-Even CrossoverChart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

A n n u a

l C o s t

A k r o n

C h i c a g o

B o w l i n g

G r e e n

Akronlowest cost

Bowling Greenlowest cost

Chicagolowest

cost


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Transportation Model Finds amount to be shipped fromseveral sources to several destinations

Used primarily for industrial locations

Type of linear programming model

Objective: Minimize total production& shipping costs

Constraints

Production capacity at source (factory)

Demand requirement at destination

Transportation Model

The transportation model technique canbe used to determine how many unitsshould be shipped from each plant toeach warehouse To Minimize TotalTransportation Cost.

Example Pakistan Ltd. has three plants running at

full capacity in Karachi, Multan, andLahore.

These plants supply four Distributionwarehouses in Rahim Yar Khan,Bhawalpur, Faisalabad, and Peshawar.

Example (Contd.)

Pak Ltd plans to build a new plant. It hasnarrowed down the choice of sites to twopossibilities: Sukkur and Peshawar.

We will now determine which site results in thelowest transportation cost by using the unittransportation costs, warehouse demands, andplant capacities shown in the following:

D.C

Existing Plant

Proposed Plant

Example

PlantAnnual ProductionCapacity (Su ppl y) Wareh ouse Deman d

Karachi 5000 RahimYar Khan 4500Multan 3000 Faisalabad 3500

Lahore 2000 Bhawalpur 2000

Sukkur (proposed) 1500 Peshawar 1000

Peshawar(proposed) 1500


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Example (Contd.)

Plant Distribution Warehouse

R Y Khan Faisalabad Bhawalpur Peshawar

Karachi 3000 7000 4250 7300

Multan 1200 3000 800 3750

Lahore 2800 500 3000 2000

Sukkur(proposed) 700 3500 1000 6000

Peshawar(proposed) 5000 4500 1000 200

Shipment Costs Rs/ Unit

Example

We will approach this problem in thefollowing manner:

We will first assume that the selected plantis the Sukkur plant, and calculate the totaltransportation cost.

Example

Later, we will assume the selected plant isPeshawar. Then we will compare thetransportation costs for both plants.

Now, the first step is to find the optimalnumber of units to ship between eachplant-warehouse combination. This alsogives the optimal transportation cost for

the problem.

Example

We can use any of the computerized LPtools for finding the optimum values forthis problem.

Some of these include WINQSB, Lindo,OM Expert, and Excel.

Transportation ProblemTransportation Problem- New Plant

at Sukkur

The total transportation cost will be Rs 24.65 million if the new

plant is built in Sukkur


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chapter 2b- facility location-condensed

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