facility location strategies eng. r. l. nkumbwa ™

Facility Location StrategiesFacility Location Strategies

Eng. R. L. NkumbwaEng. R. L. Nkumbwa™™www.nkumbwa.weebly.comwww.nkumbwa.weebly.com

2© 2010 Nkumbwa™.

Importance of LocationImportance of Location

• Up to 25% of the product’s selling cost

• Once a company commits to a location, many costs are fixed and difficult to change

• Energy

• Labor

• Location depends on the type of business

• Manufacturing – minimizing cost

• Retail and professional services – maximizing revenue

• Warehouse – cost and speed of delivery


In General - Location DecisionsIn General - Location Decisions

• Long-term decisions

• Difficult to reverse

• Affect fixed & variable costs

• Transportation cost

• As much as 25% of product price

• Other costs: Taxes, wages, rent etc.

• Objective: Maximize benefit of location to firm


Location OptionsLocation Options

• Expand the existing facility instead of moving

• Maintain current sites while adding another facility

• Closing the existing facility and moving to another


Factors The Affect Location DecisionsFactors The Affect Location Decisions

Country DecisionsCountry Decisions

Government rules, attitudes, stability, incentivesGovernment rules, attitudes, stability, incentives

Cultural and economic issuesCultural and economic issues

Location of marketsLocation of markets

Labor availability, attitudes, productivity, costsLabor availability, attitudes, productivity, costs

Availability of supplies, communications, energyAvailability of supplies, communications, energy

Exchange ratesExchange rates



Region/Community DecisionsRegion/Community Decisions

Corporate desiresCorporate desires

Attractiveness of region (culture, taxes, climate, etc…)Attractiveness of region (culture, taxes, climate, etc…)

Labor availability, costs, attitudes towards unionsLabor availability, costs, attitudes towards unions

Cost and availability of utilitiesCost and availability of utilities

Environmental regulations of state and townEnvironmental regulations of state and town

Government incentivesGovernment incentives

Proximity to raw materials and customersProximity to raw materials and customers

Land/construction costsLand/construction costs



Site DecisionsSite Decisions

Site size and costSite size and cost

Air, rail, waterway systemsAir, rail, waterway systems

Zoning restrictionsZoning restrictions

Nearness of services/supplies neededNearness of services/supplies needed

Environmental impact issuesEnvironmental impact issues


Location Decision Example - Location Decision Example - BMWBMW

In 1992, BMW decided to build its first major manufacturing plant outside Germany In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. in Spartanburg, South Carolina.


Location Decision Example – Location Decision Example – BMWBMW Country Decision FactorsCountry Decision Factors

Market location Market location

U.S. is world’s largest luxury car market U.S. is world’s largest luxury car market

Growing (baby boomers) Growing (baby boomers)

Labor Labor

Lower manufacturing labor costs Lower manufacturing labor costs

$17/hr. (U.S.) vs. $27 (Germany) $17/hr. (U.S.) vs. $27 (Germany)

Higher labor productivity Higher labor productivity

11 holidays (U.S.) vs. 31 (Germany) 11 holidays (U.S.) vs. 31 (Germany)

Other Other

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

New plant & equipment would increase productivity (lower cost/car $2,000-3000)New plant & equipment would increase productivity (lower cost/car $2,000-3000)

10© 2010 Nkumbwa™.

Location Decision Example – Location Decision Example – BMWBMW Region/Community Decision FactorsRegion/Community Decision Factors

Labor Labor

Lower wages in South Carolina (SC) Lower wages in South Carolina (SC)

About $17,000/yr (SC) vs. $27,051/yr (US) About $17,000/yr (SC) vs. $27,051/yr (US)

Based on 1993 metropolitan averages for all workers Based on 1993 metropolitan averages for all workers

Government incentives Government incentives

$135 million in state & local tax breaks $135 million in state & local tax breaks

Free-trade zone from airport to plant Free-trade zone from airport to plant

No duties on imported components or on exported carsNo duties on imported components or on exported cars

11© 2010 Nkumbwa™.

Organizations That Need To Be Close to MarketsOrganizations That Need To Be Close to Markets

Government agencies Government agencies

Police & fire departments Police & fire departments

Post Office Post Office

Retail Sales and Service Retail Sales and Service

Fast food restaurants, supermarkets, gas stations Fast food restaurants, supermarkets, gas stations

Drug stores, shopping malls Drug stores, shopping malls

Bakeries Bakeries

Services Services

Doctors, lawyers, accountants, barbers Doctors, lawyers, accountants, barbers

Banks, auto repair, motels Banks, auto repair, motels

12© 2010 Nkumbwa™.

Ranking of the Business Environment Ranking of the Business Environment in 20 Countries, 1997 - 2001in 20 Countries, 1997 - 2001

1 Netherlands 1 Netherlands

2 Britain 2 Britain

3 Canada 3 Canada

4 Singapore 4 Singapore

5 U.S. 5 U.S.

6 Denmark 6 Denmark

7 Germany 7 Germany

8 France 8 France

9 Switzerland 9 Switzerland

10 Sweden10 Sweden

11 Finland

12 Belgium

13 New Zealand

14 Hong Kong

15 Austria

16 Australia

17 Norway

18 Ireland

19 Italy

20 Chile

13© 2010 Nkumbwa™.

Labor ProductivityLabor Productivity Low wage rates often heavily influence location choicesLow wage rates often heavily influence location choices

What about productivity?What about productivity?

Example:Example:

Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day:plant pays $25 per day with a productivity of 20 units per day:

Labor cost per day/Productivity (units per day) = Cost per unitLabor cost per day/Productivity (units per day) = Cost per unit

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Labor Productivity - Example:Labor Productivity - Example:

Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican Company Q pays $70 per day with 60 units produced per day in Texas. The Mexican plant pays $25 per day with a productivity of 20 units per day:plant pays $25 per day with a productivity of 20 units per day:

Labor cost per day/Productivity (units per day) = Cost per unitLabor cost per day/Productivity (units per day) = Cost per unit

Case 1: Texas PlantCase 1: Texas Plant

$70 per day/60 units per day = $70/60 = $1.17 per unit$70 per day/60 units per day = $70/60 = $1.17 per unit

Case 2: Mexican PlantCase 2: Mexican Plant

$25 per day/20 units per day = $25/20 = $1.25 per unit$25 per day/20 units per day = $25/20 = $1.25 per unit

Lesson: Employees with poor training, poor education, or poor work habits may not be Lesson: Employees with poor training, poor education, or poor work habits may not be a good buy even at low wages.a good buy even at low wages.

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Costs: Tangible Vs. IntangibleCosts: Tangible Vs. Intangible Tangible costs – those that are readily identifiable and precisely measuredTangible costs – those that are readily identifiable and precisely measured

UtilitiesUtilities

LaborLabor

MaterialMaterial

TaxesTaxes

DepreciationDepreciation

Other costs that accounting can easily identifyOther costs that accounting can easily identify

Intangible costs – not easily quantifiableIntangible costs – not easily quantifiable

Quality of educationQuality of education

Public transportation facilitiesPublic transportation facilities

Community attitudes toward the industry and the companyCommunity attitudes toward the industry and the company

Quality and attitude of prospective employeesQuality and attitude of prospective employees

ClimateClimate

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Proximity To MarketsProximity To Markets

Service organizations (drug stores, restaurants, post offices) find proximity to market is Service organizations (drug stores, restaurants, post offices) find proximity to market is the primary location factorthe primary location factor

Manufacturing – useful to be close to customers when transporting finished goods is Manufacturing – useful to be close to customers when transporting finished goods is expensive or difficultexpensive or difficult

17© 2010 Nkumbwa™.

Proximity To SuppliersProximity To Suppliers

Firms locate near their raw materials and suppliers because:Firms locate near their raw materials and suppliers because:

PerishabilityPerishability

Transportation costsTransportation costs

BulkBulk

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Proximity To CompetitorsProximity To Competitors

Clustering – the location of competing companies near each other, often because of a Clustering – the location of competing companies near each other, often because of a critical mass of information, talent, ventire capital, or natural resourcescritical mass of information, talent, ventire capital, or natural resources

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Location Evaluation MethodsLocation Evaluation Methods

Factor-rating method Factor-rating method

Locational break-even analysis Locational break-even analysis

Center of gravity method Center of gravity method

Transportation modelTransportation model

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Factor-Rating MethodFactor-Rating Method

Most widely used location technique Most widely used location technique

Useful for service & industrial locations Useful for service & industrial locations

Rates locations using factors Rates locations using factors

Intangible (qualitative) factors Intangible (qualitative) factors

Example: Education quality, labor skills Example: Education quality, labor skills

Tangible (quantitative) factors Tangible (quantitative) factors

Example: Short-run & long-run costsExample: Short-run & long-run costs

21© 2010 Nkumbwa™.

Factors Affecting Location SelectionFactors Affecting Location Selection

Labor costs (including wages, unionization, productivity) Labor costs (including wages, unionization, productivity)

Labor availability (including attitudes, age, distribution, and skills) Labor availability (including attitudes, age, distribution, and skills)

Proximity to raw materials and suppliers Proximity to raw materials and suppliers

Proximity to markets Proximity to markets

State and local government fiscal policies (including incentives, taxes, unemployment State and local government fiscal policies (including incentives, taxes, unemployment compensation) compensation)

Utilities (including gas, electric, water, and their costs)Utilities (including gas, electric, water, and their costs)

22© 2010 Nkumbwa™.

Factors Affecting Location Selection - continuedFactors Affecting Location Selection - continued

Site costs (including land, expansion, parking, drainage) Site costs (including land, expansion, parking, drainage)

Transportation availability (including rail, air, water, and interstate roads) Transportation availability (including rail, air, water, and interstate roads)

Quality-of-life issues (including all levels of education, cost of living, health care, Quality-of-life issues (including all levels of education, cost of living, health care, sports, cultural activities, transportation, housing, entertainment, religious facilities) sports, cultural activities, transportation, housing, entertainment, religious facilities)

Foreign exchange Including rates and stability Foreign exchange Including rates and stability

Quality of government (including stability, honesty, attitudes toward new business - Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local)whether overseas or local)

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Steps in Factor Rating MethodSteps in Factor Rating Method

State relevant factors in terms of “max” or “min”State relevant factors in terms of “max” or “min”

Assign weights to each factor (should add to 100%)Assign weights to each factor (should add to 100%)

Assign rating to each factor (1-5) (1=poor, 5=excellent)Assign rating to each factor (1-5) (1=poor, 5=excellent)

Multiply scores by weights for each factor & total Multiply scores by weights for each factor & total

Calculate percent of totalCalculate percent of total

Compare top 2 alternatives (using percent as a basis of comparison)Compare top 2 alternatives (using percent as a basis of comparison)

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Steps in Factor Rating MethodSteps in Factor Rating Method

Alternative AAlternative A Alternative BAlternative B

FactorFactor WeightWeight RatingRating ScoreScore RatingRating ScoreScore

Min. Operating CostMin. Operating Cost 2020 44 8080 33 6060

Max. FlexibilityMax. Flexibility 3030 33 9090 22 6060

Max. Space Max. Space utilizationutilization

1010 33 3030 55 5050

Min. Payback periodMin. Payback period 4040 11 4040 44 160160

TotalTotal 240240 330330

PercentPercent 240/330 240/330 = .7272= .7272

330/330 = 330/330 = 1.001.00

25© 2010 Nkumbwa™.

Locational Break-Even AnalysisLocational Break-Even Analysis

Method of cost-volume analysis used for industrial locations Method of cost-volume analysis used for industrial locations

Steps Steps

Determine fixed & variable costs for each location Determine fixed & variable costs for each location

Plot total cost for each location Plot total cost for each location

Select location with lowest total cost for expected production volume Select location with lowest total cost for expected production volume

Must be above break-evenMust be above break-even

26© 2010 Nkumbwa™.

Locational Break-Even Analysis ExampleLocational Break-Even Analysis Example

You’re an analyst for AgileWorld Manufacturing Group Plc. You’re considering a new You’re an analyst for AgileWorld Manufacturing Group Plc. You’re considering a new manufacturing plant in Ndola, Kitwe, or Solwezi. manufacturing plant in Ndola, Kitwe, or Solwezi.

Fixed costs per year are $30k, $60k, & $110k respectively. Fixed costs per year are $30k, $60k, & $110k respectively.

Variable costs per case are $75, $45, & $25 respectively. Variable costs per case are $75, $45, & $25 respectively.

The price per case is $120. The price per case is $120.

What is the best location for an expected volume of 2,000 cases per year?What is the best location for an expected volume of 2,000 cases per year?

27© 2010 Nkumbwa™.


Ndola:Ndola:

Total cost = $30,000 + $75(2000) = $180,000Total cost = $30,000 + $75(2000) = $180,000

Kitwe: Kitwe:

Total Cost = $60,000 + $45(2000) = $150,000Total Cost = $60,000 + $45(2000) = $150,000

Solwezi:Solwezi:

Total Cost = $110,000 + $25(2000) = $160,000Total Cost = $110,000 + $25(2000) = $160,000

With an expected volume of 2000 units per year, Kitwe provides the lowest cost location. The With an expected volume of 2000 units per year, Kitwe provides the lowest cost location. The expected profit is:expected profit is:

Total Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per yearTotal Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per year

28© 2010 Nkumbwa™.


The crossover point for Ndola and Kitwe:The crossover point for Ndola and Kitwe:

30,000 + 75(x) = 60,000 + 45(x)30,000 + 75(x) = 60,000 + 45(x)

30(x) = 30,00030(x) = 30,000

X = 1,000X = 1,000

And the crossover point between Kitwe and Solwezi:And the crossover point between Kitwe and Solwezi:

60,000 + 45(x) = 110,000 + 25(x) 60,000 + 45(x) = 110,000 + 25(x)

20(x) = 50,00020(x) = 50,000

X = 2,500X = 2,500

Thus, for a volume o less than 1,000, Ndola would be preferred, and for a volume greater than Thus, for a volume o less than 1,000, Ndola would be preferred, and for a volume greater than 2,500, Solwezi would yield the greatest profit.2,500, Solwezi would yield the greatest profit.

Now let:Now let:

Akaron = NdolaAkaron = Ndola

Bowling Green = KitweBowling Green = Kitwe

Chicago = SolweziChicago = Solwezi

30© 2010 Nkumbwa™.

Center of Gravity MethodCenter of Gravity Method

Finds location of single distribution center serving several destinations Finds location of single distribution center serving several destinations

Used primarily for services Used primarily for services

Considers Considers

Location of existing destinations Location of existing destinations

Example: Markets, retailers etc. Example: Markets, retailers etc.

Volume to be shipped Volume to be shipped

Shipping distance (or cost) Shipping distance (or cost)

Shipping cost/unit/mile is constant Shipping cost/unit/mile is constant

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Center of Gravity Method StepsCenter of Gravity Method Steps

Place existing locations on a coordinate grid Place existing locations on a coordinate grid

Grid has arbitrary origin & scale Grid has arbitrary origin & scale

Maintains relative distances Maintains relative distances

Calculate X & Y coordinates for ‘center of gravity’ Calculate X & Y coordinates for ‘center of gravity’

Gives location of distribution center Gives location of distribution center

Minimizes transportation costMinimizes transportation cost

33© 2010 Nkumbwa™.

Center of Gravity Method - ExampleCenter of Gravity Method - Example Consider the case of Ryan’s discount Department stores, a chain o four large K-Mart Consider the case of Ryan’s discount Department stores, a chain o four large K-Mart

type outlets. The firm’s store locations are in Ndola, Kitwe, Luanshya, and Mufulira; type outlets. The firm’s store locations are in Ndola, Kitwe, Luanshya, and Mufulira; they are currently being supplied out of an old and inadequate warehouse in Luanshya, they are currently being supplied out of an old and inadequate warehouse in Luanshya, the site of the chain’s first store. the site of the chain’s first store.

Store LocationStore Location Number of containers shipped pre monthNumber of containers shipped pre month

NdolaNdola 20002000

KitweKitwe 10001000

LuanshyaLuanshya 10001000

MufuliraMufulira 20002000

34© 2010 Nkumbwa™.

Center of Gravity Method - ExampleCenter of Gravity Method - Example

30

60

90

120

30 60 90 120 150

Ndola (30,120)Luanshya (130,130)

Kitwe (90,110)

Mufulira (60,40)

Center of gravity (66.7, 93.3)

35© 2010 Nkumbwa™.

Center of Gravity Method - ExampleCenter of Gravity Method - Example

X-coordinate of the center of gravity:X-coordinate of the center of gravity:

= = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000

= 400,000/6000 =66.7= 400,000/6000 =66.7

Y-coordinate of the center of gravity:Y-coordinate of the center of gravity:

= = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000

= 560,000/6000 =93.3= 560,000/6000 =93.3

36© 2010 Nkumbwa™.

Transportation ModelTransportation Model

Finds amount to be shipped from several sources to several destinations Finds amount to be shipped from several sources to several destinations

Used primarily for industrial locations Used primarily for industrial locations

Type of linear programming model Type of linear programming model

Objective: Minimize total production & shipping costs Objective: Minimize total production & shipping costs

Constraints Constraints

Production capacity at source (factory) Production capacity at source (factory)

Demand requirement at destinationDemand requirement at destination

37© 2010 Nkumbwa™.

Components of Volume and Revenue for a Service FirmComponents of Volume and Revenue for a Service Firm

1. Purchasing power of customer drawing area 1. Purchasing power of customer drawing area

2. Service and image compatibility with demographics of the customer drawing area 2. Service and image compatibility with demographics of the customer drawing area

3. Competition in the area 3. Competition in the area

4. Quality of the competition 4. Quality of the competition

5. Uniqueness of the firm’s and competitor’s locations 5. Uniqueness of the firm’s and competitor’s locations

6. Physical qualities of facilities and neighboring businesses 6. Physical qualities of facilities and neighboring businesses

7. Operating policies of the firm 7. Operating policies of the firm

8. Quality of management8. Quality of management

38© 2010 Nkumbwa™.

Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Service/Retail/Professional Revenue FocusService/Retail/Professional Revenue Focus

Volume/revenue Volume/revenue

Drawing area, purchasing power Drawing area, purchasing power

Competition; advertising/pricingCompetition; advertising/pricing

Physical quality Physical quality

Parking/access; security/ lighting; appearance/imageParking/access; security/ lighting; appearance/image

Cost determinants Cost determinants

Rent Rent

Management caliber Management caliber

Operations policies (hours, wage rates) Operations policies (hours, wage rates)

39© 2010 Nkumbwa™.

Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Industrial Revenue FocusIndustrial Revenue Focus

Tangible costs Tangible costs

Transportation cost of raw materials Transportation cost of raw materials

Shipment cost of finished goods Shipment cost of finished goods

Energy and utility cost; labor; raw material; taxes, etc. Energy and utility cost; labor; raw material; taxes, etc.

Intangible and future costs Intangible and future costs

Attitude toward union Attitude toward union

Quality of life Quality of life

Education expenditures by state Education expenditures by state

Quality of state and local governmentQuality of state and local government

40© 2010 Nkumbwa™.

Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Service/Retail/Professional TechniquesService/Retail/Professional Techniques

Correlation analysis to determine importance of factors for a particular type of Correlation analysis to determine importance of factors for a particular type of operation operation

Traffic counts Traffic counts

Demographic analysis of drawing area Demographic analysis of drawing area

Purchasing power analysis of drawing area Purchasing power analysis of drawing area

Assumptions Assumptions

Location is a major determinate of revenue Location is a major determinate of revenue

Issues manifesting from high customer contact dominate Issues manifesting from high customer contact dominate

Costs are relatively constant for a given area; therefore, revenue function is criticalCosts are relatively constant for a given area; therefore, revenue function is critical

41© 2010 Nkumbwa™.

Location Strategies – Service vs. IndustrialLocation Strategies – Service vs. Industrial Industrial TechniquesIndustrial Techniques

Linear Programming (Transportation method) Linear Programming (Transportation method)

Weighted approach to intangibles Weighted approach to intangibles

Breakeven analysis Breakeven analysis

Crossover charts Crossover charts

Assumptions Assumptions

Location is a major determinate of cost Location is a major determinate of cost

Most major costs can be identified explicitly for each site Most major costs can be identified explicitly for each site

Low customer contact allows focus on costs Low customer contact allows focus on costs

Intangible costs can be objectively evaluatedIntangible costs can be objectively evaluated

42© 2010 Nkumbwa™.

Major Methods of Solving Location ProblemsMajor Methods of Solving Location Problems

Weighted methods which: Weighted methods which:

Assign weights and points to various factors Assign weights and points to various factors

Determine tangible costs Determine tangible costs

Investigate intangible costs Investigate intangible costs

Center of Gravity Method Center of Gravity Method

Find best distribution center locationFind best distribution center location

Location breakeven methods Location breakeven methods

Special case of breakeven analysisSpecial case of breakeven analysis

Transportation method Transportation method

A specialized linear programming methodA specialized linear programming method

43© 2010 Nkumbwa™.

Telemarketing and Internet IndustriesTelemarketing and Internet Industries

Require neither face-to-face contact with customers (or employees) nor Require neither face-to-face contact with customers (or employees) nor movement of material movement of material

Presents a whole new perspective on the location problemPresents a whole new perspective on the location problem

facility location strategies eng. r. l. nkumbwa ™

Documents

costs labor availability

energy labor location

benefit of location

location options

importance of location

costs availability of

availability of utilities

facility location strategies