0d4163. facility planng -40

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Amity Business School


Exchange rates and currency risksExchange rates and currency risks

Can have a significant impact on costCan have a significant impact on coststructurestructure

Rates change over timeRates change over time

CostsCosts

TangibleTangible -- easily measured costs such aseasily measured costs such asutilities, labour, materials, taxesutilities, labour, materials, taxes

IntangibleIntangible -- less easy to quantify andless easy to quantify andinclude education, public transportation,include education, public transportation,community, qualitycommunity, quality--ofof--lifelife

Factors That Affect Facility Location Decisions


Exchange rates and currency risksExchange rates and currency risks

Can have a significant impact on costCan have a significant impact on coststructurestructure

Rates change over timeRates change over time

CostsCosts

TangibleTangible -- easily measured costs such aseasily measured costs such asutilities, labour, materials, taxesutilities, labour, materials, taxes

IntangibleIntangible -- less easy to quantify andless easy to quantify andinclude education, public transportation,include education, public transportation,community, qualitycommunity, quality--ofof--lifelife

Facility Locationdecisions basedon costs alone

can createdifficult ethical

situations



Political risk, values, and culturePolitical risk, values, and culture

National, state, local governmentsNational, state, local governmentsattitudes toward private and intellectualattitudes toward private and intellectualproperty, zoning, pollution, employmentproperty, zoning, pollution, employmentstability may be in fluxstability may be in flux

Worker attitudes towards turnover, unions,Worker attitudes towards turnover, unions,absenteeismabsenteeism

Globally cultures have different attitudesGlobally cultures have different attitudestowards punctuality, legal, and ethicaltowards punctuality, legal, and ethicalissuesissues



Proximity to marketsProximity to markets

Very important to servicesVery important to services

JIT systems or high transportation costsJIT systems or high transportation costsmay make it important to distributersmay make it important to distributers

Proximity to suppliersProximity to suppliers

Perishable goods, high transportationPerishable goods, high transportationcosts, bulky productscosts, bulky products



Proximity to competitorsProximity to competitors

Called clusteringCalled clustering

Often driven by resources such as natural,Often driven by resources such as natural,information, capital, talentinformation, capital, talent

Found in both manufacturing and serviceFound in both manufacturing and serviceindustriesindustries



Clustering of Companies

Industry Locations Reason for clustering

Wine making

Auto Parts

Napa Valley (US)

Bordeaux region

(France)Chennai, Dewas

Gurgaon

Natural resources of land

and climate

Customer presence

Software firms Silicon Valley,

Boston, Bangalore

(India)

Talent resources of bright

graduates in

scientific/technical areas,

venture capitalists nearby

Race car builders Huntington/NorthHampton region

(England)

Critical mass of talentand information


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Theme parks(Disney World,

Universal Studios)

Orlando, Florida A hot spot for entertainment, warm

weather, tourists, and

inexpensive labour

Electronics firms Northern Mexico

NOIDA, Taiwan,

Malayasia

NAFTA, duty free export to

US, EU

Computer

hardware

distributers

Singapore, Taiwan High technological

penetration rate and per

capita GDP,

skilled/educated workforce

with large pool ofengineers




Fast food chains(Wendys,

McDonalds,

Burger King, and

Pizza Hut)

Sites within 1 mile ofeach other

Stimulate food sales,high traffic flows

General aviation

aircraft (Cessna,

Learjet, Boeing)

Wichita, Kansas

France

Mass of aviation skills

Orthopedic

devices

Warsaw, Indiana

Chennai

Ready supply of skilled

workers, strong market



Location Planning Methods

One Service Facility Multiple Candidates

Location factor rating

Centre of Gravity Method

Load Distance Method

Multiple Service Facility Multiple

Candidates

Transportation Model


Factor-Rating Method

Popular because a wide variety of factors can bePopular because a wide variety of factors can beincluded in the analysisincluded in the analysis

Six steps in the methodSix steps in the method

1.1. Develop a list of relevant factors called critical successDevelop a list of relevant factors called critical successfactorsfactors

2.2. Assign a weight to each factorAssign a weight to each factor

3.3. Develop a scale for each factorDevelop a scale for each factor

4.4. Score each location for each factorScore each location for each factor

5.5. Multiply score by weights for each factor for eachMultiply score by weights for each factor for each

locationlocation6.6. Recommend the location with the highest point scoreRecommend the location with the highest point score


Factor-Rating Example

CriticalCritical ScoresScoresSuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor Weight Weight FranceFrance DenmarkDenmark FranceFrance Denmark Denmark

LabourLabouravailabilityavailability

and attitudeand attitude .25.25 7070 6060 (.25)(70) = 17.5(.25)(70) = 17.5 (.25)(60) = 15.0(.25)(60) = 15.0PeoplePeople--toto--

car ratiocar ratio .05.05 5050 6060 (.05)(50) = 2.5(.05)(50) = 2.5 (.05)(60) = 3.0(.05)(60) = 3.0

Per capitaPer capitaincomeincome .10.10 8585 8080 (.10)(85) = 8.5(.10)(85) = 8.5 (.10)(80) = 8.0(.10)(80) = 8.0

Tax structureTax structure .39.39 7575 7070 (.39)(75) = 29.3(.39)(75) = 29.3 (.39)(70) = 27.3(.39)(70) = 27.3

EducationEducationand healthand health .21.21 6060 7070 (.21)(60) = 12.6(.21)(60) = 12.6 (.21)(70) = 14.7(.21)(70) = 14.7

TotalsTotals 1.001.00 70.470.4 68.068.0


Example 1 A hotel is actively considering five alternative locations for setting up its

facility. The locations vary in terms of the advantages that it provides to thefirm. Hence the firm requires a method of identifying the most appropriatelocation. Based on a survey of its senior executives the firm has arrived atsix factors to be considered for final site selection. The ratings of eachfactor on a scale of 1 to 100 provide this information. Further, based somedetailed analysis of both the qualitative and quantitative data available for

each of the location, the rating for the locations against each factor has alsobeen arrived at (on a scale of 0 to 100). Using this information obtain aranking of the alternative locations.

Factors Rating

Availability of infrastructure 90

Size of the market 60

Industrial relations climate 50

Tax benefits and concessions 30

Availability of cheap labour 30

Nearness to port 65

Factors Location1 Location2 Location3 Location4 Location 5

Availability of infrastructure 20 40 60 35 55

Size of the market 30 30 40 60 80

Industrial relat ions c limate 80 30 50 60 50

Tax benef its and concessions 80 20 10 20 20

Availability of cheaplabour 70 70 45 50 50

Nearness to port 20 40 90 50 60

Factor Ratings Rating of each locations against the factors


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Solution to Example 1.

Factors RatingRelativeweights

Availability of infrastructure 90 0.28

Size of the market 60 0.18

Industrial relations climate 50 0.15

Tax benefits and concessions 30 0.09

Availability of cheap labour 30 0.09

Nearness to port 65 0.20

Sum of all factor ratings 325 1.00

Factors

Relative

weights Location 1 Location 2 Location 3 Location 4 Location 5

Availability of infrastructure 0.28 20 40 60 35 55

Size of the market 0.18 30 30 40 60 80

Industrial relations climate 0.15 80 30 50 60 50

Tax benefits and concessions 0.09 80 20 10 20 20

Availability of cheap labour 0.09 70 70 45 50 50

Nearness to port 0.20 20 40 90 50 60

Overall score for the locations 41.23 37.54 54.77 46.46 56.15

Ranking of the locations 4 5 2 3 1

Overall rating for location 3 =60*0.28 + 40*0.18 + 50*0.15 +10*0.09 + 45*0.09 + 90*0.20= 54.77


Locational Break-Even Analysis

Method of costMethod of cost--volume analysis used forvolume analysis used forindustrial locationsindustrial locations

Three steps in the methodThree steps in the method

1.1. Determine fixed and variable costs forDetermine fixed and variable costs foreach locationeach location

2.2. Plot the cost for each locationPlot the cost for each location

3.3. Select location with lowest total cost forSelect location with lowest total cost forexpected production volumeexpected production volume


Locational Break-Even Analysis Example

Three locations for a Burger Shop:Three locations for a Burger Shop:

DamanDaman Rs.30,000Rs.30,000 Rs.75Rs.75 Rs.180,000Rs.180,000

NOIDANOIDA Rs.60,000Rs.60,000 Rs.45Rs.45 Rs.150,000Rs.150,000

GurgaonGurgaon Rs.110,000Rs.110,000 Rs.25Rs.25 Rs.160,000Rs.160,000

FixedFixed VariableVariable Total TotalCityCity Cost Cost Cost Cost Cost Cost

Total Cost = Fixed Cost + (Variable Cost x Volume)Total Cost = Fixed Cost + (Variable Cost x Volume)

Selling priceSelling price = Rs.120= Rs.120

Expected volumeExpected volume = 2,000= 2,000 unitsunits


Locational Break-Even Analysis Example

Rs.180,000Rs.180,000

Rs.160,000Rs.160,000 Rs.150,000Rs.150,000

Rs.130,000Rs.130,000

Rs.110,000Rs.110,000

Rs.80,000Rs.80,000

Rs.60,000Rs.60,000

Rs.30,000Rs.30,000

Rs.10,000Rs.10,000

Annualcost

Annualcost

| | | | | | |

00 500 500 1,000 1,000 1,500 1,500 2,000 2,000 2,500 2,500 3,000 3,000

VolumeVolume

DamanDamanlowestlowestcostcost

NOIDA lowestNOIDA lowestcostcost

GurgaonGurgaonlowestlowestcostcost


Centre-of-Gravity Method

Finds location of distribution CentreFinds location of distribution Centrethat minimizes distribution coststhat minimizes distribution costs

ConsidersConsiders

Location of marketsLocation of markets

Volume of goods shipped to thoseVolume of goods shipped to thosemarketsmarkets

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


Centre-of-Gravity Method Place existing locations on aPlace existing locations on a

coordinate gridcoordinate grid

Grid origin and scale is arbitraryGrid origin and scale is arbitrary

Maintain relative distancesMaintain relative distances

Calculate X and Y coordinates forCalculate X and Y coordinates forCentre of gravityCentre of gravity

Assumes cost is directlyAssumes cost is directlyproportional to distance andproportional to distance andvolume shippedvolume shipped


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xx -- coordinate =coordinate =

ddixixQQii

QQiiii

ii

ddiyiyQQii

QQiiii

ii

yy -- coordinate =coordinate =

wherewhere d dixix == xx--coordinate of location icoordinate of location i

ddiyiy == yy--coordinate of location icoordinate of location i

QQii == Quantity of goods moved toQuantity of goods moved toor from location ior from location i



NorthNorth--SouthSouth

EastEast--WestWest

120120

9090

6060

3030

| | | | | |

3030 60 60 90 90 120 120 150 150ArbitraryArbitraryoriginorigin

GurgaonGurgaon (30, 120)(30, 120)

MumbaiMumbai(130, 130)(130, 130)

ChennaiChennai(90, 110)(90, 110)

HyderabadHyderabad(60, 40)(60, 40)



Number of ContainersNumber of ContainersStore LocationStore Location Shipped per MonthShipped per Month

GurgaonGurgaon (30, 120)(30, 120) 2,0002,000

ChennaiChennai(90, 110)(90, 110) 1,0001,000

MumbaiMumbai(130, 130)(130, 130) 1,0001,000

HyderabadHyderabad(60, 40)(60, 40) 2,0002,000

xx--coordinate =coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

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

== 66.766.7

yy--coordinate =coordinate =

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

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

== 93.393.3


Centre-of-Gravity MethodNorthNorth--SouthSouth

EastEast--WestWest

120120

9090

6060

3030

| | | | | |

3030 60 60 90 90 120 120 150 150ArbitraryArbitraryoriginorigin

GurgaonGurgaon (30, 120)(30, 120)MumbaiMumbai(130, 130)(130, 130)

ChennaiChennai(90, 110)(90, 110)

HyderabadHyderabad(60, 40)(60, 40)

Centre of gravityCentre of gravity(66.7, 93.3)(66.7, 93.3)+

0d4163. facility planng -40

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