Chapter 10Chapter 10Facility Location in aFacility Location in aGlobal EnvironmentGlobal Environment

IDS 605IDS 605

M. BusingM. Busing

Spring 1999Spring 1999

Facility LocationFacility Location

Facility Location is the placement of facility with respect to customers, suppliers and other interacting facilities. It should consider:» Operating costs» Customer convenience» Transportation costs» Access to key related services

such as banking and

educational opportunities» Strategic factors

Transparency 10.1

Location as a Strategic DecisionLocation as a Strategic Decision

1. Long-term commitment

2. Linked to customer base

3. Regional facility supplies specific area

4. Product facility supplies globally

5. Combination of regional and product facilities

Transparency 10.2

Regional or Global

Factors Affecting theFactors Affecting theLocation DecisionLocation Decision

Strategic nature of decision

Quantitative factors Government incentives Qualitative factors

Transparency 10.3

Data for Site inData for Site inIndianapolis, Indiana Indianapolis, Indiana (Slide 1 of 2)(Slide 1 of 2)

(Exhibit 10.1)Transparency 10.4a

Labor

Material

Utilities

Transportation

WeldingElectricalGeneral assemblySheet metalThreaded fastenersElectrical wireNatural gasElectricityIn railMotor carrierMotor carrierOut motor carrier

$10.00/hr.$12.00/hr.$9.00/hr$.40/lb.$2.00/100$.06/lineal ft.$4.00/1,000 cu. ft.$.06/kilowatt hr.$.03/lb. (sheet metal)*$.04/lb. (fasteners)$.04/lb (wire)$20/unit (finished)

Type Rate Projected usage

Variable Production Costs

0.5 hrs./unit0.3 hrs./unit1.1 hrs./unit100 lbs./unit20/unit70 lineal ft./unit500 cu. ft./unit200 kilowatt hrs./unit100lbs./unit5 lbs./unit4 lbs./unit1

Data for Site inData for Site inIndianapolis, Indiana Indianapolis, Indiana (Slide 2 of 2)(Slide 2 of 2)

Facility OverheadInitial Investment

Special Considerations

(Exhibit 10.1)Transparency 10.4b

Land acquisition costsBuilding constructionPlant start-up costsInitial employee training

Tax abatementLow-interest loansSupplementary training expenses

$2,100,000$175,000,000

$25,000,000

Type Rate Projected usage

Variable Production Costs

*Rates are given from a specific origin to a specific destination, so distance has been accounted for.

Pro Forma Operating BudgetPro Forma Operating Budgetfor One Year for One Year (Slide 1 of 2)(Slide 1 of 2)

(Exhibit 10.2)Transparency 10.5a

Labor Welding Electric Assembly Total labor costsMaterial Sheet metal Fasteners Wire Total material costsUtilities Natural gas Electricity Total utility costs

($10.00/hr.)(.5 hrs./unit)(45,000 units)($12.00/hr.)(.3 hrs./unit)(45,000 units)($9.00/hr.)(1.1 hrs./unit)(45,000 units)

($.40/lb.)(100 lbs./unit)(45,000 units)($2.00/100)(20/unit)(45,000 units)($.06/lin.ft.)(70 lin.ft.)(45,000 units)

($4.00/1,000 cu./ft.)(500 cu./ft/unit)(45,000 units)($.06/kwh)(200 kwh/unit)(45,000 units)

$ 225,000162,000445,500

$ 832,500

$1,800,00018,000

189,000$2,007,000

$ 90,000540,000

$ 630,000

Pro Forma Operating BudgetPro Forma Operating Budgetfor One Year for One Year (Slide 2 of 2)(Slide 2 of 2)

Transportation Sheet metal Fasteners Wire Finished product Total transportation costsVariable costs

Facility overhead *

Grand total

(Exhibit 10.2)Transparency 10.5b

($.03/lb.)(100 lb./unit)(45,000 units)($.04/lb.)(5lb./unit)(45,000 units)($.04/lb.)(4lb./unit)(45,000 units)($20.00/unit)(45,000)

$ 135,0009,0007,200

900,000$1,051,200

$4,520,700

2,100,000

$6,620,700

*Some overhead costs can be variable, but to simplify the discussion in this case, we will assume all overhead costs are fixed.

Factors in Location AnalysisFactors in Location Analysis (Slide 1 of 2) (Slide 1 of 2)

Transparency 10.6a

LOCATIONCountryDistance in miles from: Los Angeles Chicago Memphis

POPULATION 1990 1980 1970 City County

MUNICIPAL SERVICESType of local governmentComprehensive city plan: Date completed Underway Under considerationNumber of full-time fire department personnel:Number of full-time city policemen:Percent of city streets paved: %

Factors in Location AnalysisFactors in Location Analysis (Slide 2 of 2) (Slide 2 of 2)

COMMERCIAL SERVICES Machine shop in city: Yes No NumberType of newspaper in city Daily WeeklyRadio stations Yes No NumberBANKING SERVICESTRANSPORTATION SERVICESTrain Community served by railroad(s): Yes No Name(s) of railroad(s):

Motor carrier Highway bus service available Yes No Number of highways serving city: Federal StateBarge:City adjoins navigable river: Yes NoBarge dock available Yes NoChannel depth: feet. Length of season: Transparency 10.6b

Including theIncluding theQualitative FactorsQualitative Factors

Integrate qualitative factors» Determine which

factors are relevant to the problem

» Weigh each factor» Rate each site for

each factor

Transparency 10.7

Examples of Indianapolis and Examples of Indianapolis and Lexington Lexington (Slide 1 of 2)(Slide 1 of 2)

Indianapolis Lexington Weight Raw Score Raw Score

Recreational activities 20 8 7University research facilities 40 8 8Union activities 40 4 7Banking services 80 7 6Available labor pool 60 7 5

Transparency 10.8a

Examples of Indianapolis and Examples of Indianapolis and Lexington Lexington (Slide 2 of 2)(Slide 2 of 2)

Indianapolis Lexington Weighted score Weighted score

Recreational activities 160 140 University research facilities 320 320Union activities 160 280Banking services 560 480Available labor pool 420 300

Total 1,620 1,520

Transparency 10.8b

Analyzing Spatial RelationshipsAnalyzing Spatial Relationships

Load-Distance Method measures proximity to customers, suppliers, interacting facilities

Transportation Problem relates to the cost of transporting materials to and from multiple facilities

Transparency 10.9

Distance from FacilityDistance from Facilityto Customerto Customer

(Exhibit 10.3)Transparency 10.10

Health Care UnitHealth Care UnitLocation ProblemLocation Problem

(Exhibit 10.4)Transparency 10.11

Locating a Health Care Center Locating a Health Care Center Using the “Load-Distance Using the “Load-Distance

Method” Method” (Slide 1 of 3)(Slide 1 of 3)

Population coordinates

Code ai xi yi (ai )(xi) (ai)(yi)

10111 30,000 3 2 90,000 60,00010112 25,000 2 4 50,000 100,00010113 11,000 1.5 5.5 16,500 60,50010114 8,000 3 7 24,000 56,00010115 18,000 3.5 5 63,000 90,00010116 24,000 4.5 3.5 108,000 84,00010117 12,000 5.25 6.25 63,000 75,000

Total 128,000 414,500 525,500

Zip

Transparency 10.12a

Locating a Health Care Center Locating a Health Care Center Using the “Load-Distance Using the “Load-Distance

Method” Method” (Slide 2 of 3)(Slide 2 of 3)

where xf = Distance along the x axis from the origin to the center of gravity yf = Distance along the y axis from the origin to the center of gravity ai = The activity level (load) from the i th location to the proposed facility Xi = the coordinate on the x axis for the i th customer location yi = the coordinate on the y axis for the i th customer location

xf

a x

a

i ii

n

ii

n

1

1( )

yf

a y

a

i ii

n

ii

n

1

1( )

Transparency 10.12b

Locating a Health Care Center Locating a Health Care Center Using the “Load-Distance Using the “Load-Distance

Method” Method” (Slide 3 of 3)(Slide 3 of 3)

The coordinates of the center of gravity are:

xf = yf = 414,500 525,500

128,000 128,000

= 3.24 = 4.11

Transparency 10.12c

Transportation ProblemTransportation Problem

Cost of moving materials between multiple destinations

Vogel’s Approximation Method

To evaluate two locations, solve the transportation problem for each location

OR

Transparency 10.13

Transportation Matrix forTransportation Matrix forProton Consulting ServiceProton Consulting Service

(Exhibit 10.5)Transparency 10.14

First Assignment forFirst Assignment forProton Consulting ServiceProton Consulting Service

(Exhibit 10.6)Transparency 10.15

Second Assignment forSecond Assignment forProton Consulting ServiceProton Consulting Service

(Exhibit 10.7)Transparency 10.16

(Exhibit 10.8)Transparency 10.17

Third Assignment forThird Assignment forProton Consulting ServiceProton Consulting Service

Final Transportation Matrix forFinal Transportation Matrix forProton Consulting ServiceProton Consulting Service

(Exhibit 10.9)Transparency 10.18

Location Decision Affects Other Location Decision Affects Other Operating Decisions Operating Decisions

Alternative to on-site expansion

On-site expansion is problematic» Material handling and

storage

» Complex production flow

» Strained communication

» New technology delayed

» Use of old equipment

» Layering of expanded responsibilities

Transparency 10.19

International Dimensions ofInternational Dimensions ofLocation DecisionLocation Decision

Reasons for locating in foreign countries » Comparative

Advantage» Closeness to market» Political relationships» Availability of

resources

Transparency 10.20

Location Analysis forLocation Analysis forService OperationsService Operations

Concepts and techniques discussed so far apply to service operations

Service issues:» Minimize response time:

Emergency medical services

» Provide minimum coverage: Fire Protection

» Mobile location: Police or security units

Transparency 10.21