Facility Location Planning

Most Facility location decisions have their own unique characteristics. For
manufacturing facilities, the location of raw materials, labor and markets are
clearly important. For example a Mall and theater closeness to the dwelling units
are a must whereas for a chemical industry or nuclear power station , by force it
has to be outside the city limits and there will be no swelling dwelling units
nearby. For manufacturing units , being near competitors may be desirable,
where as for others such as service facilities like hospitals, call centers etc it may
not be desirable.

Because of the wide variety of facilities and their unique characteristics, it is often
necessary to utilize a variety of analytical evaluation methods. Most location
decisions are made in stages . Although it is sometimes difficult to categorize
precisely, there are several general types of facilities that have different features
and require different analysis: like manufacturing, warehouse or distribution,
retail, public facilities and administrative offices. We shall study in general the
decision process and identify those aspects of location decision making that are
common to most facilities.

The Location Decision Stages and Factors Affecting Facility Location :

Facility location decision are made in three stages. At each stage a set of location
alternatives are identified, and then an evaluation procedure is used to reduce
the options.

First Stage: Location alternative represent the Regional and the

geographical decision matrix.

Second Stage: Local decision are done. This follows after the first stage.

Third Stage: Specific facility site is homed into.

REGIONAL DECISION (First Stage): The first stage of the decision process is
usually to make a regional decision. Depending upon the facility, a region may be
a country, a part of the country, a state or a province within a country. AT this
stage, economic market and legal factors tend to dominate. The following are
specific factors of potential importance.

a. Market Proximity: Manufacturing facilities can usually be located

away from ultimate consumers although close proximity allows
shorter and more predictable lead time for customers. This is true
when the manufacturing follows the principle of JIT.
b. Proximity to Raw materials: For manufacturing units, the raw
material supply is an important and critical criteria. If the ancillary
units are located near to an automobile units, lot of lead time and
transportation cost will reduce. Proximity to raw materials source
tends to be relatively less important for service facilities because
they are usually less material intensive.
c. Availability of Utilities: In our country or to be specific, Karnataka
state at present is in deficient of power. Hence any huge
manufacturing unit which needs lot of uninterrupted power, would
base its decision on establishing the industry. Whereas a residential
apartments are not subjected to this criteria much because of
dependency on alternate mode of supply available and also some
sort of acceptance of living with the minimal resource availability.
d. Labor Supply and Unionization: Companies need to know whether
sufficient manpower suiting to the requirement is available. If skilled
workers are not that available or it is very costly to employ, the
company will always think and will base their decision. Similarly if
the environment of the area has the history of union dominance, the
company will seriously think of these terms.
e. National Taxes: The tax structure varies from country to country and
from state to state. The various forms of Taxation rule tends to bias
the setting up of industry in a particular geographical area.
 f. Legal Restrictions: Some companies opened facilities abroad
assuming that they could import production inputs, but were later
confronted with import restrictions or home content laws that
prevented from doing so. Some countries also have restriction on
withdrawing profits or withdrawing them in currency. It is difficult to
move the capital out of the country ,due to the various legislation
imposed from time to time by the recipient country.

Once a general decision has been arrived at the geographical criteria, the
focus shifts next to the local decisions.

LOCAL DECISION ( SECOND STAGE): Now the location factors come into play. For
example after due decision of the country or the state, now comes which district
etc that will be better to set up the manufacturing unit. The most important
factors that come into play are:

Taxes: Within the state , few place attract more taxes and few have less
tax. There may be some tax benefit to any particular region.

Economic Incentives: The Govt in order to develop some region, attract big
manufacturing unit to set up big industries in that region. In order to attract them,
Govt gives lot of incentives like ensuring availability of land, low cost of land, tax
holiday etc.

Attractiveness of the community: The quality of life assured, housing

facility availability, many recreational facility etc availability, will force the
company to set up their manufacturing base in such areas.

Compatible Industry: There are good reasons why certain parts of the
country have high concentrations of facilities in the same industry. This is because
manpower is readily available and only some better carrots have to be shown to
attract. Moreover Govt encourages since the concentration of similar
infrastructure facility can be planned for all in a uniformed unbiased manner.

Transportation Network. If material and products must be shipped using a

specific mode, one locale may be preferred to the other. For example for heavy
steel plants making coil and sheet, if a railway siding is available, many such units
can be seen around such areas.

Govt Policy and Attitude: Local and State governments can either help or
hinder the construction of facilities. Most companies do not want to set up such
manufacturing facilities in areas where Govt interference is minimal.

Environmental Regulations: Although most of the environmental laws are

made at the national level, local restrictions have their say. These days of “Green
Environment”, polluting industry do have to plan properly and take all the siting
consideration.

SITE LOCATION(FINAL STAGE): The final stage in the decision process is to identify
and select facility sites. Recently, it has become for the second and third stages to
be merged, especially when locating large facilities, because in many cases there
is only one suitable site with specific locale. The important factors at the site level
are often described by very detailed information that can be expansive and time
consuming to obtain. For example , availability of electric generating capacity may
be an important at stage 1 and 2, whereas access to the electric power grid may
be important at stage 3. Similarly an area may have a generally good
transportation system, but a specific site may require substantial investment to
connect with the highway or railway network. In addition to access to the utility
and transport networks, the following factors are often important.

a. Space for Expansion: Companies always look forward for expansion.

Initially the company go on for a minimum level of output and always
look for increasing the productivity. If there is some constraint in this
regard, it will force the company to think.
b. Proximity to other industry: One big benefit of having
conglomeration of various supporting industry is that the resource
can be shared. For example a big unit having a good hotel in the
vicinity would save the company from all logistic liabilities.

Location Models:
 Various models are available which help identify a near ideal location. The
most popular of them are:

1. Factor Rating Method.

2. Point Rating Method.
3. Brake even Analysis .
4. Quantitative Factor Analysis.

FACTOR RATING METHOD:

In this method, factor rating are used to evaluate alternative location. The steps
involved are:

o List the most relevant factors in the location decision.

o Rate each factor ( 1 to 5, 1 for very low and 5 for very high. Higher
the rating more important is the consideration).
o Rate each location according to its merits( 1 to 10, 1 for very low and
10 for very high).
o Compute the product of ratings by multiplying the factor rating and
location rating.
o Compute the sum of the product rating
o Take decision by selecting the site which has scored the maximum
rating.

Example: Table below, gives the various factors and the ratings. Let us calculate
the product rating and then arrive at the decision.

Factors Factor Location Location Product Product

Rating ratting A Rating B Rating A Rating B
Tax Advantage 4 8 6 32 24
Suitability of 3 2 3 6 9
manpower
Proximity to 3 6 5 18 15
customers
Proximity to 5 2 4 10 20
Suppliers
Water Available 1 3 3 3 3
Receptivity of 5 4 3 20 15
Community
Quality of 4 1 2 4 8
Educational system
Access to rail & air 3 10 8 30 24
transportation
Suitability of 2 7 9 14 18
Climate
Availability of 2 6 4 12 8
Power
Total Score 149 144

Hence the total score for Location A is higher than that of . Hence location
A is the choice.

POINT RATING METHOD:

In selecting a site or location, companies have several objectives, but all of not
equal importance. The relative, weight a company assigns to each objective or to
each location factor may be represented by the number of points a perfect site
would receive in each category. The site with highest total number of points is
considered superior to other sites. The draw back of this system is that high factor
in one may compensate the low factor of some other objective, thereby leading
to a wrong decision. What is significant in the point system is the relative
importance of tangible cost factor compared to intangible factors.

Example:

After evaluating two potential sites A and B by comparing cost and finding them
approximately equal from cost point of view, a manufacturer decided to evaluate
the intangible factors for these two locations by point rating. Comparative rating
assigned to major intangible location factors to determine the relative
importance for each factor and the points assigned to each location alternative
for each of the factors are given in the table below:

Factors Rated Max possible Points for Points for

Points Loc A Loc B
Future availability of fuel 300 200 250
Transportation Flexibility and 200 150 150
Growth
Adequate Water Supply 100 100 100
Labor Availability 250 220 200
Pollution regulation 30 20 20
Site topography 50 40 30
Living conditions 150 100 125
Total 830 875

From the above we see Location B scores higher point as compared to Location A.

LOCATION BREAK EVEN ANALYSIS:

In comparing several potential locations on an economic basis, only revenue and

cost that need to be considered are the ones that vary from one location to
another. If revenue per unit is the same, regardless of where the good are
manufactured, the total revenues can be eliminated from the consideration.

Example:

Potential locations A, B and C have the cost structure shown for producing a
product expected to sell at Rs 100 per unit. Find the most economic location for
an expected volume of production for which, each of the locations A, B and C
would be most economical.

Location Fixed cost per Variable cost per unit

year
A Rs 25,000 Rs 50
B Rs 50,000 Rs 25
C Rs 80,000 Rs 15
 a) To determine the most economical location for an expected annual volume
of production of 2000 units, calculate the total cost of production.

Total Cost = FC+ Q*VC

Total cost for Loc A = 25000+ 2000*50= 1,25,000.00

Total cost for Loc B= 50000+ 2000*25= 1,00,000.00

Total cost for Loc C= 80,000+ 2000*15= 1,10,000.00

The inference is LOC B seems to be most economical unit.

B) To determine the range of annual volumes of production at which each of

three locations would become most economical , it is necessary to determine the
break even volumes:

Let Q be break even between Location A and B

25000+ Q(AB)*50= 50000+ Q(AB)*25

Hence Q(AB)= 1000 units

To determine the break even qty between Loc B and C

50000 + Q(BC)* 25 = 80000 + Q(BC)*15

Q( BC) = 3000 units.

QUALITATIVE FACTOR ANALYSIS:

If economic criteria are not sufficiently influential to decide the location

alternative, a system of weighting the criteria might be useful in making a plant
location decision. The steps are:

 Develop a list of relevant factors.

 Assign a weight to each factor to indicate its relative importance ( weights
may be from 1-10).
 Assign a common scale to each factor( 1-100) and designate any minimum
points to be scored by any factor
  Score each potential location according to the designated scale and
multiply the scores by the weights to arrive at the weighted scores.
 Total the points for each location and choose the location with maximum
points.

Example:

XYZ company is evaluating four locations for a new plant and has weighted the
relevant scores as given below. Scores have been assigned with higher values
indicative of preferred conditions. Using these, develop a qualitative factor
comparison for the four locations.

Relevant Factors Assigned Loc A Loc Loc C Loc D

Weights B
Production Cost 0.35 50 40 60 30
Raw Material 0.25 70 80 80 60
Supply
Labor Availability 0.20 60 70 60 50
Cost of living 0.05 80 70 40 80
Environment 0.05 50 60 70 90
Markets 0.10 70 90 80 50
Total 1.00

Solution:

Relevant Factors Weighted Weighted Weighted Weighted

Score A Score A Score C Score D
Production Cost 17.5 14.0 21.0 10.5
Raw Material 17.5 20.0 20.0 15.0
Supply
Labor 12 14.0 12.0 10.0
Availability
Cost of living 4 3.5 2.0 4.0
Environment 2.5 3.0 3.5 4.5
Markets 7.0 9.0 8.0 5.0
Total 60.5 63.5 66.5 49.0
Location C is preferred because of the highest weighted score.

Example:

A company is to decide on the location of a new plant. It has narrowed down the
choice to 3 locations A, B and C: Data in respect of which is furnished below:

DATA Loc A Loc B Loc C

Wages & Salaries 20,000 20,000 20,000
Power & water 20,000 23,000 25,000
Expense
Raw Material & 80,000 75,000 60,000
other supplies
Total initial 2.0 Lacs 3.0 Lacs 2.5 Lacs
investment
Distribution 50,000 40,000 60,000
Expense
Misc Expense 40,000 25,000 30,000
Expected 2,25,000 2,50,000 2,25,000
Sales/year in Rs

Use a suitable criterion and advise the company on the best choice;

Inference Loc A Loc B Loc C

Sales Revenue 2,25,000 2,50,000 2,25,000
Total Expense 2,10,000 1,90,000 1,95,000
Profit(sales-Exp) 15,000 60,000 30,000
Initial Investment =7.5%(15000/200000) 20% 12%
Best ROI Loc B
Example

A company has to select one location out of the five alternatives considered for a
new plant . The annual operating costs and other intangible factors are given
below for these five locations.

Factors Loc A Loc B Loc C Loc D Loc E

ECONOMIC
FACTORS
Labor cost 1,20,000 1,10,000 1,60,000 85,000 75,000
Tptn Cost 10,000 8,000 7,000 12,000 14,000
Local Taxes 17,000 20,000 25,000 19,000 17,000
Power Cost 21,000 29,000 25,000 18,000 23,000
Other Cost 16,000 11,000 12,000 16,000 18,000
INTANGIBLE
FACTORS
Community Very Good Fair Good Fair Very Good
attitude
Labor Good Very Good Fair Outstandin Acceptable
Availability g
Quality of Fair Acceptable Outstandin Acceptable Fair
Tptn g
Quality of Acceptable Fair Good Very Good Outstanding
Life

1) On the basis of annual operating costs, which site would you choose?
2) Devise a method of quantifying the intangible cost and integrate them with
the cost data into the overall evaluation. Which is best now?

On the basis of annual operating cost:

A B C D E
Total 1,84,000 1,78,000 2,29,000 1,50,000 1,47,000
operating
cost
Rank 4 3 5 2 1
Inference: Since the total annual operating cost is least at Location E, loc E is the
best choice.

On the basis of overall evaluation:

To quantify the intangible factors , the qualitative factors are converted into
quantitative factors using a 5 point scale.

Grade Point
Outstandin 5
g
Very Good 4
Good 3
Fair 2
Acceptable 1
Quantifying the intangible factors, we have

Intangible A B C D E
Factors
Community 4 2 3 2 4
attitude
Labor 3 4 2 5 1
Availability
Quality of 2 1 5 1 2
Tptn
Quality of 1 2 3 4 5
Life
Total Rating 10 9 13 12 12
Rank 3 4 1 2 2

To combine the economic factor with intangible factor rating, let us allot highest
rating of say 10 for the location which has the lowest annual operating cost,
hence for Location E= 10, and for other location

Loc A = 10* 1, 47,000/1,84,000= 7.98

Loc B= 10* 1,47,000/1,78,000= 8.25

Loc C= 10*1,47,000/2,29,000= 6.41

Loc D= 10*1,47,000/1,50,000 = 9.80

Total Factor rating = Economic Rating + Intangible factor rating

Loc A= 7.98 + 10 = 17.98

Loc B= 8.25 + 9 = 17.25

Loc C= 6.41 + 13 = 19.41

Loc D= 9.80 + 12= 21.80

Loc E= 10.00+12= 22.00

Inference: Total factor rating of Location E being the highest, Location E is the
best choice.