1

Facility Location
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OBJECTIVES

• Issues in Facility Location

• Various Plant Location Methods

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PLANT LOCATION

That spot where, in consideration of the business as a whole, the

total cost of production & delivering goods to all the consumers is

the lowest and maximum operating economy & effectiveness can be

achieved.
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PROBLEM IN PLANT LOCATION

1. SELECTION OF REGION

2. SELECTION OF LOCALITY (urban, rural, sub-urban)

3. SELECTION OF SITE
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NEED FOR PLANT LOCATION

To start a new plant

To expand the existing factory

Introduction of a new product

Changes in rules and regulations and laws

To overcome the drawbacks of the existing factory

Expiration of lease and landlord doesn’t renew the contract

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FACILITY LOCATION
 Facility location problem involves the
evaluation of various sites for a new facility.

 There are several factors that influence the

Facility Location Decision:
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Factors Related to
Resources
 Labor availability, Labor cost, Labor Skills;
 Materials Availability, Material cost, material
quality;
 Equipment availability, Equipment Cost;
 Land availability, Land suitability, Land cost;
 Energy availability, energy cost;
 Water availability, water quality, water cost.
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Factors Related to the

Market

Proximity to the
firm’s market, size
of the market,
potential needs of
the market.
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Factors Related to the

Infrastructure
 Availability of Financial Institutions, Strength of
Financial Institutions
 Government Stability, Government taxes, Import
and Export restrictions.
 Quality of life, Cultural issues,
 Environmental regulations, Transportation
availability, Transportation cost
 And finally, Competitors’ size, strength and
attitude in that region.
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Plant Location Methodology: Factor Rating

Method Example
Two refineries sites (A and B) are assigned the following range of
point values and respective points, where more the points the
better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
Power availability and reliability 0 to 200 150 100
Labor climate 0 to 100 54 63
Living conditions 0 to 100 24 96
Transportation 0 to 50 45 50
Water supply 0 to 10 4 5
Climate 0 to 50 8 4
Supplies 0 to 60 5 50
Best Site
Tax policies and laws 0 to 20 5 20 isBest
B
Site
is B
Total pts. 418 544
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Method of Factor Rating

Each alternative location will then be rated

based on these factor weights.
The most weighted alternative is selected
as the best alternative.
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Example
 Samson Ltd. is considering three alternative sites
for its new facility.
 After evaluating the firm’s Needs, the Managers
have Narrowed the list of Important Selection
Criteria down into three major Factors.
- Availability of skilled labor
- Availability of Raw materials, and
- Proximity to the firm’s markets.
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Example

 Weights reflecting the relative importance

of each factor have been assigned as
follows:
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Example

 Based on these criteria, the three

Alternative sites were scored
between 0 and 100 points:
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Example

 Now we will multiply each score by its

corresponding factor weight:
 Weighted scores are calculated as: (Site
Score)x(Factor Weight)
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Example
 From these results, the largest total weight
is for Site A. It appears to be the best
location.
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Example
 What happens if we change the factor
weights. Lets use the following factor
weights:
 Skilled labor: 0.45; Raw Materials:
0.40; and Market: 0.15
 Then the following results are obtained:
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Example
 19

Example
 In this case, Site C appears to be the best
choice with largest weight score.
 Therefore, factor rating method is very

sensitive to the weights assigned to each

factor.
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Example
 Since factor weights, selected factors, and
assigned scores are all determined
subjectively, the managers should be very
careful in selecting these items and
numbers.
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Plant Location Methodology:

Transportation Method of Linear
Programming

 Transportation method of linear

programming seeks to minimize costs of
shipping n units to m destinations or it
seeks to maximize profit of shipping n
units to m destinations
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Plant Location Methodology:

Centroid Method
 The centroid method is used for locating single
facility that considers existing facilities, the
distances between them, and the volumes of
goods to be shipped between them
 This methodology involves formulae used to
compute the coordinates of the two-
dimensional point that meets the distance and
volume criteria stated above
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Plant Location Methodology:

Centroid Method Formulae

C

dd VV
ix ii 
dd VV
iy ii
Cxx == ix
C
Cyy ==
iy

VV ii 
VV ii

Where:
Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
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Plant Location Methodology:

Example of Centroid Method
 Centroid method example
– Several automobile showrooms are located
according to the following grid which represents
coordinate locations for each showroom
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X

Question:
Question:What
Whatis
isthe
thebest
bestlocation
locationfor
foraanew
newModel
Model
warehouse
warehouse//temporary
temporarystorage
storagefacility
facilityconsidering
consideringonly
only
distances
distancesand
andquantities
quantitiessold
soldper
permonth?
month?
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Plant Location Methodology: Example of Centroid

Method (Continued): Determining Existing Facility
Coordinates
Y
To
Tobegin,
begin,you
youmust
mustidentify
identifythe
the Q
existing
existingfacilities
facilitieson
onaatwo-
two- (790,900)

dimensional
dimensionalplane
planeor
orgrid
gridand
and D
(250,580)
determine
determinetheir
theircoordinates.
coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You
Youmust
mustalso
alsohave
havethethe s o ld p e r mo nth
volume
volumeinformation
informationon onthe
the
business A 1250
businessactivity
activityatatthe
the
existing
existingfacilities.
facilities. D 1900

Q 2300
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Plant Location Methodology: Example of Centroid
Method (Continued): Determining the Coordinates
of the New Facility
You
Youthen
thencompute
computethe
thenew
newcoordinates
coordinatesusing
usingthe
theformulas:
formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000
CCx == 100(1250) + 250(1900) + 790(2300) == 2,417,000 == 443.49
443.49
x 1250
1250 ++ 1900
1900 ++ 2300
2300 5,450
5,450
200(1250) + 580(1900) + 900(2300) 3,422,000
CCy == 200(1250) + 580(1900) + 900(2300) == 3,422,000 == 627.89
627.89
y 1250
1250 ++ 1900
1900 ++ 2300
2300 5,450
5,450

You
Youthen
thentake
takethe
thecoordinates
coordinatesand
andplace
placethem
themon
onthe
themap:
map:
Y
S ho wro o m No o f Z-Mo b ile s
Q New
New s o ld p e r mo nth
(790,900)
location
location
ZZ
D
(250,580) of
offacility
facility A 1250
ZZabout
about
A D 1900
(100,200) (443,627)
(443,627)
(0,0) X Q 2300
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Cost-Profit-Volume
Analysis

When the fixed and

variable costs for
each site differ,
Cost-profit-volume
analysis can be
used to identify the
location with the
lowest cost.
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Example
 Foster Paper Ltd. is considering three
alternative sites for its new production
facility.
 The Annual Production Cost associated

with each alternative is a linear function of

the production volume. That is:
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Example
Total Production Cost = (Fixed Cost) +
(variable unit cost) x (annual production
volume)

 Assume that The expected annual

production volume is 250.000 units.
 And further assume that:

 (x: production volume = 250.000)

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Example

For Site A: Prod. Cost = 10.000.000 + 250 x

For Site B: Prod. Cost = 25.000.000 + 150 x
For Site C: Prod. Cost = 60.000.000 + 50 x

 Based on these information, Which site has

the lowest cost?
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Example
 At a production volume of 250.000 units, site B
has the lowest cost, because
 For Site A: Prod. Cost = 10.000.000 + 250
(250.000) = 72.500.000
 For Site B: Prod. Cost = 25.000.000 + 150
(250.000) = 62.500.000
 For Site C: Prod. Cost = 60.000.000 + 50
(250.000) = 72.500.000
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Example
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Example
 This graphic shows that annual production cost
changes with different production volumes.
 -If the expected annual production volume is
below 150.000 units, then choose site A.
 -If the expected annual production volume is
between 150.000 and 350.000 units, then choose
site B.
 -If the expected annual production volume is over
350.000 units, then choose site C.
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Question Bowl
Criteria that influences manufacturing plant and
warehouse location planning can include which
of the following?
a. Proximity to customers
b. Business climate
c. Infrastructure
d. Quality of labor
e. All of the above

Answer: e. All of the above

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Question Bowl
Criteria that influences manufacturing plant and
warehouse location planning can include
which of the following?
a. Political risk
b. Government barriers
c. Environmental regulation
d. All of the above
e. None of the above

Answer: d. All of the above

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Question Bowl
Which of the following are plant location methods?
a. Transportation method of linear programming
b. Factor-rating systems
c. Centroid method
d. All of the above
e. None of the above

Answer: d. All of the above

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Question Bowl
Which of the following methods of plant location
analysis considers the existing facilities, the
distances between them, and the volumes of
goods to be shipped?
a. Transportation method of linear programming
b. Factor-rating systems
c. Centroid method
d. All of the above
e. None of the above

Answer: c. Centroid method

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Question Bowl
Which of the following methods of plant location
analysis is the most widely used general
location technique because it combines
diverse factors in an easy-to-understand
format?
a. Transportation method of linear programming
b. Factor-rating systems
c. Centroid method
d. All of the above
e. None of the above

Answer: b. Factor-rating systems

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Question Bowl
The location decision for service facilities is
closely tied to which of the following?
a. Market selection decision
b. Material costs
c. Nearness to distributors
d. Nearness to high-skilled labor
e. None of the above

Answer: a. Market selection decision