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FACILITY LOCATION Once a firm has decided to open a new facility OR relocate an existing facility, It must decide where that facility should be located.

Location decisions are STRATEGIC : 

Location decisions are STRATEGIC Liable to affect the entire organisation Operative over long time spans Difficult to reverse Capital Intensive

Location decisions are Dynamic : 

Location decisions are Dynamic Owing to changing technology, competition, change of consumers tastes, decisions like:- New Plants Expansion Decentralization Plant Shutdown ARE CONSTANTLY UNDER REVIEW


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:

Factors Affecting Country : 

Factors Affecting Country Government stability Government regulations Political & economic systems Economic stability Exchange rates Culture Climate Export & import regulations, duties & fees Raw material availability Number & proximity of suppliers Transportation system Labor pool and cost Available technology Commercial travel Technical expertise Region

Factors Related to Resources : 

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.

Factors Related to the Market : 

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

Factors Related to the Infrastructure : 

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.


FACILITY LOCATION There are many analytical techniques that can be used in facility location decision. Some of these are: 1) Factor Rating 2) Cost-Profit-Volume analysis 3)Dimensional Analysis Method, and 4) Brown and Gibson Model.

Method of Factor Rating : 

Method of Factor Rating In factor rating method, first we must identify the Most Important Factors in evaluating alternative sites for the new facility. Then we should assign a weight between 0.1and 1 to each of these factors.

Method of Factor Rating : 

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.

Example : 

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.

Example : 

Example Weights reflecting the relative importance of each factor have been assigned as follows:

Example : 

Example Based on these criteria, the three Alternative sites were scored between 0 and 100 points:

Example : 

Example Now we will multiply each score by its corresponding factor weight: Weighted scores are calculated as: (Site Score) x (Factor Weight)

Example : 

Example From these results, the largest total weight is for Site A. Site ‘A’ appears to be the best location.

Cost-Profit-Volume Analysis : 

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.

Example : 

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:

Example : 

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 = No of units produced)

Example : 

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?

Example : 

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

Example : 


Example : 

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.

Dimensional analysis method : 

Dimensional analysis method Plant site that incurs least cost is selected. It is easy to select a plant site when all costs are tangible however there are many intangible costs, which are difficult to evaluate in absolute terms (educational facilities etc.) Since both tangible & intangible costs need to be considered thus a system of relative merits is considered.

Slide 26: 

To obtain relative merits of one plant site on other ,ratio of each cost for plant sites is taken and each cost is given an appropriate weightage by using an index to which it is raised. These weighted ratios are multiplied to obtain a figure on relative merit of two plant sites. If C1M,C2M,C3M,…………,CzM. are the different costs associated with plant site, M and C1N,C2N,C3N,…………,CzN. are the different costs associated with plant site, N

Slide 27: 

W1,W2,W3,…………...,Wz are weightage given to the cost item. Then value of relative merit of plant sites M and N is given by:- {C1M /C1N }w1 * {C2M /C2N }w2 * {C3M /C3N }w3 * {CzM /CzN }wz If value is more than 1 the plant site N is superior.

Brown & Gibson Model : 

Brown & Gibson Model This model is more elaborate & considers three classes of site location factors: Critical………e.g. water for a refinery Objective…….e.g. labor costs, raw material costs. Subjective…..e.g. recreational facilities, union activities For each site ‘I’ a location measure lm is defined

Slide 29: 

In order to ensure compatibility between objective & subjective factor measures , objective factor costs are converted to dimensionless indices. The rationale is : Site with minimum cost must have the maximum measure Relationship of total objective factor cost & corresponding objective factor measure must be maintained, a site with half the objective factor cost is assigned twice the objective factor measure of the other site

Slide 30: 

For each plant site I a location measure is calculated :- LMI = CFMI * { D* OFM I+ (1-D) * SFMI} Where CFMI specifies the measure of Critical factors for plant site I OFMI specifies the measure of Objective factors for plant site I SFMI specifies the measure of Subjective factors for plant site I D specifies the objective factor decision weight.

Slide 31: 

The sum of objective factor measure for all sites must equal to 1 The subjective factor measure is given by: SFMI = (SFWJ * SWIJ ) Where SFWJ signifies the weight of subjective factor J relative to all subjective factors and SWIJ signifies the weight of plant site I relative to all potential plant sites for subjective factor J.

Slide 32: 

This was all about the factors affecting location analysis and location analysis technique..

Slide 33: 


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