FACILITY LOCATION: FACILITY LOCATION FACILITY LOCATION: 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. FACILITY LOCATION: 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 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: 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) Center of Gravity Method, and 4) Transportation and Simulation Models. 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 and 100 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 B ased 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. It appears to be the best location. Example: 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: Example: Example Example: 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. Example: 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. 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: production volume = 250.000) 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: 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. Center of Gravity Method: Center of Gravity Method The center of gravity method is used to find a location that Minimizes the Sum of Transportation Cost in between new facility and old facilities. Transportation cost is assumed to be a linear function of the Number of Units Shipped AND the Traveling Distance. Center of Gravity Method: Center of Gravity Method The location of the firm’s existing facilities are converted into x and y coordinates. The following center of gravity equations are Then used for calculating the x and y coordinates for the new facility: Center of Gravity Method: Center of Gravity Method Center of Gravity Method: Center of Gravity Method Here, Cx : x coordinate for new location Cy : y coordinate for new location i: index for existing locations n: total number of existing locations xi: x coordinate of existing ith location , and yi: y coordinate of existing ith location. Example: Example Aldrich Manufacturing Company plans to build a Warehouse to serve its Distribution Centers in Columbus (Ohio), Frankfort (Kentucky), Nashville (Tennessee), and Richmond (Virginia). Example: Example Example: Example The number of units to be shipped monthly from Harrisburg to the Distribution Centers are shown in the following table: (Weighted Coordinates are calculated as: (Annual Shipping Volume) (x or y coordinate)) Example: Example Example: Example Using the equations of center of gravity: Cx = 2,040,000 / 10,000 = 204 (x coordinate for new facility) Cy = 1,185,000 / 10,000 = 118.5 (y coordinate for new facility) The nearest city to (204, 118.5) Charleston at West Virgina. Example: Example This method only considers the distances traveled. It does not consider the other factors such as the availability of roads on the selected location. Therefore, applying solely this method may not be applicable in every cases. Transportation Model: Transportation Model A special form of linear programming, that is Transportation Model, can be used to compare the total transportation cost associated with each alternative site. Transportation Model: Transportation Model The transportation model technique can be used to determine how many units should be shipped from each plant to each warehouse To Minimize Total Transportation Cost. Example: Example Straub Ltd. has three plants running at full capacity in Des Moines, Racine, and Gary. These plants supply four Distribution warehouses in St. Paul, Milwaukee, Chicago, and Detroit. Example: Example Straub plans to build a new plant. It has narrowed down the choice of sites to two possibilities: Kalamazoo and Duluth. We will now determine which site results in the lowest transportation Cost by using the unit transportation costs, warehouse demands, and plant capacities shown in the following: Example: Example Example: Example Example: Example We will approach this problem in the following manner: We will first assume that the selected plant is the Kalamazoo plant, and calculate the total transportation cost. Example: Example Later, we will assume the selected plant is Duluth. Then we will compare the transportation costs for both plants. Now, the first step is to find the Optimal number of units to ship between each plant-warehouse combination. This also gives the optimal transportation cost for the problem. Example: Example We can use any of the computerized LP tools for finding the optimum values for this problem. Some of these include WINQSB, Lindo, OM Expert, and Excel. We use WINQSB to solve this transportation model. The result is as follows: Example: Example Example: Example The total transportation cost will be $10,225 if the new plant is built in Kalamazoo. (This can be calculated simply by multiplying the shipment in each cell by its unit cost) On the other hand, The optimal number of units to ship between each plant and Duluth Warehouse is found as follows: Example: Example Example: Example The total transportation cost will be $13,825 if the new plant is built in Duluth. Therefore, the Kalamazoo plant will incur the lowest transportation cost. Simulation Models: Simulation Models Firms often Consider many variables and Factors when they choose a facility location. Simulation Models: Simulation Models These variables are often difficult to estimate and they also change in time. In these kinds of Dynamic Situations, Simulation may be the best modeling technique. Simulation Models: Simulation Models Simulation models allow managers to examine a range of Scenarios AND are well suited to open-ended problems. However, the determination of the parameters in a simulation is also a challenging task. Also, developing a simulation model may take considerable time and effort.