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Chapter 2
Locating Facilities
Finding the best geographic locations for
different members in a supply chain.

Lecturer: Dr. Nguyen Hang Giang Anh

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Learning Objectives

❖ Understand the importance of location decisions.

❖ Discuss factors that affect the choice of location.
❖ Describe a hierarchical approach to locating facilities.
❖ Use an infinite set approach, such as the centre of
gravity
❖ Compare locations using costing and scoring models.
❖ Use models for locating facilities on networks.
❖ Combine location decisions into a broader approach to
planning.

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Main content

1. Location decisions

2. Choosing geographic region

3. Approaches to location decisions

4. Network models

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1. LOCATION
DECISIONS
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Importance of Location decisions

❖ Location decisions are needed when an organisation opens new

facilities → Affect organization’s performance over many years.
❖ A poor facility location leads to poor performance → low
productivity, unreliable suppliers, poor materials, low quality
products and high costs.
❖ To make location decisions, organisations have to consider many
factors:
▪ Quantifiable factors: operating costs, wage rates, currency
exchange rates, etc.
▪ Nonquantifiable factors: quality of infrastructure, political
stability, etc.

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Reasons for considering location

❖ The end of lease/premises.

❖ Geographical expansion, reorganization, M&A or changes of
ownership.
❖ Change to operations/transport mode/transport network.
❖ Changes in location of customers/suppliers.
❖ Upgrading facilities.

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Expansion options with a new market

1. Licensing or franchising: local organizations make and

supply the company’s products. Require no new facilities.
2. Exporting: company makes the product in its existing
facilities and sells it to a distributor working in the new market.
3. Local distribution and sales: company makes the product in
its existing facilities but sets up its own distribution and sales
force in the new market.
4. Local assembly and finishing: company makes most of the
product in existing facilities but opens limited facilities in the
new market to finish or assemble the final product.
5. Full local production: company opens complete facilities in
the new market.

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2. CHOOSING
GEOGRAPHIC
REGION
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Hierarchy of Location decisions

Bitexco, Vincom (1st dist.)

Crescent Mall (7th dist.)
Estella Place (2nd dist.)
Giga Mall (Thu Duc dist.)
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Important factors for choosing a region

❖ Location of customers (low value goods: soft drinks, brewers,

dairies,…).
❖ Location of suppliers and materials (natural resources,…).
❖ Culture (ex: hot pot franchise restaurants).
❖ Government attitudes (ex: Apple moving to Vietnam).
❖ Direct costs (wages, materials, utilities, …).
❖ Indirect costs (local taxes, social insurance, pension and
social costs).
❖ Exchange rates.
❖ Social attitudes (ex: social welfare & employee union).
❖ Organization.
❖ Operations.
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3. APPROACHES
TO LOCATION
DECISIONS
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Two Approaches to Location Decisions

1. Infinite set approach: which uses geometric arguments

to find the best location, assuming that there are no
restrictions on site availability.
→ finds the best location in principle and then looks for a
site nearby.

2. Feasible set approach: where there are only a small

number of feasible sites, and an organisation has to
choose the best.
→ compares sites that are currently available and chooses
the best.
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Infinite set approach – Simple Model

Figure 1: Alternative Choices of Location Figure 2: Variation in transport cost with location
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The best compromise location

❖ A simple way for finding the best compromise location is

to calculate the Centre of gravity of supply and
demand.
❖ The co-ordinates of the centre of gravity are

where,
(𝑋0 , 𝑌0 ): co-ordinates of the centre of gravity which gives the facility location
(𝑋𝑖 , 𝑌𝑖 ): co-ordinates of each customer or supplier, 𝑖
𝑊𝑖 : expected demand at customer 𝑖, or expected supply from supplier 𝑖
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Example

𝑿, 𝒀 Supply or
Location co-ordinates demand
❖ Van Hendrick Industries is
Supplier 1 (91, 8) 40
building a logistics centre that
will collect components from three Supplier 2 (93, 35) 60
suppliers, and send finished Supplier 3 (3, 86) 80
goods to six regional warehouses.
Warehouse 1 (83, 26) 24
❖ The locations of these and the
amounts supplied or demanded Warehouse 2 (89, 54) 16
are shown in the next table. Warehouse 3 (63, 87) 22
❖ Where should they start looking Warehouse 4 (11, 85) 38
for a site to build the logistics Warehouse 5 (9, 16) 52
centre?
Warehouse 6 (44, 48) 28
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Solution – Centre of gravity
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Locations for Van Henrick Industries
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Feasible Set Approaches

❖ Feasible set approaches identify available sites,

compare them, and find the best.

❖ Two models are introduced:

▪ Costing model
▪ Scoring model
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Costing model (1/2)

❖ The approach calculates the total cost from each

location and chooses the cheapest.
❖ In practice, many of the costs of running a facility are
fixed regardless of its location → we concentrate on
varying costs, particularly the transport and operating
costs.
❖ Assume that the operating costs in nearby locations are
the same → we only concentrate of transport costs.
❖ Assume that the transport cost is proportional to the
distance moved → Rectilinear distance between points
will be found.
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Costing model (2/2)

Step 1: Calculate Distance for each site. There are two

ways to measure the distance between two facilities.
▪ Rectilinear Distance
▪ Euclidean Distance
Step 2: Compute (Load x Distance) for each site.
Step 3: Choose site with lowest (Load x Distance).
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Rectilinear Distance

❖ When distance between two facilities is measured along path

that is orthogonal to each other → the distance is called
Rectilinear Distance.
❖ Suppose two facilities are located at points represented by (𝑋1 ,
𝑌1 ) and ( 𝑋2 , 𝑌2 ), → the rectilinear distance between the
facilities will be calculated as:

Rectilinear Distance = Difference in X co-ordinates + Difference in Y co-ordinates

= 𝑋1 − 𝑋2 + 𝑌1 − 𝑌2
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Euclidean Distance
❖ When distance is measured along straight-line path
between the two facilities → the distance is termed as
Euclidean distance.
❖ Suppose two facilities are located at points represented
by ( 𝑋1 , 𝑌1 ) and ( 𝑋2 , 𝑌2 ) → the Euclidean distance
between the facilities will be

Euclidean Distance = (𝑋1 − 𝑋2 )2 +(𝑌1 − 𝑌2 )2

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Load-Distance value

Load-Distance value (𝐿𝐷) is calculated as:

𝑛

𝐿𝐷 = ෍ 𝑙𝑖 ∗ 𝑑𝑖
𝑖=1
where
𝑙𝑖 : load expressed as a weight or units being shipped to
location 𝑖.
𝑑𝑖 : rectilinear distance between the proposed site and
location 𝑖 (using Euclidean distance).
𝑛: total number of locations considered for each site.
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❖ Bannerman Industries want to build a depot to serve 7

major customers with different loads. Three alternative
locations A, B and C are available.
❖ Which is the best site if operating costs and inward transport
costs to its suppliers are the same for each location?

Customer X Y Load Potential

X Y
Location/Site
1 100 110 20
2 120 130 5 A 120 90
3 220 150 9
B 160 170
4 180 210 12
5 140 170 24 C 180 130

6 130 180 11
7 170 80 8
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Solution
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Map for Bannerman Industries
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Scoring model

❖ The approach assigns a range of factors, weighted

scores to compare locations.
❖ Scoring model emphasizes the factors that are
important for locations but cannot easily be costed
or quantified.
❖ Even if we cannot quantify the important factors, we still
need to identify them.
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Factors in location decisions (1/3)

Factors in location decisions (1/3)

In the region and country
● availability, skills and productivity of workforce.
● local and national government policies, regulations and attitudes.
● political stability.
● economic strength and trends.
● climate and attractiveness of locations.
● quality of life – including health, education, welfare and culture.
● location of major suppliers and markets.
● infrastructure – particularly transport and communications.
● culture and attitudes of people.
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Factors in location decisions (2/3)

Factors in location decisions (2/3)

In the city or area
● population and population trends.
● availability of sites and development issues.
● number, size and location of competitors.
● local regulations and restrictions on operations.
● community feelings.
● local services, including transport and utilities.

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Factors in location decisions (3/3)

Factors in location decisions (3/3)

In the site
● amount and type of passing traffic.
● ease of access and parking.
● access to public transport.
● organizations working nearby.
● total costs of the site.
● potential for expansion or changes.

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Procedure of Scoring model
Procedure of scoring model
Although we cannot quantify these factors directly → giving each a
score. The scoring model procedure is discussed as:

Step 1
 Decide the relevant factors in a decision
Step 2
 Give each factor a Maximum possible score (usually 0-100) or
a Weight (0.00-1.00) that shows its importance.
Step 3
 Consider each location in turn and give an actual score for each
factor, up to this maximum
Step 4
 Calculate the Total score or Total weighted score (= Site Score x
Factor Weight) for each location and find the highest.
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Step 5
 Discuss the result and make a final decision.
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Example
❖ Williams-Practar considered five alternative locations for a new
warehouse for their music distribution business. After many
discussions they compiled a list of important factors, their maximum
scores, and actual scores for each site.

❖ What is the relative importance of each factor? Which site would

you recommend?

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4. NETWORK
MODELS
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Another approach to location
❖ Sometimes it is difficult to relate the costing model and the
scoring model to actual road layout and geographic
features.

❖ Electronic maps of road networks allow another approach to

location, which is based on actual road layouts.

❖ Two standard models are illustrated for the approach:

▪ Single median problem
▪ Covering problem
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Single median problem

❖ Finds the location of one facility on a network that minimize total

cost is called the single median problem

❖ How to find the single median:

▪ Step 1: Starts with a matrix of the shortest distances
between towns.
▪ Step 2: To find the shortest average distance, we have to
combine these distances with the loads carried.
▪ Step 3: Multiply the distances by the demands at each town,
to get a matrix of the weight-distances.
▪ Step 4: Add these for each town, and find the lowest overall
value.
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Example

❖ Ian Bruce delivers goods to example

eight towns, with locations and
demands as shown in the next
figure.
❖ He wants to find the location for
a logistics centre that
minimises the average delivery
time to these towns.
❖ Where should he start looking?
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Solution
Example: Find the shortest way from AL to EN
20
10 10
DI 8
AL 15 15 9 GO
BE
7 14
8
22 EN
HT
20 5
CP 6 15
Ways from AL to EN
25 6 FR
RED= 15+9+7= 31 (smallest)
GREEN= 15+8+6+6= 35
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YELLOW= 22+6+6= 34
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Solution

solution

Weight-distance of a center at AL = (10 × 0) + (15 × 15) + (25 × 22)

+ (20 × 24) + (20 × 31) + (10 × 28) + (10 × 32) + (15 × 36) = 3015.
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Covering problem

Covering problem
❖ Sometimes the average distance or time to a facility is less important than
the maximum time.

❖ Classic example of this is fire engines and ambulances which try to

respond to emergencies within a maximum time. This is an example of the
covering problem.

❖ There are two versions of the covering problem:

▪ Look for the single location that gives the best service to all towns →
To solve this problem, we compare the longest journey times from
each location, and choose the location with the shortest of these.
▪ Specifies a level of service that must be achieved → Find the number
of facilities needed to achieve a level of service and their 39 best
locations.
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Example

example
❖ The next figure shows part of a
road network, with the travel
time (in minutes) shown on each
link.

Q1. Where would you locate a

depot to give best customer
service?

Q2. Where would you locate two

depots which give a maximum
journey of 15 minutes?

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Solution 1

Solution (1/2)

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Solution 2

Solution (2/2)
A B C D E F G H I J

A 0 10 24 10 29 29 25 20 35 32

B 10 0 14 20 19 19 15 30 25 22

C 24 14 0 15 11 5 15 25 11 14

D 10 20 15 0 26 20 30 10 25 29

E 29 19 11 26 0 6 4 23 8 3

F 29 19 5 20 6 0 10 21 6 10

G 25 15 15 30 4 10 0 27 12 7

H 20 30 25 10 23 21 27 0 15 20

I 35 25 11 25 8 6 12 15 0 5

J 32 22 14 29 3 10 7 20 5 0

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Solution to Covering problem