6.

0 FACTORS & DECISIONS IN LOCATING FACILITIES:

Facilities are the where of the supply chain. These are the places in the supply chain network
where product are stored, assembled or fabricated. The two major types of facilities are
production (manufacturing) sites and storage (warehousing) sites. Whatever the function of
the facility, decisions regarding location, capacity and flexibility of facilities have significant
impact on the supply chain performance.

An important element of designing a company’s supply chain is the location of its facilities. A
basic trade-off here is whether to centralize to gain economies of scale or decentralize to
become more responsive by being closer to the customer.

6.1 IMPORTANCE OF FACILITY LOCATION:

1. They are a key element in any firm’s overall strategic plan.
2. Dramatic changes in the global geo-political environment and rapid advances in
technology make it necessary to seriously consider where to locate a facility.
3. Facility location determines cost advantages that a firm will gain and therefore help it
remain competitive in its market.

6.2 ISSUES IN FACILITY SITE SELECTION: - MANUFACTURING FIRMS:

Manufacturing and Service Location Decisions are guided by a variety of criteria defined by
competitive imperatives. Specifically for a manufacturing firm’s supply chain these decisions
are directly influenced by the following:

1. Proximity to Customers: - Such proximity helps ensure that customers’ needs are
incorporated into product design processes more effectively in addition to ensuring
the manufactured goods reach the market as fast as possible.

2. Proximity to Suppliers: - A high-quality and competitive supply base makes a given

location suitable. Proximity to important suppliers also supports lean production
systems.
 3. Total Cost: - The objective is to select a site that minimizes total production costs.
These include regional costs such as land, construction, labour, taxes and energy
costs, inbound distribution costs, outbound distribution costs and hidden costs such as
excessive movement of pre-production materials and opportunity loss on customer
responsiveness as a result of locating far away from the customer.

4. Infrastructure: - This refers to adequate transport and communication infrastructure,

energy infrastructure and the government’s commitment to maintaining good
infrastructure.

5. Quality and Availability of Labour: The quality and availability of a labour workforce
plays an important role in choosing the location of a facility. This is because quality
and availability of labour workforce will determine the quality of products to be
produced, the efficiency with which these products are produced and the labour costs
associated in the production.

6. Competitive Advantage: - A company should consider having its base in a country,

region that stimulates innovation and provides the best environment for global
competitiveness.

Other factors that affect the manufacturing firm’s supply chain but indirectly include:
1. Proximity to other facilities: - The location of other plants or distribution centres of
the same company may influence a new facility’s location in the network. Issues of
product mix and capacity are strongly inter-connected to the location decision in this
context.

2. Business Climate: - A favorable business climate includes the presence of similar-

sized companies, the presence of companies in the same industry and for international
locations, and the presence of other foreign companies.

3. Political Risk: Political environment in both the country of location and the host
country influence location decisions.
 4. Environmental Regulations: - An environmental impact assessment should be part of
the process of locating a plant. It should also include the costs of mitigating such
impact.

5. Government Barriers: - There are both legislative and non-legislative barriers that
firms should consider before locating their facilities.

6. Tax-effects: - Firms should choose sites that offer them the best tax advantages.
Regions or countries with better tax regimes then offer the firm an opportunity to save
on production costs.

7. Free Trade Zones and Trading Blocs: Free Trade Zones refer to a closed facility
(under the supervision of government custom officials) into which foreign goods can
be brought without being subject to the payment of normal import duties.
Manufacturers in free trade zones can use imported components in the final product
and delay payment of custom duties until the product is shipped to the host country.

On the other hand, Trading Blocs are a group of countries that agree on a set of
special arrangements governing the trading of goods between member countries.
Companies may locate in places affected by the agreements to take advantage of new
market opportunities.

6.3 LOCATING SERVICE FACILITIES:

Because of the variety of service firms and the relatively low cost of establishing service
facility compared to a manufacturing, new service facilities are far more common than new
factories and warehouses.

Criteria For Selection:

1. Services typically have multiple sites to maintain close contact with customers.
The location decision is closely tied to the market selection decision.
2. Market needs also affect the number of sites to be build and the size and
characteristics of the sites.
 3. Many service location techniques aim at maximizing the profit potential of
various sites. Multiple regression analysis can be used to facilitate selection of
these sites.

6.4 TYPES OF FACILITIES

6.4.1 HEAVY-MANUFACTURING FACILITIES:

These are large, require a lot of space, and are expensive. The key factors in
heavymanufacturing location include:
i. Construction costs ii. Land costs iii. Raw
material and finished goods shipment modes iv.
Proximity to raw materials v. Utilities vi.
Means of waste disposal vii. Labor availability

6.4.2 LIGHT-INDUSTRY FACILITIES

These are smaller, cleaner plants and usually less costly. The key factors to consider in light
industry location include:
i. Land costs ii. Transportation costs iii. Proximity to markets iv. Depending on delivery
requirements including frequency of delivery required by customer

6.4.3 RETAIL AND SERVICE FACILITIES

These are the smallest and least costly. The key factors to consider in retail location include:
i. Proximity to
customers ii. Location is
everything

6.5 LOCATION ANALYSIS TECHNIQUES

a) Location Factor Rating: This is undertaken using the following steps:

i. Identify important factors ii. Weight factors

(0.00 - 1.00) iii. Identify the sites to scored
against these factors iv. Subjectively score each
factor (0 - 100) v. Sum weighted scores vi.
Choose the location with the highest score.
EXA
MPL
E OF SCORES (0 TO 100)
FACT
CATION FACTOR WEIGHT Site 1 Site 2 Site 3
OR
Labor pool and climate .30
RATI
80 65 90
Proximity to suppliers
NG .20 100 91 75
MET .15 60 95 72
Community environment .15
HOD: 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
L
Weighted Score for “Labor pool and climate” for
O
.0550 65 90 Site 1 = (0.30)(80) = 24

Wage rates

Air service

WEIGHTED
SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
20.00 18.20 15.00
9.00 14.25 10.80
11.25 12.00 12.00
6.50 9.00 9.50
 4.25 4.60 3.25

2.50 3.25 4.50 77.50

80.80 82.05
b) Center-of-Gravity Technique: - locates the new facility at center of movement in
geographic area. It is based on weight and distance traveled. It establishes a grid-map of
area and identifies coordinates and weights shipped for each location before centering the
new facility.

ILLUSTRATIONS:
1. The following information has been provided on the suitability of several locations
for a new manufacturing firm.

SCORES (0 – 100)
LOCATION FACTOR WEIGHT SITE 1 SITE 2 SITE 3
Availability of Labour 0.35 80 65 90
Proximity to Suppliers 0.30 100 91 75
Proximity to Customers 0.25 60 95 82
Infrastructure 0.10 75 80 80

Required:
Using the Factor Rating Method determine the best location for this new facility.

2. A small manufacturing facility is being planned that will feed parts to three heavy
manufacturing facilities. The location of the current facilities with their co-ordinates
and volume requirements are given in the following table.
 PLANT LOCATION CO-ORDINATES (X,Y) VOLUME (PARTS PER
YEAR
Kilifi 300,320 4,000
Ukunda 375,470 6,000
Mariakani 470,180 3,000

Required:
Use the c