5/15/2011 Prepared By: Sandeep Shrestha 1

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Need and Importance of Location Decisions
Decision of facility location (generally, facility refer to service
organization and factory or plant refers to manufacturing
organization) is important to both manufacturing and service
organization.
Facility location refers to selection of specific site for
establishment of the physical unit of production process. The
physical unit means "plant" where man, material, money,
equipment, machinery etc are brought together for
manufacturing of product or rendering of services.
Facility location has a significant impact on firm's operation as
well as cost structure, thus success of any organization is also
dependent on the location decision.
Once the location is decided and plant is installed, it is highly
expensive and some time infeasible to alter the location, if it is
later known that the location decision was not correct.

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 A wrong location decision may result in:
Low profit margin
High cost of production
Poor production efficiency
High distribution cost
Labour trouble
Closure of organization

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Industrial Location Decisions
• Cost focus
– Revenue varies little
between locations
• Location is a major
cost factor
– Affects shipping &
production costs (e.g., labor)
– Costs vary greatly between
locations

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Service Location Decisions
• Revenue focus
– Costs vary little between market areas

• Location is a major
revenue factor
– Affects amount of
customer contact
– Affects volume of
business

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 Facility location planning is more important for new
enterprises. Establishing a new plant at a new site
requires a careful decision based on the careful evaluation
of many economics and technical location factors. These
problems can be eased out if a scientific and systematic
attempt is made to evaluate the pertinent consideration.
The plant location involves three major activities:
 First to select a proper geographical region.
 Secondly, to select specific site within this region.
 Lastly, to find the actual site.
For example one may decide to establish a factory in
eastern region. He may then select Sunsari District and
Dharan Municipality for specific site. The actual site with
in Dharan decided is Plot no. 12546, Bijayapur, Ward no.
14.
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Locations Decision Sequence
Country Region/Community

Site

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Factors Affecting Location Decision
(Service and Manufacturing Organizations)
The production function is associated with the conversion of input
to desired output by using the appropriate technology i.e.
conversion process.
The inputs are fed to the conversion process, while the outputs are
marketed. Thus the important factors of production functions are
inputs, conversion process and output.
Good location decision is that, which optimize input, conversion
process and output. However, location is a long-term
commitment, therefore due care should be given to other various
factors like opportunity for expansion, product diversification,
state legislation etc.
On a broad sense, the location factors can be classified in to
following two generic types:
 Primary Factors
 Secondary Factors

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Factors Affecting Location Decisions

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Primary Factors Affecting Plant Location
The primary factors are the nature of input, nature of
output and nature of technology employed.
Nature of the Input (Raw Material)
 In some cases, it is beneficial to locate the factory (plant)
near to raw material. If the cost of transportation of raw
material is very high comparison to the transportation of
finished goods, it is suitable to establish the factory near to
input resources.
 For example: cement factory is established near the
sources of lime because major input is lime which is very
bulky. Similarly, sugar factory is established nearer to
sugar cane farm. Other examples are oil refineries, steel
industries, and paper industries which are established
nearer to source of raw material.

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Nature of Output (Product or Service)
 In some cases, it is beneficial to locate the facility nearer to
market or potential customer. Service produced by hotels, golf
course, church, temples, schools, hospitals, are usually located
near the market or the recipients because these services cannot be
transported or keep in stock. These facilities should be located
within the reach of consumers.
 In manufacturing organization, when the products are potential
of being damaged or spoiled in course of transportation, it is
beneficial to establish plant nearer to market. Furthermore, a
plant being nearer to the market can catch a big share of the
market and can render quick service to the customer.
 In some cases, the transportation of final product to market may
be costly compared to transportation of raw material to industry
and transportation cost has significant effect. In such cases, it is
beneficial to establish plant nearer to market. For examples: soft
drink companies like Coca -Cola and Pepsi are established nearer
to market.

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 Nature of Technology Employed
 Conversion process and the technology employed also
determine the facility location decisions. The
conversion process, which produces unfriendly
conditions to the people and environment, are usually
located in remote areas i.e. far from consumer and the
final product and service are transported to the market.
The nuclear plant and airport are the good examples.
 However, if the conversion process is highly
sophisticated, it is better to allocate factory in urban
location where the operation of facility can be
smoothed if any problems occurred.

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Secondary Factors Affecting Plant Location
A part from above stated three primary factors, there
are other factors affecting the location decisions, which
are generally called as secondary factors. However, it is
to be highlighted that any factor can be primary or
secondary depending upon the type of plant, its
products, technology etc.
It means that a primary factor for some type of
industry might be secondary factor for other. For
example: pure source of water is primary factor for
mineral water industry, but it is secondary factor for
ghee industry.

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Some secondary factors are:
Availability of Labours and their Skill
 Stable labour forces of' right kind, adequate size (number), and
reasonable rates with proper attitude towards works are a few factors
which govern the plant location to a major extent.
 The purpose of management is to face less boycotts, strikes or
lockouts and to achieve lower labour cost per unit of production.
 The intra and inter country movement of labour has made labour
available at any place and point of time.
Transportation and Communication Facilities
 The significance of transportation varies with the type of industries.
Basic mode of transportation like air, road, rail, water, pipelines are
preferred based on the nature of raw material and finished goods.
 If the transportation costs are a major part of the total cost, then it is
considered the controlling factor in determination of site. Conversely,
if they have got little influence on total cost, then it is of almost no
importance.
 Similar fashion applies to availability of communication facilities. In
GIS technology, communications facilities are having less importance
than past days. However, cost of transportation and communication
should be properly analyzed before selecting a site.

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 Availability of Services
Services like gas, electricity, water, drainage, waste
disposal and other external amenities like shop,
community services, medical system etc. are also the
determining factors affecting location decision.
Suitability of Land and Climate
The topography (geography) of the land also affects plant
location. Similarly the climatic conditions e.g. rain fall,
humidity, average temperature are also critical factor
while determining the location decisions.
Opportunity for Expansion
The long range prospective of expansion opportunity must
be considered while making location decision. The
location should be flexible enough to cover the expansion
program.
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  Political, Cultural and Economic Situation and Regional
Regulations.
 The political instability may jeopardize the business.
 Socio-cultural situation like women, foreign worker restriction of
working should be considered.
 The economic condition of locality is important factor to be
considered for business like gambling, casino, insurance companies or
private educational institutions.
 Similarly, the study must be made of local regulations before
determining the location decisions.
 Special Grants, Regional Tax and Import-Export Barriers
 Some local authorities and central government offer special grants,
low interest loan, low rental or taxes and other inducement in the
hope of attracting certain industries to a particular location.
 Location of companies to foreign countries to avoid export difficulties
are now commonly accepted practices.

After identifying the several key location requirement, management

should find the alternative locations that are consistent with these
requirement. These alternative locations are subjected to qualitative
and quantitative analysis before determining the exact location
decisions.

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Some Considerations and Factors That
Affect Location Decisions
Country Decisions Critical Success Factors
Political risks, government
rules, attitudes, incentives
Cultural and economic issues
Location of markets
Labour talent, attitudes,
productivity, costs
Availability of supplies,
communications, energy
Exchange rates and currency
risk
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Region/Community Critical Success Factors
Corporate desires
Decision
Attractiveness of region
(culture, taxes, climate, etc.)
Labour availability, costs,
MN
attitudes toward unions
WI Cost and availability of
MI
utilities
Environmental regulations of
state and town
OH
IL IN Government incentives and
fiscal policies
Proximity to raw materials
and customers
Land/construction costs

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Site Decision Critical Success Factors
Site size and cost
Air, rail, highway,
waterway systems
Zoning restrictions
Proximity of
services/supplies needed
Environmental impact
issues

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Techniques in Location Decisions
Factor Rating Method (Point Rating Method)
Locational Break Even Analysis
Center of Gravity Method
Load Distance Method
Transportation Method

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Locational Break-Even Analysis
 Method of cost-volume analysis to make an economic
comparisons of various locations.
 By identifying fixed and variable costs and graphing them
for each location, we can determine which one provides the
lowest cost.
 Locational break-even can be done mathematically or
graphically.
 Three steps in the method
1. Determine fixed and variable costs for each location
2. Plot the cost for each location, with costs on the
vertical axis of the graph and annual volume on the
horizontal axis.
3. Select location with lowest total cost for expected
production volume
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Locational Break-Even Analysis
Example
Three locations:

Selling price = $120

Expected volume = 2,000 units

Fixed Variable Total

City Cost Cost Cost

Kathmandu $30,000 $75

Bhaktapur $60,000 $45
Lalitpur $110,000 $25

Total Cost =Total Fixed Cost + (Variable Cost Per Unit x Volume)

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Locational Break-Even Analysis
Example
–
$180,000 –
–
$160,000 –
$150,000 –
e
–
o s t curv
c
$130,000 –
h i c ago
C
Annual cost

–
$110,000 – n
– G r ee
g ve
– owlin t cur
s
$80,000 – B co
– o st
c
$60,000 – on e
r v
– Ak c u r
–
Akron Chicago
$30,000 – Bowling Green
lowest lowest cost
– lowest cost
cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
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Volume 26
 The fixed cost and variable costs for three potential
manufacturing plant sites for a chair weaver are
shown below:
Site Fixed Cost per Year Variable Cost per Unit
1 Rs. 500 Rs. 11
2 1,000 7
3 1,700 4

Over what range of production is each location

optimal?

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The fixed cost and variable costs for three potential
manufacturing plant sites for a chair weaver are
shown below:

Site Fixed Cost per Variable Cost per

Year Year
1 Rs. 500 Rs. 11
2 1,000 7
3 1,700 4

Over what range of production is each location

optimal?
Locational Break-Even Analysis Example
For Akron:
Total cost= $30,000 + $ 75(2,000) = $ 180,000
For Bowling Green:
Total cost= $60,000 + $ 45(2,000) = $ 150,000
For Chicago:
Total cost= $110,000 + $ 25(2,000) = $ 160,000

With an expected volume of 2,000 units per year,

Bowling Green provides the lowest cost location. The
expected profit is:
Total revenue- Total cost= $120 (2,000)- $ 150,000
= $90,000 per year
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The crossover point for Akron and Bowing Green is:
30,000 + 75 (x)= 60,000 + 45 (x)
30 (x)=30,000
x = 1,000
The crossover point for Bowing Green and Chicago is:
60,000 + 45 (x)= 110,000 + 25 (x)
20 (x)=50,000
x = 2,500
As with every other OM model, locational break-even results
can be sensitive to input data. For example, for a volume of
less than 1,000, Akron would be preferred. For a volume
greater than 2,500, Chicago would yield the greatest profit.
Learning Exercise: The variable cost for Chicago is now
expected to be $22 per unit. What is the new crossover point
between Bowling Green and Chicago? [Answer: 2,174 units.]
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Factor-Rating Method
• Most widely used location technique
• Useful for service & industrial locations
• Rates locations using factors
– Tangible (quantitative) factors
• Example: Short-run & long-run costs

– Intangible (qualitative) factors

• Example: Education quality, labor skills

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 Six steps in the method
1. Develop a list of relevant factors called critical success
factors
2. Assign a weight to each factor to reflect its relative
importance in the company’s objectives.
3. Develop a scale for each factor (for example, 1 to 10 or 1 to
100 points0.
4. Have management score each location for each factor,
using the scale in step 3.
5. Multiply the score by weights for each factor for each and
total the score for each location
6. Make a recommendation based on the maximum point
score, considering the results of other quantitative
approaches as well.
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 Example: Factor Rating Method
You are assigned to select a location between Bhainsepati and Sunakothi to
open a branch of departmental store. With the given factors of urban-to-rural
population ratio, local peoples’ attitude, access to Kathmandu, and access to
utilities, compare and suggest one location out of the two.

Scores (out of 100) Weighted Scores

Factors Weight Bhainsepati Sunakothi Bhainsepati Sunakothi

Urban-to- .40 60 40 2.4 1.6

rural pop
ratio
Local’s .20 70 75 1.4 1.5
attitude
Access to .10 85 80 8.5 8.0
KTM
Access to .30 90 80 2.7 2.4
utilities
1.00 15.0 13.5
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Location Selection for a sugar factory
based on the tabulated information

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 Factor-Rating Example
Five Flags over Florida, a U.S. chain of 10 family-oriented theme
parks, has decided to expand overseas by opening its first park in
Europe. It wishes to select between France and Denmark.

Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to-
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0
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Insight:
By changing the points or weights slightly for those
factors about which there is some doubt, we can
analyze the sensitivity of the decision. For instance, we
can see that changing the scores for “labour availability
and attitude" by 10 points can change the decision. The
numbers used in factor weighting can be subjective and
the model's results are not "exact" even though this is a
quantitative approach.
Learning Exercise:
If the weight for "tax structure" drops to .20 and the
weight for "education and health” increases to .40, what
is the new result? [Answer: Denmark is now chosen,
with a 68.0 vs. a 67.5 for France.]
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Case
A business group has planned to establish a new
sugar factory in Nepal. They have made a feasibility
study that showed very good opportunity to invest
money in this sector. They have made series of
decisions regarding location, layout and facility
selection.

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 First and very difficult issue was location decision.
There were three main options for the group –
Nepalgunj, Biratnagar and Nawalparasi. Nepalgunj had
good access to raw materials, cheap labour and cheap
land. Biratnagar was good in terms of market demand
whereas Nawalparasi was good for transportation
access to all over the country and good access to the
raw materials. There were many other factors like local
tax, competitors threats, productive land of sugarcane
and friendly farmers’ group. After analysis, the business
group has decided to select the best available location.

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 The factory was to be in the large scale. The group
conducted market research and farmer survey to
know how many will be ready to start sugarcane
production. They have hired a mechanical engineer to
make an analytical study of Japanese and German
plants. Based on the available information, they have
decided to purchase a semi automated machine made
in Germany that had a continuous manufacturing
system.

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 Layout was another issue. The group had hired a
consultant to make a study about the effective layout
of the factory. Consultant had emphasized on easy
access to farmers and suppliers, good supervision from
management, maintenance department at control area,
canteen near the factory workers etc. Material
receiving system, storage and raw materials feeding
system were placed near the entry gate of the factory.
Management office, canteen, maintenance department,
marketing department, finished goods store section
were placed near the exit gate of the factory.
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 The business group was quite aware on the
interlinked decision regarding to location, capacity
and layout. Lastly they have planned to establish the
factory with suitable layout of the plant. Based on the
above information, supply your opinion regarding to
the following issues.

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 Questions: (Unit 5 and Unit 6)
Which city is the best location decision for the
business group in establishing new sugar factory?
State which process is appreciated for the production
system with justification.
Discuss an optimum layout for the above production
system with discussion of capacity issues.

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Center-of-Gravity Method
 Finds location of single distribution center
serving several destinations that
minimizes distribution costs
 Considers
 Location of existing destinations

 Example: Markets, retailers etc.

 Volume of goods shipped to those markets
 Shipping cost (or distance)
 Shipping cost/unit/mile is constant
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 Center-of-Gravity Method
 It is a mathematical technique used for finding the
location of a distribution centre that will minimize
distribution costs.
 Takes into account the location of markets, the volume of
goods shipped to those markets, and shipping costs in
finding the best location for a distribution center.
 Place existing locations on a coordinate grid
 Grid origin and scale is arbitrary
 Maintain relative distances
 Calculate X and Y coordinates for ‘center of gravity’
 Assumes cost is directly proportional to distance and
volume shipped
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Center-of-Gravity Method
∑dixQi
i
i
x - coordinate =
∑i Qi

∑diyQi
ii
y - coordinate =
∑i Qi
where dix = x-coordinate of
location i
diy = y-coordinate of
location i
Qi = Quantity of goods
5/15/2011
moved to or from location i
Prepared By: Sandeep Shrestha 45
Center-of-Gravity Method
Quain’s Discount Department Stores, a chain of four large Target-type outlets, has
store locations in - Chicago, Pittsburgh, New York, and Atlanta; they are currently
being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the
chain's first store. The firm wants to find some "central” location in which to build
a new warehouse.
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 –

60 –
Atlanta (60, 40)
30 –
| | | | | |
East-West
30 60 90 120 150
Arbitrary
–origin
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Center-of-Gravity Method
Number of Containers
Store Location Shipped per Month
Chicago (30, 120) 2,000
Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000

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Center-of-Gravity Method
Number of Containers
Store Location Shipped per Month
Chicago (30, 120) 2,000
Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000

For example, location 1 is Chicago and from table and figure,

we have: d1x=30, d1y= 120 and Q1 = 2,000
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
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Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 – + Center of gravity (66.7, 93.3)

60 –

30 – Atlanta (60, 40)

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin
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Insight:
By overlaying a U.S. map on this exhibit, we find this
location is near central Ohio. The firm may well wish to
consider Columbus, Ohio, or a nearby city as an
appropriate location. But it is important to have both
North-South and East-West interstate highways near the
city selected to make delivery times quicker.
Learning Experience:
The number of containers shipped per month to Atlanta
is expected to grow quickly to 3,000. How does this
change the center of gravity, and where should the new
warehouse be located?
[Answer: (65.7, 85.7), which is closer to Cincinnati, Ohio

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Transportation Model
 Finds amount to be shipped from several points of
supply to several points of demand
 Used primarily for industrial locations
 Solution will minimize total production and
shipping costs
 A special class of linear programming problems
– Objective: Minimize total production & shipping
costs
– Constraints
• Production capacity at source (factory)
• Demand requirement at destination
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Worldwide Distribution of
Volkswagens and Parts

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 Transportation Network

Project A $4 Plant W (Kinston)

(Greenville) 56 loads available
72 loads $16
required $8

Project B
(Fountain) $24 Plant X (Wilson)
102 loads 82 loads available
$8 required $8
$16
$16
Project C
(Ayden)
Plant Y (Bethel) $24 41 loads
77 loads available required

The problem of the Company is to schedule shipments from each plant to

each project in such a manner as to minimize the total transportation cost
within the constraints of plant capacities and project requirements.
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The problem in LP form:
Minimize
4WA + 8WB + 8WC + 16XA + 24XB + 16XC + 8YA + 16YB + 24YC
Subject to:
WA + WB + WC≤ 56 : Plant W
XA + XB + XC ≤ 82 : Plant X
YA + YB + YC ≤ 77 : Plant Y
WA + XA + YA = 72 : Project A
WB+ XB+ YB = 102 : Project B
WC+ XC+ YC = 41 : Project C
All variables ≥ 0
where, decision variables such as WA, XC, YB etc. represent the number of
truckloads from one plant to one project site.

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Presentation of the problem in a standard transportation tableau
:

To Plant
Project A Project B Project C
From capacity
WA 4 WB 8 WC 8
Plant W 56
x1 x2 x3
XA 16 XB 24 XC 16
Plant X 82
x4 x5 x6
YA 8 YB 16 YC 24
Plant Y 77
x7 x8 x9
Project 215
requirements 72 102 41 215

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Need for Facility Location Planning

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Break-even chart for operating one facility, two
facilities, and two facilities on double shifts

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