Methods of facility location selection
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This document discusses various industries and reasons for why companies within those industries tend to cluster in certain locations. It provides examples of winemakers and software firms clustering near natural resources and talent. Other industries mentioned include theme parks clustering in Orlando for its tourism, and computer hardware manufacturers clustering in Asia for its skilled workforce. The document also discusses factors companies consider for their locations, such as labor costs, taxes, and education levels.
Methods of facility location selection
- 1. CLUSTERING OF COMPANIES Industry Locations Reason for clustering Wine making Napa Valley (US) Bordeaux region (France) Natural resources of land and climate Software firms Silicon Valley, Boston, Bangalore (India) Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby Race car builders Huntington/North Hampton region (England) Critical mass of talent and information Table 8.3www.StudsPlanet.com
- 2. CLUSTERING OF COMPANIES Industry Locations Reason for clustering Theme parks (Disney World, Universal Studios) Orlando, Florida A hot spot for entertainment, warm weather, tourists, and inexpensive labor Electronics firms Northern Mexico NAFTA, duty free export to US Computer hardware manufacturers Singapore, Taiwan High technological penetration rate and per capita GDP, skilled/educated workforce with large pool of engineers Table 8.3www.StudsPlanet.com
- 3. CLUSTERING OF COMPANIES Industry Locations Reason for clustering Fast food chains (Wendy’s, McDonald’s, Burger King, and Pizza Hut) Sites within 1 mile of each other Stimulate food sales, high traffic flows General aviation aircraft (Cessna, Learjet, Boeing) Wichita, Kansas Mass of aviation skills Orthopedic devices Warsaw, Indiana Ready supply of skilled workers, strong U.S. market Table 8.3www.StudsPlanet.com
- 4. FACTOR-RATING METHOD Popular because a wide variety of factors can be included in the analysis Six steps in the method 1. Develop a list of relevant factors called critical success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score www.StudsPlanet.com
- 5. FACTOR-RATING EXAMPLE 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 Table 8.4 www.StudsPlanet.com
- 6. LOCATIONAL BREAK-EVEN ANALYSIS Method of cost-volume analysis used for industrial locations Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost for expected production volume www.StudsPlanet.com
- 7. LOCATIONAL BREAK-EVEN ANALYSIS EXAMPLE Three locations: Akron $30,000 $75 $180,000 Bowling Green $60,000 $45 $150,000 Chicago $110,000 $25 $160,000 Fixed Variable Total City Cost Cost Cost Total Cost = Fixed Cost + (Variable Cost x Volume) Selling price = $120 Expected volume = 2,000 units www.StudsPlanet.com
- 8. LOCATIONAL BREAK-EVEN ANALYSIS EXAMPLE – $180,000 – – $160,000 – $150,000 – – $130,000 – – $110,000 – – – $80,000 – – $60,000 – – – $30,000 – – $10,000 – – Annualcost | | | | | | | 0 500 1,000 1,500 2,000 2,500 3,000 Volume Akron lowest cost Bowling Green lowest cost Chicago lowest cost Figure 8.2 www.StudsPlanet.com
- 9. CENTER-OF-GRAVITY METHOD Finds location of distribution center that minimizes distribution costs Considers Location of markets Volume of goods shipped to those markets Shipping cost (or distance) www.StudsPlanet.com
- 10. CENTER-OF-GRAVITY METHOD 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 www.StudsPlanet.com
- 11. CENTER-OF-GRAVITY METHOD x - coordinate = ∑dixQi ∑Qi i i ∑diyQi ∑Qi i i y - coordinate = where dix = x-coordinate of location i diy = y-coordinate of location i Qi = Quantity of goods moved to or from location i www.StudsPlanet.com
- 12. CENTER-OF-GRAVITY METHOD North-South East-West 120 – 90 – 60 – 30 – –| | | | | | 30 60 90 120 150 Arbitrary origin Chicago (30, 120) New York (130, 130) Pittsburgh (90, 110) Atlanta (60, 40) Figure 8.3 www.StudsPlanet.com
- 13. 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 x-coordinate = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) 2000 + 1000 + 1000 + 2000 = 66.7 y-coordinate = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) 2000 + 1000 + 1000 + 2000 = 93.3 www.StudsPlanet.com
- 14. CENTER-OF-GRAVITY METHOD North-South East-West 120 – 90 – 60 – 30 – –| | | | | | 30 60 90 120 150 Arbitrary origin Chicago (30, 120) New York (130, 130) Pittsburgh (90, 110) Atlanta (60, 40) Center of gravity (66.7, 93.3) + Figure 8.3 www.StudsPlanet.com
- 15. TRANSPORTATION MODEL Finds amount to be shipped from several points of supply to several points of demand Solution will minimize total production and shipping costs A special class of linear programming problems www.StudsPlanet.com
- 16. WORLDWIDE DISTRIBUTION OF VOLKSWAGENS AND PARTS Figure 8.4 www.StudsPlanet.com
- 17. SERVICE LOCATION STRATEGY 1. Purchasing power of customer-drawing area 2. Service and image compatibility with demographics of the customer-drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firm’s and competitors’ locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management www.StudsPlanet.com
- 18. LOCATION STRATEGIES Service/Retail/Professional Location Goods-Producing Location Revenue Focus Cost Focus Volume/revenue Drawing area; purchasing power Competition; advertising/pricing Physical quality Parking/access; security/lighting; appearance/image Cost determinants Rent Management caliber Operations policies (hours, wage rates) Tangible costs Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, and so on Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government Table 8.6 www.StudsPlanet.com
- 19. LOCATION STRATEGIES Service/Retail/Professional Location Goods-Producing Location Techniques Techniques Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of area Center-of-gravity method Geographic information systems Transportation method Factor-rating method Locational break-even analysis Crossover charts Table 8.6 www.StudsPlanet.com
- 20. LOCATION STRATEGIES Service/Retail/Professional Location Goods-Producing Location Assumptions Assumptions Location is a major determinant of revenue High customer-contact issues are critical Costs are relatively constant for a given area; therefore, the revenue function is critical Location is a major determinant of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on the identifiable costs Intangible costs can be evaluated Table 8.6 www.StudsPlanet.com
- 21. HOW HOTEL CHAINS SELECT SITES Location is a strategically important decision in the hospitality industry La Quinta started with 35 independent variables and worked to refine a regression model to predict profitability The final model had only four variables Price of the inn Median income levels State population per inn Location of nearby colleges r2 = .51 51% of the profitability is predicted by just these four variables! www.StudsPlanet.com
- 22. THE CALL CENTER INDUSTRY Requires neither face-to-face contact nor movement of materials Has very broad location options Traditional variables are no longer relevant Cost and availability of labor may drive location decisions www.StudsPlanet.com
- 23. GEOGRAPHIC INFORMATION SYSTEMS (GIS) Important tool to help in location analysis Enables more complex demographic analysis Available data bases include Detailed census data Detailed maps Utilities Geographic features Locations of major services www.StudsPlanet.com