Facility Location

1
Facility Location

• Relevance of Facility Location Decisions.
• Types Causes of Facility Location.
• General Process for Facility Location.
• Trends and Future Strategies.
• Methods for Facility Location Selection.

2
Importance of Facility Location

• Facility Location decisions are part of the
  companys strategy. Infrequent but expensive.
• Reasons for the importance
• Facility Location requires large investment that
  can not be recovered.
• Facility Location decisions affect the
  competitive capacity of the company.
• All areas of the company are affected by Facility
  Location Operations, but also Business
  Development, Human Resources, Finance, etc.
• The facility location decisions affect not only
  costs but the companys income
• For a service business, market proximity is
  critical to determine the capacity to attract
  customers.
• For a manufacturing business, facility location
  affects product delivery time and level of
  customer service, which affects sales.
• Regarding costs, facility location affects a
  great variety of them
• Land costs.
• Labor costs.
• Raw materials.
• Transportation and distribution

3
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

4
Causes that originate Location decision problems

• An expanding market.
• It will require the addition of more capacity at
  a certain geographic point, either in an existent
  facility or in a new one.
• Introduction of new products or services.
• A contracting demand, or changes in the location
  of the demand.
• It may require the shut down and/or relocation of
  operations.
• The exhaustion of raw materials in a certain
  area.
• Example Extraction companies.
• Obsolescence of a manufacturing facility due to
  the appearance of new technologies.
• It means the creation of a new modern plant
  somewhere else.
• The pressure of the competence.
• To increase the level of service, it can force
  the company to increase capacity of certain
  plants or relocate some of them.
• Change in other resources, like labor conditions
  or subcontracted components, or change in the
  political or economic environment in a certain
  region.
• Mergers and acquisitions.
• Some facilities may appear as redundants, or bad
  located with respect to others.

5
Location Alternatives

• Expansion of an existent facility.
• Only possible if exists enough space.
• Attractive alternative when the current facility
  location is good enough for the company.
• Lower costs than other options
• Start a new facility in a new area.
• Sometimes is a more advantageous option than the
  previous one (if there are problems related to
  lose of focus on the companys objectives).
• Shut down of a facility and (or not) starting of
  a new one somewhere else.
• Moving production from one plant to other.

6
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

7
Issues in Facility Location

• Proximity to Customers
• Business Climate
• Total Costs
• Infraestructure
• Quality of Labor
• Suppliers
• Other Facilities
• Political Risks
• Government Barriers
• Trading Blocks
• Environmental Regulation
• Host Community
• Competitive Advantage

8
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

9
GLOBAL COMPETITION
Competitive STRATEGY
PHASE I Supply Chain Strategy
INTERNAL CONSTRAINTS Capital, growth
strategy, existing network
TARIFFS AND TAX INCENTIVES
PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact,
support required, flexibility
REGIONAL DEMAND Size, growth, homogeneity, local
specifications
PHASE II Regional Facility Configuration
COMPETITIVE ENVIRONMENT
POLITICAL, EXCHANGE RATE AND DEMAND RISK
PHASE III Desirable Sites
AVAILABLE INFRASTRUCTURE
PRODUCTION METHODS Skill needs, response time
PHASE IV Location Choices
FACTOR COSTS Labor, materials, site specific
LOGISTICS COSTS Transport, inventory, coordination
10
Levels of Decisions.
Market Potential Market Share Operating Cost
Market Region
Subregion
Transport Cost (RM) Taxes Raw material
costs Labor Cost and Availability
Access to market/materials Material Cost Labor
Cost and Availability Taxes Availability of
public services Availabilty of sites Community
amenities
Community
Access to transport Network Site
Characterics Taxes Availability of public
services Land and acquisition costs Construction
Costs
Sites
11
General Process for Facility Location

• Creation of a multifunctional team to perform the
  study.
• Preliminary analysis.
• Study of the companys strategies and the
  policies of the company to translate them into
  Facility Location requirements.
• Due to the big quantity of factors affecting
  Facility Location, the company should determine
  which is the criteria to evaluate the different
  alternatives (transportation needs, land,
  supplies, labor, infrastructures, services,
  environmental conditions).
• The multifunctional team must distinguish
  between Dominant factors (essential) Secondary
  factors (desirable).
• Search of Location Alternatives.
• Establishment of a group of location candidates.
• Evaluation of Alternatives (detailed analysis).
• Information gathering from each location to be
  measured against each of the factors considered.
• Selection of Facility Location.
• Through qualitative and quantitative analysis,
  the different alternatives will be compared
  against each other, to determine several valid
  locations.
• Objective Look for several acceptable locations,
  to let senior management to decide taking into
  account subjective factors.

12
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

13
Trends Future Strategies

• Most of the Facility Location factors vary with
  time
• The accelerated changes in the economic
  environment are impacting the frequency of
  Facility Location decisions.
• Changes in the economic environment
• International level competition among companies.
• Location in countries different than the origin
  of the company are a common situation for big
  companies.
• Appearance of new markets and unification of
  others.
• Increase of competition pressure.
• Logistics factors are more important and complex.
• Companies are reviewing their facility locations
  in order not to loose competitiveness.

14
Trends Future Strategies

• Changes in the economic environment
• Industry processes automation.
• Labor costs become less important countries with
  lower labor costs become less attractive.
• Labor qualification, flexibility and mobility
  become more important factors.
• However, labor costs are still a main factor in
  some industries and in certain manufacturing
  processes of others Relocation to Mexico,
  Taiwan, Singapore, etc.

15
Trends Future Strategies

• Changes in the economic environment
• Transportation and IT development.
• Helps in the internationalization of the
  operations higher geographical diversity in
  location decisions.
• Tendency to localize close to the markets
  emphasis in customer service, direct customer
  contact, fast development of new products, fast
  delivery
• Due to flexible technologies, companies have the
  possibility of starting up more plants at a
  smaller size.
• J.I.T. Systems.
• Some industries are forcing their suppliers and
  customers to locate their facilities in a close
  area to reduce transportation costs and supply at
  a higher frequency.

16
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

17
Locating service facilities

• Because of the variety of service firms and the
  relatively low cost of establishing a service
  facility compared to one for manufacturing, new
  service facilities are far more common than new
  factories and warehouses.
• Services typically have multiple sites to
  maintain close contact with customers. The
  location decision is closely tied to the market
  selection decision.
• Market affects the number of sites to be built
  and the size and characteristics of the sites.
• Whereas manufacturing location decisions are
  often made by minimizing costs, many service
  location decision techniques maximize the profit
  potential of various sites.

18
Cost vs Response TIme
Hi
Local FG
Mix
Regional FG
Local WIP
Cost
Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Low
Hi
Low
Response Time
19
Response time vs. Number of facilities
Response Time
Number of Facilities
20
Cost vs Number of Facilities
21
Topics

• Importance of Facility Location.
• Causes Types of Facility Location.
• Issues at Location
• General Process for Facility Location.
• Trends and Future Strategies.
• Locating Service Facilities
• Methods for Facility Location Selection.
• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.

22
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

23
Methods of Facility Location Selection

• Centroid Methods
• Factors Rating Analysis.
• Economic Analysis.
• Income independent upon location.
• Income dependent upon location.
• Transportation (Mathematical Programming
  Methods).
• Set Covering.
• No limitation of facilities.
• Limitation of facilities.

24
Factor-Rating Method

• Popular because a wide variety of factors can be
  included in the analysis
• Six steps in the method
• Develop a list of relevant factors called
  critical success factors
• Assign a weight to each factor
• Develop a scale for each factor
• Score each location for each factor
• Multiply score by weights for each factor for
  each location
• Recommend the location with the highest point
  score