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MODULE 7 – LOCATING FACILITIES
INTRODUCTION
Facility location is the process of determining geographic sites for a firm’s operations, which could include a manufacturing plant, a distribution center, and a customer service center. Distribution center is a warehouse or a stocking point where goods are stored for subsequent distribution to manufacturers, wholesalers, retailers, and customers. Location choices can be critically important for firms, and have a profound impact on its supply chains. For example, they can affect the supplier relationship process.
Analyzing location patterns to discover a firm’s underlying strategy is fascinating. Recognizing the strategic impact location decisions have on implementing a firm’s strategy and supply chain design, we first consider the qualitative factors that influence location choices and their implications across the organization. Subsequently we examine an important trend in location patterns: the use of geographical information systems (GIS) to identify market segments and how serving each segment can profitably affect the firm’s location decisions.
LEARNING OUTCOMES:
After reading this module, the learner should be able to:
- Describe the dominant factors affecting the location decisions.
- Apply the load distance method.
- Understand the center of gravity in locating facilities.
- Understand break even and cost analysis in location decisions.
TIME:
The time allotted for this module is three hours.
LEARNER DESCRIPTION
The participants in this module are 3rd^ Year BSA students.
MODULE CONTENTS:
Location decisions affect processes and departments throughout the organization. Relocating all or part of an organization can significantly affect the attitudes of the firm’s
workforce and the organization’s ability to operate effectively across departmental lines. Location also has implications for a firm’s human resources department, which must be attuned to the firm’s hiring and training needs. Locating new facilities or relocating existing facilities is usually costly; therefore, these decisions must be carefully evaluated by the organization’s accounting and finance departments.
LESSON 7.1: Factors Affecting Location Decisions
Managers of both service and manufacturing organizations must weigh many factors when assessing the desirability of particular locations, including their proximity to customers and suppliers, labor costs, and transportation costs.
Dominant Factors in Manufacturing
The following seven groups of factors dominate the decisions firms, including BMW, make about the location of new manufacturing plants or distribution centers. Often there is a trade-off among factors.
- Favorable Labor Climate - A favorable labor climate may well be the most important factor for labor-intensive firms in industries such as textiles, furniture, and consumer electronics. Labor climate is a function of wage rates, training requirements, attitudes toward work, worker productivity, and union strength.
- Proximity to Markets - After determining where the demand for services and goods is greatest, management must select a location for the facility that will supply that demand. Locating near markets is particularly important when the final goods are bulky or heavy and outbound transportation rates are high.
- Impact on Environment - As the focus on sustainability has increased, firms are looking to recognize the impact of the location decisions on the environment. Along with minimizing the carbon footprint of the new facility and its accompanying facilities in the supply chain, consideration must also be given to reducing overall energy costs.
- Quality of Life - Good schools, recreational facilities, cultural events, and an attractive lifestyle contribute to quality of life..
- Proximity to Suppliers and Resources - Firms dependent on inputs of bulky, perishable, or heavy raw materials emphasize proximity to their suppliers and resources. In such cases, inbound transportation costs become a dominant factor, encouraging such firms to locate facilities near suppliers.
- Proximity to the Parent Company’s Facilities - In many companies, plants supply parts to other facilities or rely on other facilities for management and staff support. These ties require frequent communication and coordination, which can become more difficult as distance increases.
- Utilities, Taxes, and Real Estate Costs - Other location decision factors include utility costs (telephone, energy, and water), local and state taxes, financing incentives offered by local or state governments, relocation costs, and land costs.
three functionalities of data storage, map displays, and modeling are critical parts of an intelligent GIS, and are used to a varying extent in all GIS applications.
A GIS stores information in several databases that can be naturally linked to places, such as customer sales and locations, or a census tract, or the percentage of residents in the tract that make a certain amount of money a year. The demographics of an area include the number of people in the metropolitan statistical area, city, or ZIP code; average income; number of families with children; and so forth. These demographics may all be important variables in the decision of how best to reach the target market. Similarly, the road system, including bridges and highways, location of nearby airports and seaports, and the terrain (mountains, forests, lakes, and so forth), play an important role in facility location decisions.
Comparing Several Sites
A systematic selection process begins after perception or evidence indicates that opening a retail outlet, warehouse, office, or plant in a new location will improve performance. The process of selecting a new facility location involves a series of steps.
- Identify the important location factors and categorize them as dominant or secondary.
- Consider alternative regions; then narrow the choices to alternative communities and finally to specific sites.
- Collect data on the alternatives from location consultants, state development agencies, city and county planning departments, chambers of commerce, land developers, electric power companies, banks, and onsite visits. Some of these data and information may also be contained inside the GIS.
- Analyze the data collected, beginning with the quantitative factors—factors that can be measured in dollars, such as annual transportation costs or taxes. The quantitative factors can also be measured in terms other than dollars, such as driving time and miles.
- Bring the qualitative factors pertaining to each site into the evaluation. A qualitative factor is one that cannot be evaluated in dollar terms, such as community attitudes, environmental factors, or quality of life. To merge quantitative and qualitative factors, some managers review the expected performance of each factor, while others assign each factor a weight of relative importance and calculate a weighted score for each site, using a preference matrix.
Applying the Load–Distance Method
The load–distance method is a mathematical model used to evaluate locations based on proximity factors. The objective is to select a location that minimizes the sum of the loads multiplied by the distance the load travels. Time may be used instead of distance if so desired.
Depending on the industry, a load may be shipments from suppliers, shipments between plants or to customers, or it may be customers or employees traveling to and from the facility. The firm seeks to minimize its load–distance (ld) score, generally by choosing a location that ensures loads go short distances. To calculate the ld score for any potential location, we use the actual distance between any two points using a GIS system and simply multiply the loads
flowing to and from the facility by the distances traveled. Travel time, actual miles, or rectilinear distances when using a grid approach are all appropriate measures for distance. The formula for the ld score is
These loads may be expressed as the number of potential customers needing physical presence for a service facility; loads may be tons or number of trips per week for a manufacturing facility. The score is the sum of these load–distance products. By selecting a new location based on ld scores, customer service is improved or transportation costs reduced. The goal is to find one acceptable facility location that minimizes the score, where the location is defined by its x coordinate and y coordinate or the longitude and the latitude.
Center of Gravity
Center of gravity is a good starting point to evaluate locations in the target area using the load–distance method. The first step is to determine the x and y coordinates of different locations either in the form of the longitude and latitude of the locations, or by creating an (x, y) grid.
This location generally is not the optimal one for the distance measures, but it still is an excellent starting point. The load–distance scores for locations in its vicinity can be calculated until the solution is near optimal.
Using Break-Even Analysis
Break-even analysis can help a manager compare location alternatives on the basis of quantitative factors that can be expressed in terms of total cost. It is particularly useful when the manager wants to define the ranges over which each alternative is best. The basic steps for graphic and algebraic solutions are as follows:
- Determine the variable costs and fixed costs for each site. Recall that variable costs are the portion of the total cost that varies directly with the volume of output. Recall that fixed costs are the portion of the total cost that remains constant regardless of output levels.
- Plot the total cost lines—the sum of variable and fixed costs—for all the sites on a single graph
- Identify the approximate ranges for which each location has the lowest cost
- Solve algebraically for the break-even points over the relevant ranges.
Watch a Youtube Videos by Joshua Emmanuel about the ―Break-even Point‖ at
o https://www.youtube.com/watch?v=XhbBZC77DSw
o https://www.youtube.com/watch?v=OyEcQ_mQOlE
Watch a Youtube Videos by Dan Scollon about the ―GIS Mapping Your World‖ at
o https://www.youtube.com/watch?v=6AlH5TvFoLw
TEST YOUR KNOWLEDGE:
MODULE REFERENCES:
Stevenson, William (2018), Project Management; the managerial process 7th^ ed. Stevenson, William (2018), Operations Management 13th^ Edition Zani, Rosliza (2018), Operation management Krajewski, Lee J. (2016) Operation management: sustainability and supply chain management 12 th^ ed. Verma, A.P. (2016). Industrial Engineering and Management
