FACILITY LOCATION

Learning Objectives
• Understand the importance of locating facilities.
• Understand the causes leading to location decisions.
• Identify the factors that affect location decisions.
• Explain the factor rating analysis
X method
R and the forced
decision matrix.
• Choice of location based on economic analysis – break-
even analysis and transportation model.
• Understand load distance methods for solving location
problems.
 Importance

• Strategic implications
• Determines production technology and
cost structure
• Large capital outlays that are not easily
reversible
• Provide timely and convenient service to
the customers
 Factors

• Market Factors - Proximity to customers and

suppliers (raw materials).
• Availability of Labour
• Availability of Infrastructure
– Communications and Transport
– Services
– Amenities
• Land and Climate
 Factors
• Safety and Environmental Considerations
• Regional Considerations
• Business Environment
– Political stability
– Economic state
– Foreign exchange rates, currency repatriation regulations,
import export barriers, and government incentives become
major factors when considering location of facilities globally.
– Socio-cultural factors
• Integration
 Methods – Factor Rating Analysis

• Let us take the example of setting up a ready

made garments store specialising in casual
cotton clothing at a shopping mall. Four existing
malls A, B, C and D have been short-listed. The
factors that were considered important and
critical are proximity of a college (C), income(I),
availability of parking space(PS), quality and
number of stores already in the mall(QN),
proximity of other shopping complexes in the
area(P).
 Methods – Factor Rating Analysis
Loc Attribute C I PS QN P Total Rank
Weightage 5/15 4/15 2/15 3/15 1/15
A Score 2 1 3 0 1
Wtd Score 10/15 4/15 6/15 0/15 1/15 21/15 II
B Score 0 2 1 2 3
Wtd Score 0/15 8/15 2/15 6/15 3/15 19/15 III

C Score 2 3 2 3 2
Wtd Score 10/15 12/15 4/15 9/15 2/15 37/15 I

D Score 2 0 0 1 0
Wtd Score 10/15 0/15 0/15 3/15 0/15 13/15 IV
 Break-even Analysis
A sports goods firm intends to set up a unit to produce
tennis rackets. It is considering sites A, B and C for the
purpose. Cost data for the sites is given below.
Site Fixed Cost Variable Cost
A Rs 50000 Rs 135
B Rs 100000 Rs 110
C Rs 120000 Rs 120

If the selling price is Rs 300/- per racket and the annual

demand is 3000, Which site would you recommend ?
 Break-even Analysis
Revenue at all sites is the same = 300 X 3000 = 900000

Location Fixed Cost Variable Total Cost Profit

Cost
A 50000 405000 455000 445000

B 100000 330000 430000 470000

C 120000 360000 480000 420000

Locate at Site B
 Break-even Analysis
• At what volume of production would location A become viable?
Break Even Analysis

700000

600000

500000
Total Cost in Rs

400000

300000

200000

100000

0
0 1000 2000 3000 4000 5000
Production Volume

Location A Location B
 Transportation Model
• Pre-mixed concrete is supplied to three project sites X, Y and Z from two
existing facilities located at A and B.

X Y Z Capacity

A 2 3 2 300
B 1 1 3 400
C or 3 2 1 200
D 1 3 4 200
Requirement 200 300 400
 Load Distance Methods

• Centroid Method
– The center of gravity method is used for
locating single facilities that considers existing
facilities, the distances between them, and the
volumes of goods to be shipped between them.
– This methodology involves formulas used to
compute the coordinates of the two-
dimensional point that meets the distance and
volume criteria stated above.
 Load Distance Methods

x=
∑dW
=y
ix i ∑d W iy i

∑W ∑ i Wi
where x is the X coordinate of the centroid
y is the Y coordinate of the centroid
dix is the X coordinate of the ith location
diy is the Y coordinate of the ith location

Wi is the weight or load moved from or to the ith location.

 Example
A company has five existing production facilities. The company is now
centralising its purchase system and establishing a warehouse which will supply
materials to the five facilities. Where should the warehouse be located?

X Coordinate Y Coordinate Load

A 25 40 450
B 350 400 350
C 325 75 1500
D 400 150 250
E 450 350 450
 Solution
25 × 450 + 350 × 350 + 325 × 1500 + 400 × 250 + 450 × 450
x= = 307.9
450 + 350 + 1500 + 250 + 450
40 × 450 + 400 × 350 + 75 × 1500 + 150× 250+ 350× 450
y= = 155.1
450 + 350 + 1500 + 250 + 450
Grid Map for Example 9.4

450
400 350,400
B
350 450,350
300
E
250
200
150 308,155 400,150
100 F D
325,75
50 25,40
0 A C
0 100 200 300 400 500
 Median Load Method
• Similar to centroid method
• Identify the median load.
• Find the X coordinates of the existing
facility that sends or receives the median
load.
• Find the Y coordinates of the existing
facility that sends or receives the median
load.
• Locate new plant at X,Y
 Example
X Coordinate Y Coordinate Load

A 25 40 450
B 350 400 350
C 325 75 1500
D 400 150 250
E 450 350 450

Total Loads 3000. Median Load between 1500 and 1501.

 Example
• Find the X Coordinate of the Median Load.
Consider the movement of loads in the X
direction. Beginning at the origin and moving
along the X axis consider the loads moved to
each location. From location A 450 loads are
moved, that is, loads 0‑450 are moved from A
(X= 25). The next location along the X axis is C.
From C 1500 loads are moved, that is loads
451-1950 are moved (X=325). Since the median
load falls in the interval 451-1951, the X
coordinate of the new warehouse is X=325.
 Example
• Find the Y Coordinate of the Median Load.
Consider the movement of loads in the Y
direction. Beginning at the origin and moving
along the Y axis consider the loads moved to
each location. From location A 450 loads are
moved, that is, loads 0‑450 are moved from A
(Y= 40). The next location along the Y axis is C.
From C 1500 loads are moved, that is loads
451-1950 are moved (Y=75). Since the median
load falls in the interval 451-1951, the Y
coordinate of the new warehouse is Y=75.
• Locate Warehouse at (325,75).