FACILITY LOCATION

INTRODUCTION

Business systems utilize facilities like plant and machinery, warehouses etc., while performing the task of producing products and services a proper planning of these facilities would definitely reduce their cost of operation and maintenance. Plant location decisions are very important because they have direct bearing on factors like financial, employment and distribution patterns. In the long run, relocation may even benefit the organization. But, the relocation of the plant involves stoppage of production, and also cost for shifting the facilities to a new location.

In addition to these things, it will introduce some inconvenience in the normal functioning of the business. Hence at the time of starting any industry, one should generate several alternate sites for locating the plant. After a critical analysis, it is the best site to be selected for commissioning the plant. Location of warehouses and other facilities are also having direct bearing on the operational performance of organization.

FACTORS INFLUENCING PLANT LOCATION

1. Availability of land for present and future needs and cost of land and land Development and building etc.

2. Availability of inputs such as labor and raw material, etc.

3. Closeness to the market place

4. Stability of demand

5. Availability of communication facilities

6. Availability of necessary modes of transportation like road, rail, airport, and waterways.

7. Availability of infrastructural facilities such as power, water, financial institutions banks etc.

8. Disposal of waste and effluents and their impact on environment

9. Government support, grant, subsidy, tax structure

10. Availability of housing facilities and recreational facilities.

11. Demographic factors like population, trained man power, academic institutions, standard of living, income level, etc.

12. Security culture of the society

13. Fuel cost

Specific Factors: A multinational company, desiring to set up plant should consider the following aspects in addition to the normal factors:

1. Economic stability of the country and the concern of the country towards outside investments are to be considered

2. The success of operation of the factory depends upon the cultural factors, language and cultural differences which can present operating control and even policy problems. Units of measurement are also very important in international business.

3. Analysis must be based on the factors like wage rate, policy, duties, etc.,

4. The Company can set up joint ventures with any leading local giants that will solve many local problems.

Factors that affect Location Decisions

• Proximity to source of raw materials,

• Cost and availability of energy and utilities,

• Cost, availability, skill and productivity of labor,

• Government regulations at the federal, state, county and local levels,

• Taxes at the federal, state, county and local levels,

• Insurance,

• Construction costs and land price,

• Government and political stability,

• Exchange rate fluctuation,

• Export and import regulations, duties and tariffs,

• Transportation system,

• Technical expertise,

• Environmental regulations at the federal, state, county and local levels,

• Support services,

• Community services – schools, hospitals- recreation and so on,

• Weather,

• Proximity to customers,

• Business climate,

• Competition-related factors.

The supply distribution system

Logistics Management

Logistics management can be defined as the management of the transportation and distribution of goods.

Goods _

Raw materials

Subassemblies obtained from suppliers

Finished goods shipped from plants to warehouses or customers

Logistics management includes all distribution and transportation activities from suppliers through to customers. Logistics management is the management of a series of macro-level transportation and distribution activities with the main objective of delivering the right amount of material at the right place at the right time at the right cost using the right methods.

The decisions typically encountered in logistics management concern facility location, transportation and goods handling and storage. Logistics management problems can be classified into three categories:

1   1.  Location Problems:

Location Problems involve determining the location of one or more new facilities in one or more of several potential sites. The number of sites must at least equal the number of new facilities being located. The cost of locating each new facility at each of the potential sites is assumed to be unknown. It is the fixed cost of locating a new facility at a particular site plus the operating and transportation cost of serving customers from this facility-site combination.

2. Allocation Problems:

Allocation Problems assume that the number and location of facilities are known and attempt to determine how each customer is to be served. That is, given the demand for goods at each customer center, the production or supply capacities at each facility, and the cost of serving each customer from each facility, the allocation problem determined how much each facility is to supply to each customer center.

3. Location – Allocation Problems:

Location – Allocation Problems involve determining not only how much each customer is to receive from each facility but also the number of facilities along with their locations and capacities.

LOCATION STRATEGY AND ITS IMPORTANCE

The following events are quite common in any business venture:

• Establishment of a new venture

• Expansion of the existing business

• Significant change in existing demand, supply and marketing locations

• Significant change in the cost structure.

• Government policies

Because of these events, an organization will be keen in additional or alternate sites for its production activities. So the plant location becomes an important decision which in turn influences plant layout and facilities needed. Also, it influences capital investment and operating costs. For example, in steel industry, if we integrate the unit’s right from ore extraction to final steel formation in a nearby area, the transportation cost would be substantially reduced and also, the availability of supplies to the final stage of production in the integrated plant would be improved. This in turn, improves the productivity of the plant.

LOCATION EVALUATION METHOD

Various models are available which help to identify the ideal location. Some of the popular models are:

1.      Factor rating method

2.      Weighted factor rating method

3.      Load-distance method

4.      Centre of gravity method

5.      Break even analysis

1.      Factor Rating Method

The process of selecting a new facility location involves a series of following steps:

2.      Identify the important location factors.

3.      Rate each factor according to its relative importance, i.e., higher the ratings is indicative of prominent factor.

4.      Assign each location according to the merits of the location for each factor.

5.      Calculate the rating for each location by multiplying factor assigned to each location with basic factors considered.

6.      Find the sum of product calculated for each factor and select best location having highest total score.

ILLUSTRATION 1:
Let us assume that a new medical facility, Health-care, is to be located in Delhi. The location factors, factor rating and scores for two potential sites are shown in the following table. Which is the best location based on factor rating method?

Solution

The total score for location 2 is higher than that of location 1. Hence location 2, is the best choice.

1   2.    Weighted Factor Rating Method

In this method to merge quantitative and qualitative factors, factors are assigned weights based on relative importance and weightage score for each site using a preference matrix is calculated. The site with the highest weighted score is selected as the best choice.

ILLUSTRATION 2: Let us assume that a new medical facility, Health-care, is to be located in Delhi. The location factors, weights, and scores (1 = poor, 5 = excellent) for two potential sites are shown in the following table. What is the weighted score for these sites? Which is the best location?

SOLUTION: The weighted score for this particular site is calculated by multiplying each factor’s weight by its score and adding the results:

Weighed score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 × 5 = 75 + 100 + 75 + 15 + 50 = 315 Weighed score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15× 2 + 10 × 3 = 125 + 75 + 75 + 30 + 30 = 335

Location 2 is the best site based on total weighted scores.

1      3.      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 total weighted loads moving into and out of the facility. The distance between two points is expressed by assigning the points to grid coordinates on a map. An alternative approach is to use time rather than distance.

DISTANCE MEASURES
Suppose that a new warehouse is to be located to serve Delhi. It will receive inbound shipments from several suppliers, including one in Ghaziabad. If the new warehouse were located at Gurgaon, what would be the distance between the two facilities? If shipments travel by truck, the distance depends on the highway system and the specific route taken. Computer software is available for calculating the actual mileage between any two locations in the same county. However, for load-distance method, a rough calculation that is either Euclidean or rectilinear distance measure may be used. Euclidean distance is the straight-line distance, or shortest possible path, between two points.

Distance between point A and point B

The point A on the grid represents the supplier’s location in Ghaziabad, and the point B represents the possible warehouse location at Gurgaon. The distance between points A and B is the length of the hypotenuse of a right triangle, or

d_AB = Sqrt((X_A–X_B)²+(Y_A– Y_B)²)

where d_AB = distance between points A and B
X_A = x-coordinate of point A
Y_A = y-coordinate of point A
X_B= x-coordinate of point B
Y_B = y-coordinate of point B

Rectilinear distance measures distance between two points with a series of 90° turns as city blocks. Essentially, this distance is the sum of the two dashed lines representing the base and side of the triangle . The distance travelled in the x -direction is the absolute value of the difference in x-coordinates. Adding this result to the absolute value of the difference in the y -coordinates gives

D_AB = |X_A– X_B| + |Y_A– Y_B|

CALCULATING A LOAD-DISTANCE SCORE
Suppose that a firm planning a new location wants to select a site that minimizes the distances that loads, particularly the larger ones, must travel to and from the site. Depending on the industry, a load may be shipments from suppliers, between plants, or to customers, or it may be customers or employees travelling to or from the facility. The firm seeks to minimize its load- distance, generally by choosing a location so that large loads go short distances.

To calculate a load-distance for any potential location, we use either of the distance measures and simply multiply the loads flowing to and from the facility by the distances travelled. These loads may be expressed as tones or number of trips per week. This calls for a practical example to appreciate the relevance of the concept. Let us visit a new Health-care facility, once again.

4 Centre of Gravity
Centre of gravity is based primarily on cost considerations. This method can be used to assist managers in balancing cost and service objectives. The centre of gravity method takes into account the locations of plants and markets, the volume of goods moved, and transportation costs in arriving at the best location for a single intermediate warehouse.

The centre of gravity is defined to be the location that minimizes the weighted distance between the warehouse and its supply and distribution points, where the distance is weighted by the number of tones supplied or consumed. The first step in this procedure is to place the locations on a coordinate system. The origin of the coordinate system and scale used are arbitrary, just as long as the relative distances are correctly represented. This can be easily done by placing a grid over an ordinary map. The centre of gravity is determined by the formula.

C_X = ∑D_ix.W_i/∑W_i and C_Y = ∑D_iy.W_i/∑W_i

where C_x = x-coordinate of the centre of gravity
C_y = y-coordinate of the centre of gravity
D_ix = x-coordinate of location i
D_iy = y-coordinate of location i

5 Break Even Analysis
Break even analysis implies that at some point in the operations, total revenue equals total cost. Break even analysis is concerned with finding the point at which revenues and costs agree exactly. It is called ‘Break-even Point’. The Fig. 2.3 portrays the Break Even Chart: Break even point is the volume of output at which neither a profit is made nor a loss is incurred. The Break Even Point (BEP) in units can be calculated by using the relation:

Plotting the break even chart for each location can make economic comparisons of locations. This will be helpful in identifying the range of production volume over which location can be selected.

Classification of Facility Location Problems

Facility Location problems can be classified as:

• Single-Facility Location Problems

Single-Facility location problems deal with the optimal determination of the location of a single facility.

• Multifacility Location Problems

Multifacility location problems deal with the simultaneous location determination for more than one facility.

Generally, single-facility location problems are location problems, but multifacility location problems can be location as well as location allocation problems.

Another classification of location problems is based on whether the set of possible locations for a facility is finite or infinite

• Continuous Space Location Problem

If a facility can be located anywhere within the confines of a geographic area, then the number of possible locations is infinite, and such a problem is called a Continuous Space Location Problem.

• Discrete Space Location Problem

Discrete Space Location Problems have a finite feasible set of sites in which to locate a facility. Because facilities can be located anywhere in a two-dimensional space, sometimes the optimal location provided by the continuous space model may be infeasible. For example, a continuous space model may locate a manufacturing facility on a lake

Facility Location Problem

The facility location problem consists of selecting a site for new facilities that will minimize the production and distribution cost of products and/or services to potential customers.

Reasons for considering Location Problem

• Significant changes in the level of demand,

• Significant changes in the geographical distribution of demand,

• Changes in the cost or quality requirements of critical production inputs (labor, raw materials, energy  etc,)

• Significant increases in the real-estate value of existing or adjacent sites or in their taxation,

• Need to change as a result of fire or flood for reasons of prestige or improved public relations.

Alternatives to New Location

• The increase of existing capacity by additional shifts or overtime, especially for capital-intensive systems.

• The use of seasonal inventories to reduce the need for maintaining capacity for peak demand.

• The use of subcontractors.

• The purchase of new equipment for the present location.

Important Factors in Location Decisions

• Production inputs (raw materials, human resources, etc…),

• Process techniques,

• Environmental factors

o The availability and reliability of supporting systems

o Social and cultural conditions

o Legal and political considerations.