Facilities Planning (ID: 8054212-3)

3- Facilities Location

The Week of 06/02/2022

Dr. Hussain Abualkhair
College of Engineering – Industrial Engineering Program
Facilities Planning Hierarchy

Facility Systems
Design
Facilities
Location
(Macro)
Facilities Layout
Planning Design
Facilities
Design
(Micro) Handling
Systems
Design

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Importance of Location
▪ Up to 25% of the product’s selling cost
▪ Once a company commits to a location, many costs are fixed and difficult to change
▪ Energy
▪ Labor
▪ Location depends on the type of business
• Manufacturing – minimizing cost
• Retail and professional services – maximizing revenue
• Warehouse – cost and speed of delivery

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
In General - Location Decisions

▪ Long-term decisions
▪ Difficult to reverse
▪ Affect fixed & variable costs
• Transportation cost
o As much as 25% of product price
• Other costs: Taxes, wages, rent etc.
▪ Objective: Maximize benefit of location to firm

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Options

▪ Expand the existing facility instead of moving

▪ Maintain current sites while adding another facility
▪ Closing the existing facility and moving to another

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Factors that Affect Location Decisions

▪ Country Decisions
• Government rules, attitudes, stability, incentives
• Cultural and economic issues
• Location of markets
• Labor availability, attitudes, productivity, costs
• Availability of supplies, communications, energy
• Exchange rates

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Factors that Affect Location Decisions
▪ Region/Community Decisions
• Corporate desires
• Attractiveness of region (culture, taxes, climate, etc...)
• Labor availability, costs, attitudes towards unions
• Cost and availability of utilities
• Environmental regulations of state and town
• Government incentives
• Proximity to raw materials and customers
• Land/construction costs

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Factors that Affect Location Decisions

▪ Site Decisions
• Site size and cost
• Air, rail, waterway systems
• Zoning restrictions
• Nearness of services/supplies needed
• Environmental impact issues

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Decision Example - BMW

▪ In 1992, BMW decided to build its first major

manufacturing plant outside Germany in Spartanburg,
South Carolina.

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Decision Example – BMW
1- Country Decision Factors
▪ Market location
• U.S. is world’s largest luxury car market
• Growing
▪ Labor
• Lower manufacturing labor costs
o $17/hr. (U.S.) vs. $27 (Germany)
• Higher labor productivity
o 11 holidays (U.S.) vs. 31 (Germany)
▪ Other
• Lower shipping cost ($2,500/car less)
• New plant & equipment would increase productivity (lower cost/car $2,000-3000)

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Decision Example – BMW
2- Region/Community Decision Factors
▪ Labor
• Lower wages in South Carolina (SC)
o About $17,000/yr (SC) vs. $27,051/yr (US)
• Based on 1993 metropolitan averages for all workers

▪ Government incentives
• $135 million in state & local tax breaks
• Free-trade zone from airport to plant
o No duties on imported components or on exported cars

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Organizations That Need To Be Close to
Markets
▪ Government agencies
• Police & fire departments
• Post Office
▪ Retail Sales and Service
• Fast food restaurants, supermarkets, gas stations
• Drug stores, shopping malls
• Bakeries
▪ Services
• Doctors, lawyers, accountants, barbers
• Banks, auto repair, motels

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Current Ranking of the Business
Environment (2020)

▪ https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Current Ranking of the Business
Environment (2020)

▪ https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Labor Productivity

▪ Low wage rates often heavily influence location choices

▪ What about productivity?
▪ Example:
• Company Q pays $70 per day with 60 units produced per day in Texas. The
Mexican plant pays $25 per day with a productivity of 20 units per day: ??
o Labor cost per day/Productivity (units per day) = Cost per unit
Lesson: Employees with poor training, poor education, or poor work
habits may not be a good buy even at low wages.

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Labor Productivity - Example:
▪ Company X pays SR500 per day with 50 units produced per day in Jeddah.
The Rabigh plant pays SR200 per day with a productivity of 25 units per day:
Labor cost per day/Productivity (units per day) = Cost per unit
• Case 1: Jeddah Plant
• 500 SR per day/50 units per day = 500/50= 10 SR per unit
• Case 2: Rabigh Plant
• 300 SR per day/25 units per day = 300/25 = 12 SR per unit
Lesson 2: Employees at low wages may not be a good buy

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Proximity To Markets

▪ Service organizations (drug stores, restaurants, post

offices) find proximity to market is the primary location
factor
▪ Manufacturing – useful to be close to customers when
transporting finished goods is expensive or difficult

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Proximity To Suppliers

▪ Firms locate near their raw materials and suppliers

because:
• Perishability
• Transportation costs
• Bulk

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Proximity To Competitors

▪ Clustering – the location of competing companies near

each other, often because of a critical mass of information,
talent, ventire capital, or natural resources

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Evaluation Methods

▪ Factor-rating method
▪ Locational break-even analysis
▪ Center of gravity method
▪ Transportation model

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Factor-Rating Method

▪ Most widely used location technique

▪ Useful for service & industrial locations
▪ Rates locations using factors
• Intangible (qualitative) factors
o Example: Education quality, labor skills
• Tangible (quantitative) factors
o Example: Short-run & long-run costs

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Factors Affecting Location Selection

▪ Labor costs (including wages, unionization, productivity)

▪ Labor availability (including attitudes, age, distribution, and skills)
▪ Proximity to raw materials and suppliers
▪ Proximity to markets
▪ State and local government fiscal policies (including incentives, taxes,
unemployment compensation)
▪ Utilities (including gas, electric, water, and their costs)

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Factors Affecting Location Selection (cont.)

▪ Site costs (including land, expansion, parking, drainage)

▪ Transportation availability (including rail, air, water, and interstate roads)
▪ Quality-of-life issues (including all levels of education, cost of living, health
care, sports, cultural activities, transportation, housing, entertainment,
religious facilities)
▪ Foreign exchange Including rates and stability
▪ Quality of government (including stability, honesty, attitudes toward new
business - whether overseas or local)

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Steps in Factor Rating Method

▪ State relevant factors in terms of “max” or “min”

▪ Assign weights to each factor (should add to 100%)
▪ Assign rating to each factor (1-5) (1=poor, 5=excellent)
▪ Multiply scores by weights for each factor & total
▪ Calculate percent of total
▪ Compare top 2 alternatives (using percent as a basis of
comparison)
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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Steps in Factor Rating Method
Alternative A Alternative B
Factor Weight Rating Score Rating Score
(%) (Out of 5) (Out of 5)

Min. Operating 20 4 80 3 60
Cost

Max. Flexibility 30 3 90 2 60

Max. Space 10 3 30 5 50
utilization
Min. Payback 40 1 40 4 160
period
Total 240 330
Percent 240/500 = 330/500 =
0.5 0.66

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Locational Break-Even Analysis

▪ Method of cost-volume analysis used for industrial locations

▪ Steps
• Determine fixed & variable costs for each location
• Plot total cost for each location
• Select location with lowest total cost for expected production volume

o Must be above break-even

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Locational Break-Even Analysis Example

▪ You’re an analyst for AC Delco. You’re considering a new

manufacturing plant in Akron, Bowling Green, or Chicago.
▪ Fixed costs per year are $30k, $60k, & $110k respectively.
▪ Variable costs per case are $75, $45, & $25 respectively.
▪ The price per case is $120.
▪ What is the best location for an expected volume of 2,000
cases per year?
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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Locational Break-Even Analysis Example

▪ Akron:
• Total cost = $30,000 + $75(2000) = $180,000
▪ Bowling Green:
• Total Cost = $60,000 + $45(2000) = $150,000
▪ Chicago:
• Total Cost = $110,000 + $25(2000) = $160,000
▪ With an expected volume of 2000 units per year, Bowling Green provides the lowest
cost location. The expected profit is:
▪ Total Revenue – Total Cost = $120(2000) - $150,000 = $90,000 per year

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Locational Break-Even Analysis Example

▪ The crossover point for Akron and Bowling Green:

▪ 30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
X = 1,000
▪ And the crossover point for Bowling Green and Chicago: 60,000 + 45(x) = 110,000 + 25(x)
20(x) = 50,000
X = 2,500
▪ Thus, for a volume of less than 1,000, Akron would be preferred, and for a volume greater than
2,500, Chicago would yield the greatest profit.

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Locational Break-Even Analysis Example

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Center of Gravity Method

▪ Finds location of single distribution center serving several destinations

▪ Used primarily for services
▪ Considers:
• Location of existing destinations
o Example: Markets, retailers, etc.
• Volume to be shipped
• Shipping distance (or cost)
o Shipping cost/unit/mile is constant

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Center of Gravity Method

▪ Place existing locations on a coordinate grid

• Grid has arbitrary origin & scale
• Maintains relative distances
▪ Calculate X & Y coordinates for ‘center of gravity’
• Gives location of distribution center
• Minimizes transportation cost

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Center of Gravity Method Formulas

åd V
ix i
Cy =
åd V
iy i

åV
Cx =
åV i i

Cx = X coordinate of center of gravity

Cy = X coordinate of center of gravity
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith location

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Center of Gravity Method - Example
▪ Consider the case of Alpha’s discount Department stores, a chain of four large K-Mart
type outlets. The firm’s store locations are in Chicago, Pittsburgh, New York, and
Atlanta; they are currently being supplied out of an old and inadequate warehouse in
Pittsburgh, the site of the chain’s first store.
Store Location Number of containers shipped pre month

Chicago 2000

Pittsburgh 1000

New York 1000

Atlanta 2000

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Map of USA

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Center of Gravity Method - Example
Chicago (30,120)
New York (130,130)
120
Pittsburgh ( 90,110)

90
Center of gr avity (66.7, 93.3)

60

30 Atlanta (60,40)

30 60 90 120 150
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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Center of Gravity Method - Example
X-coordinate of the center of gravity:
= (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 2000
= 400,000/6000 =66.7
Y-coordinate of the center of gravity:
= (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 2000
= 560,000/6000 =93.3

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Transportation Model

▪ Finds amount to be shipped from several sources to several

destinations
▪ Used primarily for industrial locations
▪ Type of linear programming model
• Objective: Minimize total production & shipping costs
• Constraints:
o Production capacity at source (factory)
o Demand requirement at destination

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Components of Volume and Revenue for a
Service Firm
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 competitor’s locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm 8. Quality of management

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Strategies – Service vs. Industrial
Service/Retail/Professional Revenue 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)

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Strategies – Service vs. Industrial
Industrial Revenue Focus

▪ Tangible costs
• Transportation cost of raw materials
• Shipment cost of finished goods
• Energy and utility cost; labor; raw material; taxes, etc.
▪ Intangible and future costs
• Attitude toward union
• Quality of life
• Education expenditures by state
• Quality of state and local government

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Strategies – Service vs. Industrial
Service/Retail/Professional Techniques

▪ Correlation analysis to determine importance of factors for a particular type of

operation
▪ Traffic counts
▪ Demographic analysis of drawing area
▪ Purchasing power analysis of drawing area Assumptions
▪ Location is a major determinate of revenue
▪ Issues manifesting from high customer contact dominate
▪ Costs are relatively constant for a given area; therefore, revenue function is critical

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Location Strategies – Service vs. Industrial
Industrial Techniques

▪ Linear Programming (Transportation method)

▪ Weighted approach to intangibles
▪ Breakeven analysis
▪ Crossover charts
▪ Assumptions
▪ Location is a major determinate of cost
▪ Most major costs can be identified explicitly for each site • Low customer contact
allows focus on costs
▪ Intangible costs can be objectively evaluated

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Major Methods of Solving Location
Problems
▪ Weighted methods which:
• Assign weights and points to various factors
• Determine tangible costs
• Investigate intangible costs
▪ Center of Gravity Method
• Find best distribution center location
▪ Location breakeven methods
• Special case of breakeven analysis
▪ Transportation method
• A specialized linear programming method

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA
Telemarketing and Internet Industries

▪ Require neither face-to-face contact with customers (or

employees) nor movement of material
▪ Presents a whole new perspective on the location problem

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COLLEGE OF ENGINEERING – INDUSTRIAL ENGINEERING PROGRAM TU.EDU.SA