Logistics Section 02 Locating Facility

Source: From Assoc. Prof.
Ho Thanh Phong, IU lecture notes

1
Source: From Assoc. Prof. Ho Thanh Phong, IU lecture notes
Lecture 2 and 3
Locating Facilities
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Learning Objectives
Understand the importance of location decisions
Discuss factors that affect the choice of location
Understand a hierarchical approach to locating facilities
Use an infinite set approach, such as the centre of gravity
Use models for locating facilities on networks
Combine location decisions into a broader approach to
planning
3
Outline
1. Importance of location
2. Choosing the geographic region
3. Infinite set approaches
4. Feasible set approaches
5. Network models
6. Location planning

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1. Importance of Location
1.1. Location decisions
Decision where these facilities should be located.
FACILITIES LOCATION: finds the best geographic locations
for the different elements in a supply chain.
Needed whenever an organization opens new facilities.
Affect the organization's performance for many years.
If select a poor location: low productivity, unreliable
suppliers, poor materials, low quality products and high
costs.
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6
Reasons:
the end of a lease on existing premises
expansion into new geographic areas
changes in the location of customers or suppliers
changes to operations
upgrading facilities perhaps to introduce new technology
changes to transport such as a switch from rail transport to
road
changes in the transport network
mergers or acquisitions giving duplicate operations
1. Importance of Location
1.1. Location decisions
Consider many factors:
Quantifiable: operating costs, wage rates, taxes, currency
exchange rates, number of competitors, distance from current
locations, development grants, population, reliability of
supplies.
Non-quantifiable: quality of infrastructure, political stability,
social attitudes, industrial relations, legal system, future
developments of the economy etc.
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In General - Location Decisions
Long-term decisions
Difficult to reverse
Affect fixed & variable costs
Transportation cost
As much as 25% of product price
Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of location to firm
1.2. Alternatives to locating new facilities
Expand or change operations at an existing site
Open additional facilities at another site, while maintaining
operations at the existing site
Close down existing operations and move all operations to a
new site

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Options in order of increasing investment:
1. Licensing or franchising: local organizations make and
supply the companys products
2. Exporting: the company makes the product in its existing
facilities and sells it to a distributor working in the new
market.
3. Local distribution and sales: the company makes the
product in its existing facilities, but sets up its own
distribution and sales force in the new market.
4. Local assembly and finishing: the company makes most of
the product in existing facilities, but opens limited facilities
in the new market to finish or assemble the final product.
5. Full local production: the company opens complete
facilities in the new market.
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Break-Even Analysis
Break-even analysis computes the amount of goods required
to be sold to just cover costs
Break-even analysis includes fixed and variable costs
Procedure:
Step 1: For each location, determine the fixed an variable
costs
Step 2: Plot the total costs for each location on one graph
Step 3: Identify ranges of output for which each location
has the lowest total cost
Step 4: Solve algebraically for the break-even points
over the identified ranges

Break-Even Analysis

Remember the break even equations used for calculation
total cost of each location and for calculating the breakeven
quantity Q.

Total cost = F + cQ
Total revenue = pQ
Break-even is where Total Revenue = Total Cost

Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost
Example using Break-even Analysis: Clean-Clothes Cleaners is considering four
possible sites for its new operation. They expect to clean 10,000 garments. The
table and graph below are used for the analysis.
Example 9.6 Using Break-Even Analysis
Location Fixed Cost Variable Cost Total Cost
A $350,000 $ 5(10,000) $400,000
B $170,000 $25(10,000) $420,000
C $100,000 $40(10,000) $500,000
D $250,000 $20(10,000) $450,000

From the graph you can see that the two lowest cost intersections occur between C & B
(4667 units) and B & A (9000 units)
The best alternative up to 4667 units is C, between 4667 and 9000 units the best is B, and
above 9000 units the best site is A
2. Choosing The Geographic Region
Overall approach

Considerations in choosing regions

GENERAL APPROACH COORDINATING LOCATION DECISIONS:
1. Review the aims of a supply chain
2. Do a logistics audit
3. Identify mismatches
4. Examine alternatives for overcoming the mismatch
5. Make location decisions
6. Confirm the location
7. Implement and monitor the solutions
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Overall approach - Hierarchy of Location decisions
Considerations in Location Decisions
Location of customers
Location of suppliers and materials
Culture
Government attitudes
Direct costs
Indirect costs:
Exchange rates
Social attitudes:
Organization
Operations

Location Decision Example
BMW decided to
build its first major
manufacturing plant
outside Germany in
Spartanburg, South
Carolina.
Country Decision Factors
Market location
U.S. is worlds largest luxury car
market
Growing (baby boomers)
Labor
Lower manufacturing labor costs
$17/hr. (U.S.) vs. $27 (Germany)
Higher labor productivity
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)
Region/Community Decision Factors
Labor
Lower wages in South Carolina (SC)
Government incentives
$135 million in state & local tax breaks
Free-trade zone from airport to plant
No duties on imported components or on exported cars
Approaches to Location Decisions
1. Infinite set approach finds the best location in principle by
using some geometric arguments, assume that there are no
restrictions on site availability, and then looks for a site
nearby.
2. Feasible set approach compares sites that are currently
available and chooses the best
Simple Models
Simple Models
INFINITE SET APPROACHES
Simple Models
Variation in transport cost with location
Simple Models:
Center of Gravity (COG) Technique
A simple way of finding the best compromise location
calculates the centre of gravity of supply and demand.
The co-ordinates of the centre of gravity are
(X
0
, Y
0
) are the co-ordinates of the centre of gravity which gives
the facility location
(X
i
, Y
i
) are co-ordinates of each customer and supplier, i
W
i
is expected demand at customer i, or expected supply from
supplier i
Grid-Map Coordinates
Example
Van Hendrick Industries is building a central logistics
centre that will collect components from three suppliers,
and send finished goods to six regional warehouses. The
locations of these and the amounts supplied or demanded
are shown in the following table. Where should they start
looking for a site?
Example (Van Hendrick Industries cont.)
Location X,Y co-ordinates Supply or demand
Supplier 1 91,8 40
Supplier 2 93,35 60
Supplier 3 3,86 80
Warehouse 1 83,26 24
Warehouse 5 9,16 52
Example - Solution
Example (Van Hendrick Industries cont.) Solution
The centre of gravity is
X
0
= 45.5
Y
o
= 50.3,
you can check by calculating:
Weaknesses of the Centre of Gravity Method
Example:
Suppose you work in Alberta, Canada and want to
deliver 20 tons of materials a day to Edmonton and 40
tons a day to Calgary. These two cities are connected by
a straight road 300 km long. If the costs of getting
deliveries from suppliers are the same regardless of
location, where would you build a warehouse?
The centre of gravity is
(40 300 + 20 0)/60 = 200 km from Edmonton.

A warehouse at the centre of gravity would have to
deliver 20 tons to Edmonton for 200kms with 200x20
unit cost and to 40 tons to Calgary for 100kms with
100x40 unit cost
The total is 8000 unit cost
But if you built the warehouse in Calgary, you would
only have to move 20 tons to Edmonton with total cost
is 6000 units cost
FEASIBLE SET APPROACHES
Costing models

Scoring models

Important factors for scoring models

Costing models
Feasible set approaches identify available sites, compare them,
and find the best.
An obvious analysis calculates the total cost of working from
each location and finds the cheapest.
Many of the costs of running a facility are fixed regardless of its
location. We concentrate on those costs that vary, particularly
the transport and operating costs.
Total variable cost = Operating cost + Inward transport
cost + Outward transport cost of a facility
Costing models
Locations near to customers have higher costs of inward
transport, and those near to suppliers have higher costs of
outward transport, so the best location is likely to be
somewhere in between.
We assume that the transport cost is proportional to the
distance moved. Uses map references or co-ordinates to find
the distance between points
Use this simple measure to identify the location with the
lowest total value of load distance moved

Compute (Load x Distance) for each site
Choose site with lowest (Load x Distance)
Distance can be actual or straight-line

Costing model ( or Load-Distance Technique)
Distance Measure

There are two ways to measure the distance between two facilities.

1.Rectilinear Distance
2.Euclidean Distance

Rectilinear distance

When distance between two facilities is measured along path that is
orthogonal to each other, then that distance is termed as rectilinear distance.
Suppose two facilities are located at points represented by (X
1
, Y
1
) and at
(X
2
, Y
2
), then the rectilinear distance between the facilities will be :

| X
1
- X
2
| + | Y
1
Y
2
|

Distance Measure (Cont.)
Euclidean distance

When distance is measured along straight-line path between the two
facilities, then that distance is termed as Euclidean distance. Suppose
two facilities are located at points represented by (X
1
, Y
1
) and at (X
2
, Y
2
),
then the Euclidean distance between the facilities will be

{ ( X
1
X
2
)
2
+ ( Y
1
- Y
2
)
2
}
1 / 2

The rectilinear distance measure is often used for factories, American cities, etc which are laid out in the
form of a rectangular grid. For this reason it is sometimes called the Manhattan distance measure. The
Euclidean distance measure is used where genuine straight line travel is possible
Costing Model (use Euclidean distance)
n
LD =
where,
LD =
l
i
d
i
d
i
=
=
=
load-distance value
load expressed as a weight, number of trips or units
being shipped from proposed site and location i
distance between proposed site and location i
(x
i
- x)
2
+ (y
i
- y)
2
l
i
d
i
i =1
where,
(x,y) = coordinates of proposed site
(x
i
, y
i
) =coordinates of existing facility
: Example
Potential Sites
Site X Y
1 360 180
2 420 450
3 250 400
X
Y
Wt
A
200
200
75
Suppliers
B C
100 250
500 600
105 135
D
500
300
60
Compute distance from each site to each supplier
Site 1 d
A
=
d
B
=
(x
A
- x
1
)
2
+ (y
A
- y
1
)
2
=
(x
B
- x
1
)
2
+ (y
B
- y
1
)
2
=
(200-360)
2
+ (200-180)
2
= 161.2
(100-360)
2
+ (500-180)
2
= 412.3
d
C
= 434.2 d
D
= 184.4
Site 2 d
A
= 333 d
B
= 323.9 d
C
= 226.7 d
D
= 170
Site 3 d
A
= 206.2 d
B
= 180.4 d
C
= 200 d
D
= 269.3
Compute load-distance
n
LD =
l
i
d
i
i = 1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
* Choose site 3
: Example (cont.)
Costing models (use Rectilinear distance)
Example:
Bannerman Industries want to build a depot to serve seven
major customers located at coordinates (100, 110),
(120,130), (220, 150), (180, 210), (140, 170), (130, 180) and
(170, 80).
Average weekly demands, in vehicle loads, are 20, 5, 9, 12,
24, 11 and 8 respectively.
Three alternative locations are available at (120, 90), (160,
170) and (180,130).
Which is the best site if operating costs and inward
transport costs are the same for each location?
Map for Bannerman Industries
Example (cont.):
As operating and transport inward costs are the same for all
three locations, we only need a way of comparing the costs of
local deliveries from each. For simplicity we will use the
rectilinear distance to customers. Then the distance from A to
customer 1 is:
Example (cont.):
Comparison of sites
Example (cont.):
Costing models
We can use a version of this costing model to find the best
number of facilities
Costing models
Finding the optimal number of facilities

Logistics Section 02 Locating Facility

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Logistics Section 02 Locating Facility

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Source: From Assoc. Prof.

Ho Thanh Phong, IU lecture notes

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