CHAPTER 5

FACILITY LOCATION

Learning Objectives

After reading this chapter, you will be able to…

• identify the important criteria for facility location decision;
• recognize the hierarchical nature of location decision;
• use location analysis techniques to decide facility location.

Facility location is the geographical positioning of plant or service facility relative to the
resources, other operations or customers with which it interacts. This is one of the key
strategic decisions of contemporary manufacturing and service firms. Location is one of
the major factors which decides the success or failure of a business. Locating a retail shop
on the wrong street or even wrong side of the street can have significant impact on sales.
Location problem of both manufacturing and service facilities is closely linked to two
competitive imperatives:
1. The facilities should be located close to the customer due to time-based competition,
trade agreements, and transportation costs.
2. The facilities should be located close to inputs to get advantages such as cheap raw
materials, low wage and high technical skills.

CRITERIA FOR FACILITY LOCATION DECISION

Facility location problem is common to both new and existing businesses. New
businesses have to decide on locations for their various operations such as manufacturing,
warehousing and sales. In existing businesses, location decision is prompted by demand
and supply changes. For example, new markets, changes in labor pool and scarcity of raw
material are some reasons for finding new locations for existing businesses. In both
situations, location decisions are guided by a variety of criteria. The important criteria in
location decision are described below:

Proximity to Customer
Ever-increasing need for customer responsiveness triggers the firms to have their
operations close to customer. This ensures faster delivery of goods to customer. In
addition, it helps to understand the customers’ needs in product development.
54 Operations Management: Concepts and Applications

Convenience to Customer
Some locations, which are close to customers, are not convenient to the customers. For
example, super market in the city is close to many customers but it is not convenient to
them because of the traffic congestion. Therefore, convenience should be considered in
addition to the proximity in location decision.

Capital Costs
Capital costs include land, construction and equipment costs. There is a huge variation in
land cost at different location. Construction and equipment costs also can differ with the
location due to variations in cost of supplies, taxes etc.

Operational Costs
In addition to capital costs, operational costs should be taken into account in selection of
facility location. This includes logistic, labor and energy costs.

Business Climate
Favorable business climate means supporting environment of the location. This includes
the presence of similar size businesses, the presence of companies in the same industry,
and presence of other foreign companies in the case of international locations. Business
legislation and local government intervention to facilitate business via subsidies, tax
concessions, and other support are also factors be considered.

Infrastructure
Adequate road, rail, air and sea transportation, water supply, electricity and
telecommunication requirements are very important.

Quality of Workforce
Educational and skill levels of the workforce and the willingness and ability to learn are
important.

Suppliers
Availability of high quality and competitive supplier base at a close proximity is crucial
for location decision.

Image
Customers’ image on location is a decisive factor in location selection. Some locations
are firmly associated in customers’ mind with a particular image. Customers have the
perception that products produced in particular area are better than those produced in
other areas.
 Facility Location 55

Community Factors
Community factors are those derived from the social, political and economic environment
of the location. These factors may have significant impact on business operations and
cost. These include:
• Tax rates
• Government financial assistance
• Capital movement restriction
• Import and export duties
• Restrictions on imports and exports
• Political stability
• Language
• Availability of support services
• Environmental regulations

Importance of criteria depends on the type of facility. For example, land cost and
availability of raw material are very important criteria for heavy manufacturing like
cement plant whereas the availability of knowledge workers is crucial for knowledge
based industry like software development.

LEVELS OF LOCATION DECISION

Site for the facility locations cannot be achieved in one decision step. It should pass
several levels of decision. These are usually presented at following levels:
• Choosing the region
• Choosing the sub-region or country
• Choosing the area
• Choosing the site

Choosing the Region

In choosing the region, an organization focuses on which part of the world it wants to
locate its new facility. Many large companies consider the whole world as possible
locations for their business operations. While some operations of the business are located
in East Asia, others are located in North America. Many western companies shift their
labor intensive operations to Asian region while keeping their high tech operations in the
west. These companies have wide range of options in locating their business operations.
In regional decision, some of the important criteria are as follows: economic stability
and growth, culture, climate, raw material availability and proximity to suppliers,
transportation and distribution system, proximity to customers and technological level.
56 Operations Management: Concepts and Applications

Choosing the Sub-region or Country

Once an organization has decided in which region it wishes to locate the facility, it will
then need to choose a sub-region or country. For example, once a company decides to
locate PCB assembly plant in South-East Asia, it should choose whether it should be
located in Malaysia, Thailand, Philippines or Singapore. Some of the criteria went into
deciding the region are applicable in deciding the sub-region or country.
Criteria to be considered in choosing sub-region or country are: government
stability, government regulations, economic stability, exchange rates, culture, climate,
export and import regulations, duties and tariffs, raw material availability, labor cost and
education, environmental regulations, technology level, technical expertise, cross-border
trade regulations, infrastructure etc.

Choosing the Area

After selecting the country, next decision is area of the location within the country.
Management should select the most suitable province, district or region within the
country at this level based on appropriate criteria. Factors affecting the area decision
include labor, infrastructure, transport cost, proximity of customers, number of customers,
construction/leasing costs, land costs, incentive packages, governmental regulations,
environmental regulations, raw material availability, local business regulations,
availability of services, business climate, availability of sites, financial services,
community inducements, proximity of suppliers etc.

Choosing the Site

Site selection is the final decision in facility location problem. Once the area is selected,
possible sites should be identified. Criteria used to select a site are usually concerned
with the characteristics of the specific site and its immediate surroundings. Criteria
influencing the decision are customer base, construction/leasing cost, land cost, size of
site, transportation, utilities, zoning restrictions, safety/security, competition, business
climate, raw material availability, infrastructure etc.

LOCATION ANALYSIS TECHNIQUES

In addition to the judgments based on qualitative factors, systematic and quantitative

techniques can be used to select among alternative locations. A few important
quantitative techniques are described in this section.

Location Rating Factor Method

Often operations managers have to evaluate alternative locations based on number of

criteria (factors). Decision making is much difficult since one alternative is the best on
 Facility Location 57

one criterion while another is the best on some other criteria. Location rating factor
method is a systematic approach to solve this problem. The procedure involves:

• Identify the criteria which will be used to evaluate the alternative locations.
• Establish the relative importance of each criterion and assign weighting factors
(1-10).
• Rate each location according to each criterion (1: poor – 10: excellent).
• Calculate the sum weighted score.

Example 5.1: Location Rating Factor Method

A company manufacture plastic packing materials has decided to set up a new plant. The
company has decided on three sites among which they wish to select the best site. The
important criteria which the company believes and their relative importance are shown in
table 5.1 with the rates for each site.

Table 5.1: Criteria and their Relative Importance

Scores (1 to 10)

Location Factor Weight Site 1 Site 2 Site 3

Business climate 3.0 8.0 6.5 9.0

Proximity to suppliers 2.0 10.0 9.1 7.5
Wage rates 1.5 6.0 9.5 7.2
Community environment 1.5 7.5 8.0 8.0
Proximity to customers 1.0 6.5 9.0 9.5
Shipping modes 0.5 8.5 9.2 6.5
Utilities 0.5 5.0 6.5 9.0

Decide on the best site for the new plant.

Solution

Value of a site for each criterion is then calculated by multiplying score by the weightings
of each criterion. All these values are then summed for each site to obtain its total
weighted score as shown in Table 5.2. Site 3 has the highest total weighted score.
Therefore, it is the preferred site for the new plant.
58 Operations Management: Concepts and Applications

Table 5.2: Weighted Scores for the Sites

Weighted Scores
Location Factor Site 1 Site 2 Site 3

Business climate 24.00 19.50 27.00

Proximity to suppliers 20.00 18.20 15.00
Wage rates 9.00 14.25 10.80
Community environment 11.25 12.00 12.00
Proximity to customers 6.50 9.00 9.50
Shipping modes 4.25 4.60 3.25
Utilities 2.50 3.25 4.50
Total Score 77.50 80.80 *82.05

Centre of Gravity Technique

The centre of gravity technique is used to locate single facility considering the existing
facilities, the distances between them, and the volumes of goods to be shipped. This
method is useful to locate warehouses and distribution centres. It finds a location which
minimizes the transportation cost. The facility is located at the center of the geographic
area. The procedure involves,
- Establish the grid map
- Identify the coordinates and weight dispatched for each location
- Calculate the centre of gravity.
Figure 5.1 elaborates this technique.

n n
2 (x2, y2), W2
 xW i i  yW i i
y2
x= i =1
n
y= i =1
n

W
i =1
i W
i =1
i
1 (x1, y1), W1
y1

3 (x3, y3), W3 where,

x, y = coordinates of the new
y3 facility at center of gravity
xi, yi = coordinates of existing
facility i
Wi = annual weight dispatched
from facility i

X1 X2 X3 X

Figure 5.1: Grid Map

 Facility Location 59

Example 5.2: Centre of Gravity Technique

A supermarket chain wants to establish a central distribution centre for all the outlets.
Each outlet has different sales volumes. The monthly sales are shown below by the
number of trucks sent to each outlet. The coordinates of the each location in the grid map
are also shown in Figure 5.2. Find the most suitable place for the distribution centre.

700
A B C D
X 200 100 300 500
600 C Y 400 500 600 300
Wt 75 105 135 60
500 B
o Center
400

300 D

200 A

100

0 100 200 300 400 500 600 700 x

Figure 5.2 Grid Map

Solution

Center of gravity is,

 x W (200)(75) + (100)(105) + (300)(135) + (500)(60)

i =1
i i
x= = = 256
n
75 + 105 + 135 + 60
W i =1
i

 y W (400)(75) + (500)(105) + (600)(135) + (300)(60)

i =1
i i
y= = = 484
n
75 + 105 + 135 + 60
W i =1
i

Coordinates for warehouse (256, 484)

60 Operations Management: Concepts and Applications

Load Distance Technique

Center of gravity method discussed above assumes that there are an infinite number of
locations available on the grid map for the choice. But, actual situation is that there are
not infinite locations and only several alternatives are available for choice. In this
situation, the location is selected in order to minimize the transport cost. Transport cost is
proportional to the load to be transported and distance.

Steps for selecting location:

• Compute Load × Distance for each site

• Choose site with lowest Load × Distance
• Distance can be actual or straight-line

n
LD =  l j d i
i =1

where, LD = the load-distance value

li = the load expressed as a weight, number of trips or units being shipped
from the proposed site and location i
di = the distance between the proposed site and location i

d i = ( xi − x ) 2 + ( y i − y ) 2
where, (x, y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility

Example 5.3: Load Distance Technique

A rice milling company is going to set up a new plant for milling. Coordinates of three
proposed sites are given below. Mainly rice is supplied by 4 suppliers. Coordinates of the
supplier and the number of trucks travel from each place per week is shown below. Find
the most suitable site to set up the new plant.

Potential Sites Suppliers

Site X Y A B C D
1 360 180 X 200 100 250 500
2 420 450 Y 200 500 600 300
3 250 400 Wt 75 105 135 60
 Facility Location 61

Solution

Compute distance from each site to each supplier:

Site 1

d A = ( x A − xi ) 2 + ( y A − y i ) 2 = (200 − 360) 2 + (200 − 180) 2 = 161.2

d A = ( x B − xi ) 2 + ( y B − y i ) 2 = (100 − 360) 2 + (500 − 180) 2 = 412.3

d B = 434.2 d D = 184.4

Site 2 dA = 333.0 dB = 323.9 dC = 226.7 dD = 170.0

Site 3 dA = 206.2 dB = 180.4 dC = 200.0 dD = 269.3

Compute load-distance,
n
LD =  li d i
i =1

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063

Site 2 = (75)(333.0) + (105)(323.9) + (135)(226.7) + (60)(170.0) = 99,789

Site 3 = (75)(206.2) + (105)(180.3) + (135)(200.0) + (60)(269.3) = 77,555*

Site 3 has the lowest load distance value. Therefore site 3 is the most suitable place for
the new rice mill.

In this example straight line distance was considered. But in many cases, actual
transport distance is not the straight distance; then the actual distance should be
considered in calculation.

CHAPTER HIGHLIGHTS

❖ Facility location decision is based on a number of criteria.

❖ There are several levels of location decision: region, country, area, and site.
❖ Location rating factor method is used for evaluating alternative locations based on
multiple location factors.
❖ Locations such as warehouses and distribution centres are selected so that transport
cost is minimum.
62 Operations Management: Concepts and Applications

DISCUSSION QUESTIONS

1. Discuss the importance of location selection decision for the success of the
business.
2. State two techniques that you would use in selecting a plant location? Explain what
difficulties you may face in using these techniques.
3. A multinational company has decided to relocate its assembly plant in Germany to
another country. What are the different levels of decision hierarchy in choosing the
plant location? What are the decision criteria that should be considered in each
level?
4. Contrast the location problems of a manufacturing firm and a super market
showing the relevant considerations they share and those they do not.
5. What are the limitations of using centre of gravity technique in location selection?
6. What are the important factors that companies consider when determining the
country, region, community and site at which to locate a facility.
7. What are the factors to be considered in selecting locations for the following?
a. A medical school
b. An internet café
c. A washing plant for clothing
d. A production plant for fertilizer
e. A sales outlet for agricultural machinery
f. A garment factory
g. A hospital
h. A supermarket
i. A ship repairing yard

PROBLEMS

1. Panorama Company wishes to select a location for its proposed warehouse to a

hazardous raw material. It considers five sites under four criteria. Following table
shows the details of the sites.

Site A Site B Site C Site D Site E

Land cost Rs. 2.0 Mn Rs. 2.5 Mn Rs. 3.0 Mn Rs. 2.8 Mn Rs.3.3 Mn
Distance to factory 10 km 5 km 9 km 10 km 8 km
Environmental impact Moderate Less Moderate High Less
Infrastructure Good Very Good Good Fair Fair

Show your process of decision making in selecting a site for the warehouse. What
additional information do you need to select the most suitable site? Assuming
missing information (if any) select the most suitable site.
 Facility Location 63

2. A multinational company wishes to locate their new production facility in South

Asia. In selecting the location, the company considers six criteria and each country is
evaluated based on them and given scores 0-100. Find the most suitable country for
the plant using the data given in the following table. Weights are assigned to the
criteria based on their importance.

Scores
Criteria Weight Sri Lanka India Pakistan Bangladesh
Government tax 0.25 86 82 73 80
Infrastructure 0.10 81 62 86 28
Raw material 0.20 72 55 39 95
Political stability 0.15 44 49 58 54
Business climate 0.05 68 70 60 32
Labour cost 0.25 22 78 66 90

3. Amano manufacturing company has four plants A, B, C and D. The company wishes
to locate its distribution centre at one of its plant’s premises. The plants should
transport their production to distribution centre after production. Select the best
premises for the distribution centre. Following details are given.

Distance to Plant (Km) Amount of Production

From Plant A B C D (‘000s)
A 0 12 9 10 10
B 12 0 7 11 8
C 8 7.5 0 6 5
D 10 12 6 0 9

4. Prabudda & Sons restaurant chain uses a distribution centre to prepare the
ingredients it provides its individual restaurants. The company is attempting to
determine the location for a new distribution centre that will serve five restaurants.
The grid map coordinates of the five restaurants and the annual number of truck
loads transported to each restaurant are shown below.
64 Operations Management: Concepts and Applications

Coordinates
Restaurant Annual Truck loads
X Y
1 400 250 18
2 300 210 20
3 250 400 16
4 210 180 24
5 105 300 30

a) Determine the least cost location using the centre of gravity method.
b) Plot the five restaurants and the proposed new distribution centre on a guide
map.

5. Bingo Furniture Company, which assembles steel furniture, obtains its components
from three suppliers. Supplier A provides all the boxes and packaging material;
supplier B provides all steel components; supplier C provides all rubber and plastic
components. Supplier A sends one truck load of the materials per week to the factory
and is located at the position (10, 10) on a grid reference which covers the local area.
Supplier B sends four truck loads of components per week to the factory and is
located at the point (20, 30) on the grid. Supplier C sends three truck loads of
components per week to the factory and is located at the point (50, 30) on the grid.
After assembly ten truck loads of final product per week are sent to a warehouse
which is located at (50, 10) on the grid. Where should the company locate its
assembly plant so as to minimize its transport cost? State any assumption you made.