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					Facility Location


    Relevance of Facility Location Decisions.
    Types & Causes of Facility Location.
    General Process for Facility Location.
    Trends and Future Strategies.
    Methods for Facility Location Selection.
Location Case Studies
   Case 1: Ikea has not open a center in Valencia.

   Case 2: After a fire at its painting facilities in Stutgart,
    Schefenacker AG, the biggest rear view mirror manufacturer in
    the world, decides to open a new facility in Mosonmagyorovar
    (Hungary). It will be the thrid painting facility of this type after
    (USA and South Korea).

   Case 3: Grupo F Segura, following the requirements of their
    clients (mainly VW group) opens a factory at Hungary.

   Case 4: Ford Motor Company is to decide where to assemble the
    next generation of Ford Focus and Ford Fiesta.

   Case 5: Zara UK is opening a new store in Canary Wharf
Importance of Facility Location
   Facility Location decisions are part of the company’s strategy. Infrequent
    but expensive.
   Reasons for the importance:
       Facility Location requires large investment that can not be recovered.
       Facility Location decisions affect the competitive capacity of the company.
           All areas of the company are affected by Facility Location: Operations, but also
            Business Development, Human Resources, Finance, etc.
       The facility location decisions affect not only costs but the company’s
        income:
           For a service business, market proximity is critical to determine the capacity to
            attract customers.
           For a manufacturing business, facility location affects product delivery time and
            level of customer service, which affects sales.
       Regarding costs, facility location affects a great variety of them:
           Land costs.
           Labor costs.
           Raw materials.
           Transportation and distribution
Topics

   Importance of Facility Location.
   Causes & Types of Facility Location.
   Issues at Location
   General Process for Facility Location.
   Trends and Future Strategies.
   Locating Service Facilities
   Methods for Facility Location Selection.
       Centroid Methods
       Factors Rating Analysis.
       Economic Analysis.
       Transportation (Mathematical Programming Methods).
       Set Covering.
Causes that originate Location decision problems
    An expanding market.
        It will require the addition of more capacity at a certain geographic
         point, either in an existent facility or in a new one.
    Introduction of new products or services.
    A contracting demand, or changes in the location of the demand.
        It may require the shut down and/or relocation of operations.
    The exhaustion of raw materials in a certain area.
        Example: Extraction companies.
    Obsolescence of a manufacturing facility due to the appearance of
     new technologies.
        It means the creation of a new modern plant somewhere else.
    The pressure of the competence.
       To increase the level of service, it can force the company to increase
         capacity of certain plants or relocate some of them.
    Change in other resources, like labor conditions or subcontracted
     components, or change in the political or economic environment in a
     certain region.
    Mergers and acquisitions.
       Some facilities may appear as redundants, or bad located with respect
         to others.
Location Alternatives
   Expansion of an existent facility.
       Only possible if exists enough space.
       Attractive alternative when the current facility location is good
        enough for the company.
       Lower costs than other options
   Start a new facility in a new area.
       Sometimes is a more advantageous option than the previous one
        (if there are problems related to lose of focus on the company’s
        objectives).
   Shut down of a facility and (or not) starting of a new one
    somewhere else.
   Moving production from one plant to other.
Topics

   Importance of Facility Location.
   Causes & Types of Facility Location.
   Issues at Location
   General Process for Facility Location.
   Trends and Future Strategies.
   Locating Service Facilities
   Methods for Facility Location Selection.
       Centroid Methods
       Factors Rating Analysis.
       Economic Analysis.
       Transportation (Mathematical Programming Methods).
       Set Covering.
Issues in Facility Location
   Proximity to Customers
   Business Climate
   Total Costs
   Infraestructure
   Quality of Labor
   Suppliers
   Other Facilities
   Political Risks
   Government Barriers
   Trading Blocks
   Environmental Regulation
   Host Community
   Competitive Advantage
Plant Location Methods



If the Boss likes Bakersfield, I like Bakersfield
Topics

   Importance of Facility Location.
   Causes & Types of Facility Location.
   Issues at Location
   General Process for Facility Location.
   Trends and Future Strategies.
   Locating Service Facilities
   Methods for Facility Location Selection.
       Centroid Methods
       Factors Rating Analysis.
       Economic Analysis.
       Transportation (Mathematical Programming Methods).
       Set Covering.
 Competitive STRATEGY                                     GLOBAL COMPETITION
                                        PHASE I
                                      Supply Chain
INTERNAL CONSTRAINTS                    Strategy
Capital, growth strategy,                                  TARIFFS AND TAX
existing network                                           INCENTIVES


PRODUCTION TECHNOLOGIES                                  REGIONAL DEMAND
Cost, Scale/Scope impact, support      PHASE II          Size, growth, homogeneity,
required, flexibility
                                    Regional Facility    local specifications
                                     Configuration
       COMPETITIVE
      ENVIRONMENT                                       POLITICAL, EXCHANGE
                                                        RATE AND DEMAND RISK

                                      PHASE III
                                     Desirable Sites           AVAILABLE
                                                            INFRASTRUCTURE
 PRODUCTION METHODS
 Skill needs, response time


FACTOR COSTS                          PHASE IV          LOGISTICS COSTS
Labor, materials, site specific     Location Choices    Transport, inventory, coordination
Levels of Decisions.
                             Market Potential
        Market Region         Market Share
                             Operating Cost

                            Transport Cost (RM)
                                   Taxes
          Subregion
                             Raw material costs
                         Labor Cost and Availability
                         Access to market/materials
                                Material Cost
                         Labor Cost and Availability
        Community                    Taxes
                        Availability of public services
                             Availabilty of sites
                           Community amenities

                        Access to transport Network
                              Site Characterics
                                     Taxes
           Sites        Availability of public services
                         Land and acquisition costs
                             Construction Costs
General Process for Facility Location
   Creation of a multifunctional team to perform the study.
   Preliminary analysis.
       Study of the company’s strategies and the policies of the company to
        translate them into Facility Location requirements.
       Due to the big quantity of factors affecting Facility Location, the company
        should determine which is the criteria to evaluate the different alternatives
        (transportation needs, land, supplies, labor, infrastructures, services,
        environmental conditions…).
           The multifunctional team must distinguish between: Dominant factors
            (essential); Secondary factors (desirable).
   Search of Location Alternatives.
       Establishment of a group of location candidates.
   Evaluation of Alternatives (detailed analysis).
       Information gathering from each location to be measured against each of
        the factors considered.
   Selection of Facility Location.
       Through qualitative and quantitative analysis, the different alternatives will
        be compared against each other, to determine several valid locations.
       Objective: Look for several acceptable locations, to let senior management
        to decide taking into account subjective factors.
Topics

   Importance of Facility Location.
   Causes & Types of Facility Location.
   Issues at Location
   General Process for Facility Location.
   Trends and Future Strategies.
   Locating Service Facilities
   Methods for Facility Location Selection.
       Centroid Methods
       Factors Rating Analysis.
       Economic Analysis.
       Transportation (Mathematical Programming Methods).
       Set Covering.
Trends & Future Strategies
   Most of the Facility Location factors vary with time:
       The accelerated changes in the economic environment are
        impacting the frequency of Facility Location decisions.
   Changes in the economic environment:
       International level competition among companies.
       Location in countries different than the origin of the company are a
        common situation for big companies.
       Appearance of new markets and unification of others.
       Increase of competition pressure.
       Logistics factors are more important and complex.
       Companies are reviewing their facility locations in order not to
        loose competitiveness.
Trends & Future Strategies
   Changes in the economic environment:
       Industry processes automation.
           Labor costs become less important: countries with lower labor
            costs become less attractive.
           Labor qualification, flexibility and mobility become more
            important factors.
           However, labor costs are still a main factor in some industries
            and in certain manufacturing processes of others: Relocation to
            Mexico, Taiwan, Singapore, etc.
Trends & Future Strategies
   Changes in the economic environment:
       Transportation and IT development.
           Helps in the internationalization of the operations: higher
            geographical diversity in location decisions.
           Tendency to localize close to the markets: emphasis in
            customer service, direct customer contact, fast development of
            new products, fast delivery…
           Due to flexible technologies, companies have the possibility of
            starting up more plants at a smaller size.
       J.I.T. Systems.
           Some industries are forcing their suppliers and customers to
            locate their facilities in a close area to reduce transportation
            costs and supply at a higher frequency.
Topics

   Importance of Facility Location.
   Causes & Types of Facility Location.
   Issues at Location
   General Process for Facility Location.
   Trends and Future Strategies.
   Locating Service Facilities
   Methods for Facility Location Selection.
       Centroid Methods
       Factors Rating Analysis.
       Economic Analysis.
       Transportation (Mathematical Programming Methods).
       Set Covering.
Locating service facilities
   Because of the variety of service firms and the relatively low
    cost of establishing a service facility compared to one for
    manufacturing, new service facilities are far more common
    than new factories and warehouses.
   Services typically have multiple sites to maintain close contact
    with customers. The location decision is closely tied to the
    market selection decision.
   Market affects the number of sites to be built and the size and
    characteristics of the sites.
   Whereas manufacturing location decisions are often made by
    minimizing costs, many service location decision techniques
    maximize the profit potential of various sites.
       Cost vs Response TIme
         Local FG
  Hi
          Mix
             Regional FG

                Local WIP
Cost             Central FG

                     Central WIP

                              Central Raw Material and Custom production


                                      Custom production with raw material at suppliers
 Low
       Low             Response Time                            Hi
Response Time 1 week-> 1 Distribution Center




                                           Clientes
                                           Centro
                                           distribución
Response Time 5 days-> 2 Distribution Center




                                           Clientes
                                           Centro
                                           distribución
Response Time 3 days-> 5 Distribution Center




                                           Clientes
                                           Centro
                                           distribución
Response Time 1 day-> 13 Distribution Center




                                           Clientes
                                           Centro
                                           distribución
Same Day Response --> 26 Distribution Centers




                                           Customer
                                           DC
Response time vs. Number of facilities


       Response
       Time




                                 Number of Facilities
Cost vs Number of Facilities


                                                      Total Costs



                                                  Percent Service
      Cost of Operations




                                                   Level Within
                                                  Promised Time

                                                    Facilities
                                                     Inventory
                                                    Transportation
                                                    Labor




                           Number of Facilities
Topics

   Importance of Facility Location.
   Causes & Types of Facility Location.
   Issues at Location
   General Process for Facility Location.
   Trends and Future Strategies.
   Locating Service Facilities
   Methods for Facility Location Selection.
       Centroid Methods
       Factors Rating Analysis.
       Economic Analysis.
       Transportation (Mathematical Programming Methods).
       Set Covering.
Methods of Facility Location Selection
   Centroid Methods
   Factors Rating Analysis.
   Economic Analysis.
       Income independent upon location.
       Income dependent upon location.
   Transportation (Mathematical Programming Methods).
   Set Covering.
       No limitation of facilities.
       Limitation of facilities.
    Centroid Method                      N/S

                                       150

                                       120
                                                                     1.000
Transport cost are related to volume    90     2.000        1.000

                                        60

                                        30
                                                         2.000
                                                                                E/O
                                                30     60    90     120   150
                                     Origen arbitrario



               Cx =
                      d V
                        ix       i

                       V    i
                                       Cx , Cy = Gravity Center
                                       dix , diy = coordinates de la ubicación i
               Cy =
                      d V
                        iy       i     Vi      = Volume of goods moved from/to i
                       V    i
Methods of Facility Location Selection
   Centroid Methods
   Factors Rating Analysis.
   Economic Analysis.
       Income independent upon location.
       Income dependent upon location.
   Transportation (Mathematical Programming Methods).
   Set Covering.
       No limitation of facilities.
       Limitation of facilities.
    Factor-Rating Method
   Popular because a wide variety of factors can be included in the
    analysis
   Six steps in the method
     Develop a list of relevant factors called critical success factors

     Assign a weight to each factor

     Develop a scale for each factor

     Score each location for each factor

     Multiply score by weights for each factor for each location

     Recommend the location with the highest point score
   Factor-Rating Example
  Critical                    Scores
 Success                    (out of 100)           Weighted Scores
  Factor        Weight   France Denmark        France           Denmark
Labor
 availability
 and attitude    .25       70     60       (.25)(70) = 17.5 (.25)(60) = 15.0
People-to
 car ratio       .05       50     60        (.05)(50) = 2.5   (.05)(60) = 3.0
Per capita
 income          .10       85     80         (.10)(85) = 8.5  (.10)(80) = 8.0
Tax structure    .39       75     70       (.39)(75) = 29.3 (.39)(70) = 27.3
Education
 and health      .21       60     70       (.21)(60) = 12.6 (.21)(70) = 14.7
Totals          1.00                                  70.4              68.0

                                                                Table 8.3
Methods of Facility Location Selection
   Centroid Methods
   Factors Rating Analysis.
   Economic Analysis.
       Income independent upon location.
       Income dependent upon location.
   Transportation (Mathematical Programming Methods).
   Set Covering.
       No limitation of facilities.
       Limitation of facilities.
Locational Break-Even Analysis Example
 Three locations:
                     Fixed Variable    Total
 City                Cost    Cost       Cost
 Akron              $30,000   $75     $180,000
 Bowling Green      $60,000   $45     $150,000
 Chicago           $110,000   $25     $160,000
 Selling price = $120
 Expected volume = 2,000 units

Total Cost = Fixed Cost + Variable Cost x Volume
Locational Break-Even Analysis Example

                         –
               $180,000 –
                         –
               $160,000 –
               $150,000 –
                         –
               $130,000 –
                         –
 Annual cost




               $110,000 –
                         –
                         –
                $80,000 –
                         –
                $60,000 –
                         –
                         –
                             Akron                                       Chicago
                $30,000 –    lowest
                                              Bowling Green
                                                                          lowest
                         –    cost
                                               lowest cost
                                                                           cost
                $10,000 –
                        |      |        |       |            |     |        |
                         –
                       0      500     1,000   1,500     2,000    2,500    3,000
                                                    Volume
Methods of Facility Location Selection
   Centroid Methods
   Factors Rating Analysis.
   Economic Analysis.
       Income independent upon location.
       Income dependent upon location.
   Transportation (Mathematical Programming Methods).
   Set Covering.
       No limitation of facilities.
       Limitation of facilities.
Network Optimization Models
    Allocating demand to production facilities
    Locating facilities and allocating capacity
                   Key Costs:

                   • Fixed facility cost
                   • Transportation cost
                   • Production cost
                   • Inventory cost
                   • Coordination cost

 Which plants to establish? How to configure the network?
Conventional Network

           Materials                                        Customer
Vendor                                Finished   Customer    Store
             DC                                    DC
 DC                                  Goods DC

                                                            Customer
          Component                                          Store
Vendor   Manufacturing
 DC                        Plant                 Customer   Customer
                         Warehouse                 DC        Store
          Components
             DC                                             Customer
Vendor                                                       Store
 DC                                   Finished
                                                 Customer
                                     Goods DC
             Final                                 DC       Customer
           Assembly                                          Store
Demand Allocation Model

   Which market is served               n m
                                 Min   cij xij
    by which plant?                     i 1 j 1
 Which supply sources           s.t.
    are used by a plant?          n
xij = Quantity shipped from       xij  D j
                                 i 1
    plant site i to customer j
                                  m
                                  xij  K i
                                 j 1

                                 xij  0
Plant Location with Multiple Sourcing
    yi = 1 if plant is located           n          n m

     at site i, 0 otherwise
                                  Min  f i y i    cij xij
                                         i 1       i 1 j 1
    xij = Quantity shipped       s.t.
     from plant site i to
                                   n
     customer j                    xij  D j
                                  i 1
                                   n
                                   xij  K i y i
                                  j 1
                                  m
                                   y i  k ; y i {0,1}
                                  i 1
    Multi-echelon

                         Local DC
                                                  Store 1
                        Cross-Dock
            Regional                 Customer 1
             Finished                   DC        Store 1
            Goods DC    Local DC
 National               Cross-Dock
                                                  Store 2
                                     Customer 2
 Finished
                                        DC
Goods DC                 Local DC                 Store 2
            Regional    Cross-Dock
             Finished                             Store 3
            Goods DC
                                                  Store 3
Methods of Facility Location Selection
   Centroid Methods
   Factors Rating Analysis.
   Economic Analysis.
       Income independent upon location.
       Income dependent upon location.
   Transportation (Mathematical Programming Methods).
   Set Covering.
       No limitation of facilities.
       Limitation of facilities.
Set Covering Models
 Define:
 cj   cost of locating facility at site j

 aij     =   {   1
                 0
                     if facility located at site j can cover customer i
                     Otherwise




 xj      =   {   1
                 0
                     if facility located at site j
                     Otherwise


      The set covering problem is to:
The set covering problem is to:
                      n
 Minimize            c
                      j 1
                             j   xj

 s.t .
  n

 a
 j 1
         i, j   x j  1,              i  1..n

 x j  0,1 ,                        j  1..n
Greedy Heuristic for Set Covering Problem:

   Step 1:   If cj = 0, for any j = 1, 2, ..., n, set xj = 1 and remove all
             constraints in which xj appears with a coefficient of +1.
   Step 2:   If cj > 0, for any j = 1, 2, ..., n and xj does not appear with a
             +1 coefficient in any of the remaining constraints, set xj = 0.
   Step 3:   For each of the remaining variables, determine cj/dj, where
             dj is the number of constraints in which xj appears with a +1
             coefficient. Select the variable k for which ck/dk is minimum,
             set xk = 1 and remove all constraints in which xj appears
             with a +1 coefficient. Examine the resulting model.
   Step 4    If there are no more constraints, set all the remaining
             variables to 0 and stop. Otherwise go to step 1.
Example:

A rural country administration wants to locate several
medical emergency response units so that it can
respond to calls within the county within eight minutes
of the call. The county is divided into seven population
zones. The distance between the centers of each pair
of zones is known and is given in the matrix below.
Imagine that the one that has to make the decision
does not want to place a emergency unit on B or D
Example:

              1    2    3    4    5    6    7
          1   0    4    12   6    15   10   8
          2   8    0    15   60   7    2    3
          3   50   13   0    8    6    5    9
 [dij]=
          4   9    11   8    0    9    10   3
          5   50   8    4    10   0    2    27
          6   30   5    7    9    3    0    27
          7   8    5    9    7    25   27   0
Example 4:
The response units can be located in the center of population zones 1
through 7 at a cost (in hundreds of thousands of dollars) of 100, 80, 120
110, 90, 90, and 110 respectively. Assuming the average travel speed
during an emergency to be 60 miles per hour, formulate an appropriate
set covering model to determine where the units are to be located and
how the population zones are to be covered and solve the model using
the greedy heuristic.
    Solution:
    Defining
                 1   if zone i’s center can be reached from center of zone j within 8 minutes
     aij =   {   0         otherwise




and noting that dij > 8, dij <= 8 would yield aij values of 0, 1,
respectively the following [aij] matrix can be set up.
Solution:
 Minimize Subject to:

100x1+80x2+120x3+110x4+90x5+90x6+110x7
    x1 +    x2 +            x4 +                                x7   =1
    x1 +    x2 +                    x5             +   x6   +   x7   =1
                    x3 +    x4 +    x5             +   x6            =1
                            x3   +   x4   +                     x7   =1
               x2       +   x3   +            x5   +   x6            =1
               x2       +   x3   +            x5   +   x6            =1
    x1    +    x2       +            x4   +                     x7   =1
    x1    ,    x2       ,   x3   ,   x4   ,   x5   ,   x6   ,   x7   {0,1}
Greedy Heuristic

Step 1: Since each cj > 0, j = 1, 2, ..., 7,
       go to step 2.
Step 2: Since xj appears in each
       constraint with a +1 coefficient, go
       to step 3.
Greedy Heuristic
Step 3:

   c1   100          c5   90
      =     = 33.3      =    = 22.5
   d1    3           d5    4
   c2   80           c6   90
      =    = 16         =    = 22.5
   d2    5           d6    4
   c3   120          c7   110
      =     = 30        =     = 27.5
   d3    5           d7    4
   c4   110
      =     = 27.5
   d4    4
Greedy Heuristic
Since the minimum ck/dk occurs for k = 2, set x2 = 1 and remove
          the first two and the last three constraints. The
          resulting model is shown below.

 Minimize Subject to:

 100x1+120x3+110x4+90x5+90x6+110x7
               x3 + x4 + x5 + x6           =1
               x3 + x4 +                x7 =1
          x1   ,  x3 ,   x4 ,   x5 , x6 ,  x7 {0,1}
Greedy Heuristic:
Step 4: Since we have two constraints go to step 1.
Step 1: Since c1 > 0, j = 1, 3, 4, ..., 7, go to step 2
Step 2: Since c1 > 0 and x1 does not appear in any of
          the constraints with a +1 coefficient, set x1 = 0.
Greedy Heuristic
Step 3:

  c3          120            c7       110
          =         =   60        =         =   110
  d3           2             d7        1

  c4          110
          =         =   55
  d4           2

  c5          90
          =         =   90
  d5           1

  c6          90
          =         =   90
  d6           1
Greedy Heuristic

Since the minimum ck/dk occurs for k = 4, set x4 = 1 and
   remove both constraints in the above model since x4
   has a +1 coefficient in each. The resulting model is
   shown below.
    Minimize Subject to:
   120x3+90x5+90x6+110x7
        x3 , x5 , x6 , x7       =0
Greedy Heuristic:

Step 4:   Since there are no constraints in the above
          model, set x3 = x5 = x6 = x7 = 0 and stop.

          The solution is x2 = x4 = 1; x1 = x3 = x5 = x6 = x7 =
          0. Cost of locating emergency response units to
          meet the eight minute response service level is
          80 + 110 = 190.

				
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