Locating Facilities by gegeshandong


									Locating Facilities
Importance of Location
 Facilities Location finds the best
  geographic locations for the different
  elements in a supply chain.
 Location decisions are needed whenever
  an organization opens new facilities.
  These are important decisions that affect
  the organization’s performance for many

Location Decisions
 If an organization makes a mistake and
  opens facilities in a poor location, it
  cannot simply close down and move to a
  better place. Working in the wrong
  location can give very poor performance,
  but moving can be equally difficult.
 The right location does not guarantee
  success, but the wrong location will
  certainly guarantee failure.
 Location decisions are invariably difficult,
  and organizations have to consider many
   The end of a lease on existing premises
   Expansion into new geographic areas
   Changes in the location of customers or
   Changes to operations (i.e. electricity company
    moving from coal generators to gas)
   Upgrading facilities
   Changes to transport
   Changes in the transport network
   Mergers or acquisitions giving duplicate
    operations that must be rationalized

Reasons why companies need to
consider location
   Licensing or Franchising
    ◦ Local organizations make and supply the
      company’s products in return for a share of the
   Exporting
    ◦ The company makes the product in its existing
      facilities and sells it to a distributor working in
      the new market.

Alternatives to locating new
   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.
   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
   Full Local Production
    ◦ The company opens complete facilities in the
      new market.
   Warwick Suppliers is planning to expand
    into Europe. It is considering a number of
    options, each of which has a fixed annual
    payment (for rent, electricity, and other
    overheads) and a variable cost that
    depends on throughput (handling,
    depreciation, staff, and so on). The
    following table shows a simplified view of
    these costs.

Sample Problem
       Alternative          Fixed Cost        Variable Cost
Exporting from existing
                                   €800,000              €900
Using a local distributor        €2,400,000              €700
Open a facility for local
                                 €9,000,000              €520
Open limited production
                                 €8,000,000              €360
Open larger production
                                €12,000,000              €440
   Alternatively, Warwick can avoid entering
    the market by licensing a local
    manufacturer to make the product in
    return for a royalty of about 2% of sales.
    How might it approach this decision, if it
    is planning on selling about 10,000 units a
    year with a contribution to profit of 10%?
   Alternative A is the cheapest for
    throughput, X, from 0 up to
    ◦ 800,000 + 900x =2,400,000 + 700x => 8,000
   After this Alternative B is cheapest until
    ◦ 2,400,000 + 700x = 8,000,000 + 360x =>16,471
   After this point, Alternative D remains the

 With production of 10,000 units a year,
  alternative B, using a local distributor, is
  cheapest with costs of €9.4M (2.4M + 10K
  x 700)
 Alternative A, exporting directly with
  existing facilities is not much more
  expensive at €9.8M (800K + 10K x 900),
  and is probably easier to organize.
 Option B has an average cost of €940,
  and adding a contribution to profit of 10%
  gives a selling price of 940 x 1.1 = €1034,
  and total profit of €940,000. If Warwick
  negotiated a royalty of 2% of sales, they
  would get a profit of only 1034 x 0.02 .
  10,000 = €206,800.
 Take note that Warwick still has to look at
  the more detailed costs, their aims, longer
  term plans, amount of control they want,
  and a whole series of other factors.
Choosing the Geographic
                             Geographical Regions
   Business Strategy
                                for Locations

Culture, Costs, Customers,
      Suppliers, etc
                             Countries and Areas

    Local Conditions           Cities and Towns

     Available Sites           Individual Sites

Hierarchy of Decisions for
   Facility location involves a hierarchy of
    decisions. At the top of this are the broad
    decisions about at which geographic
    regions to work in. Then come more local
    views that consider alternative countries
    or areas within this region. Then we look
    more closely at alternative towns and
    cities within this area.

Overall Approach
 The broad decisions about geographical
  regions and countries come from the
  business strategy. An organization with a
  strategy of global operations or expansion
  must continually look for new locations.
 Obvious choices for location are to get
  close to customers, or close to suppliers.
   Another option is to open facilities in
    areas that give lower operating costs.
    Manufacturers move to areas with low
    production costs, even when these are
    some way from both their customers and
    suppliers. This puts more pressure on
    logistics. The supply chains become more
    complicated, but logistics has to be so
    efficient that lower production costs are
    not swamped by higher logistics costs.
 A problem with moving to areas with low
  cost operations is that they might give
  higher total costs than expected.
 Another problem is that transport costs
  change quickly, and rises can make them
  more important than operating costs.
 Perhaps the overriding consideration is
  that costs may not be a dominant factor
  in location. A logistics strategy might
  focus on quality, flexibility, speed of
  response, reliability, customer service and
  so forth, rather than lowest cost.
   Location of Customers
   Location of Suppliers and Materials
   Cultures
   Government Attitudes
   Direct Costs
   Indirect Costs
   Exchange Rates
   Social Attitudes
   Organization
   Operations
Considerations in Choosing
Infinite Set Approaches
 After making a decision about the
  geographical region and country, an
  organization has to look in more detail at
  the areas, towns, cities, and individual
 There are several ways they can approach
  these decisions, and the best depends on
  specific circumstances.
 One approach that is NOT recommended
   Infinite Set Approach
    ◦ Which uses geometric arguments to find the
      best location, assuming that there are not
      restrictions on site availability.
   Feasible Set Approach
    ◦ Where there are only a small number of
      feasible sites, and an organization has to
      choose the best.

Two Distinct Approaches to
Location Decisions
A   facility can be located near to
 It can be located near to suppliers
 It can be located at some point
  between suppliers and customers

Simple Methods (Infinite Set)


   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. In practice, many of
    the costs of running a facility are fixed
    regardless of its location.

Costing Models (Feasible Set)
   If an organization concentrates activities
    in a few key locations – such as main
    logistics centers – inward transport
    consists of large deliveries made to a few
    facilities and the cost is low. However, the
    few facilities are, on average, further
    away from customers and the outward
    transport cost is high.

Arguments (For Costing Models)
   If there are a large number of spread-out
    facilities – such as retail shops – inward
    transport consists of small deliveries to
    more destinations and the cost is high.
    The facilities are, on average, nearer to
    customers, so they have the benefits of
    higher customer service and lower
    outward transport cost.
   Operating costs also vary with facility size,
    with larger facilities generally more
    efficient and giving economies of scale.
    Remember, though, that larger facilities
    do not necessarily give economies of
    scale, and there can be real
    ‘diseconomies’ caused by higher cost of
    supervision, coordination, communication,
Few facilities give
low cost for inward
transport, but high
cost for outward

More facilities give
high cost for
inward transport,
but low cost for
outward transport
 Scoring models emphasize the factors
  that are important for locations, but which
  cannot easily be costed or quantified.
 Even if we cannot quantify the important
  factors, we still need to identify them.

Scoring Models (Feasible Set)
   Availability, skills and productivity of
   Local and national government policies,
    regulations, grants and attitudes
   Political stability
   Economic strength and trends
   Climate and attractiveness of locations
   Quality of life – including health, education,
    welfare and culture
   Location of major suppliers and markets
   Infrastructure – particularly transport and
   Culture and attitudes of people
In the region and country…
 Population  and population trends
 Availability of sites and development
 Number, size and location of
 Local regulations and restrictions on
 Community feelings
 Local services, including transport
  and utilities

In the city or area…
 Amount   and type of passing
 Ease of access and parking
 Access to public transport
 Organizations working nearby
 Total costs of the site
 Potential for expansion or

In the site…
   For manufacturing businesses
    ◦ Availability of a workforce with appropriate
    ◦ Labor relations and community attitudes
    ◦ Environment and quality of life for employees
    ◦ Closeness of suppliers and services
    ◦ Quality of infrastructure
    ◦ Government policies toward industry

Important Factors for Scoring Models
   For services
    ◦ Population density
    ◦ Socio-economic characteristics of the nearby
    ◦ Location of competitors and other services
    ◦ Location of other attractions such as retail
    ◦ Convenience for passing traffic and public
    ◦ Ease of access and convenient parking
    ◦ Visibility of site
   Sometimes it is difficult to relate the two
    approaches to actual road layout and
    geographic features. There are, however,
    many databases of road networks that
    automatically find the best routes
    between two points, such as Microsoft
    AutoRoute Express and Softkey Journey

Network Models

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