Week 5

Facility Locations
TQM
Reasons and Importance of location decisions

🞂​Factorsaffecting location decision of

service, and manufacturing organizations

🞂​Techniques of location analysis: Qualitative and

quantitative analysis;
 Factors Affecting Location
Decisions

Location decisions are considered as strategic decisions as they have

long term impact on profitability of an organization. Most of the location
decisions are irreversible. Once a company decides to locate its plant or
retail outlet after incurring huge cost it becomes very difficult for it to
change or renew the location of that outlet.
Location Decision Sequence
 Factors Affecting
Location Decision

Selection of Region or Selection of Community Selection of the Site

Area
• Labour Facility • Soil, Size
• Quality of Life and
•Availability of •Community & Topography
Raw Materials Labour Attitudes • Easy Availability
• Location of •Local Taxes of Cheap Land
Markets and • Transport
• Labour Supply
Restrictions Facility
• Transportation •Finance and • Disposal of
Facilities Research Facilities Waste Materials
• Climate and • Water Supply
etc.
Taxes • Risk of
• Power Sources
Uncertainties etc.
•Governmental
Policies etc.
 Factors Affecting Location
Decisions

Selection of a region. This refers

to a selection of a particular
geographical zone or state taking
into consideration such factors as
nearness to market and sources of
raw materials, basic infrastructure
facilities available, climatic
conditions and taxation and laws.
 Factors Affecting Location
Decisions
Selection of a community. This refers to the selection of the
specific location within the selected region. The factors that influence
the selection of community are availability of labor, community
attitude, social structure and service facilities. Generally the
following alternatives of community are available:
(a) Urban area
(b) Sub-Urban area
(c) Rural area
Comparison of Service and Manufacturing
Considerations

Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking
 Technique of Location
Analysis
Factor/Point Rating Method

Factor rating method is used for evaluating wide range of intangible

factors associated importantly with location.

• Factor rating method is a kind of survey technique which follows

following steps:

🞂​Step 1: Identify the sensitive factors for location decisions. For

example, direct materials, direct labour, power, taxes, insurance etc.

🞂​Step 2: Rate each factor from 1(very poor) to 5 (very good)

according to their merit basis. For example, Factor rate – 4, 3, 2, 5,
1.

Step 3: Rate the alternative location from 1 (very low) to 10 (very

high) according to their merits of each characteristics. For example,
10, 6, 8, 4, 2, so on.
 Factor/Point Rating
Method

🞂​Step3: Rate the alternative location from 1 (very low) to 10 (very

high) according to their merits of each characteristics. For
example, 10, 6, 8, 4, 2, so on.

🞂​Step 4: Multiply the factor rate and alternative location rate and
find the total score of each alternative location.

Step 5: Select the location with highest score.

 Analysis of Location under Factor Rating
Method
Location A Location B
Factors Factor Locatio Factor Locatio
Total Total
Rate n Rate n
Rate Rate
Direct 5 10 50 2 8 16
Materials

Direct Labour 4 9 36 3 10 30
Climate 3 7 21 4 7 28
Transportatio 2 5 10 5 5 25
n

Power 1 4 4 1 3 3
Taxes 5 2 10 2 2 4
Insurance 4 1 4 3 4 12
Total 135 118
Decision: From above analysis, location A is the best location
because
it has the maximum score i.e. 135.
 Centre Gravity Method

• Centre of gravity or weight centre is a

technique of quantitative method for
locating a facility such as a warehouse
at the centre of movement in a
geographic are based on weight and
distance.

• Locates a single facility to serve many

destinations (customers)

• It is a mathematical technique that can

be used for locating a distribution
centre that will minimize distribution
 Centre Gravity Method

This method identifies a set of coordinates designating a central location

on a map relative to all other locations. This has following steps:

• Step 1: Place location on a coordinate system.

• Step 2: Determine the centre of gravity using following

equations/formula:

Σ
X - Coordinate value =
Σ𝑿𝑾
𝑾
Σ
Y –Coordinate value =
Σ𝒀𝑾
𝑾
Where,
X, Y= Coordinates of existing facility.
W = Annual weight shipped from
facility.
Example: A Himalayan Company is investigating which location could be best
as a centre relative. Following are the information that has been collected for that
purpose.

Location XY-Coordinates (in Tons per year

miles)

A (10, 20) 10
B (20, 30) 20
C (5, 10) 5
D (20, 40) 10

Identify the center gravity value.

Solution: Let’s identify the information for the requirement of formula
given.

Location XY- Tons/ XW YW

Coordinates Year
(in miles) (W)
A (10, 20) 10 100 200
B (20, 30) 20 400 600
C (5, 10) 5 25 50
D (20, 40) 10 200 400

Total 45 725 1250

Solution: Let’s identify the information for the
requirement of formula given.

Now, applying formulas, we will get the results

as:
Σ𝑿𝑾 𝟕𝟐𝟓
Σ𝑾 𝟒𝟓
X - Coordinate value = = = 16.11
Σ𝒀𝑾 𝟏𝟐𝟓𝟎
Y – Coordinate value = = =
Σ𝑾
𝟒𝟓
27.78

Decision: Calculated XY-coordinate value is (16.11, 27.78). Location B

should be selected as a best location because calculated XY coordinate
value is nearer to given XY coordinate value of Location B (16.11,
27.78 : 20, 30).
Least Cost /Locational Break-Even-Analysis (BEA)
Method
• Least cost /Locational Break-even analysis is the use of cost-
volume analysis to make an economic comparison of
location alternatives.

• By identifying fixed and variable costs and graphing them

for each location, we can determine which one provides
the lowest cost.

• It is particularly useful when the operation manager wants

to define the ranges over which each alternative is best.

• Locational break-even analysis can be done

mathematically or graphically.
 Least Cost /Locational Break-Even-Analysis (BEA)
Method
The graphic approach has the advantage of providing the range of
volume over which each location is preferable. The steps to locational
break-even analysis are as follows:

Step 1: Determine the fixed and variable cost for each location.

Step 2: Plot the total cost for each location, with costs on the
vertical axis of the graph and annual volume on the horizontal
axis.

Step 3: Select the location that has the lowest total cost for the
expected production volume.
Example: Lalu, owner of Hallmark Shopping Mall, is considering three
locations-Lajimpat, Baneshwor and Boudha. He wishes to find the most
economical location for an expected volume of 2,000 units per year.

Location Fixed cost($) Variable cost ($)

Lajimpat 30,000 75
Baneshwor 60,000 45
Boudha 1,10,000 25

Solution
🞂​For each of the three locations, total cost is calculated with 2000 units

of volume of production.

Total cost = Fixed cost + Cost per unit × Volume of production.

For Lajimpat,
Total cost = $ 30000 + $75 × 2000 = $ 180,000
 For Baneshwor,
Total cost = $60000 + $45 × 2000 = $150,000

For Boudha,
Total cost = $110000 + $25 × 2000 = $ 160,000

Hence, with an expected volume of 2000 units per year,

Baneshwor provides the lowest cost location. So, Baneshwor is
selected as best location.

Calculating the Cross-Over Point

For Lajimpat and

Baneshwor 30000 + 75x =
60000 +30x
or, 45x= 30000
x = 1000 units.

🞂 ​ For Baneshwor and Boudha

60000 + 45x = 110000 +
25x
or, 20x = 50000
x = 2500 units
 $
180,000

$
160,000
$
150,000
Total Cost

$
130,000

$
110,000

80,000

60,000 Lajimpat is Baneshwor is Boudha is

$ best best best
10,000
50 1000 1500 2000 2500 3000
$ 0 3500 of Production Units
Expected Volume
30,000
Summarized Table for Location
Decisions
Volume range Lowest cost location

0-999 units Lajimpat

1000 Units La or Ba

1001-2499 units Baneshwor

2500 Units Ba or Bou

≥ 2500 units Boudha