Facility Location Relevance of Facility Location Decisions Types

Location Case Studies n Case 1: Ikea has not open a center in Valencia.

Importance of Facility Location n n Facility Location decisions are part of the company’s

Topics n n n n Importance of Facility Location. Causes & Types of Facility

Causes that originate Location decision problems q An expanding market. n q q Introduction

Location Alternatives n Expansion of an existent facility. q q q n Only possible

Issues in Facility Location n n n Proximity to Customers Business Climate Total Costs

Plant Location Methods If the Boss likes Bakersfield, I like Bakersfield

Competitive STRATEGY INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact,

Levels of Decisions. Market Region Market Potential Market Share Operating Cost Subregion Transport Cost

General Process for Facility Location n n Creation of a multifunctional team to perform

Trends & Future Strategies n Most of the Facility Location factors vary with time:

Trends & Future Strategies n Changes in the economic environment: q Industry processes automation.

Trends & Future Strategies n Changes in the economic environment: q Transportation and IT

Locating service facilities n n Because of the variety of service firms and the

Cost vs Response TIme Hi Local FG Mix Regional FG Local WIP Cost Central

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 Response time vs. Number of facilities Number of Facilities

Cost vs Number of Facilities Total Costs Cost of Operations Percent Service Level Within

Methods of Facility Location Selection n Centroid Methods Factors Rating Analysis. Economic Analysis. q

Centroid Method N/S 150 120 Transport cost are related to volume 1. 000 90

Factor-Rating Method n n Popular because a wide variety of factors can be included

Factor-Rating Example Critical Success Factor Labor availability and attitude People-to car ratio Per capita

Locational Break-Even Analysis Example Three locations: Fixed Variable Total City Cost Akron $30, 000

Annual cost Locational Break-Even Analysis Example – $180, 000 – – $160, 000 –

Network Optimization Models n n Allocating demand to production facilities Locating facilities and allocating

Conventional Network Vendor DC Materials DC Finished Goods DC Customer Store Component Manufacturing Customer

Demand Allocation Model Which market is served by which plant? n Which supply sources

Plant Location with Multiple Sourcing n n yi = 1 if plant is located

Multi-echelon Regional Finished Goods DC National Finished Goods DC Regional Finished Goods DC Local

Set Covering Models Define: cj cost of locating facility at site j aij xj

Greedy Heuristic for Set Covering Problem: Step 1: Step 2: Step 3: Step 4

Example: A rural country administration wants to locate several medical emergency response units so

Example: 1 [dij]= 2 3 4 1 7 0 8 8 3 50 9

Example 4: The response units can be located in the center of population zones

Solution: Defining aij = { 1 0 if zone i’s center can be reached

Solution: Minimize Subject to: 100 x 1+80 x 2+120 x 3+110 x 4+90 x

Greedy Heuristic Step 1: Since each cj > 0, j = 1, 2, .

Greedy Heuristic Step 3: c 1 100 = = 33. 3 d 1 3

Greedy Heuristic Since the minimum ck/dk occurs for k = 2, set x 2

Greedy Heuristic: Step 4: Since we have two constraints go to step 1. Step

Greedy Heuristic Step 3: c 3 d 3 c 4 d 4 c 5

Greedy Heuristic Since the minimum ck/dk occurs for k = 4, set x 4

Greedy Heuristic: Step 4: Since there are no constraints in the above model, set

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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 n Case 1: Ikea has not open a center in Valencia. n 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 thrid painting facility of this type after (USA and South Korea). n Case 3: Grupo F Segura, following the requirements of their clients (mainly VW group) opens a factory at Hungary. n Case 4: Ford Motor Company is to decide where to assemble the next generation of Ford Focus and Ford Fiesta. n Case 5: Zara UK is opening a new store in Canary Wharf

Importance of Facility Location n n Facility Location decisions are part of the company’s strategy. Infrequent but expensive. Reasons for the importance: q q Facility Location requires large investment that can not be recovered. Facility Location decisions affect the competitive capacity of the company. n q The facility location decisions affect not only costs but the company’s income: n n q All areas of the company are affected by Facility Location: Operations, but also Business Development, Human Resources, Finance, etc. 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: n n Land costs. Labor costs. Raw materials. Transportation and distribution

Topics n n n n 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. q q q Centroid Methods Factors Rating Analysis. Economic Analysis. Transportation (Mathematical Programming Methods). Set Covering.

Causes that originate Location decision problems q An expanding market. n q q Introduction of new products or services. A contracting demand, or changes in the location of the demand. n q q It means the creation of a new modern plant somewhere else. The pressure of the competence. n q Example: Extraction companies. Obsolescence of a manufacturing facility due to the appearance of new technologies. n q It may require the shut down and/or relocation of operations. The exhaustion of raw materials in a certain area. n q It will require the addition of more capacity at a certain geographic point, either in an existent facility or in a new one. 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. n Some facilities may appear as redundants, or bad located with respect to others.

Location Alternatives n Expansion of an existent facility. q q q n 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. q Sometimes is a more advantageous option than the previous one (if there are problems related to lose of focus on the company’s objectives). n Shut down of a facility and (or not) starting of a new one somewhere else. n Moving production from one plant to other.

Issues in Facility Location n n n 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

Competitive STRATEGY INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility COMPETITIVE ENVIRONMENT GLOBAL COMPETITION PHASE I Supply Chain Strategy PHASE II Regional Facility Configuration REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK PHASE III Desirable Sites PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific TARIFFS AND TAX INCENTIVES PHASE IV Location Choices AVAILABLE INFRASTRUCTURE LOGISTICS COSTS Transport, inventory, coordination

Levels of Decisions. Market Region Market Potential Market Share Operating Cost Subregion Transport Cost (RM) Taxes Raw material costs Labor Cost and Availability Community Access to market/materials Material Cost Labor Cost and Availability Taxes Availability of public services Availabilty of sites Community amenities Sites Access to transport Network Site Characterics Taxes Availability of public services Land acquisition costs Construction Costs

General Process for Facility Location n n Creation of a multifunctional team to perform the study. Preliminary analysis. q q 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…). n n Search of Location Alternatives. q n Establishment of a group of location candidates. Evaluation of Alternatives (detailed analysis). q n The multifunctional team must distinguish between: Dominant factors (essential); Secondary factors (desirable). Information gathering from each location to be measured against each of the factors considered. Selection of Facility Location. q q 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.

Trends & Future Strategies n Most of the Facility Location factors vary with time: q n The accelerated changes in the economic environment are impacting the frequency of Facility Location decisions. Changes in the economic environment: q q q 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 n Changes in the economic environment: q Industry processes automation. n n n 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 n Changes in the economic environment: q Transportation and IT development. n n n q 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. n 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.

Locating service facilities n n 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 Hi Local FG Mix Regional FG Local WIP Cost Central FG Central WIP Central Raw Material and Custom production with raw material at suppliers 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 Response time vs. Number of facilities Number of Facilities

Cost vs Number of Facilities Total Costs Cost of Operations Percent Service Level Within Promised Time Facilities Inventory Transportation Labor Number of Facilities

Methods of Facility Location Selection n Centroid Methods Factors Rating Analysis. Economic Analysis. q q n n Income independent upon location. Income dependent upon location. Transportation (Mathematical Programming Methods). Set Covering. q q No limitation of facilities. Limitation of facilities.

Centroid Method N/S 150 120 Transport cost are related to volume 1. 000 90 1. 000 2. 000 60 30 2. 000 E/O 30 Origen arbitrario 60 90 120 150 Cx , Cy = Gravity Center dix , diy = coordinates de la ubicación i Vi = Volume of goods moved from/to i

Factor-Rating Method n n Popular because a wide variety of factors can be included in the analysis Six steps in the method q Develop a list of relevant factors called critical success factors q Assign a weight to each factor q Develop a scale for each factor q Score each location for each factor q Multiply score by weights for each factor for each location q Recommend the location with the highest point score

Factor-Rating Example Critical Success Factor Labor availability and attitude People-to car ratio Per capita income Tax structure Education and health Totals Weight Scores (out of 100) France Denmark Weighted Scores France Denmark . 25 70 60 . 05 50 60 . 10. 39 85 75 80 70 (. 10)(85) = 8. 5 (. 10)(80) = 8. 0 (. 39)(75) = 29. 3 (. 39)(70) = 27. 3 . 21 60 70 (. 21)(60) = 12. 6 (. 21)(70) = 14. 7 1. 00 (. 25)(70) = 17. 5 (. 25)(60) = 15. 0 (. 05)(50) = 2. 5 70. 4 (. 05)(60) = 3. 0 68. 0 Table 8. 3

Locational Break-Even Analysis Example Three locations: Fixed Variable Total City 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

Annual cost Locational Break-Even Analysis Example – $180, 000 – – $160, 000 – $150, 000 – e – curv t s o $130, 000 – go c a c i – Ch $110, 000 – n ee r – g G ve – wlin t cur o $80, 000 – B cos t s – co $60, 000 – on rve r – Ak cu – Akron Bowling Green $30, 000 – lowest cost – cost $10, 000 – | | | – 0 500 1, 000 1, 500 2, 000 Volume Chicago lowest cost | | 2, 500 3, 000

Network Optimization Models n n 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 Vendor DC Materials DC Finished Goods DC Customer Store Component Manufacturing Customer DC Plant Warehouse Components DC Vendor DC Final Assembly Customer Store Finished Goods DC Customer Store Customer DC Customer Store

Demand Allocation Model Which market is served by which plant? n Which supply sources are used by a plant? xij = Quantity shipped from plant site i to customer j n

Plant Location with Multiple Sourcing n n yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j

Multi-echelon Regional Finished Goods DC National Finished Goods DC Regional Finished Goods DC Local DC Cross-Dock Store 1 Customer 1 DC Customer 2 DC Store 1 Store 2 Store 3

Set Covering Models Define: cj cost of locating facility at site j aij xj = { 1 0 if facility located at site j can cover customer i Otherwise if facility located at site j Otherwise The set covering problem is to:

The set covering problem is to:

Greedy Heuristic for Set Covering Problem: Step 1: Step 2: Step 3: Step 4 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. 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. 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. 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 [dij]= 2 3 4 1 7 0 8 8 3 50 9 9 3 2 3 4 5 6 4 12 6 15 10 0 15 60 7 2 13 0 8 6 5 11 8 0 9 10

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, 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 aij = { 1 0 if zone i’s center can be reached from center of zone j within 8 minutes 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: 100 x 1+80 x 2+120 x 3+110 x 4+90 x 5+90 x 6+110 x 7 x 1 + x 2 + x 4 + x 1 + x 2 + x 5 + x 3 + x 4 + x 5 + x 1 + , x 2 + + x 2 + , x 3 + + x 3 , x 4 + + x 5 x 4 x 6 + , x 5 + + , x 7 =1 =1 =1 x 7 =1 =1 x 6 x 6 =1 , x 7 =1 {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: c 1 100 = = 33. 3 d 1 3 c 5 90 = = 22. 5 d 5 4 c 2 80 = = 16 d 2 5 c 6 90 = = 22. 5 d 6 4 c 3 120 = = 30 d 3 5 c 7 110 = = 27. 5 d 7 4 c 4 110 = = 27. 5 d 4 4

Greedy Heuristic Since the minimum ck/dk occurs for k = 2, set x 2 = 1 and remove the first two and the last three constraints. The resulting model is shown below. Minimize Subject to: 100 x 1+120 x 3+110 x 4+90 x 5+90 x 6+110 x 7 x 3 + x 4 + x 5 + x 6 =1 x 3 + x 4 + x 7 =1 x 1 , x 3 , x 4 , x 5 , x 6 , x 7 {0, 1}

Greedy Heuristic: Step 4: Since we have two constraints go to step 1. Step 1: Since c 1 > 0, j = 1, 3, 4, . . . , 7, go to step 2 Step 2: Since c 1 > 0 and x 1 does not appear in any of the constraints with a +1 coefficient, set x 1 = 0.

Greedy Heuristic Step 3: c 3 d 3 c 4 d 4 c 5 d 5 c 6 d 6 = = 120 2 110 2 90 1 = 60 = 55 = 90 c 7 d 7 = 110 1 = 110

Greedy Heuristic Since the minimum ck/dk occurs for k = 4, set x 4 = 1 and remove both constraints in the above model since x 4 has a +1 coefficient in each. The resulting model is shown below. Minimize Subject to: 120 x 3+90 x 5+90 x 6+110 x 7 x 3 , x 5 , x 6 , x 7 =0

Greedy Heuristic: Step 4: Since there are no constraints in the above model, set x 3 = x 5 = x 6 = x 7 = 0 and stop. The solution is x 2 = x 4 = 1; x 1 = x 3 = x 5 = x 6 = x 7 = 0. Cost of locating emergency response units to meet the eight minute response service level is 80 + 110 = 190.