Supply Chain Location Decisions Chapter 11 11-01
What is a Facility Location? Facility Location The process of determining geographic sites for a firm s operations. Distribution center (DC) A warehouse or stocking point where goods are stored for subsequent distribution to manufacturers, wholesalers, retailers, and customers. 11-02
Location Decisions Location decisions affect processes and departments Marketing Human resources Accounting and finance Operations International operations 11-03
Location Decisions Factors affecting location decisions Sensitive to location High impact on the company s ability to meet its goals 11-04
Location Decisions Dominant factors in manufacturing Favorable labor climate Proximity to markets Impact on Environment Quality of life Proximity to suppliers and resources Proximity to the parent company s facilities Utilities, taxes, and real estate costs Other factors 11-05
Location Decisions Dominant factors in services Impact of location on sales and customer satisfaction Proximity to customers Transportation costs and proximity to markets Location of competitors Site-specific factors 11-06
What is a GIS? GIS Geographical Information System A system of computer software, hardware, and data that the firm s personnel can use to manipulate, analyze, and present information relevant to a location decision. 11-07
Locating a Single Facility Expand onsite, build another facility, or relocate to another site Onsite expansion Building a new plant or moving to a new retail or office space Comparing several sites 11-08
Selecting a New Facility Step 1: Step 2: Step 3: Step 4: Step 5: Identify the important location factors and categorize them as dominant or secondary. Consider alternative regions; then narrow to alternative communities and finally specific sites. Collect data on the alternatives. Analyze the data collected, beginning with the quantitative factors. Bring the qualitative factors pertaining to each site into the evaluation. 11-09
Example 11.1 A new medical facility, Health-Watch, is to be located in Erie, Pennsylvania. The following table shows the location factors, weights, and scores (1 = poor, 5 = excellent) for one potential site. The weights in this case add up to 100 percent. A weighted score (WS) will be calculated for each site. What is the WS for this site? Location Factor Weight Score Total patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preferences 10 5 11-10
Example 11.1 The WS for this particular site is calculated by multiplying each factor s weight by its score and adding the results: Location Factor Weight Score Total patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preferences 10 5 WS = (25 4) + (20 3) + (20 3) + (15 4) + (10 1) + (10 5) = 100 + 60 + 60 + 60 + 10 + 50 = 340 The total WS of 340 can be compared with the total weighted scores for other sites being evaluated. 11-11
Application 11.1 Management is considering three potential locations for a new cookie factory. They have assigned scores shown below to the relevant factors on a 0 to 10 basis (10 is best). Using the preference matrix, which location would be preferred? Location Factor Weight The Neighborhood Sesame Street Material Supply 0.1 5 9 8 Quality of Life 0.2 9 8 4 Mild Climate 0.3 10 6 8 Labor Skills 0.4 3 4 7 Ronald s Playhouse 11-12
Application 11.1 Management is considering three potential locations for a new cookie factory. They have assigned scores shown below to the relevant factors on a 0 to 10 basis (10 is best). Using the preference matrix, which location would be preferred? Location Factor Weight The Neighborhood Material Supply 0.1 5 0.5 9 0.9 8 Quality of Life 0.2 9 1.8 8 1.6 4 Mild Climate 0.3 10 3.0 6 1.8 8 Labor Skills 0.4 3 1.2 4 1.6 7 6.5 Sesame Street 5.9 Ronald s Playhouse 0.8 0.8 2.4 2.8 6.8 11-13
Applying the Load-Distance (ld) Method Identify and compare candidate locations Like weighted-distance method Select a location that minimizes the sum of the loads multiplied by the distance the load travels Time may be used instead of distance 11-14
Applying the Load-Distance (ld) Method Calculating a load-distance score Varies by industry Use the actual distance to calculate ld score Use rectangular or Euclidean distances Different measures for distance Find one acceptable facility location that minimizes the ld score Formula for the ld score ld = l i d i i 11-15
Application 11.2 What is the distance between (20, 10) and (80, 60)? Euclidean distance: d AB = (x A x B ) 2 + (y A y B ) 2 = (20 80) 2 + (10 60) 2 = 78.1 Rectilinear distance: d AB = x A x B + y A y B = 20 80 + 10 60 = 110 11-16
Application 11.3 Management is investigating which location would be best to position its new plant relative to two suppliers (located in Cleveland and Toledo) and three market areas (represented by Cincinnati, Dayton, and Lima). Management has limited the search for this plant to those five locations. The following information has been collected. Which is best, assuming rectilinear distance? Location x,y coordinates Trips/year Cincinnati (11,6) 15 Dayton (6,10) 20 Cleveland (14,12) 30 Toledo (9,12) 25 Lima (13,8) 40 11-17
Application 11.3 Location x,y coordinates Trips/year Cincinnati (11,6) 15 Dayton (6,10) 20 Cleveland (14,12) 30 Toledo (9,12) 25 Lima (13,8) 40 Cincinnati = Dayton = Cleveland = Toledo = Lima = 15(0) + 20(9) + 30(9) + 25(8) + 40(4) = 810 15(9) + 20(0) + 30(10) + 25(5) + 40(9) = 920 15(9) + 20(10) + 30(0) + 25(5) + 40(5) = 660 15(8) + 20(5) + 30(5) + 25(0) + 40(8) = 690 15(4) + 20(9) + 30(5) + 25(8) + 40(0) = 590 11-18
Center of Gravity Method A good starting point Find x coordinate, x*, by multiplying each point s x coordinate by its load (l t ), summing these products l i x i, and dividing by l i The center of gravity s y coordinate y* found the same way Generally not the optimal location x* = l i x i i l i i y* = l i y i i l i i 11-19
Example 11.2 A supplier to the electric utility industry produces power generators; the transportation costs are high. One market area includes the lower part of the Great Lakes region and the upper portion of the southeastern region. More than 600,000 tons are to be shipped to eight major customer locations as shown below: Customer Location Tons Shipped x, y Coordinates Three Rivers, MI 5,000 (7, 13) Fort Wayne, IN 92,000 (8, 12) Columbus, OH 70,000 (11, 10) Ashland, KY 35,000 (11, 7) Kingsport, TN 9,000 (12, 4) Akron, OH 227,000 (13, 11) Wheeling, WV 16,000 (14, 10) Roanoke, VA 153,000 (15, 5) 11-20
What is the center of gravity for the electric utilities supplier? Using rectilinear distance, what is the resulting load distance score for this location? Example 11.2 Customer Location Tons Shipped x, y Coordinates Three Rivers, MI 5,000 (7, 13) Fort Wayne, IN 92,000 (8, 12) Columbus, OH 70,000 (11, 10) Ashland, KY 35,000 (11, 7) Kingsport, TN 9,000 (12, 4) Akron, OH 227,000 (13, 11) Wheeling, WV 16,000 (14, 10) Roanoke, VA 153,000 (15, 5) The center of gravity is calculated as shown below: l i = i l i x i = i 5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607 5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13) + 16(14) + 153(15) = 7,504 l i x i i x* = = l i 7,504 607 = 12.4 i 11-21
Example 11.2 What is the center of gravity for the electric utilities supplier? Using rectilinear distance, what is the resulting load distance score for this location? l i y i = i Customer Location Tons Shipped 5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11) + 16(10) + 153(5) = 5,572 x, y Coordinates Three Rivers, MI 5,000 (7, 13) Fort Wayne, IN 92,000 (8, 12) Columbus, OH 70,000 (11, 10) Ashland, KY 35,000 (11, 7) Kingsport, TN 9,000 (12, 4) Akron, OH 227,000 (13, 11) Wheeling, WV 16,000 (14, 10) Roanoke, VA 153,000 (15, 5) l i y i i x* = = l i i 5,572 607 = 9.2 11-22
Example 11.2 What is the center of gravity for the electric utilities supplier? Using rectilinear distance, what is the resulting load distance score for this location? The resulting load-distance score is Customer Location Tons Shipped x, y Coordinates Three Rivers, MI 5,000 (7, 13) Fort Wayne, IN 92,000 (8, 12) Columbus, OH 70,000 (11, 10) Ashland, KY 35,000 (11, 7) Kingsport, TN 9,000 (12, 4) Akron, OH 227,000 (13, 11) Wheeling, WV 16,000 (14, 10) Roanoke, VA 153,000 (15, 5) ld = l i d i = 5(5.4 + 3.8) + 92(4.4 + 2.8) + 70(1.4 + 0.8) + 35(1.4 i + 2.2) + 90(0.4 + 5.2) + 227(0.6 + 1.8) + 16(1.6 + 0.8) + 153(2.6 + 4.2) = 2,662.4 where d i = x i x* + y i y* 11-23
Application 11.4 A firm wishes to find a central location for its service. Business forecasts indicate travel from the central location to New York City on 20 occasions per year. Similarly, there will be 15 trips to Boston, and 30 trips to New Orleans. The x, y-coordinates are (11.0, 8.5) for New York, (12.0, 9.5) for Boston, and (4.0, 1.5) for New Orleans. What is the center of gravity of the three demand points? l i x i i x* = = l i l i y i i y* = = l i i i [(20 11) + (15 12) + (30 4)] (20 + 15 + 30) [(20 8.5) + (15 9.5) + (30 1.5)] (20 + 15 + 30) = 8.0 = 5.5 11-24
Using Break-Even Analysis Compare location alternatives on the basis of quantitative factors expressed in total costs Determine the variable costs and fixed costs for each site Plot total cost lines Identify the approximate ranges for which each location has lowest cost Solve algebraically for break-even points over the relevant ranges 11-25
Example 11.3 An operations manager narrowed the search for a new facility location to four communities. The annual fixed costs (land, property taxes, insurance, equipment, and buildings) and the variable costs (labor, materials, transportation, and variable overhead) are as follows: Community Fixed Costs per Year Variable Costs per Unit A $150,000 $62 B $300,000 $38 C $500,000 $24 D $600,000 $30 11-26
Example 11.3 Step 1:Plot the total cost curves for all the communities on a single graph. Identify on the graph the approximate range over which each community provides the lowest cost. Step 2:Using break-even analysis, calculate the break-even quantities over the relevant ranges. If the expected demand is 15,000 units per year, what is the best location? 11-27
Example 11.3 To plot a community s total cost line, let us first compute the total cost for two output levels: Q = 0 and Q = 20,000 units per year. For the Q = 0 level, the total cost is simply the fixed costs. For the Q = 20,000 level, the total cost (fixed plus variable costs) is as follows: Community Fixed Costs A $150,000 B $300,000 C $500,000 D $600,000 Variable Costs (Cost per Unit)(No. of Units) Total Cost (Fixed + Variable) 11-28
Example 11.3 To plot a community s total cost line, let us first compute the total cost for two output levels: Q = 0 and Q = 20,000 units per year. For the Q = 0 level, the total cost is simply the fixed costs. For the Q = 20,000 level, the total cost (fixed plus variable costs) is as follows: Community Fixed Costs Variable Costs (Cost per Unit)(No. of Units) Total Cost (Fixed + Variable) A $150,000 B $300,000 C $500,000 D $600,000 $62(20,000) = $1,240,000 $1,390,000 $38(20,000) = $760,000 $1,060,000 $24(20,000) = $480,000 $980,000 $30(20,000) = $600,000 $1,200,000 11-29
Example 11.3 The figure shows the graph of the total cost lines. A is best for low volumes B for intermediate volumes C for high volumes. We should no longer consider community D, because both its fixed and its variable costs are higher than community C s. Annual cost (thousands of dollars) 1,600 1,400 1,200 1,000 800 600 400 200 Break-even point (20, 1,200) (20, 1,060) (20, 1,390) Break-even point A best B best C best 0 2 4 6 8 10 12 14 16 18 20 22 6.25 14.3 Q (thousands of units) (20, 980) A D B C 11-30
Example 11.3 The break-even quantity between A and B lies at the end of the first range, where A is best, and the beginning of the second range, where B is best. (A) (B) $150,000 + $62Q = $300,000 + $38Q Q = 6,250 units The break-even quantity between B and C lies at the end of the range over which B is best and the beginning of the final range where C is best. (B) (C) $300,000 + $38Q = $500,000 + $24Q Q = 14,286 units 11-31
Example 11.3 The break-even quantity between A and B lies at the end of the first range, where A is best, and the beginning of the second range, where B is best. No other break-even quantities are (A) (B) $150,000 + $62Q = $300,000 + $38Q Q = 6,250 units The break-even quantity between B and C lies at the end of the range over which B is best and the beginning of the final range where C is best. (B) (C) $300,000 + $38Q = $500,000 + $24Q Q = 14,286 units needed. The break-even point between A and C lies above the shaded area, which does not mark either the start or the end of one of the three relevant ranges. 11-32
Application 11.5 By chance, the Atlantic City Community Chest has to close temporarily for general repairs. They are considering four temporary office locations: Property Address Move-in Costs Monthly Rent Boardwalk $400 $50 Marvin Gardens $280 $24 St. Charles Place $360 $10 Baltic Avenue $60 $60 Use the graph on the next slide to determine for what length of lease each location would be favored? Hint: In this problem, lease length is analogous to volume. 11-33
Total Cost Application 11.5 F s + c s Q = F B + c B Q Q = F B F s c s c B $60 $360 = $10 $60 300 = = 6 months 50 500 400 300 200 Boardwalk St Charles Place Marvin Gardens Baltic Avenue The short answer: Baltic Avenue if 6 months or less, St. Charles Place if longer 100 0 1 2 3 4 5 6 7 8 Months 11-34
Locating a facility within a Supply Chain Network When a firm with a network of existing facilities plans a new facility, one of two conditions exists Facilities operate independently Facilities interact 11-35
Locating Within a Network A five step GIS framework Step 1: Map the data Step 2: Split the area Step 3: Assign a facility location Step 4: Search for alternative sites Step 5: Compute ld scores and check capacity 11-36
The Transportation Method A special case of linear programming Represented as a standard table, sometimes called a tableau Rows of the table are linear constraints that impose capacity limitations Columns are linear constraints that require a certain demand level to be met Each cell in the tableau is a decision variable, and a per-unit cost is shown in each cell 11-37
Transportation Method for Location Basic steps in setting up the initial tableau Create a row for each plant and a column for each warehouse Add a column for plant capacities and a row for warehouse demands Each cell not in the requirements row or capacity column represents a shipping route from a plant to a warehouse. The sum of the shipments in a row must equal the corresponding plant s capacity and the sum of shipments in a column must equal the corresponding warehouse s demand 11-38
Transportation Method for Location Plant San Antonio, TX (1) Warehouse Hot Spring, AR (2) Sioux Falls, SD (3) Capacity Phoenix 5.00 6.00 5.40 400 Atlanta 7.00 4.60 6.60 500 Requirements 200 400 300 900 900 11-39
Transportation Method for Location Dummy plants or warehouses The sum of capacities must equal the sum of demands If capacity exceeds requirements we add an extra column (a dummy warehouse) If requirements exceed capacity we add an extra row (a dummy plant) Assign shipping costs to equal the stockout costs of the new cells Finding a solution The goal is to find the least-cost allocation pattern that satisfies all demands and exhausts all capacities 11-40
Example 11.4 The optimal solution for the Sunbelt Pool Company, found with POM for Windows, is shown below and displays the data inputs, with the cells showing the unit costs, the bottom row showing the demands, and the last column showing the supply capacities. 11-41
Example 11.4 Below shows how the existing network of plants supplies the three warehouses to minimize costs for a total of $4,580. All warehouse demand is satisfied: Warehouse 1 in San Antonio is fully supplied by Phoenix Warehouse 2 in Hot Springs is fully supplied by Atlanta. Warehouse 3 in Sioux Falls receives 200 units from Phoenix and 100 units from Atlanta, satisfying its 300-unit demand. 11-42
Example 11.4 Below shows the total quantity and cost of each shipment. The total optimal cost reported in the upper-left corner of the previous table is $4,580, or 200($5.00) + 200($5.40) + 400($4.60) + 100($6.60) = $4,580. 11-43
Example 11.4 11-44
Solved Problem 1 An electronics manufacturer must expand by building a second facility. The search is narrowed to four locations, all of which are acceptable to management in terms of dominant factors. Assessment of these sites in terms of seven location factors is shown in the following table. For example, location A has a factor score of 5 (excellent) for labor climate; the weight for this factor (20) is the highest of any. Calculate the weighted score for each location. Which location should be recommended? 11-45
Solved Problem 1 FACTOR INFORMATION FOR ELECTRONICS MANUFACTURER Factor Score for Each Location Location Factor Factor Weight A B C D 1. Labor climate 20 5 4 4 5 2. Quality of life 16 2 3 4 1 3. Transportation system 16 3 4 3 2 4. Proximity to markets 14 5 3 4 4 5. Proximity to materials 12 2 3 3 4 6. Taxes 12 2 5 5 4 7. Utilities 10 5 4 3 3 11-46
Solved Problem 1 Based on the weighted scores shown below, location C is the preferred site, although location B is a close second. CALCULATING WEIGHTED SCORES FOR ELECTRONIC MANUFACTURER Weighted Score for each Location Location Factor Factor Weight A B C D 1. Labor climate 20 2. Quality of life 16 3. Transportation system 16 4. Proximity to markets 14 5. Proximity to materials 12 6. Taxes 12 7. Utilities 10 Totals 100 11-47
Solved Problem 1 Based on the weighted scores shown below, location C is the preferred site, although location B is a close second. CALCULATING WEIGHTED SCORES FOR ELECTRONIC MANUFACTURER Weighted Score for each Location Location Factor Factor Weight A B C D 1. Labor climate 20 100 80 80 100 2. Quality of life 16 32 48 64 16 3. Transportation system 16 48 64 48 32 4. Proximity to markets 14 70 42 56 56 5. Proximity to materials 12 24 36 36 48 6. Taxes 12 24 60 60 48 7. Utilities 10 50 40 30 30 Totals 100 348 370 374 330 11-48
Solved Problem 2 The operations manager for Mile-High Lemonade narrowed the search for a new facility location to seven communities. Annual fixed costs (land, property taxes, insurance, equipment, and buildings) and variable costs (labor, materials, transportation, and variable overhead) are shown in the following table. a. Which of the communities can be eliminated from further consideration because they are dominated (both variable and fixed costs are higher) by another community? b. Plot the total cost curves for all remaining communities on a single graph. Identify on the graph the approximate range over which each community provides the lowest cost. c. Using break-even analysis, calculate the break-even quantities to determine the range over which each community provides the lowest cost. 11-49
Solved Problem 2 FIXED AND VARIABLE COSTS FOR MILE-HIGH LEMONADE Community Fixed Costs per Year Variable Costs per Barrel Aurora $1,600,000 $17.00 Boulder $2,000,000 $12.00 Colorado Springs $1,500,000 $16.00 Denver $3,000,000 $10.00 Englewood $1,800,000 $15.00 Fort Collins $1,200,000 $15.00 Golden $1,700,000 $14.00 11-50
Location costs (in millions of dollars) Solved Problem 2 10 8 6 Golden Break-even point 4 2 Break-even point Fort Collins Boulder Denver 0 1 2 3 4 5 6 2.67 Barrels of lemonade per year (in hundred thousands) 11-51
Solved Problem 2 a. Aurora and Colorado Springs are dominated by Fort Collins, because both fixed and variable costs are higher for those communities than for Fort Collins. Englewood is dominated by Golden. b. Fort Collins is best for low volumes, Boulder for intermediate volumes, and Denver for high volumes. Although Golden is not dominated by any community, it is the second or third choice over the entire range. Golden does not become the lowest-cost choice at any volume. 11-52
Solved Problem 2 c. The break-even point between Fort Collins and Boulder is $1,200,000 + $15Q = $2,000,000 + $12Q Q = 266,667 barrels per year The break-even point between Denver and Boulder is $3,000,000 + $10Q =$2,000,000 + $12Q Q = 500,000 barrels per year 11-53
Solved Problem 3 The new Health-Watch facility is targeted to serve seven census tracts in Erie, Pennsylvania, whose latitudes and longitudes are shown below. Customers will travel from the seven census-tract centers to the new facility when they need health care. What is the target area s center of gravity for the Health-Watch medical facility? LOCATION DATA AND CALCULATIONS FOR HEALTH WATCH Census Tract Population Latitude Longitude Population Latitude Population Longitude 15 2,711 42.134 80.041 114,225.27 216,991.15 16 4,161 42.129 80.023 175,298.77 332,975.70 17 2,988 42.122 80.055 125,860.54 239,204.34 25 2,512 42.112 80.066 105,785.34 201,125.79 26 4,342 42.117 80.052 182,872.01 347,585.78 27 6,687 42.116 80.023 281,629.69 535,113.80 28 6,789 42.107 80.051 285,864.42 543,466.24 Total 30,190 1,271,536.04 2,416.462.80 11-54
Solved Problem 3 11-55
Solved Problem 3 Next we solve for the center of gravity x* and y*. Because the coordinates are given as longitude and latitude, x* is the longitude and y* is the latitude for the center of gravity. 1,271,536.05 x* = = 42.1178 30,190 2,416,462.81 y* = 30,190 = 80.0418 The center of gravity is (42.12 North, 80.04 West), and is shown on the map to be fairly central to the target area. 11-56
Solved Problem 4 The Arid Company makes canoe paddles to serve distribution centers in Worchester, Rochester, and Dorchester from existing plants in Battle Creek and Cherry Creek. Arid is considering locating a plant near the headwaters of Dee Creek. Annual capacity for each plant is shown in the right-hand column of the tableau. Transportation costs per paddle are shown in the tableau in the small boxes. For example, the cost to ship one paddle from Battle Creak to Worchester is $4.37. The optimal allocations are also shown. For example, Battle Creek ships 12,000 units to Rochester. What are the estimated transportation costs associated with this allocation pattern? 11-57
Solved Problem 4 Source Battle Creek Cherry Creek Dee Creek Destination Worchester Rochester Dorchester $4.37 $4.25 $4.89 $4.00 $5.00 $5.27 $4.13 $4.50 $3.75 Capacity 12,000 10,000 18,000 Demand 6,000 22,000 12,000 40,000 11-58
Solved Problem 4 Source Battle Creek Cherry Creek Dee Creek Destination Worchester Rochester Dorchester $4.37 $4.25 $4.89 12,000 $4.00 $5.00 $5.27 6,000 4,000 $4.13 $4.50 $3.75 6,000 12,000 Capacity 12,000 10,000 18,000 Demand 6,000 22,000 12,000 40,000 11-59
Solved Problem 4 The total cost is $167,000 Ship 12,000 units from Battle Creek to Rochester @ $4.25 Ship 6,000 units from Cherry Creek to Worchester @ $4.00 Ship 4,000 units from Cherry Creek to Rochester @ $5.00 Ship 6,000 units from Dee Creek to Rochester @ $4.50 Ship 12,000 units from Dee Creek to Dorchester @ $3.75 Cost = $51,000 Cost = $24,000 Cost = $20,000 Cost = $27,000 Cost = $45,000 Total = $167,000 11-60
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