1. Facility Location
• Issues in Facility Location
• Various Plant Location Methods

2. Preamble
• There is no such thing as a perfect location. Every location has a
mix of attributes—some very strong, others not
• The winning location is usually the one that seems optimal when
evaluated as a whole
• This means that the weaknesses, on balance, are either negated
via some form of action to mitigate their impact, or are deemed
inconsequential in light of the other relative strengths

3. Competitive Imperatives Impacting Location
• Factors Related to Markets:
– The need to produce close to the customer due to time-based competition,
trade agreements, and shipping costs.
• Factors Related to Resources:
The need to locate near the appropriate resources to take advantage of low costs
– Labor skills availability, Labor cost
– Materials Availability, Material cost, Material quality (Ancilarisation)
– Equipment availability, Equipment cost
– Land availability, Land suitability, Land cost
– Energy availability, energy cost
– Water quality availability, water cost

4. Competitive Imperatives Impacting Location (contd)
• Factors Related to the Infrastructure
–
–
–
–
–
–
Availability of Financial Institutions
Government Stability, Government taxes, Import and Export restrictions
Quality of life, Cultural issues
Environmental regulations,
Transportation availability, Transportation cost
Competitors’ size, strength and attitude in that region
• Other Factors
– Exchange rates
– Financial Incentives
– Export Zones

5. Other Factors (e.g. India)
• Population Mix
– Over 50% of the population is below 25 years of age
– Over 65% of the population is below 35 years of age
– Average age is expected to be 29 years in 2020
• Second largest pool of scientists and engineers
380
13,800
1,500
500,000
Universities
Colleges (4,600 in professional fields)
Research Institutions
Scientists and Engineers graduate every year
• 7 million new entrants every year to the working population
Fewer days to fill skilled job vacancies
Costs significantly lower than emerging economies
Work 3 shifts, 6 days a week
• Legislation remains a significant drag on business. Rigidity of firing
regulations

6. Other Factors (e.g. India) (contd)
• Infrastructure
Unreliability of power supply (17 outages a month v/s 5 in China, 60% industries
depend on private power supply)
Road network (6,000 Kms of expressways, plan for 14,300 Kms in next 5 years)
• Institutions
Property Rights are watertight and enforceable
Judiciary is highly independent
Freedom of Press and political right is assured
• Federation of 29 States
Total Tax Incentive Package is high
• Corruption
“An irritant rather than a critical issue”
Liberalisation
RTI Act

7. Other Factors (e.g. India) (contd)
• Administrative approvals to start new business is 89 days (double
than China)
• Closing business takes up to 10 years
• Manufacturing Excellence
– TPM Excellence Awards instituted by Japanese Institute of Plant
Maintenance
153 (132) plants in India – highest tally outside Japan
– Deming Quality Awards instituted by Japanese Union of Scientists and
Engineers
21 (15) companies in India – highest tally outside Japan

8. Other Factors (e.g. India) (contd)
• If one is looking for markets outside India
High Volume, Low Variety, Low or Moderate Technology – its China!!
Low Volume, High Variety, High Technology – its India!!
• If one is looking for Indian markets – its India (76% of India’s GDP
is domestic consumption!)

9. Location Decision Example - BMW
In 1992, BMW decided to build its first major manufacturing plant
outside Germany in Spartanburg, South Carolina

10. Location Decision Example – BMW
Country Decision Factors
Market location
– U.S. is world’s largest luxury car market
– Growing (baby boomers)
Labor
– Lower manufacturing labor costs
• $17/hr. (U.S.) vs. $27 (Germany)
– Higher labor productivity
• 11 holidays (U.S.) vs. 31 (Germany)
Other
– Lower shipping cost ($2,500/car less)
– New plant & equipment would increase productivity (lower cost/car $2,000-3000)

11. Location Decision Example – BMW
Region/Community Decision Factors
Labor
– Lower wages in South Carolina (SC)
• About $17,000/yr (SC) vs. $27,051/yr (US)
– Based on 1993 metropolitan averages for all workers
Government incentives
– $135 million in state & local tax breaks
– Free-trade zone from airport to plant
• No duties on imported components or on exported cars

12. Labor Productivity
• Low wage rates often heavily influence location choices
• What about productivity?
Example:
– Company Q pays $70 per day with 60 units produced per day in Texas. The
Mexican plant pays $25 per day with a productivity of 20 units per day:
– Labor cost per day/Productivity (units per day) = Cost per unit

13. Labor Productivity - Example:
• Company Q pays $70 per day with 60 units produced per day in
Texas. The Mexican plant pays $25 per day with a productivity of 20
units per day
• Labor cost per day/Productivity (units per day) = Cost per unit
Case 1: Texas Plant
– $70 per day/60 units per day = $70/60 = $1.17 per unit
Case 2: Mexican Plant
– $25 per day/20 units per day = $25/20 = $1.25 per unit
• Lesson: Employees with poor training, poor education, or poor work
habits may not be a good buy even at low wages

14. Issues in Facility Location
•
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•
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Business Climate
Political Risks
Environmental Regulations
Host Community
Infrastructure – Power, Telecommunication, Connectivity, etc
Quality of Labor
Suppliers / Ancilarisation
Incentives / Free Trade Zones
Total Costs

15. Plant Location Methodology:
Factor Rating Method Example
Location A is assigned the following range of point values
and respective points
Location A
Factor
Weight
Rating
(1-100)
Factor
Rating
Business Climate
0.20
60
12.0
Environmental Regulations
0.05
80
4.0
Infrastructure Availability (a)
Infrastructure Availability (b)
Quality of labour
Suppliers
Host Community
Incentives
Others
0.10
0.10
0.15
0.10
0.10
0.15
0.05
40
30
50
50
30
70
60
4.0
3.0
7.5
5.0
3.0
10.5
3.0
52.0
Total

16. Plant Location Methodology:
Transportation Method of Linear Programming
• Transportation method of linear programming seeks to minimize
costs of shipping n units to m destinations or its seeks to maximize
profit of shipping n units to m destinations.

17. Plant Location Methodology:
Center of Gravity Method
• The center of gravity method is used for locating single facilities
that considers existing facilities, the distances between them, and
the volumes of goods to be shipped between them.
• This methodology involves formulas used to compute the
coordinates of the two-dimensional point that meets the distance
and volume criteria stated above.

18. Plant Location Methodology:
Center of Gravity Method Formulae
Cx =
d ix Vi
Vi
Cy =
d iy Vi
Vi
Cx = X coordinate of center of gravity
Cy = X coordinate of center of gravity
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = Volume of goods moved to or from ith
location

19. Plant Location Methodology:
Example of Center of Gravity Method
• Center of gravity method example
– Several automobile dealers are located according to the
following grid which represents coordinate locations for each
showroom.
S ho wro o m
Y
Q
No o f Z-Mo b ile s
s o ld p e r mo nth
(790,900)
A
1250
D
1900
Q
D
2300
(250,580)
A
(100,200)
(0,0)
X
Question: What is the best location for a new Z-Mobile facility
considering only distances and quantities sold per month?

20. Plant Location Methodology:
Example of Center of Gravity Method:
Determining Existing Facility Coordinates
To begin, you must identify the
existing facilities on a twodimensional plane or grid and
determine their coordinates.
Y
Q
(790,900)
D
(250,580)
A
(100,200)
(0,0)
You must also have the
volume information on the
business activity at the
existing facilities.
S ho wro o m
X
No o f Z-Mo b ile s
s o ld p e r mo nth
A
1250
D
1900
Q
2300

21. Plant Location Methodology:
Example of Center of Gravity Method:
Determining the Coordinates of the New Facility
You then compute the new coordinates using the formulas:
100(1250) + 250(1900) + 790(2300)
2,417,000
=
= 443.49
1250 + 1900 + 2300
5,450
Cx =
200(1250) + 580(1900) + 900(2300)
3,422,000
Cy =
=
= 627.89
1250 + 1900 + 2300
5,450
Y
S ho wro o m
Q
(790,900)
D
New
location
Z
No o f Z-Mo b ile s
s o ld p e r mo nth
A
A
1250
D
(250,580)
1900
Q
2300
(100,200)
(0,0)
X