facility location models.pdf

The physical location of business facilities can have a significant impact on the success of

a company. In this supplement we will briefly discuss some of the factors that are impor-

tant in locating facilities. We will focus on several quantitative methods for facility loca-

tion, including location factor ratings, the center-of-gravity technique, and the load-distance

technique.

OperationalDecision-MakingTools: FacilityLocation Models

Chapter

7

In this supplement, you will learn about . . .

Types of Facilities

Site Selection: Where to Locate

Global Supply Chain Factors

Location Analysis Techniques

Supplement to

TYPES OF FACILITIES

The type of facility is a major determinant of its location. The factors important in determin-

ing the location of a manufacturing plant are usually different from those important in locating

a service facility or a warehouse. In this section we discuss the major categories of facilities

and the different factors that are important in the location desired.

Heavy manufacturing facilities are plants that are large, require a lot of space, and are ex-

pensive to construct, such as automobile plants, steel mills, and oil refineries.

Factors in the location decision for plants include construction costs, land costs, modes of

transportation for shipping heavy manufactured items and receiving bulk shipments of raw

materials, proximity to raw materials, utilities, means of waste disposal, and labor availability.

Sites for manufacturing plants are normally selected where construction and land costs can be

kept at a minimum and raw material sources are nearby in order to reduce transportation costs.

Access to railroads is frequently a factor in locating a plant. Environmental issues have in-

creasingly become a factor in plant location decisions.

Heavy-manufacturing

facilities are large, require

a lot of space, and are

expensive.

298 Part 1 • Operations Management

Light-industry facilities are perceived as cleaner plants that produce electronic equipment and

components, computer products, or assembled products like TVs; breweries; or pharmaceutical firms.

Distribution centers for The Gap in Gallatin, Tennessee, Target in Augusta City, Virginia, and

Home Depot in Savannah, Georgia, each encompass more than 1.4 million square feet of space—

about 30 times bigger than the area of a football field! The UPS Worldwide Logistics warehouse

in Louisville, Kentucky, includes 1.3 million square feet of floor space. Because of their role as

intermediate points in the supply chain, transportation costs are often an important factor in the

location decision for warehouses. The proximity to markets is also a consideration, depending on

the delivery requirements, including frequency of delivery required by the customer.

Retail and service facilities are usually the smallest and least costly. Examples include retail

facilities such as groceries and department stores, among many others, and such service facilities

as restaurants, banks, hotels, cleaners, clinics, and law offices. However, there are always excep-

tions, and some service facilities, such as a hospital, a company headquarters, a resort hotel, or a

university academic building can be large and expensive. One of the most important factors for lo-

cating a service or retail facility is proximity to customers. It is often critical that a service facility

be near the customers it serves, and a retail facility must be near the customers who buy from it.

Construction costs tend to be less important, although land or leasing costs can be high. For retail

operations, for which the saying “location is everything” is meaningful, site costs can be very

high. Factors like zoning, utilities, transportation, environmental constraints, and labor tend to be

less important for service operations, and closeness to suppliers is not usually as important as it is

to manufacturing firms, which must be close to materials and parts suppliers.

Light-industry facilities are

smaller, cleaner plants and

are usually less costly.

Retail and service facilities

are the smallest and least

costly.

When we see in the news that a company has selected a site for a new plant, or a new store is open-

ing, the announcement can appear trivial. Usually it is reported that a particular site was selected

from among two or three alternatives, and a few reasons are provided, such as good community,

heavy customer traffic, or available land. However, such media reports do not reveal the long, de-

tailed process for selecting a site for a business facility. It is usually the culmination of a selection

process that can take several years and the evaluation of dozens or hundreds of potential sites.

Decisions regarding where to locate a business facility or plant are not made frequently, but

they tend to be crucial in terms of a firm’s profitability and long-term survival. A mistake in loca-

tion is not easily overcome. Business success often is being “in the right place at the right time.”

For a service operation such as a restaurant, hotel, or retail store, being in the right place usually

means in a location that is convenient and easily accessible to customers.

Location decisions for services tend to be an important part of the overall market strategy for

the delivery of their products or services to customers. However, a business cannot simply survey

the demographic characteristics of a geographic area and build a facility at the location with the

greatest potential for customer traffic; other factors, particularly financial considerations, must be

part of the location decision. Obviously, a site on Fifth Avenue in New York City would be attrac-

tive for a McDonald’s restaurant, but can enough hamburgers and french fries be sold to pay the

rent? In this case, the answer is yes.

Location decisions are usually made more frequently for service operations than manufactur-

ing facilities. Facilities for service-related businesses tend to be smaller and less costly, although a

hospital, or hotel can require a huge investment and be very large. Services depend on a certain

degree of market saturation; the location is actually part of their product. Where to locate a manu-

facturing facility is also important, but for different reasons, not the least of which is the very high

expense of building a plant or factory. Although the primary location criteria for a service-related

business is usually access to customers, a different set of criteria is important for a manufacturing

facility. These include the nature of the labor force, and labor costs, proximity to suppliers and

markets, distribution and transportation costs, energy availability and cost, the community infra-

structure of roads, sewers, and utilities, quality of life in a community, and government regula-

tions and taxes.

When the site selection process is initiated, the pool of potential locations for a manufacturing

or service facility is, literally, global. In today’s international marketplace, countries around the

SITE SELECTION: WHERE TO LOCATE

world become potential sites. The site selection process is one of gradually and methodically

narrowing down the pool of alternatives until the final location is determined. In the following dis-

cussion, we identify some of the factors that companies consider when determining the country,

region, community, and site at which to locate a facility.

GLOBAL SUPPLY CHAIN FACTORS

In recent years U.S. companies have begun to locate in foreign countries to be closer to newly

emerging markets and to take advantage of lower labor costs. Trade agreements between countries

have reduced trade barriers around the world and created new markets like the European Commu-

nity (EC), Eastern Europe, and Asia.

Foreign firms have also begun to locate in the United States to be closer to their customers.

For both U.S. and foreign companies, the motivation is the same—to reduce supply chain costs

and better serve their customers. Relatively slow overseas transportation requires multinational

companies to maintain large, costly inventories to serve their foreign customers in a timely man-

ner. This drives up supply chain costs and makes it economical for companies to relocate closer to

their markets.

While foreign markets offer great opportunities, the problems with locating in a foreign country

can be substantial, making site location a very important part of supply chain design. For example,

although China offers an extremely attractive market because of its huge population, growing econ-

omy, and cheap labor force, it has an inefficient transportation and distribution system, and numer-

ous government regulations. Markets in Russia and the former Soviet states are attractive; however

they can also be risky since the free market economy is still new to these states. Lack of familiarity

with standard business practices and corruption can threaten success for foreign companies.

Some of the factors that multinational firms must consider when locating in a foreign country

include the following:

• Government stability • Raw material availability

• Government regulations • Number and proximity of suppliers

• Political and economic systems • Transportation and distribution systems

• Economic stability and growth • Labor force cost and education

• Exchange rates • Available technology

• Culture • Commercial travel

• Climate • Technical expertise

• Export and import regulations, duties, • Cross-border trade regulations

and tariffs • Group trade agreements

REGIONAL AND COMMUNITY LOCATION FACTORS

IN THE UNITED STATES

Manufacturing facilities in the United States were historically located in the Midwest, especially in

the Great Lakes region. Industry migrated to the sunbelt areas, the Southeast and Southwest, during

the 1960s and 1970s, where labor was cheaper (and not unionized), the climate was better, and the

economy was growing. However, in the late 1990s, there was a perceptible shift in new plants and

plant expansion back to the nation’s agricultural heartland. The North Central region, consisting of

Illinois, Michigan, and Ohio, attracted new and expanded facilities as did the South Atlantic region.

Certain states are successful in attracting new manufacturing facilities for a variety of reasons.

Ohio, for example, is well located along the Interstate-75 corridor, and it is within one-day truck

delivery of 60% of the U.S. population and two-thirds of its purchasing power. It has a good base

of skilled and educated labor, a large mass of industry that spawns other businesses, and it has

established good incentive programs to attract new businesses. Ohio also benefits from a number

of towns and cities with populations less than 50,000 that have a rich agricultural heritage. The

residents of these communities have a strong work ethic and are self-reliant and neighborly. These

communities typically have quality health services; low crime rates; solid infrastructures of roads,

water and sewer systems; open spaces to expand; and quality education.

The most growth in

manufacturing facilities

is in the Midwest.

Ohio attracts manufacturing

facilities because of good

transportation, skilled labor

with a strong work ethic,

incentive programs, and

quality social services.

Supplement 7 • Operational Decision-Making Tools: Facility Location Models 299


Labor is one of the most important factors in a location decision, including the cost of labor,

availability, work ethic, the presence of organized labor and labor conflict, and skill and educa-

tional level. Traditionally, labor costs have been lower and organized labor has been less visible

across the South and Southwest. While labor conflict is anathema to many companies, in some

cases labor unions have assisted in attracting new plants or in keeping existing plants from relo-

cating by making attractive concessions.

The proximity of suppliers and markets are important location factors. Manufacturing compa-

nies need to be close to materials, and service companies like fast-food restaurants, retail stores,

groceries, and service stations need to be close to customers and distribution centers. Transporta-

tion costs can be significant if frequent deliveries over long distances are required. The closeness

of suppliers can determine the amount of inventory a company must keep on hand and how

quickly it can serve its own customers. Uncertainty in delivery schedules from suppliers can re-

quire excessive inventories.

It is important for service-related businesses to be located near their customers. Many busi-

nesses simply look for a high volume of customer traffic as the main determinant of location, re-

gardless of the competition. An interstate highway exit onto a major thoroughfare always has a

number of competing service stations and fast-food restaurants. Shopping malls are an example of

a location in which a critical mass of customer traffic is sought to support a variety of similar and

dissimilar businesses.

Another important factor, infrastructure, is the collection of physical support systems of a loca-

tion, including the roads, water and sewer, and utilities. If a community does not have a good in-

frastructure, it must make improvements if it hopes to attract new business facilities. From a

company’s perspective, an inadequate infrastructure will add to its supply chain costs and inhibit

its customer service.

Factors that are considered when selecting the part of the country and community for a facility

are summarized as follows:

• Labor (availability, education, cost, • Business climate

and unions) • Community services

• Proximity of customers • Incentive packages

• Number of customers • Government regulations

• Construction/leasing costs • Environmental regulations

• Land cost • Raw material availability

• Modes and quality of transportation • Commercial travel

• Transportation costs • Climate

• Community government • Infrastructure (e.g., roads, water, sewers)

• Local business regulations • Quality of life

• Government services • Taxes

(e.g., Chamber of Commerce) • Availability of sites

• Financial services • Proximity of suppliers

• Community inducements • Education system

LOCATION INCENTIVES

Besides physical and societal characteristics, local incentives have increasingly become a major

important factor in attracting companies to specific locations. Incentive packages typically include

job tax credits, relaxed government regulations, job training, road and sewage infrastructure im-

provements, and sometimes just plain cash. These incentives plus the advantages of a superior

location can significantly reduce a company’s supply chain costs while helping it achieve its

strategic goal for customer service.

States and communities cannot afford to overlook incentives if they hope to attract new com-

panies and jobs. However, they must make sure that the amount of their investment in incentive

packages and the costs they incur for infrastructure improvements are balanced against the num-

ber of new jobs developed and the expansion of the economy the new plant will provide.

Incentives are a good public investment unless they bankrupt the locality. While some small com-

munities are successful in attracting new businesses, they are left with little remaining tax base to

pay for the infrastructure improvements needed to support the increased population drawn by job

Labor—cost, availability,

work ethic, conflict, and

skill—is important in a

company’s location decision.

Closeness to customers can be

a factor in providing quality

service.

Service facilities generally

require high customer-traffic

volume.

Infrastructure:

the roads, water and sewer, and

utilities at a location.

Location incentives include

tax credits, relaxed

government regulations,

job training, infrastructure

improvements, and money.

demand. Thus, states and communities, much like businesses, need a strategy for economic devel-

opment that weighs the costs versus the benefits of attracting companies.

GEOGRAPHIC INFORMATION SYSTEMS

A recent information technological advancement that is increasingly being used in the facility loca-

tion and site selection process is a geographic information system or GIS. A GIS is a computerized

system for storing, managing, creating, analyzing, integrating, and digitally displaying geographic

(i.e., spatial, data). A GIS is both a database system as well as a set of operations for working with and

analyzing this data. As a tool specifically used for site selection, it allows the user to interactively

search and analyze the type of data and information (i.e., location factors) we discussed in the previ-

ous sections that might be related to the site selection process, such as population, labor, income, cus-

tomer base, climate, taxes, and transportation. Frequently a GIS used for site selection will incorporate

quantitative models (like the ones presented later in this chapter and text) to help analyze the data.

Figure S7.1 provides a simple schematic diagram of how a GIS for site selection might be con-

structed. Each layer (or spatial map) in this diagram contains information about one characteristic

(or attribute) of the location begin analyzed. Each layer that might relate to the site selection process

is precisely overlaid on the other layers so that their corresponding geographic (spatial, locations)

are exactly matched to each other. The bottom layer is a geographic grid that serves as a frame of

reference (e.g., latitude and longitude), to which all the other layers are precisely matched.

Once these layers of data have been entered into the GIS, information about the layers can be

compared and analyzed in combination. For example, transportation routes can be considered rel-

ative to the location of plants, distribution centers, and shippers, as well as labor markets and nat-

ural resources, such as water. Such comparative analyses are frequently in the form of digital

computer displays as well as three-dimensional graphs and displays. The GIS may provide just

statistical analyses for use in the decision-making process, or it may incorporate one or more

quantitative models to provide a recommended decision about a site.

The advantage of a GIS is that it enables the user to integrate large quantities of information

about potential facility sites and then analyze these data with a number of different, powerful ana-

lytical tools. The ability to consider hundreds of separate layers of spatial information and then

combine it with other layers of information is the main reason GIS has become such a popular

tool for location analysis and site selection.

One of the first major uses of GIS was in environmental and natural resources planning, and land

use management for the analysis of such things as agricultural lands, wildlife habitat, wetlands,

Natural resources

Customers

Cost

Transportation

Labor

Location

LongitudeLatitude

Layersof spatial

data

Figure S7.1

A GIS Diagram



floodplains, and forests. It has also come to be used extensively for utilities and infrastructure plan-

ning and management, including such things as energy use, cable and pipe networks, gas lines, elec-

trical usage and networks, and transportation, as well as real estate analysis, demographic and

marketing analysis, and various government applications such as emergency services and analyzing

tax bases. However, in recent years GIS has come to be used more and more in business applications.

For example, GIS has been used to select distribution centers or hubs based on spatial data for ship-

ping times, customer locations, transportation routes, etc. Bank of America upon entering the New

York City market used a GIS to show the distribution of its own branch network relative to deposit

potential in the New York market area; from this they determined where their market coverage was

strong or weak. Levi Strauss used a GIS to create a geographic network of its existing retailers, poten-

tial retailers, and the customer base each served, so it could make sure that new stores that joined its

retail network would not adversely affect sales in existing stores. Edens & Avant, one of the nation’s

leading retail real estate companies, has a GIS-based Web site that enables retailers to locate space in

their inventory (at various shopping malls, etc.) that specifically matches their site selection criteria.

Today there are hundreds of commercial software systems that offer GIS capabilities for dif-

ferent applications including site selection, and numerous consulting and software firms that spe-

cialize in the development of GIS for specific applications. The list of Web sites for this

supplement includes links to several GIS software systems and some of the major companies that

specialize in GIS development and applications.

• Internet

Exercises

We will discuss three techniques to help make a location decision—the location rating factor, the

center-of-gravity technique, and the load-distance technique. The location factor rating mathemat-

ically evaluates location factors, such as those identified in the previous section. The center-of-

gravity and load-distance techniques are quantitative models that centrally locate a proposed

facility among existing facilities.

LOCATION FACTOR RATING

The decision where to locate is based on many different types of information and inputs. There is no

single model or technique that will select the “best” site from a group. However, techniques are

available that help to organize site information and that can be used as a starting point for comparing

different locations.

In the location factor rating system, factors that are important in the location decision are identi-

fied. Each factor is weighted from 0 to 1.00 to prioritize the factor and reflect its importance. A

subjective score is assigned (usually between 0 and 100) to each factor based on its attractiveness

compared with other locations, and the weighted scores are summed. Decisions typically will not

be made based solely on these ratings, but they provide a good way to organize and rank factors.

LOCATION ANALYSIS TECHNIQUES

Location factor rating:

a method for identifying and

weighting important location

factors.

The Dynaco Manufacturing Company is going to build a new plant to manufacture ring bear-

ings (used in automobiles and trucks). The site selection team is evaluating three sites, and

they have scored the important factors for each as follows. They want to use these ratings to

compare the locations.

Example S7.1

Location FactorRating

Scores (0 to 100)

Location Factor Weight Site 1 Site 2 Site 3

Labor pool and climate 0.30 80 65 90

Proximity to suppliers 0.20 100 91 75

Wage rates 0.15 60 95 72

Community environment 0.15 75 80 80

Proximity to customers 0.10 65 90 95

Shipping modes 0.05 85 92 65

Air service 0.05 50 65 90

LOCATION FACTOR RATING WITH EXCEL AND OM TOOLS

Exhibit S7.1 shows the Excel spreadsheet for Example S7.1. Notice that the location score for

Site 1 is shown in cell E12 and the formula for the computation of the site 1 score (embedded in

E12) is shown on the formula bar at the top of the spreadsheet.

Exhibit S7.2 shows the OM Tools spreadsheet for Example S7.1

Solution

The weighted scores for each site are computed by multiplying the factor weights by the score

for that factor. For example, the weighted score for “labor pool and climate” for site 1 is

(0.30)(80) 5 24 points

The weighted scores for each factor for each site and the total scores are summarized as follows:

Site 3 has the highest factor rating compared with the other locations; however, this evalua-

tion would have to be used with other information, particularly a cost analysis, before making

a decision.

Weighted Scores

Location Factor Site 1 Site 2 Site 3

Labor pool and climate 24.00 19.50 27.00

Proximity to suppliers 20.00 18.20 15.00

Wage rates 9.00 14.25 10.80

Community environment 11.25 12.00 12.00

Proximity to customers 6.50 9.00 9.50

Shipping modes 4.25 4.60 3.25

Air service 2.50 3.24 4.50

Total score 77.50 80.80 82.05

Exhibit S7.2

Formula for Site 1 Score

Exhibit S7.1

• Excel File

• OM Tools



CENTER-OF-GRAVITY TECHNIQUE

In general, transportation costs are a function of distance, weight, and time. The center-of-gravity, or

weight center, technique is a quantitative method for locating a facility such as a warehouse at the

center of movement in a geographic area based on weight and distance. This method identifies a

set of coordinates designating a central location on a map relative to all other locations.

The starting point for this method is a grid map set up on a Cartesian plane, as shown in

Figure S7.2. There are three locations, 1, 2, and 3, each at a set of coordinates (xi, yi) identifying

its location in the grid. The value Wi is the annual weight shipped from that location. The objective

is to determine a central location for a new facility.

Center-of-gravity technique:

the center of movement in a

geographic area based on transport

weight and distance.

x1 x2 x3

y3

y1

y2

y

x

3 (x3, y3), W3

2 (x2, y2), W2

1 (x1, y1), W1

Figure S7.2

Grid MapCoordinates

The Burger Doodle restaurant chain purchases ingredients from four different food suppliers.

The company wants to construct a new central distribution center to process and package the

ingredients before shipping them to their various restaurants. The suppliers transport ingredi-

ent items in 40-foot truck trailers, each with a capacity of 38,000 lbs. The locations of the

four suppliers, A, B, C, and D, and the annual number of trailer loads that will be transported

to the distribution center are shown in the following figure:

Example S7.2

The Center-of-Gravity Technique

y

x

(135)C

(105)B

Mil

es

700

600

500

400

300

200

0

100

Miles

100 200 300 400 500 600 700

(60)D

(75)A

The coordinates for the location of the new facility are computed using the following formulas:

where

Wi = annual weight shipped from facility i

x i, yi = coordinates of existing facility i

x, y = coordinates of the new facility at center of gravity

x =

an

i=1

x iWi

an

i=1

Wi

, y =

an

i=1

yiWi

an

i=1

Wi

CENTER-OF-GRAVITY TECHNIQUE WITH EXCEL

AND OM TOOLS

Exhibit S7.3 shows the Excel spreadsheet for Example S7.2. The formula for computing the

x-coordinate in cell C13 is shown on the formula bar at the top of the spreadsheet.

Exhibit S7.4 on the next page shows the OM Tools spreadsheet for Example S7.2.

LOAD-DISTANCE TECHNIQUE

A variation of the center-of-gravity method for determining the coordinates of a facility location

is the load-distance technique. In this method, a single set of location coordinates is not identified.

Using the center-of-gravity method, determine a possible location for the distribution center.

Solution

Thus, the suggested coordinates for the new distribution center location are x 5 238 and y 5 444.

However, it should be kept in mind that these coordinates are based on straight-line distances, and

in a real situation actual roads might follow more circuitous routes.

= 444

=120021752 + 1500211052 + 1600211352 + 130021602

75 + 105 + 135 + 60

y =

aD

i=A

yiWi

aD

i=A

Wi

= 238

=120021752 + 1100211052 + 1250211352 + 150021602

75 + 105 + 135 + 60

x =

aD

i=A

x iWi

aD

i=A

Wi

A B C D

xA 5 200 xB 5 100 xC 5 250 xD 5 500

yA 5 200 yB 5 500 yC 5 600 yD 5 300

WA 5 75 WB 5 105 WC 5 135 WD 5 60

• Excel File

Formula for x coordinate

Exhibit S7.3

Load-distance technique:

a method of evaluating different

locations based on the load being

transported and the distance.



Instead, various locations are evaluated using a load-distance value that is a measure of weight

and distance. For a single potential location, a load-distance value is computed as follows:

where

LD 5 the load-distance value

li 5 the load expressed as a weight, number of trips,

or units being shipped from the proposed site to location i

di 5 the distance between the proposed site and location i

The distance di in this formula can be the travel distance, if that value is known, or can be deter-

mined from a map. It can also be computed using the following formula for the straight-line distance

between two points, which is also the hypotenuse of a right triangle:

where

The load-distance technique is applied by computing a load-distance value for each potential

facility location. The implication is that the location with the lowest value would result in the min-

imum transportation cost and thus would be preferable.

1x i, yi2 = coordinates of existing facility

1x, y2 = coordinates of proposed site

di = 21x i - x22 + 1yi - y22

LD = an

i=1

li di

Exhibit S7.4

• OM Tools

Burger Doodle wants to evaluate three different sites it has identified for its new distribution

center relative to the four suppliers identified in Example S7.2. The coordinates of the three

sites under consideration are as follows:

Solution

First, the distances between the proposed sites (1, 2, and 3) and each existing facility (A, B,

C, and D), are computed using the straight-line formula for di:

= 161.2

= 21200 - 36022 + 1200 - 18022

Site 1: dA = 21xA - x122

+ 1yA - y122

Site 3: x3 = 250, y3 = 400

Site 2: x2 = 420, y2 = 450

Site 1: x1 = 360, y1 = 180

Example S7.3

The Load-DistanceTechnique

LOAD-DISTANCE TECHNIQUE WITH EXCEL AND OM TOOLS

Exhibit S7.5 shows the Excel spreadsheet for Example S7.3. The formula for computing the dis-

tance from supplier location A to site 1 is embedded in C11 and is shown on the formula bar at the

top of the spreadsheet. The formula for computing the location-distance formula for site 1 is

shown in the call out box attached to cell C17.

Exhibit S7.6 shows the OM Tools spreadsheet for Example S7.3.

Next, the formula for load distance is computed for each proposed site:

Since site 3 has the lowest load-distance value, it would be assumed that this location would

also minimize transportation costs. Notice that site 3 is very close to the location determined

using the center-of-gravity method in Example S7.2.

= 77, 555

LD 1site 32 = 17521206.22 + 110521180.32 + 1135212002 + 16021269.32

= 99, 789

LD 1site 22 = 175213332 + 110521323.92 + 113521226.72 + 160211702

= 125, 063

= 17521161.22 + 110521412.32 + 113521434.22 + 16021184.42

LD 1site 12 = aD

i=A

li di

Site 3: dA = 206.2, dB = 180.3, dC = 200, dD = 269.3

Site 2: dA = 333, dB = 323.9, dC = 226.7, dD = 170

= 184.4

= 21500 - 36022 + 1300 - 18022

dD = 21xD - x122

+ 1yD - y122

= 434.2

= 21250 - 36022 + 1600 - 18022

dC = 21xC - x122

+ 1yC - y122

= 412.3

= 21100 - 36022 + 1500 - 18022

dB = 21xB - x122

+ 1yB - y122

• Excel File

=B7*C11+C7*C12+D7*C13+E7*C14

Exhibit S7.5



Exhibit S7.6

• OM Tools

SUMMARY

Facility location is an often overlooked but important aspect

of a company’s strategic plan. What kind of facility to build

and where to locate it are expensive decisions. A location de-

cision is not easily reversed if it is a bad one. For a service op-

eration, the wrong location can result in too few customers to

be profitable, whereas for a manufacturing operation, a wrong

location can result in excessive costs, especially for trans-

portation and distribution, and high inventories. The quantita-

tive tools presented in this supplement are not usually

sufficient for making an actual location decision, but they do

provide means for helping in the location analysis and deci-

sion process.

• Practice

Quizzes

SUMMARY OF KEY TERMS

center-of-gravity technique a quantitative method for locating a

facility at the center of movement in a geographic area

based on weight and distance.

infrastructure the physical support structures in a community,

including roads, water and sewage systems, and utilities.

load-distance technique a quantitative method for evaluating

various facility locations using a value that is a measure of

weight and distance.

location factor rating a system for weighting the importance of

different factors in the location decision, scoring the indi-

vidual factors, and then developing an overall location

score that enables a comparison of different location

sites.

SUMMARY OF KEY FORMULAS

Center-of-Gravity Coordinates

x =

an

i=1

x iWi

an

i=1

Wi

, y =

an

i=1

yiWi

an

i=1

Wi

Load-Distance Technique

di = 21x i - x22 + 1yi - y22

LD = an

i=1

li di

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