# Facility Location Models

Topics: Variable cost, Costs, Fixed cost Pages: 21 (5597 words) Published: February 27, 2013
Chapter: 1

Facility Location Models
1.1 Introduction Facility Location is a geographic location of manufacturing/service facilities where transformation activities from inputs into the output are performed. Selecting a location of facilities is very crucial decision not only for manufacturing unit but also for service unit. Generally it is a strategic decision and involves lot of activities. It starts from identifying the suitable locations based on certain criteria and then evaluating all locations based on specific tools and techniques. Factor Rating Method, Break even analysis, Centre of Gravity Method, Simple Median Method and Transportation Techniques are available that would help the decision maker to identify the best suitable location for their facility. 1.2 Factor Rating Method It is the simple method to compare the alternative sites. The procedure for factor rating method is explained below. Identify the factors which are relevant for location and list them. According to the relative importance of factors, rate each factor i.e. 1 to 7 scales where 1 is least important and 7 is most important. Rate each location i.e. 1 to 10 scales where 1 is very poor and 10 is very good on each factor. Calculate the total score of each location. Prefer the location which has highest location score. Example 1.1: A Car manufacturing unit has considered five alternative locations for their manufacturing plant. Table 1.1 provides the information regarding the factors which is rated in 1 to 7 scale rating. Table 1.2 provides information regarding the score of each location on each factor from 1 to 10. Suggest the best location to the manufacturing unit by using factor rating method. Table 1.1 Factor ratings for manufacturing unit Factors Raw material availability Tax Benefit Labor availability Factor rating ( 1 to 7 scale ) 5 6 3

Proximity to customers Power availability Transportation facility Basic amenities Availability of water

6 5 4 2 1

Table 1.2 Rating of each location on against each factor (1 to 10 scales) Factors Raw material availability Tax Benefit Labor availability Proximity to customers Power availability Transportation facility Basic amenities Availability of water Location 1 9 4 5 7 2 8 7 5 Location 2 8 7 4 8 5 4 5 6 Location 3 8 5 7 7 6 5 6 5 Location 4 Location 5 6 9 8 9 5 4 6 8 9 3 4 7 7 6 7 4

Answer: Now let us calculate performance of each location based on rating. Location 1: The total score for location 1 is computed as Overall score for location 1 = ( 5 × 9) + ( 6 × 4 ) + ( 3 × 5 ) + ( 6 × 7 ) + ( 5 × 2 ) + ( 4 × 8 ) + (2 × 7) + (1 × 5) = 45 + 24 + 15 +42 +10 +32 +14 +5 = 187

Location 2: The total score for location 2 is computed as Overall score for location 2 = ( 5 × 8) + ( 6 ×7 ) + ( 3 × 4) + ( 6 ×8 ) + ( 5 × 5 ) + ( 4 × 4 ) + (2 × 5) + ( 1 × 6) = 40 + 42 + 12 +48 +25 + 16 +10 + 6 = 199

Location 3 : The total score for location 3 is computed as

Overall score for location 3 = ( 5 ×8 ) + ( 6 ×5 ) + ( 3 × 7) + ( 6 ×7 ) + ( 5 ×6 ) + ( 4 ×5 ) + (2 ×6) + (1 ×5)

= 40 + 30 + 21 +42 +30 +20 +12 +5 = 200

Location 4: The total score for location 4 is computed as Overall score for location 4 = ( 5 × 6) + ( 6 ×9 ) + ( 3 × 8 ) + ( 6 ×9 ) + ( 5 ×5 ) + ( 4 ×4 ) + (2×6) + (1 ×8) = 30 + 54+ 24 + 54 + 25 +16 +12 +8 = 223

Location 5: The total score for location 5 is computed as Overall score for location 5 = (5 × 9) + (6 ×3) + (3 ×4) + (6 × 7) + (5 × 7) + (4 × 6) + (2 × 7) + (1 ×4) = 45 + 18 + 12+42 +35 +24 +14 +4 = 194 Conclusion: From overall total score, location 4 has highest total score amongst the all five locations. Hence location 4 should be selected for setting up their manufacturing facilities.

1.3 Break even Analysis: When we locate the plant and start the operations on it, there are two types of costs associated with it. Fixed cost and variable cost. Purchase of land, Construction cost, etc are the fixed costs. Irrespective of the volume of production, fixed cost remains...

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