CHAPTER 9

Facility Location
 Facility Location
• Facility location
– refers to choosing the locations for distribution
centers, warehouses, and production facilities to
facilitate logistical effectiveness and efficiency.
– logistics/supply chain activity that has evolved
from a tactical decision to one of tremendous
strategic importance in numerous organizations

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 Facility Location
• Initial focus in facility location is on the region (e.g., country, state,
local areas)
– the focus can vary on whether a company has a multinational or
domestic focus
• Multinational company might initially focus on regions of world such as
Western Europe, the Pacific Rim, North America
• Domestic company might focus on states (provinces/territories) or group of
states (provinces/territories)
• The next focus is precise; it usually involves a selection various
area(s) within the selected region
• Once this has been determined, a detailed examination of various
locations within the selected area is appropriate
– Physical examination, relevant zoning and regulatory considerations
• Failure to do so can result in costly – and embarrassing mistake

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 Facility Location
• Unfortunate experience of supermarket chain
– Company picked a site for a new grocery store, received the
appropriate construction permits, built the store, hired relevant
personnel, stocked the store with products.
– Several days before the store’s grand opening, the parent
company was threatened with legal action by a competing
supermarket that had a store located across the street from new
store. The legal action referred to the relevant zoning laws –
which had not been cheeked prior construction – that
prohibited any new grocery store from being built within a one-
mile radius close the brand-new store!
– As a result, the supermarket chain had to cancel its grand
opening, close the brand-new store, transfer the products to
other stores, and lay off many of newly hired personnel.

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 The Strategic Importance of Facility Location

• Logistics managers face a marketplace that is dynamic and

ever-changing; this dynamism and change are two reasons
why facility location has evolved from tactical to strategic
consideration
• Facilities such as manufacturing plants and warehousing
represent fix points where goods are produced, processed ,
assembled, or stored
• Because these facilities can be very expensive to lease or
build, companies are often hesitate to close them
• However poorly located facilities can negatively impact
logistical effectiveness (due to longer and less reliable
delivery times) and efficiency (due to increase delivery
costs)

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 The Strategic Importance of Facility Location
Factors that can influence facility location decisions

• Cost considerations Wages in Manufacturing in China (currency - Yuan)

– Consumers sensitized to buy

only when prices are low
– Businesses offer discounted
prices to compete
– Low price/low cost
framework led companies to Oil Price Trend
operate in countries with low-
cost labor
– Companies reconsidering
locations due to significant
surge in oil prices because of
transportation cost (adopting
near-sourcing) – China vs
Mexico

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The Strategic Importance of Facility Location
Factors that can influence facility location decisions

• Customer service expectations

– Expectations continue to increase over time
– Customers looking for faster and more reliable order
cycles
– How faster and more reliable order cycle from
location perspective?
– Should companies relay on one/two facilities or
multiple facilities to serve its customers?
• One facility - Fewer facilities and lower inventory cost, but
higher transportation cost
• Multiple facilities - More facilities and higher inventory cost,
but lower transportation cost

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 The Strategic Importance of Facility Location
Factors that can influence facility location decisions

ü Location of Customer or
Supply Markets
ü Population shift
ü Improvement in transportation
and technology allow consumers
to migrate from one region to
another
ü In 1950, most populist states: New
York, California, , Pennsylvania,
Illinois, Ohio
ü In 2010, most populist states:
California, Texas, New York,
Florida, Illinois
ü Northeast/Midwest vs
Southwest/Northeast

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The Strategic Importance of Facility Location
Factors that can influence facility location decisions

ü Location of Customer or Supply Markets

üEconomics growth
üOrganizations sometimes expand the geographic scope to
serve new customers
üPopulation perspective – China, India
üWealth growth perspective - Growing middle class families
who often prefer Western brand names (e.g., in 2015,
McDonald’s has 2000+ restaurants in China, up from 1000 in
2008)
üSustainability
üPurchasing locally grown product (locavore strategy), reduce
carbon footprints related to production and transportation

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 Determining the Number of Facilities

• Early stage in facility location decision should

involve determining the total number of
facilities that firm should operate rather than
asking question “Where should we locate a new
facility?”
• Facilities are generally added when service
levels become unacceptable (or needed)
• Software packages exist to help in determining
the number and location of facilities

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 Determining the Number of Facilities
• Key issue - time it takes to get from facility to
the target-population (or market)
• Shows how altering number of facilities
affects transit time
– Moving from 2 to 5 facilities saves 1 day lead
time
– Moving from 5 to 10 facilities saves ½ day
lead time

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Determining the Number of Facilities
The 10 Best
Warehouse Networks
have been developed
based on the lowest
possible transit lead-
times to customers
represented by the
US population.

For example,
Vincennes, IN
provides the lowest
possible transit lead-
time for one
warehouse. Any other
location will increase
transit time to the US
population.

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 General Factors Influencing Facility
Location
• Tangible product (combination of raw materials,
component parts, labor) are made for sale in
various markets
• Raw materials, components parts, labor, and
markets influence where to locate
manufacturing, processing, or assembly facility
• Warehouses, distribution centers, and cross-
docking facilities exist to facilitate the distributing
of products; their locations are influenced by
locations of plants and markets they serve

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 General Factors Influencing Facility
Location
• Natural Resources
– Materials used to make products extracted directly
from ground or sea (as in the case of mining, fishing)
or indirectly (as in the case of farm products)
– In some instances, these resources may be located
great distance from the point where materials will be
consumed
– Pure materials (lose no weight in processing) - the
processing point can be anywhere near raw material source
and market
– Weight-losing products (lose weight in processing), the
processing point should be near the point where they are
mined or harvested – to avoid unnecessary transportation
charge – sugar derived from sugar beets
– Weight-gaining products (gain weight in processing), the
processing point should be close to market – bottling water

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 General Factors Influencing Facility
Location
• Population can be views as market for goods and
potential source of labor
• Population characteristic - Market for Goods
• Planner for consumer products pay attention to various
attributes of current and potential customers; such as
changes in population size as well as changes in population
characteristics
• With respect to population size, projected population
increase in U.S. 9% between 2010 to 2020, the growth
unlikely to be uniform across various states
• With respect to population characteristics, longer life spans
can increase the demand for health-related products such as
prescription medicines

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 General Factors Influencing Facility
Location
• Population can be views as market for goods and potential source
of labor
• Population characteristic - Source of Labor
– Labor related characteristic: size of the workforce, unemployment rate, age
profile, its skills and education, prevailing wage rates and union status are
important; a key locational determinant for some organizations as
– Labor wage rates – e.g., hourly compensation among manufacturing in 2011,
$47.38 , $35.53, $9.34, $6.48 in Germany, U.S., Taiwan, Mexico; Maquiladora –
duty free and tax free facilities located south of the US-Mexican border
– Exploit workers – e.g., sweatshops – organizations do not comply with fiscal
and legal obligations
– Union status – some companies prefer geographic areas not in which unions
are not strong; Right-to-work laws - individual cannot be compelled to join a
union as a condition of employment
– Racial, ethnic, and cultural consideration – some companies may be a
hesitancy to establish facilities in areas that are not culturally divers because it
may be difficult to transfers workers to such locations
– Expatriate workers - people who are sent to other countries for extended
period of time

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 General Factors Influencing Facility
Location
• Taxes and Incentives
– Warehousing and inventories can be prime source of tax
revenues by relevant taxing organizations – sales, real estate,
corporate income, fuel, unemployment compensation taxes
– Inventory tax
• Based on the value of inventory that is held on the assessment date(s)
• Some states offer exemption from inventory tax (e.g., Wyoming is the
most tax-friendly state for business, while New Jersey was the least
tax-friendly state – source: usatoday.com)
– Incentive packages
• Inducement for firms to locate facilities in particular area
• North Carolina provided Google ~ $210 million in incentive over 30
year period in return for locating computer warehouse in Lenoir, NC

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 General Factors Influencing Facility
Location
• Transportation Considerations
– In the form of availability and cost are a key aspect of facility
location decision because transportation decisions represent
such a large portion of total logistics costs
– Transportation Availability - refers to the number of
transportation modes (intermodal competition) as well as the
number of carriers within each mode (intramodal competition)
that could serve a proposed facility; E.g., a company might need
both rail and truck services
– Existence of competition tends to have both cost and service
benefits for potential users
– Limited competition generally leads to higher transportation
costs - users have to accept whatever service they receive
– Poor location significantly increase transportation cost as well as
negatively affect customer service

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 General Factors Influencing Facility
Location
• Transportation Considerations
– With respect to cost
– centrally located facilities tend
to minimize the total transit
distances, which likely results in
minimum transportation costs
– centralized location can also
maximize a facility’s service
area
– Figure illustrates truck distance
from Nebraska
– Note that how many states are
located within 1000 miles
(generally considered 2-day
service by truck) of Nebraska

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 General Factors Influencing Facility
Location
• Proximity to Industry Clusters
– Agglomeration concept
• the net advantages which can be gained by sharing of common location by
various enterprises
– Agglomeration concept, better known today as the industry cluster
concept
• Detroit in the U.S. auto industry’s heyday, Pittsburgh when steelmaking was
king, Silicon Valley for tech, Research Triangle Park, Wall Street, and even
Hollywood
• Industry clusters offers organizations proximity to key suppliers. E.g., Honda’s
assembly plant, Greenburg, Indiana – suppliers are located with-in half day’s
transit time from the facility
• Proximity to key suppliers has been catalyst in the development of supplier
parks, a concept that developed around automakers and their supplier in
Europe, and spread other continents
– Reduce shipping costs and inventory carrying cost
– Allow faster and more consistence delivery

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 General Factors Influencing Facility
Location
• Trade Patterns
• Commodity flow data studied to determine changes
occurring in the movement of raw materials and semi
processed goods
• Commodity flows - Logisticians are interested in: How
much is being produced? Where is it being shipped?
– This information would tell how market is functioning, and
how to identify manufactures and their major customers to
find a lower-cost production-distribution arrangement
• Trade agreements
– US-Mexico-Canada Agreement, (USMCA) (aka (NAFTA) has
resulted in increased north-south movement of product
among the United States, Canada, and Mexico, and the
Interstate 35 corridor has become a hotbed for distribution
activity
– European Union (EU) has allowed many companies to
reduce the number of relevant distribution facilities because
of virtual elimination of trade barriers among members. E.g.,
Benelux countries (Belgium, Netherland, Luxemburg)

https://www.google.com/search?q=European+Union+(EU)

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 General Factors Influencing Facility
Location
• Quality-of-Life Considerations
– nonbusiness factors into business decision of where to locate a plant
or distribution facility
• Cost of living
• Educational opportunities
• Crime rates
• Employment opportunities
• Weather
• Cultural amenities
– Employees who are able to live a reasonable lifestyle tend to be
happier and more loyal; happy and loyal employees are less likely to
leave their jobs and less likely to offend prospective customers
– Because many organizations now compete nationally and
internationally for talent, less-than-desirable geographic locations
might hinder the recruiting process
– The quality of life in a region impacts both employee retention and the
ability to attract employees

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 General Factors Influencing Facility
Location
• Considerations when locating in other countries, besides
quality of life consideration
– Relevant legal system
– Political stability
– Bureaucratic red tape
– Corruption
– Protectionism - practice of shielding a country's domestic industries
from foreign competition by taxing imports.
– Economic Nationalism – an ideology that favors state interventionism
in the economy e.g., protecting domestic workers
– Privatization
– Expropriation (confiscation) - the action by the state or an authority of
taking property from its owner for public use or benefit.
– Treaties and trade agreements

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Specialized Location Characteristics
• Current zoning of the land
– There may be limits on how the land can be used
(e.g., warehouse, manufacturing site, distribution
facilities)
• Local unions
– Have areas of jurisdiction
– Firm’s labor relations manager may have distinct
preferences with which locals they are willing to work
with
– Different supplemental agreements provide
companies with differing levels of managerial
flexibility (or inflexibility)

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Specialized Location Characteristics
• Title search
– May be needed to make sure a parcel of land can be sold
and that there are no liens against it
– Engineers examine site for proper drainage and to
determine load-bearing characteristics of the soil
• Environment regulations
– Require due diligence be carried out to determine who
previously owned the prospective site and how it was used
– Brownfields - Previously used site that contain chemicals
or other types of industrial waste

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Specialized Location Characteristics
• Weather
– Decisions can be influenced by the potential for
• Tornadoes
• Floods
• Hurricanes
• Others
– Experts can be hired to evaluate site-specific
climate risks and the associated mitigation costs1

1Wayne Labs, “Refining Location, Location, Location,” Food Engineering, December 2011, 49–55.

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Specialized Location Characteristics
• Free Trade Zone
– Foreign trade zones, export processing zones, special
economic zones
– Refer to highly specialized sites where nondomestic
merchandise may be stored, exhibited, processed, or used
in manufacturing operations without being subjected to
duties and quotas until the goods or their products enter
the customs territory of the zone country
– Have become extremely popular in recent years. E.g., India
has approved over 575 new special economic zones since
2005
– Often located at, or near, water ports, although they can
also be located at, or near, airports
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 Finding the Lowest-Cost Location
• Theory of the location of industries can be
used to show that one or several locations
will minimize transportation costs
• Figure 9.3 shows a laboratory-like piece of
equipment that could be used to find the
lowest-cost location, in terms of
transportation, for assembling a product
consisting of inputs from two sources and a
market in third area
• Assume you have two inputs, one produced
in Long Beach, one produced in Seattle. Two
inputs are combined to make a product
which is sold in NY. Assume, 10 ton of
product consumed in NY, and must combine
5 and 7 ton from Seattle, Long Beach.
• Take a circular table, put a map on it, knot
together three pieces of string. Add metal
washers which represents input and output.
• And take the knot, gently move it until all the
three washers on all three string pulling
down.

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 Finding the Lowest-Cost Location
• Grid systems
– Allow one to analyze
spatial relationships with
mathematical tools
– Checkerboard patterns
are placed on a map
– Grid is numbered in two
directions, horizontal
and vertical

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 Finding the Lowest-Cost Location
• Grid systems
– Center-of-gravity approach used for locating a
single facility while minimizing the distance to
existing facilities
– Weighted center-of-gravity approach takes volume
into account
• Facility will be located closer to the existing sites with
the greatest current demand

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 Finding the Lowest-Cost Location

Southwest (0,0)

The grid system has its lower left (southwest) corner labelled as point zero (0,0). The vertical (north-south) axis shows distances
north of point 0,0. The horizontal (east-west) axis shows distances to east. In this example, the average distance north is
(3+1+3+2+3) or 12. The figure is divided by the number of stores (5 stores), resulting in north location of 12/5 or 2.4 miles. The
average distance east is (1+2+3+4+6) or 16; 16 divided by 5 equals 3.2 mile. Thus the best (lowest-cost) location is one with
coordinates 2.4 miles north, and 3.2 miles east of point zero.

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Finding the Lowest-Cost Location

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Facility Relocation and Facility Closing
• Two specialized situations regarding location
choice
– Facility relocation
• Associated with business growth
– Facility closing
• Associated with business contraction

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Facility Relocation and Facility Closing
• Facility relocation
– Occurs when a firm decides that it can no longer
continue operations in its present facility and
must move operations to another facility to better
serve suppliers or customers
– Common reason for facility relocation
§ Lack of room for expansion at current site

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Facility Relocation and Facility Closing
• Facility relocation
– Decision involves a comparison of the advantages
and disadvantages of a new site to the advantages
and disadvantages of an existing location
– Must also consider the potential consequences of
relocation on their human resources
(consequences that may not be easily quantified)
– Must keep current employees informed
– Be prepared for unplanned glitches during
transition to prevent customer service issues

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 Facility Relocation and Facility
Closing
• Facility Closing
– Occurs when a company decides to discontinue
operations at a current site because the
operations may no longer be needed or can by
absorbed by other facilities.
– Examples leading to facility closure:
§ Eliminating redundant capacity in mergers and
acquisitions
§ Improving supply chain efficiency
§ Poor planning
§ Insufficient volume of business

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Facility Relocation and Facility Closing
• Facility closing
– Other considerations can factor into the decision
• Union contracts
– May prohibit facilities from being closed
• Human impact must be considered
– Individuals are losing jobs and pay
– Individuals suffer a loss of self-esteem
– Employees should be kept informed
• Poorly handled closings can lead to negative publicity

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LINEAR PROGRAMMING SOLUTION

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 LP Solutions with SOLVER
• A company currently ships its product from 5
plants to 4 warehouses. It is considering
closing one or more plants to reduce cost.
Transportation cost, fixed cost of each plant,
capacity of each plant, and demand of each
warehouse are given.
• What plant(s), if any, should the company
close, in order to minimize transportation
and fixed costs?

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 LP Solutions with SOLVER
Transportation Costs (per 1000 products)
Plant 1 Plant 2 Plant 3 Plant 4 Plant 5
Warehouse 1 $4,000 $2,000 $3,000 $2,500 $4,500
Warehouse 2 $2,500 $2,600 $3,400 $3,000 $4,000
Warehouse 3 $1,200 $1,800 $2,600 $4,100 $3,000
Warehouse 4 $2,200 $2,600 $3,100 $3,700 $3,200

Capacity of Each Plant (per 1000)

Plant 1 Plant 2 Plant 3 Plant 4 Plant 5
Capacity 20 22 17 19 18

Fixed Cost (per 1000)

Plant 1 Plant 2 Plant 3 Plant 4 Plant 5
Capacity $12000 $15000 $17000 $13000 $16000

Demand (per 1000)

Demand
Warehouse 1 15
Warehouse 2 18
Warehouse 3 14
Warehouse 4 20

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 LP Solutions with SOLVER
Plant 1 Plant 2 Plant 3 Plant 4 Plant 5
Plant 1 Plant 2 Plant 3 Plant 4 Plant 5
Warehouse 1 !"" !"# !"$ !"% !"& v1 v2 v3 v4 v5
Warehouse 2 !#" !## !#$ !#% !#&
Warehouse 3 !$" !$# !$$ !$% !$&
Warehouse 4 !%" !%# !%$ !%% !%&

Min Total Cost = (4000 * X11 + 2500 * x21 + 1200 * x31 + 2200 * x41 + 2000 * X12 + 2600 * x22 + 1800 * x32 + 2600 *
x42 + 3000 * X13 + 3400 * x23 + 2600 * x33 + 3100 * x43 + 2500 * X14 + 3000 * x24 + 4100 * x34 + 3700 * x44 + 4500 *
X15 + 4000 * x25 + 3000 * x35 + 3200 * x45 ) + (12000 * v1 + 15000 * v2 + 17000 * v3 + 13000 *v4 + 16000 *v5)

Subject to
x11 + x12 + x13 + x14 + x15 >= 15
x21 + x22 + x23 + x24 + x25 >= 18
x31 + x32 + x33 + x34 + x35 >= 14
x41 + x42 + x43 + x44 + x45 >= 20

X11 + x21 + x31 + x41 <= 20

X12 + x22 + x32 + x42 <= 22
X13 + x23 + x33 + x43 <= 17
X14 + x24 + x34 + x44 <= 19
X15 + x25 + x35 + x45 <= 18
V1 –v5 = o/1 (binary)

X11 –x45 >= 0

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LP Solutions with SOLVER

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LP Solutions with SOLVER

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LP Solutions with SOLVER

For integer
problem, make
sure ‘ignore
integer
constrains box’
is unchecked

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LP Solutions with SOLVER

8-45
 Copyright Notice

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

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