TIS Consulting
Share

Plant Location Models

Published in: Blog / February, 20 2014

plant-locations

The location of the company site is a decision that could incur on high costs that should not be taken lightly; some expected (rent and transportation of goods) but other unexpected like loss of sales resulting from lack of presence to their market. Some of these costs can hardly be controlled since they are function of external factors; additionally, relocation would imply not only a significant investment requirement, but also would affect productivity. (Singh 2012)

The site selection process starts with an evaluation of available zones or specific places, and must be properly aligned with the company’s strategies. (Erossa 1987) A practical tool to evaluate potential locations using the company’s factors, either qualitative or quantitative, is an evaluation table. The evaluation table enlists each of the locations’ grades based on the factors and their relevance. The relevance of each factor is a function of the company’s strategies and assists in the selection of the best location. For instance, a company focused in low costs would explore for those locations that incur low transportation costs, while a company focused in market differentiation would consider locations accessible to its market instead. (Singh 2012) (Mind Tools Ltd 2013)

Some common factors used in an evaluation table are:

  • Land availability; growth flexibility, land cost.
  • Human Resources; workers availability within the area, expected wages.
  • Capital; incentives from third parties.
  • Distance and Access to Suppliers
  • Production; for instance, if the product changes in value, weight, volume or another factor during the different phases of its production. This is considered to quantify the costs that it would have during production.
  • Access to the market.
  • Logistics; transportation channels and accessibility.

(Mentzer 2008)

A good example of a global company that uses the evaluation table tool for site selection is Hard Rock Café restaurant. The evaluation table is used for specific locations using relevant factors such as demography, transportation, tourist presence, market in the area, and clusters of similar business. With the support of this tool, Hard Rock Café has opened 170 establishments around the world guaranteeing success and assuring a positive effect on the Hard Rock’s image, since it usually commits to a location for no less than ten years. (Hard Rock 2010) (Render, Heizer, and Amer 2006)

Hard Rock Locations by 2006 (Render, Heizer, and Amer 2006)

Moreover, other frequently used methods for site location are the center of gravity technique and the economic analysis. The center of gravity technique is based on other significant locations, which could be either clients and/or suppliers depending on each case (orange markets in Figure 2). Each of them is weighted depending of their relevance for the company. The resulting position (yellow marker in Figure 2) assists in the search of potential locations by setting a reference of an ideal location and is calculated using the following formula for each coordinate:

Where x is the horizontal coordinate, y is the vertical coordinate and Q is the weight depending in their relevance. (Vassilakis 2009)

Example of the Center of Gravity Technique (Google)

Client

Coordinate X

Coordinate Y

Q

1

4.5

16.5

800

2

14

5

800

3

26.5

17.5

200

4

33.5

18.5

390

5

38

18

200

Moving on, the economic analysis considers other internal elements such as the production’s volume and its costs (either fixed or variable) to identify the most economic location. A graphic comparison of production levels and costs is usually created for every potential location, assisting not only in the most economic location but in its expected flexibility. (Departamento de Organización de Empresas, E.F. y C. 2004)(Vassilakis 2009)

Example of Economic Analysis

An assortment of specialized programs are available to assist in this kind of analyses; but the most important step in order to get the best location is defining the company’s most relevant factors. This way, the factors will reflect the company’s requirements and assure the prevention of external costs. TIS Consulting Group has successfully performed studies for distribution centers and manufacturing plants site selection by following and combining such techniques as the ones discussed above; thus, enabling private and public entities to select sites in a proficient fashion.

 

Departamento de Organización de Empresas, E.F. y C. 2004. “Localización de Instalaciones.” Universitat Politècnica de València. September 14. http://personales.upv.es/jpgarcia/LinkedDocuments/5%20Localizaciion%20instalaciones.pdf.

Erossa, Victoria. 1987. Proyectos de Inversión En Ingeniería: (su Metodología). Editorial Limusa. http://books.google.com.mx/books?id=radgq2zQxH0C&lpg=PA78&ots=4j4ozJvl64&dq=macroanalisis%20localizaci%C3%B3n%20de%20plantas&pg=PA78#v=onepage&q=macroanalisis%20localizaci%C3%B3n%20de%20plantas&f=false.

Fang, Dianjun, and Weibing Weng. 2010. “KPI Evaluation System of Location Decision for Plant Relocation from the View of the Entire Supply Chain Optimization.” IEEE Xplore. http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=5585366&tag=1.

Google. “Google Maps”. Google Maps. https://maps.google.com/.

Hard Rock. 2010. “Hard Rock Cafe Dubai to Relocate to Festival Centre.” Hard Rock Cafe International, Inc. August 16. http://www.hardrock.com/newsviewer.aspx?id=28&section=cafe.

Mentzer, John T. 2008. “7 Keys to Facility Location.” ProQuest LLC. May. http://0-search.proquest.com.millenium.itesm.mx/docview/221135474?accountid=11643.

Mind Tools Ltd. 2013. “Porter’s Generic Strategies”. Mind Tools Ltd. http://www.mindtools.com/pages/article/newSTR_82.htm.

Render, Barry, Jay Heizer, and Bev Amer. 2006. “Video Case: Where to Place Hard Rock’s Next Cafe.” Pearson Prentice Hall. http://recursos.pearson.es/castroman/videos/vid_cases/v0801cse.html#.

Schwab, Klaus, and Xavier Sala-i-Martín. 2012. “The Global Competitiveness Report 2012 – 2013.” World Economic Forum. http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf.

Singh, KJ. 2012. “What Are the Factors Affecting Plant Location Decisions and the Need for Such Decisions.” Master of Business Administration. http://www.mbaofficial.com/mba-courses/operations-management/what-are-the-factors-affecting-plant-location-decisions-and-the-need-for-such-decisions/.

Vassilakis, Panayotis. 2009. “Facility Location.” University of the Aegean. April 11. http://labs.fme.aegean.gr/decision/images/stories/docs/HealthCare_FacilityLocation.pdf.

If you have any questions or comments about this post contact us.

Leave the Comfort Zone

Set sail to be the best company you can be. Step by step, project by project, innovation by innovation. We can help you get there.

CONTACT US