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Facility location refers to the location of a service or manufacturing facility with respect to customers, suppliers, and other existing facilities such that it allows the company to gain a competitive and/or strategic edge. In making a location decision, both tangible costs (e.g., cost of operating the facility; cost of land (if it applies); cost of labor, taxes, and utilities; cost of inbound and outbound transportation) and intangible costs (e.g., availability of qualified labor and labor climate) must be considered. Because the location decision usually involves making a large capital investment, it not only affects the firm’s ability to compete but also has long-term strategic implications. Therefore, in making the location decision, we should consider issues related to marketing, production, transportation and other relevant costs as well as the strategy of the organization. The importance of various factors in relation to the location decision will vary between service and manufacturing organizations and from industry to industry as well.

Location decisions can have an impact on access to markets, costs (including materials, labor, rent, construction, and transportation), quality of work life (e.g., community-related factors), and growth potential.

The fact that similar businesses are located widely underscores the futility of searching for that “one best” location. However, it does not necessarily follow that little attention is needed in finding a suitable location. Many organizations that have not been successful are no longer in business (e.g., service stations in poor locations, motels bypassed by an expressway, and so on). Moreover, others currently in operation might be much more profitable in another location. For some businesses (e.g., restaurants) regional factors are not particularly significant, and even community-related factors are of little importance. However, site-related factors are extremely important. Similarly, there are numerous examples of firms that are less affected by community or site factors than they are by regional factors (i.e., nearness to market, labor, or raw materials).  Important community factors include size of the community, public transportation, schools, recreational facilities, libraries, restaurants, shopping centers, cultural and entertainment selections, and so on.

Manufacturing and non-manufacturing organizations tend to approach location decisions in a similar way, but the factors that are important to each tend to differ. Although both tend to take costs and profits into consideration, manufacturing firms are often concerned with location of raw materials, transportation costs, availability of energy and water, and similar factors. Non-manufacturing firms often are more concerned with convenience, access to markets, traffic flow, and the like.

Foreign locations may offer lower taxes, access to markets, availability of raw materials, lower transportation costs (due to nearness to market), and lower labor costs than a comparable domestic location. Potential drawbacks often relate to the political and economic stability of the host country and attitudes of the populace towards a particular nation, industry, or firm.  Low labor costs often represent a major reason why companies (especially manufacturing firms) locate in particular countries. It may be useful to have a slide handy that compares hourly wage rates across certain countries, including the U.S., Germany, Japan, Mexico, and certain low-wage Asian countries.  Location rating, or factor rating, is a qualitative technique used to develop an overall composite index for an alternative, which can be used to compare location alternatives. It involves identifying relevant factors, assigning relative weights to the factors, and rating each alternative with respect to the factors.

The first step is to decide on the criteria to use to evaluate location alternatives (e.g., cost, profits, community service, etc.). The second step is to identify any important factors that will dominate the decision. The third step is to develop location alternatives (country, general region, small number of community alternatives, and site alternatives among the community alternatives). The fourth step is to evaluate the alternatives and make a selection.

Locational breakeven analysis generally assumes the following:

Fixed costs are constant for the range of probable output.
Variable costs are linear for the range of probable output.
The level of output that will be required can be estimated within a narrow range.
A single product is involved.
Recent trends include the location of foreign manufacturing plants in the United States, having smaller factories located close to markets, choosing nearby suppliers, low-cost labor is becoming less of a factor in many industries, and advances in information technology make it less important to have design, engineering, etc. close to the factory.

Due to economies of scale, the centrally located large facility will be more efficient. The scheduling and coordination between the large facility and suppliers or customers will be simplified. However, due to distance, transportation/distribution costs to or from the large facility will be much higher than those costs would be when using several smaller dispersed facilities instead. Having several smaller dispersed facilities will not only reduce the transportation cost but also increase the flexibility of the firm in terms of being able to reduce distribution lead time, thus resulting in faster deliveries or receipts of goods or merchandise.

Unlike the process design decision, the facility location decision is a macro decision and thus requires the involvement of top-level management. The larger the facility, the higher the level of involvement of the company personnel will be. In terms of various functions or departments within the company, manufacturing (or operations), logistics and distribution, marketing, and strategic planning must be involved. Depending on the type of facility considered, other groups may also need to be included in making this important decision.


You must decide which of several sites will be best for the location of a third restaurant in the company’s chain in a suburb of a medium-sized city. Compose an email to your employee, Jim Watson, outlining the information you will need from him before you can analyze the location alternatives.

Be sure to incorporate learnings from the lecture notes and powerpoints provided.

Question 29