7 Keys to Facility Location
By John T. Mentzer -- Supply Chain Management Review, 5/1/2008
A hundred-mile move in another direction, and millions of dollars saved. A location a few hundred yards off, and millions of dollars squandered.The first example describes the recent experience of a fast-growing regional clothing retailer whose executive team fine-tuned the decision on where to locate a new distribution center. The second example refers to another company's siting of a new warehouse close to a rail line—but with no rail spur to the warehouse itself.
Site location matters. Indeed, it has become a more critical decision for supply chain leaders as supply chains have stretched, companies have expanded, and transportation costs have soared. Today, a poor location decision can have much greater and more immediate effects on operating efficiencies and cash flow.
Yet it is surprising how few of the executives responsible for the location of a new distribution center (DC) or production facility can explain the basic principles behind choosing the location. In fact, it is alarming that more and more business leaders are relying on the results of sophisticated computer analyses to make their location decisions without fully understanding the underlying logic—or its potential impact on their supply chains.
Having been involved in a number of facility location and facility network analysis projects over the last 30 years, I am impressed with the great strides made in network analysis computer models. From the rather primitive mainframe models of the 1970s, we have progressed to the sophisticated, zip code-based models of today that operate on notebook computers. But the speed and ready availability of computing power should be seen not as the solution to complex location puzzles. It should only ever be the means for solving those puzzles.
Just as in other operations activities, the computers should not be “making” facilities-location decisions. Executives should be looking to the location network analysis tools for more than a flat recommendation on where to build a new building. They should be demanding reports on how sensitive any decision might be to underlying factors such as regional infrastructure plans, local tax incentives, long-term production plans, and much more.
It is not the purpose of this article to do a deep dive into the details of the network analysis computer models that are designed to recommend facility location. Rather, my objective is to review the business logic that should underpin those models. Specifically, I want to emphasize the seven factors—land, labor, capital, sources, production, markets, and logistics—that any executive must consider before approving a new facility location. This article takes a close look at each factor and how it should affect a facility location decision.
- Land
Check to see whether the area you are considering is constrained and cramped by other facilities, or a wide-open space. Make sure you can live with your neighbors, if there are any. Click to continue. - Labor
One of the primary factors driving corporations to other countries such as China and India. Locations are often determined by the workforce likely to be employed there. Click to continue. - Capital
Different states or countries often offer economic incentives to companies that decide to set up shop there, including tax incentives and low-interest economic development loans.Click to continue. - Sources of Supply
Be sure to check out how far away your regular suppliers are from a potential location. Some of them may not want to suddenly have to travel twice the distance to get to you.Click to continue. - Production
Compare your supplies to the final product, considering whether value, weight, volume or other factors change. Click to continue. - Markets
Maintain a balance between an inexpensive location and proximity to customers. Don't get too close, or go too far away. Click to continue. - Logistics
Check to see how close a location is to the nearest airport, port of entry, rail line, or major highway. Assess what changes will need to be made to get goods to and from the new location. Click to continue.
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