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
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.