9

Service Management (5e)

Operations, Strategy, Information Technology
By
Fitzsimmons and Fitzsimmons

Chapter 9
Service Facility Location

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Learning Objectives
Discuss

how a facility location is affected by selection of the

criteria for judging customer service.

Locate

a single facility using the cross-median approach.

Discuss

nontraditional location strategies: competitive

clustering, saturation marketing, marketing intermediaries,
substitution of communication for transportation, and the
impact of the Internet on service location.

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Service Facility Location Planning

Flexibility: of a location is a measure of the degree to which the

service can react to changing economic situations. Therefore, in
location decisions plan for future economic changes and portfolio
effect.

Competitive positioning: refers to methods by which the firm can

establish itself relative to its competitors. Multiple location or prime
location can be barrier to entry.

Demand management: it is the ability to control the quality, quantity,

and timing of demand. For example, a hotel can control demand by
locating near a diverse set of market generators that supply a steady
demand .

Focus: can be developed by offering the same narrowly defined

service at many locations.

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Geographic Representation
Location

options and travel distance can be represented on

either a plane (flat surface) or a network.

Plane

provides infinite possibilities you can move in any

direction represented by XY coordinates (sometimes called
the latitude and the longitude). Distance between locations is
measured in two ways:
Euclidian

metric or vector using Pythagorean theorem

d ij ( xi x j ) ( yi y j )
2

2 1/ 2

Metropolitan

method more like a grid travel in a city, where we

move at right angle.

dij xi x j yi y j

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Geographic Representation
Location on a Plane
Y

Destination j

Yj

Euclidean

d ij

( x x )
i

( yi y j )

Origin i

Yi

Metropolitan

dij xi x j yi y j
0

Xi

Xj

2 1/ 2

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Location on a network
It

is characterized by a solution space that is restricted to the

nodes of that network.

Example,

a highway system could be considered a network

with major highway intersections as nodes.

The

arcs of the network represent travel distance (or time)

between pairs of nodes, calculated using the shortest route.

Networks

can represent more accurately the geographic

uniqueness of an area (e.g., the travel restrictions caused by
river with few bridges or by mountainous terrain).

Unfortunately,

the cost of gathering the travel times between

nodes can be prohibitive

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Multisite location
Location

of a single facility is easy and can be solved using

mathematics for an optimal location.

However,

methods used to locate a single facility do not

guarantee optimal results when we use them to find solution
for multisite location problem. This complexity is added by:
Demand

pattern at different sites is different

Capacity maybe different at different sites
Services at different sites maybe hierarchical and inter-dependent,
example private physicians and clinics offer primary care, general
hospitals provide primary care plus hospitalization, and health
centers add special treatment capabilities.

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Optimization Criteria
Criteria

for location maximization differ based on private or

public ownership.

Private

sector

In private sector, the location decision is governed by either minimization

of cost (e.g. in the case of locating distribution centers) or maximization of
profit (e.g. in the case of locating retail locations).
Typical problem here would focus on the trade-off between cost of building
and operating facilities versus cost of transportation. Example, warehouse
location problem.
This model maybe applied in services, when the decision is to locate
services like consulting, auditing, lawn care services which require you
to travel to the customer.
When the consumer travels to the facility, no direct cost is incurred by the
provider. Instead, distance becomes a barrier restricting potential
consumer demand and the corresponding revenue generated.

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Public

sector criteria

In locating public facility, the decisions are governed by the needs of

the society as a whole.

Location decisions are complicated by the lack of agreement on goals

and the difficulty of measuring benefits in dollars to make trade-offs
with facility investment.

Because the benefits of a public service are difficult to define or

quantify directly, substitute measure of utility maximization are used.

Utility will be maximized if people have to travel less to reach a public

facility; or more people can travel to the public facility

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Effect of criteria on location

Maximize

utilization

Maximize

the total number of visits to the health care center

The center should be located in city C, because it contains a large
number of elderly people for whom distance is a strong deterrent
Minimize

distance per capita

Minimize

the average distance per capita to the closest center

City B should be selected, because it is centrally located between
the two large cities
Minimize

distance per visit

Minimize

the average per-visit travel distance to the nearest center

City A should be selected as it has the largest population and has
the most mobile and frequent users of health care.

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Effect of Optimization Criteria

City A

10

15

-10

-5

10

15

1. Maximize Utilization

(City C: elderly find distance a barrier)

2. Minimize Distance per Capita

(City B: centrally located)

3. Minimize Distance per Visit

(City A: many frequent users)

-10

City B

20

25

-5

-15

City C

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Estimation of Geographic Demand

Define the Target Market

To forecast demand, we need to define target population. We use past

records to project future demand

Select a Unit of Area

To forecast , we need to define geographic units based on 2 factors

Estimate Geographic Demand

Unit must be large enough to contain a sample size required for estimating
demand
We should not have so many geographic units, that we cannot do calculations
using our computing power.

Regression analysis

Map Geographic Demand on a three dimensional map

to provide a visual representation of the geographic distribution

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Facility location technique

Single

facility on a line

Suppose

you want to find a location that would minimize the

average walk to your concession from anywhere on the beach
Locate in the center if the population is equally divided
If population density is different, then locate the median w.r.t to the
density distribution of the bathers

i 0

is

Z wi ( s xi ) wi ( xi s )
S = site of the beach mat concession

i location of the i-th demand point on the beach in feet from the
origin, in this case taken to be west end of the beach
wrelative weight of demand attached to the i-th location on beach

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LEAVE PAGES 260-267

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Other criteria for site selection

So

far we have examined location objective from customer

convenience point of view, that is, distance travelled to be
minimized .

However,

there could be other criteria used for location as

discussed in the next slide.

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Site Selection Considerations

table 9.10, pp. 268

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Breaking the Rules

Competitive

When firms in the same business locate close to each other so that
customers can compare more easily, ex., car dealership, motels

Saturation

Clustering

Marketing

When a company locates its units close to each other to squeeze out
the competition, reduce advertising needs, increase customer
awareness, better inventory management.; example Au Bon Pain,
Risk of cannibalizing your sales

Marketing

Intermediaries

Services cannot be inventoried and are intangible, cannot be

transported, thus limiting the geographic area of service
By using marketing intermediaries you can expand geographical
coverage; e.g. banks extend credit worldwide through Credit
Cards, HMO

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Continued.
Substitute

Electronic Media for Travel

Technology interphase has provided communication possibilities that

expand the coverage of service, example. Nurse practitioners can
use communication with a distant hospital to provide health care
without transporting the patient
Working out of home or providing service at customer s location ,
example, telebanking

Impact

of the Internet on Service Location

E-commerce website becomes the virtual location of these firms

Location of the warehouse is a concern because you have to ship
the products, e.g. Amazon.com, eBay, FedEx

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Strategic Location Considerations

Front Office

External
Customer

Is travel out to customer or

customer travel to site?

Is service performed on
person or property?

Can electronic media substitute for

physical travel?

Is co-location necessary?

(consumer) Is location a barrier to entry?

Availability of labor?

Internal
Customer
(employee)

Back Office

Are self-service kiosks an

alternative?

How is communication
accomplished?

Are economies of scale

possible?
Can employees work from
home?
Is offshoring an option?

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Topics for Discussion

Pick

a particular service, and identify shortcomings in its site

selection.

How

would you proceed to estimate empirically the

parameter in the Huff retail location model for a branch
bank?

Why

do you think set covering is an attractive approach to

public sector facility location?

What

are the benefits of using intermediaries in the service

distribution channel?