Location

Planning
Operations Management (11
th

Edition) William J. Stevenson

NATURE OF LOCATION
DECISION
The Strategic Importance of
Location
 One of the most important decisions a firm makes
 Increasingly global in nature
 Significant impact on fixed and variable costs
 Decisions made relatively infrequently
 Long-term decisions
 Once committed to a location, many resource and
cost issues are difficult to change
 The objective of location
strategy is to MAXIMIZE the
benefit of location to the firm.
Location Options include:
Expanding existing facilities
Maintain existing and add sites
Closing existing and relocating
Making Location
Decisions
Decide on the criteria
Identify the important factors
Develop location alternatives
Evaluate the alternatives
• Identify general region
• Identify a small number of community
alternatives
• Identify site alternatives
Evaluate and make selection
Location and Costs
 Location decisions based on low cost require
careful consideration
 Once in place, location-related costs are fixed in
place and difficult to reduce
 Determining optimal facility location is a good
investment
 “Invented” overnight delivery.
 Uses “hub” concept.
 Enables service to more locations with fewer aircraft.
 Concentrates package flows to exploit transportation
economies of scale.
 Enables sorting economies of scale.
 Key issue: Where to locate hubs??
Industrial Location Decisions
 COST focused.
• Revenue varies little between locations.
 Production separate from consumption.
 Location is major cost factor.
• Costs vary greatly between locations.
 Shipping costs.

 Production costs (e.g., labor).

Service Location Decisions
 REVENUE focus.
 Costs vary little between market areas.
 Production/service together with consumption.
 Location is a major revenue factor.
 Affects amount of customer contact.
 Affects volume of business.
Organizations That Locate
Close to Markets/Customers
Government agencies.
• Police & fire departments, post offices, public
libraries.
Retail sales and Services.
• Fast food restaurants, supermarkets, gas stations.
• Doctors, lawyers, barbers, banks, auto repair, etc.
When transporting finished goods is more
expensive than transporting materials.
• Bottling plants, breweries.
• Electricity production.
Organizations That Locate
Close to Suppliers or
Materials
By necessity.
• Mining, fishing, farming, etc.

When transporting materials is more expensive

than transporting finished goods.
• Perishable raw materials. (Seafood processing.)
• Heavy or bulky raw materials. (Steel producers.)
• Processing reduces bulk. (Lumber mills, paper
production.)
Location Decision Factors
Community
Regional Considerations

Site-related
Multiple Plant
Factors
Strategies
Factors Affecting Country
Decision
 Government rules, attitudes, stability,
incentives.
 Labor availability, attitudes, productivity, cost.
 Availability of supplies, communications,
energy.
 Culture & economy.
 Location of markets.
 Exchange rate.
Ranking of the Business
Environment in 20 Countries,
2015 (Forbes)
1. Denmark 11. Hong Kong
2. New Zealand 12. Switzerland
3. Norway 13. Iceland
4. Ireland 14. Australia
5. Sweden 15. Belgium
6. Finland 16. Portugal
7. Canada 17. Lithuania
8. Singapore 18. Germany
9. Netherlands 19. Estonia
10. United Kingdom 20. Slovenia
Factors Affecting
Region/Community Decision
• Attractiveness of region (culture, taxes,
climate, etc.).
• Labor availability, costs, attitudes towards
unions.
• Environmental regulations of state and town.
• Proximity to customers & suppliers.
• Corporate desires.
• Costs and availability of utilities.
• Government incentives.
• Land/construction costs.
Factors Affecting Site
Decision
• Access to air, rail, highway, and waterway
systems.
• Proximity to needed services/supplies.
• Site size and cost.
• Zoning restrictions.
• Environmental impact issues.

.
Multiple Plant Strategies
 Product plant strategy
 Market area plant strategy
 Process plant strategy
Trends in Locations
Foreign producers locating in U.S.

Made in USA”

urrency fluctuations
Just-in-time manufacturing techniques
Microfactories
Information Technology
Location Decision Example -
BMW
In 1992, BMW decided to build
its first major manufacturing
plant outside Germany in
Spartanburg, South Carolina.
Country Decision - BMW
Market location.
U.S. is world’s largest luxury car market & is
growing.
Labor.
U.S. has lower manufacturing labor costs.
$17/hr. (U.S.) vs. $27 (Germany).
U.S. may have higher labor productivity.
11 holidays (U.S.) vs. 31 (Germany).

Other.
Lower shipping cost ($2,500/car less).
New plant & equipment would increase productivity
(lower cost/car $2,000-3000).
Region/Community Decision -
BMW
Labor.
Lower wages in South Carolina (SC).
About $17,000/yr in SC vs. $27,051/yr in U.S.
(based on 1993).

Government incentives.
$135 million in state & local tax breaks.
Free-trade zone from airport to plant.
No duties on imported components or on exported
cars.
Global Locations
Facilitating Factors
• Trade agreements
• Technology

Benefits
• Markets
• Cost savings
• Legal and regulatory
• Financial
Globalization
Disadvantages
• Transportation costs
• Security
• Unskilled labor
• Import restrictions
• Criticisms
Risks
• Political
• Terrorism
• Legal
• Cultural
Evaluating Locations
Cost-Profit-Volume Analysis
• Determine fixed and variable costs
• Plot total costs
• Determine lowest total costs
Location Cost-Volume Analysis
Assumptions
• Fixed costs are constant
• Variable costs are linear
• Output can be closely estimated
• Only one product involved
Example 1: Cost-Volume Analysis

Fixed and variable costs for

four (4) potential locations

L o c a tio n F ix e d V a r ia b le
C o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5
Example 1: Solution
F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts

A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0
 Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300
200 A Superior
C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

Location Evaluation Methods
1. Factor-rating method.
2. Locational break-even
analysis.
3. Center of gravity method.
4. Transportation model.
Factor-Rating Method
Most widely used location technique.
Useful for service & industrial locations.
Rates locations using factors. Decision based on
quantitative and qualitative inputs.
• Intangible (qualitative) factors.
Example: Education quality, labor skills.
• Tangible (quantitative) factors.
Example: Short-run & long-run costs.
Based on weighted average.
Steps in Factor Rating
Method
• List relevant factors.
• Assign importance weight to each factor (0-
1).
• Make weights sum to one.
• Set a scale for scoring each factor (1-10 or 1-
100).
• Score each location using factor scale.
• Multiply scores by weights for each factor &
sum.
• Select location with maximum total score.
• Consider sensitivity to weights and scores.
Factors Affecting Location
 Labor costs and availability, including wages,
productivity, attitudes, age, distribution,
unionization, and skills.
 Site costs, including land cost, parking,
drainage, expansion opportunities, etc.
 Proximity to raw materials and suppliers.
 Proximity to markets.
 State and local government fiscal policies
(including incentives, taxes, unemployment
compensation).
Factors Affecting Location -
continued
Utilities, including availability and costs.
Transportation availability (road, rail, air,
water, pipeline).
Quality-of-life issues (education, cost of living,
health care, sports, cultural activities, housing,
entertainment, religious facilities, etc.).
Foreign exchange, including rates and
stability.
Government, including stability, honesty,
attitudes toward new business, etc.
Factor Rating Example
Three locations: A, B and C; Four factors.
1. Assign weights to each factor.
2. Score each location on each factor.
3. Multiply the weight and score and sum for each
location.
Factor weight A B C
Cost 0.3
Proximity to trans. 0.2
Taxes 0.1
Labor 0.4
Factor Rating Example
Three locations: A, B and C; Four factors.
Factor weight A B C
Cost 0.3 10 9 7
Proximity to trans. 0.2 7 3 10
Taxes 0.1 7 5 10
Labor 0.4 6 8 5
7.5 7 7.1
A is best; B and C are
Note that if the labor scoresimilar.
for A was 5, not 6, then all
locations are similar.
Locational Break-Even Analysis
Cost-volume analysis used for location.
Steps:
• Determine fixed & variable costs for each
location.
• Find break-even point.
• Plot cost for each location.
• Select location with lowest total cost for
expected production volume.
Must be above break-even.
Locational Break-Even
Analysis Example
You’re an analyst for AC Delco. You’re
considering a new manufacturing plant
in Akron, Bowling Green, or Chicago.
Fixed costs per year are $30k, $60k, &
$110k respectively. Variable costs per
case are $75, $45, & $25 respectively.
The price per case is $120.

What is the best location for an

expected volume of 2,000 cases per
year?
Locational Break-Even
Analysis Example
A=Akron: Total Cost = TC = 30000 +
75x
B=Bowling Green: Total Cost = TC =
60000 + 45x
C=Chicago: Total Cost = TC =
110000 + 25x B is
For all: Total Revenue = TR = Best
120x

At x=2000 cases/year:
Locational Break-Even
Analysis Example
You’re an analyst for AC Delco. You’re
considering a new manufacturing plant in
Akron, Bowling Green, or Chicago. Fixed
costs per year are $30k, $60k, & $110k
respectively. Variable costs per case are $75,
$45, & $25 respectively. The price per case is
$120.

Over what range of output is each location

preferred?
Locational Break-Even
Analysis Example
A=Akron: TC = 30000 + 75x
B=Bowling Green: TC = 60000 + 45x
C=Chicago: TC = 110000 + 25x

A is best at x=0.
A < B for x < 1000/yr and A < C for x < 1600/yr,
so
A is best over range 0<x<1000/yr.
B < C for x < 2500/yr so,
B is best over range 1000<x<2500/yr.
Locational Crossover Chart
200,000
k ron
A
150,000
o
Chicag
$

100,000 reen
g G
lin
Bow

50,000 Akron lowest Bowling Green Chicago

cost lowest cost lowest cost

0
0 500 1000 1500 2000 2500 3000

Volume
Locational Crossover Chart
200,000

e
nu
k ron

ve
A

Re
150,000
o
Chicag
$

100,000 reen
g G
lin
Bow

50,000 Akron lowest Bowling Green Chicago

cost lowest cost lowest cost

0
0 500 1000 1500 2000 2500 3000
Volume
Locational Break-Even
Analysis Example
A is unprofitable for low volumes.
Use break-even analysis with A to find
break-even point = 666.67/yr.

A is best and profitable over range 666.67<x<1000/yr.

B is best and profitable over range 1000<x<2500/yr.

C is best and profitable over range 2500/yr < x.

Center of Gravity Method
Decision based on minimum distribution costs
Finds location of single facility serving several
destinations.
Used for services and distribution centers.
Requires:
• Location of existing destinations (Markets,
retailers etc.)
• Volume to be shipped.
• Shipping distance (or cost).
Center of Gravity Method
Steps
Find X and Y coordinates for all destinations.
Can use an arbitrary coordinate grid.
Calculate center of gravity location for facility as
weighted average of X & Y coordinates.
Approximately minimizes transportation cost.
Location is not necessarily optimal, but is
usually close.
Center of Gravity Method
Equations
X Coordinate
∑ d ix Wi dix = x coordinate of
Cx = i
location i
∑ Wi
i
Wi = Volume of goods
Y Coordinate moved to or from
∑ d iy Wi
location i
Cy = i
∑ Wi
diy = y coordinate of
i location i
Center of Gravity Example
Given 4 cities with volume demanded and (x,y) coordinates.
Find location for one warehouse to minimize total distance
to supply these cities.
New York (130,130)
Chicago (30,120)
120
Location Volume
Pittsburgh (90,110)
Chicago 200
Pittsburgh 100
New York 100 60
Atlanta 200
Atlanta (60,40)

0
0 60 120
 Center of Gravity Example
Location Volume X-Coordinate Y-Coordinate
Chicago 200 30 120
Pittsburgh 100 90 110
New York 100 130 130
Atlanta 200 60 40

X coordinate of warehouse:
Cx=(200x30+100x90+100x130+200x60)/(200+100+100+200) = 66.7

Y coordinate of warehouse:
Cy=(200x120+100x110+100x130+200x40)/(200+100+100+200) = 93.3
 Center of Gravity Example
New York (130,130)
Location Volume
Chicago (30,120)
Chicago 2000 120
Pittsburgh 1000
Pittsburgh (90,110)
New York 1000 X
Atlanta 2000
60 Center of gravity = (66.7, 93.3)

Atlanta (60,40)

0
0 60 120
Transportation Model
Decision based on movement costs of raw materials or
finished goods
Finds amount to be shipped from several sources to several
destinations.
Used primarily for industrial locations.
Type of linear programming model.
Objective: Minimize total production & shipping costs.
Constraints:
Production capacities at sources (factories).
Demand requirements at destinations.
Transportation Model
Example 800 Chicago
1000
500
Supply is in green London
300
Demand is in red St. Louis
200

900 Atlanta
300

From To Cost per unit

flow
Chicago London $40
Chicago St. Louis
$10
St. Louis Chicago
$8
St. Louis Atlanta
$20
Atlanta London $35
Transportation Model
Example
Demand
Supply $40 London 1000
800 Chicago $1
$10
$8 Chicago 500
300 St. Louis
$35 $1 St. Louis 200
900 Atlanta $20
$1
Atlanta 300

xij = Flow from origin i to destination j.

Objective is minimize cost for all flows.
Constraints for supply at each origin (3) and
demand at each destination (4).
Integer Programming for
Location
x = 1 if a warehouse is located at Boston; 0 otherwise.
1

x2 = 1 if a warehouse is located at Hartford; 0 otherwise.

x3 = 1 if a warehouse is located at Albany; 0 otherwise.

♦ Minimize the cost to locate warehouses:

Minimize C1 x1 + C2 x2 + C3 x3

♦ At most two warehouses can be opened:

x1 + x2 + x3 ≤ 2

♦ Either Boston or Hartford should have a warehouse:

x1 + x2 ≤ 1
Location for Service
Organizations
Focus on Revenue and Volume of Business,
which are determined by:
Purchasing power and demographics of customer
drawing area.
Competition in the area (amount and quality).
Relative attractiveness of the firm’s and
competitor’s locations.
• Uniqueness of location and offerings.
• Physical qualities of facilities and neighboring
businesses.
• Operating policies and quality of management.
 Service vs. Industrial
Location
SERVICE LOCATION INDUSTRIAL LOCATION
Techniques Techniques
Regression models to determine Linear and Integer Programming
importance of different factors. (Transportation method).
Factor rating. Factor rating.
Traffic counts & demographic analysis Breakeven and crossover analysis.
of drawing area.
Center of gravity.
Center of gravity.
Assumptions
Assumptions
Location is major determinate of
Location is major determinate of cost.
revenue.
Costs can be identified for each site.
High customer contact issues
dominate. Low customer contact allows focus
on costs.
Costs are relatively constant for a given
area. Intangible costs can be objectively
evaluated.
Telemarketing and Internet
Industries
Require neither face-to-face contact with
customers (or employees) nor movement of
material.
Keys are:
• Labor costs and productivity.
• Information systems infrastructure (including
training and management).
• Government incentives (including taxes).
Geographic Information
Systems - GIS
New tool to help in location analysis.
Combines spatial (locational) data and attribute
data (for example, demographics).
Uses spatial analyses to identify best or
satisfactory locations.
Allows intuitive graphical display using maps.