Location Strategy

Supply Chain Management

Location Strategy

Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals

CONTROLLING
• Purchasing and supply • Transport decisions

ORGANIZING
scheduling decisions Customer

PLANNING
• Storage fundamentals service goals
• Storage decisions • The product
• Logistics service
• Ord . proc. & info. sys.

Location Strategy
• Location decisions
• The network planning process
Facility Location Decisions
What's located?
• Sourcing points •Intermediate points •Sink points
− Plants − Warehouses − Retail outlets
− Vendors − Terminals − Customers/Users
− Ports − Public facilities
− Service centers
Key Questions
• How many facilities should there be?
• Where should they be located?
• What size should they be?

Why Location is Important

• Gives structure to the network
• Significantly affects inventory and transportation costs
• Impacts on the level of customer service to be achieved
Weber’s Classification of Industries
 Classification of Location Decisions
• Driving force
– Manufacturing - transportation, inventory, labor, taxes
– Retail - Traffic flow and resulting revenue
– Service - Response time, accessibility, and availability
• Number of facilities • Single warehouse location
– Single facility – Graphic
– Multiple facility – Grid, or center-of-gravity approach

• Discreteness of choices • Multiple warehouse location

– Simulation
– Continuous – Optimization
– Discrete – Heuristics
• Degree of Data Aggregation
• Time Horizon – Static / Dynamic
Facility Location Models
• Single warehouse location

– Graphic

– Grid, or center-of-gravity approach

• Multiple warehouse location

– Simulation
– Optimization
– Heuristics
Facility Location Models
 Location
Center of Gravity Approach
Census Population
Tract (x, y) (l) lx ly
A (2.5, 4.5) 2 5 9 x* =
B (2.5, 2.5) 5 12.5 12.5
C (5.5, 4.5) 10 55 45
D (5, 2) 7 35 14
E (8, 5) 10 80 50 y* =
F (7, 2) 20 140 40
G (9, 2.5) 14 126 35
Totals 68 453.5 205.5
 Location
Center of Gravity Approach
Census Population
Tract (x, y) (l) lx ly
A (2.5, 4.5) 2 5 9 x* = 453.5
B (2.5, 2.5) 5 12.5 12.5 68
C (5.5, 4.5) 10 55 45
D (5, 2) 7 35 14 205.5
E (8, 5) 10 80 50 y* =
F (7, 2) 20 140 40 68
G (9, 2.5) 14 126 35
Totals 68 453.5 205.5
 Location
Center of Gravity Approach
Census Population
Tract (x, y) (l) lx ly
A (2.5, 4.5) 2 5 9 x* = 453.5
B (2.5, 2.5) 5 12.5 12.5 68
C (5.5, 4.5) 10 55 45
D (5, 2) 7 35 14 205.5
E (8, 5) 10 80 50 y* =
F (7, 2) 20 140 40 68
G (9, 2.5) 14 126 35
Totals 68 453.5 205.5
 Location
Center of Gravity Approach
Census Population
Tract (x, y) (l) lx ly
A (2.5, 4.5) 2 5 9 x* = 6.67
B (2.5, 2.5) 5 12.5 12.5
C (5.5, 4.5) 10 55 45
D (5, 2) 7 35 14
E (8, 5) 10 80 50 y* = 3.02
F (7, 2) 20 140 40
G (9, 2.5) 14 126 35
Totals 68 453.5 205.5
 Location
Center of Gravity Approach
Dynamic Location
• The general long-range nature of the location problem
- Network configurations are not implemented immediately
- There are fixed charges associated with moving to a new
configuration
• We seek to find a set of network configurations that minimizes the present
value over the planning horizon

Retail Location
• Contrasts with plant and warehouse location.
- Revenue rather than cost driven
- Factors other than costs such as parking, nearness to competitive
outlets, and nearness to customers are dominant

Methods
• Weighted checklist
- Good where many subjective factors are involved
- Quantifies the comparison among alternate locations
 Location
North Health-Watch
Erie

Scranton

State College
Pittsburgh
Harrisburg
Philadelphia
Uniontown
 Location
North Health-Watch
Erie

Location Factor Weight Score

Scranton

Total patient miles per month 25 4

Facility utilization State College
20 3
Pittsburgh
Average time per emergency trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 Location
North Health-Watch
Erie

Weighted Score
Location Factor Weight Score
Scranton

Total patient miles per month 25 4

Facility utilization State College
20 3
Pittsburgh
Average time per emergency trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 Location
North Health-Watch
Erie

Weighted Score
Location Factor Weight Score
Scranton

WS patient
Total = (25 xmiles
4) per month 25 4
Facility utilization State College
20 3
Pittsburgh
Average time per emergency trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 Location
North Health-Watch
Erie

Weighted Score
Location Factor Weight Score
Scranton

WS patient
Total = (25 xmiles
4) + (20
per xmonth
3) 25 4
Facility utilization State College
20 3
Pittsburgh
Average time per emergency trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 Location
North Health-Watch
Erie

Weighted Score
Location Factor Weight Score
Scranton

WS patient
Total = (25 xmiles
4) + (20
per xmonth
3) + 25 4
(20 x 3)
Facility utilization State College
20 3
Pittsburgh
Average time per emergency trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 Location
North Health-Watch
Erie

Weighted Score
Location Factor Weight Score
Scranton

WS patient
Total = (25 xmiles
4) + (20
per xmonth
3) + 25 4
(20 x 3) + (15 x 4) + State College
Facility utilization 20 3
Pittsburgh
Average(10time x 1)
per+ emergency
(10 x 5) trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 Location
North Health-Watch
Erie

Weighted Score
Location Factor Weight Score
Scranton

WS patient
Total = 340 miles per month 25 4
Facility utilization State College
20 3
Pittsburgh
Average time per emergency trip 20 3
Harrisburg
Expressway accessibility 15
Philadelphia
4
Land and Uniontown
construction costs 10 1
Employee preference 10 5
 A Hypothetical Weighted Factor Checklist for
a Retail Location Example
(1) (2) (3)=(1)(2)
Factor
Weight Factor Score Weighted
a b
(1 to 10) Location Factors (1 to 10) Score
8 Proximity to competing stores 5 40
5 Space rent/lease
considerations 3 15
8 Parking space 10 80
7 Proximity to complementary
stores 8 56
6 Modernity of store space 9 54
9 Customer accessibility 8 72
3 Local taxes 2 6
3 Community service 4 12
8 Proximity to major
transportation arteries 7 56
Total index 391
a
Weights approaching 10 indicate great importance.
b
Scores approaching 10 refer to a favored location status.
 Location
Break-Even Analysis
 Location
Break-Even Analysis

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30
 Location
Break-Even Analysis
for 20,000 units

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

Total Variable Costs

 Location
Break-Even Analysis
for 20,000 units

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

Total Variable Costs

$62 (20,000)
 Location
Break-Even Analysis
for 20,000 units

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

Total Variable Costs

$62 (20,000) = $1,240,000
 Location
Break-Even Analysis
for 20,000 units

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62 $1,390,000
B $300,000 $38
C $500,000 $24
D $600,000 $30

Total Variable Costs

$62 (20,000) = $1,240,000
 Location
Break-Even Analysis
for 20,000 units

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62 $1,390,000
B $300,000 $38
C $500,000 $24
D $600,000 $30

Total Variable Costs

$62 (20,000) = $1,240,000
 Location
Break-Even Analysis
for 20,000 units

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62 $1,390,000
B $300,000 $38 $1,060,000
C $500,000 $24 $ 980,000
D $600,000 $30 $1,200,000
Community
Fixed Costs
per Year
Total Costs
(Fixed + Variable) Location
A
B
$150,000
$300,000
$1,390,000
$1,060,000 Break-Even Analysis
C $500,000 $ 980,000
1600
D $600,000 $1,200,000
Annual cost (thousands of dollars)

1400

1200

1000

800

600

400

200

0
2 4 6 8 10 12 14 16 18 20 22

Q (thousands of units)
Community
Fixed Costs
per Year
Total Costs
(Fixed + Variable) Location
A
B
$150,000
$300,000
$1,390,000
$1,060,000 Break-Even Analysis
C $500,000 $ 980,000
1600
D $600,000 $1,200,000 A
Annual cost (thousands of dollars)

(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800

600

400

200

0
2 4 6 8 10 12 14 16 18 20 22

Q (thousands of units)
Community
Fixed Costs
per Year
Total Costs
(Fixed + Variable) Location
A
B
$150,000
$300,000
$1,390,000
$1,060,000 Break-Even Analysis
C $500,000 $ 980,000
1600
D $600,000 $1,200,000 A
Annual cost (thousands of dollars)

(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800

600
Break-even
400
point
200
A best
0
2 4 6 8 10 12 14 16 18 20 22

Q (thousands of units)
Community
Fixed Costs
per Year
Total Costs
(Fixed + Variable) Location
A
B
$150,000
$300,000
$1,390,000
$1,060,000 Break-Even Analysis
C $500,000 $ 980,000
1600
D $600,000 $1,200,000 A
Annual cost (thousands of dollars)

(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800 Break-even point
600
Break-even
400
point
200
A best B best
0
2 4 6 8 10 12 14 16 18 20 22
6.25 14.3
Q (thousands of units)
Community
Fixed Costs
per Year
Total Costs
(Fixed + Variable) Location
A
B
$150,000
$300,000
$1,390,000
$1,060,000 Break-Even Analysis
C $500,000 $ 980,000
1600
D $600,000 $1,200,000 A
Annual cost (thousands of dollars)

(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800 Break-even point
600
Break-even
400
point
200
A best B best C best
0
2 4 6 8 10 12 14 16 18 20 22
6.25 14.3
Q (thousands of units)
 Location
Break-Even Analysis
1600 A
Annual cost (thousands of dollars)

(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800 Break-even point
600
Break-even
400
point
200
A best B best C best
0
2 4 6 8 10 12 14 16 18 20 22
6.25 14.3
Q (thousands of units)
 Location
Break-Even Analysis
1600 A
Annual cost (thousands of dollars)

(20, 1390)
1400
(20, 1200) D
1200 Break-Even Quantities
(20, 1060) B
C
1000
(A) (B)
(20, 980)
800 $150,000 + $62Q Break-even
= $300,000 + $38Q
point
600 Q = 6,250 units
Break-even
400 (B) (C)
point
200 $300,000 + $38Q = $500,000 + $24Q
A best B best C best units
Q = 14,286
0
2 4 6 8 10 12 14 16 18 20 22
6.25 14.3
Q (thousands of units)
 Location
Transportation Method
Setting up the Initial Tableau
Create a row for each plant and a column for each warehouse

Warehouse
Plant
1 2 3

Phoenix

Atlanta
 Location
Transportation Method
Setting up the Initial Tableau
Add a column for plant capacities and a row for warehouse demand

Warehouse
Plant Capacity
1 2 3

Phoenix 400

Atlanta 500

900
Requirements 200 400 300 900
 Location
Transportation Method
Setting up the Initial Tableau
Insert costs into the shipping route option cells

Warehouse
Plant Capacity
1 2 3
$5.00 $6.00 $5.40
Phoenix 400

$7.00 $4.60 $6.60

Atlanta 500

900
Requirements 200 400 300 900
 Location
Transportation Method
Interpreting the Optimal Solution