BM1902

LOCATION PLANING AND ANALYSIS

The Need for Location Decisions

According to Atkin and Brooks (2015), a location decision often occurs when an organization experiences
a growth in demand for its products or services that cannot be satisfied by expansion at an existing
location. The addition of a new location to complement an existing system is often the realistic alternative.
Some firms face location decisions due to depletion of basic inputs or raw materials needed in the
production. For instance, fishing and logging operations are often forced to relocate due to the temporary
exhaustion of fish or forests at a given location. For other firms, they begin to look for a different business
location when the cost of doing business at a particular location has risen or when their business
experiences a shift in the market or change in their consumer preferences (Atkin & Brooks, 2015). The
options for location planning are as follows:

• Expand an existing facility. This option can be attractive if there is an adequate room or space for
expansion, especially if the current location has desirable features that are not readily available
elsewhere. Expansions are often less expensive than those of other alternatives.
• Add new locations while retaining existing ones. This option is common in retail operations.
Adding a new location can be a defensive strategy designed to maintain a market share or to
prevent competitors from entering a market.
• Shut down at one location and move to another. This option is the result of a shift in markets,
exhaustion of raw materials, and rising cost of operations. An organization must weigh the costs
of moving against the costs and benefits of remaining in an existing location.
• Do nothing. This option is the result of a detailed analysis of potential locations which fails to
uncover benefits that make one of the previous three (3) alternatives attractive. A firm may decide
to maintain its status quo or current state, at least for the time being.

Global Locations
In the past, companies tend to operate “home-based” in a single country. Now, companies are finding
strategic and tactical reasons to globalize their operations. As they do, some companies gain profit from
their efforts, while others find it tough to contend with issues involved in managing global operations.
Atkin and Brooks (2015) summarized the risks associated with global business expansion as follows:

• Political. Globalization has to contend with political instability and political unrest, which can
create risks for personnel safety and the safety of assets. Moreover, a government has the power
to nationalize facilities, which means to take over the company-owned facilities of a global
business.
• Terrorism. Globalization has to contend with terrorism, which remains a threat in many parts of
the world. Terrorism will put risk on personnel and assets of a global business.
• Economic. Globalization has to contend with economic instability, which might create inflation or
deflation that may negatively impact the profitability of a global business.
• Legal. Globalization has to contend with changing laws and regulations that may reduce or
eliminate the key benefits of having a global business.

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• Ethical. Globalization has to contend with corruption and bribery, which are common in some
countries. This poses a number of issues, which include maintaining operations without resorting
to bribery and preventing employees from engaging in bribery act.
• Cultural. Globalization has to contend with the cultural differences present in different countries.
An example of this is when Walmart first opened its stores in Japan using its low-cost pricing
strategy. Walmart struggled since the Japanese consumers associated low cost with low quality
as their cultural perception.

General Procedure for Making Location Decisions

Large established companies, particularly those that already operate in more than one (1) location, tend
to take a more formal approach in making location decisions. They usually consider a wider range of
geographic locations. The general procedure for making location decisions usually consists of the
following steps:

1. Decide on the criteria to use for evaluating location alternatives, such as increased revenues or
community service.
2. Identify important factors, such as the location of markets or the raw materials.
3. Develop location alternatives, such as countries or general region for a location, community
alternatives, and site alternatives.
4. Evaluate the alternatives and make a selection.

Identifying a Country, Region, Community, and Site

Atkin and Brooks (2015) summarized the following considerations of global firms in identifying a country,
region, community, and site for global business conduct:

Identifying a Country

• Government. Firms must review the following: policies on foreign ownership of production
facilities, local content requirements, import restrictions, currency restrictions, environmental
regulations, local product standards, and liability laws.
• Cultural differences. Firms must review the following: living circumstances for foreign workers
and their dependents, ways of doing business, and religious holidays/traditions.
• Customer preferences. Firms must review the local sentiments of the people in purchasing
products and services.
• Labor. Firms must review the following: level of training and education of workers, wage rate,
labor productivity, work ethic, possible regulations limiting the number of foreign employees, and
language differences.
• Resources. Firms must review the availability and quality of raw materials, energy, transportation,
and infrastructure.
• Financial. Firms must review the financial incentives, tax rates, inflation rates, and interest rates
in the preferred country.
• Technological. Firms must review the rate of technological change and innovations in the
preferred country.

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• Market. Firms must review the market potential and competition in the preferred country.
• Safety. Firms must review crime records and terrorism threats in the preferred country.

Identifying a Region

• Location of raw materials. Firms must locate near or at the source of raw materials for three (3)
primary reasons: necessity, perishability, and transportation costs.
• Location of markets. Firms must consider the distribution costs or the perishability of a finished
product in choosing a market location. Profit-oriented firms frequently locate near the markets
they intend to serve as part of their competitive strategy, whereas nonprofit organizations choose
locations relative to the needs of the users of their services.
• Labor factors. Firms must consider the cost and availability of labor, wage rates in an area, labor
productivity, and attitudes toward work, and whether unions are a serious potential problem in a
particular region.

Identifying a Community

• Quality of life. Firms must observe the schools, churches, shopping, housing, transportation,
entertainment, recreation, and cost of living on a preferred community.
• Services. Firms must observe medical, fire, and police protection on a preferred community.
• Taxes. Firms must observe the manner of tax collection if it is directed or undirected to state or
the community.
• Environmental regulations. Firms must observe the state and local regulation on sustainable
development.
• Utilities. Firms must observe the cost and availability of utilities in a preferred community.
• Development support. Firms must observe the bond issues, low-cost loans, and grants being
provided by the local government in a preferred community.

Identifying a Site

• Land. Firms must identify the cost, degree of development required, soil characteristics and
drainage, room for expansion, and parking on a preferred site for the conduct of business.
• Transportation. Firms must identify the types of access roads and other means of transportation
on a preferred site for the conduct of business.
• Environmental/legal. Firms must identify the zoning restrictions on a preferred site for the
conduct of business.

Evaluating Location Alternatives

The following are the techniques used in evaluating location alternatives:

• Locational Cost-Profit-Volume Analysis. This is the economic comparison of location alternatives.

This method determines the total cost which will be incurred in a location decision based on
attributed fixed and variable costs, given the capacity volume of the sites. After identifying the

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total costs for various location options, the facility manager or decision-maker will be able to
choose which among the options shows the best value.
ILLUSTRATION: The following are the total costs that will be incurred based on attributed fixed
and variable costs for location alternatives A, B, C, and D:

Location Fixed Variable Total

+ =
Alternatives Cost Cost Cost
A P250,000 P110,000 P360,000
B 100,000 300,000 400,000
C 150,000 200,000 350,000
D 200,000 350,000 550,000

Table 1. Locational Cost-Profit-Volume Analysis

Source: Operations Management, 2012, p. 351

KEY POINTS: From the given data, the facility manager or decision-maker may already decide
which location alternative offers the best value, based on possible costs which will be incurred for
each location alternative. Based on the illustration, location C will incur the least possible cost
whereas location D shall incur the highest possible costs. From this, location C is the best
alternative since it offers the least possible cost for the company.

• Transport Model. This involves the movement of either raw materials or finished goods. If a
facility is the sole source or destination of shipments, the company may include the transportation
costs in a locational cost–volume analysis by incorporating the transportation cost per unit being
shipped into the variable cost per unit.
ILLUSTRATION: The following are the total costs that will be incurred based on attributed fixed
and variable costs including the transportation expenses for location alternatives A, B, C, and D:

Location Fixed Variable Transport Total

+ + =
Alternatives Cost Cost cost Cost
A P250,000 P110,000 20,000 P380,000
B 100,000 300,000 10,000 410,000
C 150,000 200,000 35,000 385,000
D 200,000 350,000 15,000 565,000

Table 2. Transport model

Source: Operations Management, 2012, p. 351

KEY POINTS: From the given data, the facility manager or decision-maker may already decide
which location offers the best value, based on fixed and variable costs including the possible
transport expenses which will be incurred for each location alternative. Based on the illustration,
location A is the best alternative since it offers the least possible motion cost for the company.

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• Factor Rating. The value of factor rating provides a rational basis for evaluation of location
alternatives. It also facilitates comparison among alternatives by establishing a composite value
for each alternative that summarizes all related quantitative and qualitative factors. Factor rating
enables decision-makers to incorporate their personal opinions and quantitative information in
the decision process.
ILLUSTRATION: ABC Corp. desires to determine which location between Alternative 1 and
Alternative 2 offers the best value by assigning a weight to each factor that indicates its relative
importance as follows:

Scores (Out of 100) Weighted scores

Factor Weight Alt. 1 Alt. 2 Alternative 1 Alternative 2
Location proximity .10 100 60 .10(100) = 10.0 .10(60) = 6.0
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating costs .15 80 90 .15(80) = 12.0 .15(90) = 13.5
TOTAL 70.6 TOTAL 82.7
Table 3. Factor rating
Source: Operations Management, 2012, p. 353

KEY POINTS: By simply assigning weighted scores based on the personal inputs of the decision-
maker or facility manager, s/he will be able to select which location alternative offers the best
value. Based on the illustration, Alternative 2 is the best option because it has a higher factor
rating based on the requirements of the business operation.

• Center of Gravity Method. This determines the location of a facility that will minimize shipping
costs or travel time to various destinations by identifying the coordinates of the destinations and
graphing them to estimate where is the best location given the set of destinations and assumed
fixed volume.
ILLUSTRATION: The following are the shipment records of XYZ Transport:

Destination Product X Product Y Weekly Quantity

D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
Total 2,000
Table 4. Center of Gravity Method
Source: Operations Management, 2012, p. 354

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FORMULA:

∑ 𝑥𝑥𝑖𝑖 𝑄𝑄𝑖𝑖 ∑ 𝑦𝑦𝑖𝑖 𝑄𝑄𝑖𝑖

𝑥𝑥̅ = 𝑦𝑦� =
∑ 𝑄𝑄𝑖𝑖 ∑ 𝑄𝑄𝑖𝑖

Where:
𝑄𝑄𝑖𝑖 is the total quantity to be shipped to destination 𝑖𝑖
𝑥𝑥𝑖𝑖 is the coordinate of destination 𝑖𝑖
𝑦𝑦𝑖𝑖 is the coordinate of destination 𝑖𝑖

SOLUTION: To determine the center of gravity, the coordinates of Products X and Y shall be
multiplied by their corresponding weekly quantity using the formulas:

∑ 𝑥𝑥𝑖𝑖 𝑄𝑄𝑖𝑖 2(800) + 3(900) + 5(200) + 8(100)

𝑥𝑥̅ = =
∑ 𝑄𝑄𝑖𝑖 2,000
6,100
=
2,000

= 3.05 𝑜𝑜𝑜𝑜 3

∑ 𝑦𝑦𝑖𝑖 𝑄𝑄𝑖𝑖 2(800) + 5(900) + 4(200) + 5(100)

𝑦𝑦� = =
∑ 𝑄𝑄𝑖𝑖 2,000
7,400
=
2,000

= 3.7

GRAPHICAL PRESENTATION:

Figure 1. Center of Gravity Method

Source: Operations Management, 2012, p. 356

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KEY POINTS: The coordinates of the center of gravity are approximately (3,3.7). This would place
it south of destination D2, which has coordinates of (3,5). This means that the best location of the
business to efficiently accommodate Destinations 1-4 will be at (3,3.7).

References
Atkin, B. & Brooks, A. (2015). Total facilities management (4th ed.). United Kingdom: John Wiley & Sons,
Ltd.
Stevenson, W. (2012). Operations management (11th ed.). New York: McGraw-Hill Education.

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