Om - Location Decisions

OPERATIONS MANAGEMENT with TQM
1st Semester SY 2023-2024

Ms. Marissa C. Bautista
Lesson: Location Decisions
Objectives:
• State the main reasons why organizations need to make location decisions.
• State the impact of location on costs and revenues.
• Evaluate the location decisions based on the given methods.
Activity:
Let’s suppose that you are going to start your shoes manufacturing business. Make a
list of criteria/s of an area/location you are looking for. Explain your reason why you
think those are essential for your shoes manufacturing business.
_____________________________________________________________________________________
1
Location Decision
➢ Finding an ideal geographical region to install a facility or plant.
➢ It is vital component in facility planning as it greatly impacts the organization’s
PROFITABILITY, COST, and SUCCESS
o Profitability – installation of facilities involves massive investment and
cannot be change frequently.
▪ REMEMBER: Poor location decisions, relocating to another place
may lead to a heavy investment loss.
o Cost – cost include direct, indirect, fixed and variable costs.
▪ The organization aims to deliver products at minimum cost to its
customers. Therefore, the industrialists are going got a strategic
and logical approach to choose the best location. It also helps in
smooth and efficient working of the organization.
➢ Also termed as FACILITY LOCATION and SITE LOCATION.

➢ Location decision is take to set up a new plant, relocate or expand the existing
plant.
➢ The decision depends on the following factors:
o Industry size
o Nature
o Product
➢ The goal behind selecting a suitable location is to create accessibility to
o Customers
o Workers or Employees
o Transportation
o Materials
OBJECTIVES OF LOCATION DECISION
1. Revenue potential from the site
• Revenue potential is the capability of a specific solution, product, or service
to generate profit for the business.
• Revenue potential often looks at the:
1. Ongoing revenue of a solution
2. Generated from subscriptions
3. Recurrent payments
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4. Loyal customers
2. Availability of resources
• Resource availability refers to the information about the resources you can
use to service projects, when, and under what conditions.
• The success of a business depends on whether they have access to the
essential resources and tools.
• This is a major decision guiding facility location problem. Manufacturing
companies that use heavy, bulky, or perishable products as raw materials or
factor inputs must be located near the source of these raw materials or
inputs, this is to ensure regular and timely supply of raw materials as well
as reduce the cost of transporting and storing them. A good example are
food processing companies, the major farm product used in processing those
goods need to be in close range to ensure steady supply of these products.
Similarly, most wood processing companies are located close to the supply
of quality timber. Generally, the cost of transportation or shipping of these
raw material is to be weighed. Perishable products may be lost or damaged
in transit if the distance to the plant is far, thus the closer the facility is to
the source of its inputs determines its ability to cut costs.
3. Tax Advantages
• The kind and amount of taxes levied by a state should be considered in
locating a plant/facility. Investigation should be made on the type of taxes
and the biases for which they are fixed. Some places have special grants
given to attract investors to such area. Similarly, import/export barriers
should be duly considered as this affects the total cost of doing business.
• The policies of the state governments and local bodies concerning labor
laws, building codes, safety, etc., are the factors that demand attention. To
have a balanced regional growth of industries, both central and state
governments in our country offer the package of incentives to entrepreneurs
in particular locations. The incentive package may be in the form of
exemption from a sales tax and excise duties for a specific period, soft loan
from financial institutions, subsidy in electricity charges and investment
subsidy. Some of these incentives may tempt to locate the plant to avail
these facilities offered.
• To achieve this plethora of objectives several different policy instruments
may be employed:
POSSIBLE INVESTMENT INCENTIVE INSTRUMENTS

Corporate Tax
Other Tax Incentives Non-tax Incentives
Incentives
a) Tax a) Personal income tax a) Subsidized or
holiday/reduced exemption on concessional
corporate tax rates. dividends paid out financing
b) Tax credits by companies b) Loan guarantees
c) Investment receiving a tax c) Direct grants
allowances concession.
3
d) Accelerated b) Exemption from d) Provision of

depreciation withholding taxes dedicated
e) Reinvestment or c) Duty drawback infrastructure
expansion schemes
allowances d) Exemption from
f) Double deductions import tariffs
of certain expenses e) Exemption from
for tax purposes sales, property, and
wage income tax
4. Reducing costs and Production time

• Cost reduction is the process of decreasing a company’s expenses to
maximize profits. It involves identifying and removing expenditures that do
not provide added value to customers while also optimizing processes to
improve efficiency.
• When a manufacturing operation can reduce cycle times, more products are
turned out in less time, increasing profit margins. The ability to shorten this
process also results in less raw materials inventory. And fewer man hours
mean lower labor costs.
• The availability of basic support services needed by the facility to make their
operations smooth should be considered. This decision affects to total cost of
operation, where such services are not readily available or at a high cost, the
organization will have to spend more in providing such services or attracting
them at a higher cost.
5. Convenient transportation facilities
• Good transportation facilities make the plants accessible for easy movement
of raw materials as well as finished products, thereby reducing costs.
6. Suitable environment for employees
• The safety of employees as well as the facility needs to be taken into
consideration when making location decisions. If the location is not safe, it
may detract employees and even potential customers from patronizing the
facility. Also, the probability of loss of property, or damage of the machines
increases when safety of the environment or location is poor.
• Good roads, hospitals, school’s churches, parks and residential area are
necessary amenities that make living conditions for worker’s desirable.
7. Availability of labor and skills of employees
• Education, experience, and skill of available labor is an important factor
that affects location decision. It is always preferable to locate the plant in an
area where skilled, semi-skilled and unskilled labor are available. This
reduces costs of training and hiring experts from abroad.
8. Meet the maximum demand of customers
• Goods are produces to be sold to the identified markets or customers,
therefore the proximity of a facility to the market or customers is of grave
importance to the organization. Proximity helps to reduce transportation
costs and time of delivery.
4
9. Maximum space utilization

• It is of significant benefit to keep a new plant or subsidiary plant close to the
parent facility. This makes it easier for them to share resources and thus
reduce total cost.
• The possibility of increasing future production capacity occasioned by
increase in product demand is a critical factor in location decisions. There
should be adequate space for future expansion or diversification of the
facility as the need arises.
FACTORS AFFECTING LOCATION DECISIONS
• Product and Industry: The nature of the

product impacts the facility’s location.
For instance, poultry farms are
established on the outskirts of the city.
• Availability of Resources: The plant
must be located close to the suppliers of
the raw materials. This is because, it
minimizes the transportation cost, time
and overall cost of production.
• Proximity to Consumers: The
organizations offering services may
choose to locate facilities near their
target customers. Thus, providing them
with an advantage over similar service
providers.
• Climate Conditions: Manufacturing of
some products demands specific climatic
conditions. For this reason, industries are set up in areas
where suitable climatic condition exists.
• Proximity to Market: The companies producing customized or assembled
products are located near their target market. Consequently, it reduces the
time required for product assembly and delivery.
• Regulatory and Policy Issues: The political policies differ in different
geographical boundaries. So, the organizations prefer locations inside open
economies having favorable policies.
• Labor Supply: Before installing the plant, companies assess the availability
of skilled labor. Also, they ensure the availability of necessities for the
employee’s survival.
• Free Trade Zones: Free Trade Zones are areas in which one can conduct
business free from customs duty. Thus, it is an essential factor when
selecting a site location.
• Infrastructure: Before the installation, industries must assess the availability
of infrastructure in that region. It may include connectivity via Rail, Roads,
Air and Sea.
5
• Taxes: The tax rates vary within and across the regions. This factor directly
impacts the organizations.
LOCATION DECISION PROCESS
Step 1: Investigation
Firstly, the organizations investigate their requirements regarding their location. They
conduct an internal SWOT analysis and decide whether to move, expand or install a
new setup.
Step 2: Identification
Post investigation, they try to identify the potential locations for locating the facility.
For example, installing the facility in the Domestic or Foreign regions.
Step 3: Evaluation
The next step in the location decision process is evaluating the potential locations. The
evaluation process may include a detailed comparison of all the alternatives available.
Step 4: Selection
Companies conduct a thorough analysis of the location and government policies in the
selected region. Also, an in-depth evaluation of the merits and demerits of the chosen
area. Therefore, choosing the most appropriate location of the facility for installation.
LOCATION PLANNING TECHNIQUES
Location Analysis Techniques

• are the methods that critically evaluate
location alternatives to select an ideal location
for the plant or industry.
• these are the tools used by the organizations
for decision-making while locating a plant or
facility.
• Location techniques are a systematic
approach for choosing the most desirable
location alternative. It strives to identify a site
with Geographical and Technical viability.
• The goal behind using location techniques is
to examine the revenue-generating potential of
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the alternatives and helps to find locations that maximize value and minimize
costs.
PLANT LOCATION TECHNIQUES

Following are the various quantitative and qualitative location analysis
techniques. Organizations can use either one method or a combination thereof.
1. The Factor-Rating Method
2. Location Break-Even Analysis
3. Centre-of-Gravity Method
4. Load-Distance Method
5. Transportation Method
The Factor-Rating Method

• In this location analysis technique, the analysis is based on the influential
factors and the prospecting locations. It is a simple and widely used method for
locating the facility.
• It is the comparative analysis of alternative locations and the factors affecting
business. And the site having the maximum product of factor rating and location
ranks is the one to be selected.
• The factors include tangible and intangible factors essential to the organization.
The steps involved in the factor rating method are discussed below.
• Steps in Factor Rating Method
1. Identify the relevant factors affecting that business location.
2. Rate various factors as per their relative importance.
3. Performance rating of the alternatives as per advantage on each factor.
4. Calculate the product of ratings by multiplying the factor ratings with
location ratings for each factor.
5. Compare the factor ratings between the available alternative.
6. Select the site containing the maximum sum of the products.
Note: The higher the rank is, the more influential the factor will be.
• The merits of using this method are:
o The clarity in comparison during the selection of the alternatives.
o An analysis is based on multiple factors.
o Fast judgement while selecting the location.
o Can incorporate any factor that can impact the plant during analysis.
• Besides all the above merits, its demerits are as follows:
o Only limited to board-level analysis
o Helpful for just initial screening
• Illustration: Let us assume that a new medical facility, YourHealth, is to be in
Muntinlupa City. The location factors, factor rating and scores for two potential
sites are shown in the following table. Which is the best location based on factor
rating method?
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Factor Rating
Location Factor
rating Location 1 Location 2
1 Facility utilization 8 3 5
2 Total patient per month 5 4 3
3 Average time per emergency trip 6 4 5
4 Land and construction costs 3 1 2
5 Employee preferences 5 5 3
Factor Location 1 Location 2

Location Factor rating Rating Total = Rating
Total = 1 x 3
(1) (2) 1x2 (3)
1 Facility utilization 8 3 24 5
2 Total patient per
5 4 20 3
month
3 Average time per
6 4 24 5
emergency trip
4 Land and
3 1 3 2
construction costs
5 Employee
5 5 25 3
preferences
Total 96 Total
Answer this question: Which of the two locations is the best choice based on factor
rating method? _____________________________________________________________________
Location Breakeven Analysis

• In this location analysis technique, helps in finding the most economical location
alternative. This technique examines the economic aspect of the prospecting
sites.
• The location providing a minimum cost of production yielding maximum output is
to be selected.
• Therefore, we estimate the costs from various factors that significantly affect
business. After that, we separate all the costs under operating and fixed costs.
And then, plot the break-even analysis for each location on the graph.
• Formula:
where,
Q = Break-even quantity
p = Price/unit
c = Variable cost/unit
F = Fixed cost
Note: One can only use this technique when the costs of each location are known.
• Illustration: Let us assume that a new branch of your Truck Company,
TruckMoToRs, is to be established in two different locations, Muntinlupa City or
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Makati City, but you only have enough budget for one branch location only. The
price per unit, variable cost per unit and fixed cost for two potential sites are
shown in the following table. Which is the best location based on location
break-even analysis?
Cost Data
Location Site Fixed Costs Variable Costs Price per unit
Makati City 4,000,000.00 30,000.00 75,898.00
Muntinlupa City 6,000,000.00 24,000.00 82,000.00
Break-even Quantity (Makati City) Break-even Quantity (Muntinlupa City)

𝐹𝐶 𝐹𝐶
𝑄= 𝑄=
( 𝑝 − 𝑐) ( 𝑝 − 𝑐)
4,000,000
𝑄=
( 75,898 − 30,000)
4,000,000
𝑄=
45,898
𝑄 = 87.15 𝑜𝑟 88 trucks
Let us see what would be the profit or loss for the two sites at the breakeven
volume.
Cost Comparison
Makati City Muntinlupa City
Cost Cost
Fixed 4,000,000.00 Fixed
Variable 30,000.00 Variable
4,030,000.00
Revenue Revenue
75,898 x 88 = 6,679,024.00
Profits Profits
6,679,024.00 – 4,030,000.00
= 2,649,024.00
1. What would be the expected revenues for an estimated volume of breakeven units
if the factory is located at (i) at Makati City and (ii) at Muntinlupa City? Where
would you like to locate the factory? _____________________________________________
_____________________________________________________________________________________
2. Now what do we find? ___________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
9
Centre-of-Gravity Method
• The Center of Gravity Method is an approach that seeks to compute geographic
coordinates for a potential single new facility that will minimize costs. It’s an
approach where the main inputs that it considers are the following:
o Markets
o Volume of goods shipped
o Shipping costs
• This method is beneficial because it’s (1) Simple to compute, (2) Considers
existing facilities, (3) and Minimizes costs.
• The center of gravity method is used for locating single facilities that considers
existing facilities, the distances between them, and the volumes of goods to be
shipped between them.
• This methodology involves formulas used to compute the coordinates of the
two-dimensional point that meets the distance and volume criteria stated
above.
• Formula:
where,
x̄ = the x coordinate for the new facility
ȳ = the y coordinate for the new facility
xi = x coordinate of destination (market) i
yi = y coordinate of destination (market) i
Qi = quantity to be transported to destination i
• Illustration: Using the center of gravity method and the information below on
the location of the potential markets, determine where the new facility should
be located to minimize the total transportation cost. Note that a selected point
in the middle of each region is representing the regional market.
Market Volume (Q) X Y

A 600 1 2
B 400 3 4
C 550 6 4
D 800 2 6
10
1(600) + 3(400) + 6(550) + 2(800) Compute for the

𝑥̅ =
600 + 400 + 550 + 800
600 + 1200 + 3300 + 1600

𝑥̅ =
600 + 400 + 550 + 800
6700
𝑥̅ =
2350
𝑥̅ = 2.85
What is the best location for a new facility considering only distances and quantities
sold per month? Plot your answer into two-dimensional plane or grid and determine their
coordinates.
Load Distance Method

• The load-distance method is a mathematical model used to evaluate locations
based on proximity factors.
• The objective is to select a location that minimizes the total weighted loads
moving into and out of the facility. The distance between two points is expressed
by assigning the points to grid coordinates on a map. An alternative approach is
to use time rather than distance.
• Steps in Load Distance Method:
o Find the relative value grid position of all existing and perspective
locations.
o Find the load at each location. This can be the number of people served
or the amount of goods to be transported.
o Measure the distance of the perspective locations from each of the
existing locations.
• Rectilinear Formula: DAb = |XA – XB| + |YA – YB|
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• Illustration: The new Health-care facility is targeted to serve seven census tracts
in the Philippines. The table given below shows the coordinates for the Center of
each census tract, along with the projected populations, measured in
thousands. Customers will travel from the seven census tract centers to the
new facility when they need healthcare. Two locations being considered for the
new facility are at (5.5, 4.5) and (7, 2), which are the centers of census tracts C
and F. Details of seven census tract centers, co-ordinate distances along with
the population for each center are given below. If we use the population as the
loads and use rectilinear distance, which location is better in terms of its total
load- distance score?
Sl. No. Census Tract (x,y) Population (l)

1 A (2.5,4.5) 2
2 B (2.5,2.5) 5
3 C (5.5,4.5) 10
4 D (5,2) 7
5 E (8,5) 10
6 F (7,2) 20
7 G (9,2.5) 14
Location at (5.5,4.5) Location at (7,2)

Load Load
Census Population Distance
(x,y) Distance (d) Distance Distance
Tract (l) (d)
(d x l) (d x l)
A (2.5,4.5) 2 3+0=3 3x2=6
B (2.5,2.5) 5 3+2=5 5 x 5 = 25
C (5.5,4.5) 10 0+0=0 0 x 10 = 0
D (5,2) 7 .5 + 2.5 = 3 3 x 7 = 21
E (8,5) 10 2.5 + 0.5 = 3 3 x 10 = 30
F (7,2) 20 1.5 + 2.5 = 4 4 x 20 = 80
G (9,2.5) 14 3.5 + 2 = 5.5 5.5 x 14 = 77
Total 239 Total
Example Computation: DAb = |XA – XB| + |YA – YB|
DA = |5.5 – 2.5| + |4.5 – 4.5| DD = |5.5 – 5| + |4.5 – 2|

DA = |3| + |0| = 3 DD = |.5| + |2.5| = 3
DB = |5.5 – 2.5| + |4.5 – 2.5| DE = |5.5 – 8| + |4.5 – 5|

DB = |3| + |2| = 5 DE = |-2.5| + |-0.5| = 3
DC = |5.5 – 5.5| + |4.5 – 4.5| DF = |5.5 – 7| + |4.5 – 2|

DC = |0| + |0| = 0 DF = |-1.5| + |2.5| = 4
DG = |5.5 – 9| + |4.5 – 2.5|

DG = |-3.5| + |2| = 5.5
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Summing the scores for all tracts gives a total load-distance score of 239
when the facility is located at (5.5, 4.5) versus a load-distance score of ________ at
location (7, 2). Therefore, the location in census tract is a ________ better location.
Transportation Method
• Transportation Model is a special case of LPP (Linear Programming Problem) in
which the main objective is to transport a product from various sources to various
destinations at total minimum cost.
• In Transportation Models, the sources and destinations are known, the supply
and demand at each source and destinations are also known.
• It is designed to find the best arrangement for transportation such that the
transportation cost is minimum.
• Vogel’s Approximation Method (VAM) is one of the methods to obtain feasible
solution of transportation problem. This method works on the concept of
Opportunity or Penalty cost.
• Opportunity cost is the penalty occurring for not selecting the right sell for the
allocation.
• Steps in doing Vogel’s Approximation Method
o Identify the two lowest costs in each row and column of the given cost
matrix and then write the absolute row and column difference. These
differences are called penalties.
o Identify the row or column with the maximum penalty and assign the
corresponding cell’s min (supply, demand). If two or more columns or
rows have the same maximum penalty, then we can choose one among
them as per our convenience.
o If the assignment in the previous satisfies the supply at the origin, delete
the corresponding row. If it satisfies the demand at that destination,
delete the corresponding column.
o Stop the procedure if supply at each origin is 0, i.e., every supply is
exhausted, and demand at each destination is 0, i.e., every demand is
satisfying. If not, repeat the above steps, i.e., from step 1.
• For example:
o Consider three companies (Company1, Company2 and Company3) which
produce mobile phones and are in different regions.
o Similarly, consider three cities (namely City A, City B & City C) where the
mobile phones are transported.
o The companies where mobile phones are available are known as sources
and the cities where mobile phones are transported are called
destinations.
• Let,
o Company1 produces a1 units,
o Company2 produces a2 units,
o Company3 produces a3 units.
• Let,
o demand in City A is b1 units,
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o demand in City B is b2 units,

o demand in City C is b3 units.
• The cost of transportation from each source to destination is given in table:
Destinations
City A City B City C Supply
Sources
Company 1 C1A C1B C1C A1

Demand B1 B2 B3 ∑Ai = ∑Bi
• The transportation of mobile phones should be done in such a way that the
total transportation cost is minimum.
• Illustration: A mobile phone manufacturing company has three branches
located in three different regions, say Laguna, Antipolo and Muntinlupa. The
company must transport mobile phones to three destinations Makati,
Mandaluyong and Malabon. The availability from Laguna, Antipolo and
Muntinlupa is 40, 60 and 70 units respectively. The demand at Makati,
Mandaluyong and Malabon are 70, 40 and 60 respectively. The transportation
cost is shown in the matrix below (Php). Use the Vogel’s Approximation Method
to find a basic feasible solution (BFS). (to be discussed on our next meeting)
Destinations
Makati Mandaluyong Malabon Supply
Sources
Laguna 4 5 1 40
Antipolo 3 4 3 60
Muntinlupa 6 2 8 70
Demand 70 40 60 170
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OPERATIONS MANAGEMENT with TQM

1st Semester SY 2023-2024

➢ Also termed as FACILITY LOCATION and SITE LOCATION.

POSSIBLE INVESTMENT INCENTIVE INSTRUMENTS

d) Accelerated b) Exemption from d) Provision of

4. Reducing costs and Production time

9. Maximum space utilization

FACTORS AFFECTING LOCATION DECISIONS

• Product and Industry: The nature of the

LOCATION PLANNING TECHNIQUES

Location Analysis Techniques

PLANT LOCATION TECHNIQUES

The Factor-Rating Method

Factor Location 1 Location 2

Location Breakeven Analysis

Break-even Quantity (Makati City) Break-even Quantity (Muntinlupa City)

Market Volume (Q) X Y

1(600) + 3(400) + 6(550) + 2(800) Compute for the

600 + 1200 + 3300 + 1600

Load Distance Method

Sl. No. Census Tract (x,y) Population (l)

Location at (5.5,4.5) Location at (7,2)

Example Computation: DAb = |XA – XB| + |YA – YB|

DA = |5.5 – 2.5| + |4.5 – 4.5| DD = |5.5 – 5| + |4.5 – 2|

DB = |5.5 – 2.5| + |4.5 – 2.5| DE = |5.5 – 8| + |4.5 – 5|

DC = |5.5 – 5.5| + |4.5 – 4.5| DF = |5.5 – 7| + |4.5 – 2|

DG = |5.5 – 9| + |4.5 – 2.5|

o demand in City B is b2 units,

Company 1 C1A C1B C1C A1

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