Location Decision

1
Why Location Important
• Focus on Revenue - service industry
• Focus on Cost – manufacturing industry
• Risk
• Innovation
• Goal
• Maximize the benefit of location

2
Location Decision Sequence
Country Region/Community

Site

© 1995
Corel © 1995 Corel Corp.
Corp.

© 1995
Corel
Corp.

3
Country Factors
 Government rules, attitudes, political risk,
incentives
 Culture & economy
 Market location
 Labor availability, attitudes, productivity, and
cost
 Availability of supplies, communications,
energy
 Exchange rates and currency risks

4
Region Factors
• Attractiveness of region (culture, taxes, climate,
etc.)
• Labor availability, costs, attitudes towards unions
• Costs and availability of utilities
• Environmental regulations of state and town
• Government incentives
• Proximity to raw materials & customers
• Land/construction costs

5
Site Factors

• Site size and cost

• Air, rail, highway, and waterway systems
• Zoning restrictions
• Nearness of services/supplies needed
• Environmental impact issues
Service company: Revenue=price*sales, Demand, Cost, purpose, Competitor-clustering, parking spot

Factory:regulation, tax, cost, suppliers, environment,market

© 1995 Corel Corp.

6
Location Evaluation Methods

 Factor-rating method
 Locational break-even analysis
 Center of gravity method
 Transportation model

7
Factor-Rating Method

• Most widely used location technique

• Useful for service & manufacturing industrial
locations
• Rates locations using factors
• Tangible (quantitative) factors
• Example: Short-run & long-run costs
• Intangible (qualitative) factors
• Example: Education quality, labor skills

8
Steps in Factor Rating Method
• List relevant factors
• Assign importance weight to each factor (such
as 0 – 1)
• Develop scale for each factor (such as 1 – 100)
• Score each location using factor scale
• Multiply scores by weights for each factor &
total
• Select location with maximum total score

9
An Example

10
An Example

11
Locational Break-Even Analysis

• Method of cost-volume analysis used for

industrial locations
• Steps
• Determine fixed & variable costs for each location
• Plot total cost for each location (Cost on vertical axis,
Annual Volume on horizontal axis)
• Select location with lowest total cost for expected
production volume

12
 Locational Break-Even Crossover Chart
500
Annual Cost ($000) 400

300

200

100 B A
lower cost lower cost

0
0 2 4 6 8 10 12
Volume (000 units)

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Center of Gravity Method
• Finds location of single distribution center that minimizes
total distribution cost
• Used primarily for services

14
Center of Gravity Method Steps

• A map showing locations of destinations

• Accurate and drawn to scale
• Place a coordinate system on the map
• Coordinate has arbitrary origin & scale
• Maintains relative distances

• Calculate X & Y coordinates for ‘center of

gravity’
• Gives location of distribution center
• Minimizes transportation cost

15
 y

D2 (4,4)
D4
(3,3) D3 (5,2.5)
D1
(4,2)

x
Equal quantities?

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Center of Gravity

• When quantities to/from each location are

equal
x coordinate of the center of gravity
d ix
Cx = i
n
y coordinate of the center of gravity
d iy
Cy = i
n

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Center of Gravity Equations
When quantities to locations are not equal

X Coordinate dix = x coordinate of

d Q
location i
ix i
C = i Qi = Volume of goods
Q
x
i moved to or from location i
i
diy = y coordinate of
location i
Y Coordinate
d Q iy i
Cy = i

Q i
i

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Transportation

• Several points of supply

• Several points of demand
• Minimize total production and transportation costs
• Linear programming

19
Service Location

• Factor-rating method
• Regression models
• Break-even analysis
• Center-of-gravity method

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