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Location Planning

and Analysis
Need for Location Decisions

 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources
Nature of Location Decisions

 Strategic Importance
 Long term commitment/costs
 Impact on investments, revenues, and operations
 Supply chains
 Objectives
 Profit potential
 No single location may be better than others
 Identify several locations from which to choose
 Options
 Expand existing facilities
 Add new facilities
 Move
Making Location Decisions

 Decide on the criteria


 Identify the important factors

 Develop location alternatives

 Evaluate the alternatives

 Make selection
 Tata said that the group had opted for Gujarat because it had
"already lost a lot of time (in the Singur controversy) and urgency
was the need of the day." "We had an urgency to move to a new
location." The chairman said that the 'reputation of Gujarat' and
the 'speed' at which provisions were made, forced him to opt for
Gujarat.

 "The land we have been provided is well located, attractive and


extremely central," He said that the new plant could be bigger in
size as compared to that in Singur because the complex is expected
to house more vendors.

 Mr. Tata remarked. When asked what were the tax incentives
provided by the state, Mr. Tata said, "They are slightly better than
what we had previously."
Location Decision Factors
Community
Regional Factors Considerations

Multiple Plant Site-related


Strategies Factors
Regional Factors

 Location of raw materials


 Location of markets

 Labor factors

 Climate and taxes


Community Considerations

 Quality of life
 Services

 Attitudes

 Taxes

 Environmental regulations

 Utilities

 Developer support
Site Related Factors

 Land
 Transportation

 Environmental

 Legal
Multiple Plant Strategies

 Product plant strategy


 Market area plant strategy

 Process plant strategy


Location Decisions -
Manufacturing
 Favorable Labor Climate
 Proximity to Markets
 Quality of Life
 Proximity to Suppliers
 Proximity to Parent Company
 Utilities, Taxes, and Real Estate
Costs
Location Decisions -
Services
 Proximity to Customers
 Transportation Costs and
Proximity to Markets
 Location of Competitors
 Site-Specific Factors
Comparison of Service and
Manufacturing Considerations

Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking
Foreign a. Policies on foreign ownership of production facilities
Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions

Customer Possible buy locally sentiment


Preferences

Labor Level of training and education of workers


Work practices
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation
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 potential locations

L o c a tio n F ix e d V a r ia b le
C ost C ost
A $ 2 5 0 ,0 0 0 $11
B 1 0 0 ,0 0 0 30
C 1 5 0 ,0 0 0 20
D 2 0 0 ,0 0 0 35
Example 1: Solution

Fixed Variable Total


Costs Costs Costs

A $250,000 $11(10,000) $360,000


B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000
Evaluating Locations

 Transportation Model
 Decision based on movement costs of raw
materials or finished goods
 Factor Rating
 Decision based on quantitative and qualitative
inputs
 Center of Gravity Method
 Decision based on minimum distribution costs
Factor-Rating Method
 Six steps:
1. Develop a list of relevant factors.
2. Assign a weight to each factor reflecting its relative
importance to the firm.
3. Develop a rating scale for the factors.
4. Score each location on each factor based on the scale.
5. Multiply the scores by the weights for each factor and total
the weighted scores for each location.
6. Make a recommendation based on the maximum point score,
considering other [quantitative?] factors.
Location
North Health-Watch
Erie

Scranton

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

Scranton
Location Factor Weight Score
Total patient miles per month 25
State College 4
Facility utilization 20 3
Pittsburgh
Average time per emergency trip 20 3
Expressway accessibility Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference 10 5
Location
North Health-Watch
Erie

Weighted Score
Scranton
Location Factor Weight Score
Total patient miles per month 25
State College 4
Facility utilization 20 3
Pittsburgh
Average time per emergency trip 20 3
Expressway accessibility Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference10 5
Location
North Health-Watch
Erie

Weighted Score
Scranton
Location Factor Weight Score
WS = (25 x 4)
Total patient miles per month 25
State College 4
Facility utilization 20 3
Pittsburgh
Average time per emergency trip 20 3
Expressway accessibility Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference10 5
Location
North Health-Watch
Erie

Weighted Score
Scranton
Location Factor Weight Score
WS = (25 x 4) + (20 x 3)
Total patient miles per month 25
State College 4
Facility utilization 20 20 3
Pittsburgh
Average time per emergency trip 20 3
Expressway accessibility Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference10 5
Location
North Health-Watch
Erie

Weighted Score
Scranton
Location Factor Weight Score
WS = (25 x 4) + (20 x 3) +
Total patient miles per month 25
State College 4
(20 x 3)20
Facility utilization 3
Pittsburgh
Average time per emergency trip 20 3
Expressway accessibility Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference10 5
Location
North Health-Watch
Erie

Weighted Score
Scranton
Location Factor Weight Score
WS = (25 x 4) + (20 x 3) +
Total patient miles per month 25
State College 4
(20 x 3)20+ (15 x 4)
Facility utilization + 3
Pittsburgh
Average time (10 x emergency
per 1) + (10 xtrip5) 20 3
Expressway accessibility Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference10 5
Location
North Health-Watch
Erie

Weighted Score
Scranton
WS = 340
Location Factor Weight Score
WS of 340 can be
Total patientwith
compared miles
theper month
total WS 25
State College 4
Facility utilization
for other sites being20 3
Pittsburgh
Average
evaluatedtime per
and theemergency
site with trip 20 3
Expressway
highest WSaccessibility
is best Harrisburg15 4
Land and construction costs Philadelphia
10 1
Uniontown
Employee preference10 5
Center-of-Gravity Method

1. Place the locations to be supported on a coordinate


system (like a graph).
2. Calculate the center of gravity:

X  coordinate 
 lx i i
Ycg  coordinate 
 ly
i i

 l
cg
l i i
Where:
xi = x-coordinate of location i.
yi = y-coordinate of location i.
li = quantity (load) of goods moved to/from location i.
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
y* =
D (5, 2) 7 35 14
E (8, 5) 10 80 50
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
453.5
A (2.5, 4.5) 2 5 9 x* =
68
B (2.5, 2.5) 5 12.5 12.5
C (5.5, 4.5) 10 55 45 205.5
D (5, 2) 7 35 14 y* = 68
E (8, 5) 10 80 50
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
453.5
A (2.5, 4.5) 2 5 9 x* =
68
B (2.5, 2.5) 5 12.5 12.5
C (5.5, 4.5) 10 55 45 205.5
D (5, 2) 7 35 14 y* = 68
E (8, 5) 10 80 50
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* = 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 y* = 3.02
E (8, 5) 10 80 50
F (7, 2) 20 140 40
G (9, 2.5) 14 126 35
Totals 68 453.5 205.5
Location
Break-Even Analysis
Break-Even Analysis
 Break-even analysis can be used for location analysis
especially when the costs of each location are known
 Step 1: For each location, determine the fixed and
variable costs
 Step 2: Plot the total costs for each location on one graph
 Step 3: Identify ranges of output for which each location
has the lowest total cost
 Step 4: Solve algebraically for the break-even points
over the identified ranges
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)