Service Facility Location

Learning Objectives
 .
 Locate a single facility using the cross-median approach.
 Use the Huff retail location model to estimate revenue
and market share for a potential site.
 Locate multiple facilities using the set covering model.

10-2
Service Facility Location
Planning
 Competitive positioning: prime location can
be barrier to entry.
 Demand management: ability to attract
 Flexibility: reaction to the change in market
conditions
 Expansion strategy:

10-3
Strategic Considerations
 Competitive Clustering (Among Competitors)
(e.g. Auto Dealers, Motels)
 Saturation Marketing (Same Firm)
(e.g. An Bon Pain, Ice Cream Vendors)
 Substitute Communication for Travel
(e.g. telecommuting, e-Commerce)
 Separation of Front from Back Office
(e.g. ATM, shoe repair)
 Impact of the Internet on Service Location
(e.g. Amazon.com, eBay, FedEx)

10-4
 Site Selection Considerations
1. Access: 5. Expansion:
Convenient to freeway exit and Room for expansion
entrance ramps. Served by public
transportation.
2. Visibility: 6. Environment:
Set back from street, Surrounding Immediate surroundings should
clutter, Sign placement compliment the service
3. Traffic: 7. Competition:
Traffic volume on street that may Location of competitors
indicate potential impulse buying
4. Parking: 8. Government:
Adequate off-street parking Zoning restrictions, Taxes
10-5
 Regression Model for Motel Location

 Competitive Factors: Room rate, hotels within

one mile, competitive room rate
 Demand Generators: College, Hospital beds
within one mile, Annual tourists
 Area Demographics: Family income, residential
population
 Market Awareness: State population per inn,
Distance to nearest inn
 Physical Attributes: Sign visibility, Distance to
downtown, Accessibility
Y= 39 + (-5.41)STATE + (5.86)PRICE + (-3.09)INCOME + (1.75) COLLEGE
10-6
 11-7

Plant Location Methodology: Factor Rating Method Example

Two refineries sites (A and B) are assigned the following

range of point values and respective points, where the
more points the better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
Power availability and reliability 0 to 200 150 100
Labor climate 0 to 100 54 63
Living conditions 0 to 100 24 96
Transportation 0 to 50 45 50
Water supply 0 to 10 4 5
Climate 0 to 50 8 4
Supplies 0 to 60 5 50
Tax policies and laws 0 to 20 Best Site
5 20 is B
Total pts. 418 544
 11-8

Plant Location Methodology: Centroid Method

 The centroid 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
 11-9

Plant Location Methodology: Centroid Method Formulas

Cx =
d V ix i
Cy =
d V iy i

V i V i

Where:
Cx = X coordinate of centroid
Cy = X coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
 11-10

Plant Location Methodology: Example of Centroid Method

 Centroid method example

 Several automobile showrooms are located according
to the following grid which represents coordinate
locations for each showroom

Y S ho wro o m No o f Z-Mo b ile s

Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X
Question: What is the best location for a new Z-Mobile
warehouse/temporary storage facility considering only distances
and quantities sold per month?
 11-11

Plant Location Methodology: Example of Centroid Method (Continued):

Determining Existing Facility Coordinates

Y
To begin, you must identify the Q
existing facilities on a two- (790,900)

dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You must also have the s o ld p e r mo nth
volume information on the
business activity at the A 1250
existing facilities.
D 1900

Q 2300
 11-12

Plant Location Methodology: Example of Centroid Method (Continued):

Determining the Coordinates of the New Facility
You then compute the new coordinates using the formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000
Cx = = = 443.49
1250 + 1900 + 2300 5,450

200(1250) + 580(1900) + 900(2300) 3,422,000

Cy = = = 627.89
1250 + 1900 + 2300 5,450

You then take the coordinates and place them on the map:
Y
S ho wro o m No o f Z-Mo b ile s
Q New
(790,900) s o ld p e r mo nth
location
D
Z
(250,580)
of facility A 1250
Z about
A D 1900
(100,200) (443,627)
(0,0) X Q 2300
Single Facility Location Using
Cross Median Approach

6 3 (W3=3)
5
4
Y miles

2 (W2=1)
3
2 1 (W1=7)

1 4 (W4=5)

0
0 2 4 6
X miles
10-13
Single Facility Location Using
Cross Median Approach

6 3 (W3=3)
5
4
Y miles

2 (W2=1)
3
2 1 (W1=7)

1 4 (W4=5)

0
0 2 4 6
X miles
Solution is line segment y=2, x=2,3 10-14
Problems
 8.5, 8.6
 Huff Retail Location Model
First, a gravity analogy is used to estimate
attractiveness of store j for customers in
area i.
Aij= Attraction to store j for customers in area i
Sj = Size of the store (e.g. square feet)
Tij= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel
Sj
Aij  
Tij 10-16
Huff Retail Location Model
Second, to account for competitors we
calculate the probability that customers
from area i will visit a particular store j.
Aij
Pij  n

A
j 1
ij

10-17
 Huff Retail Location Model
Third, annual customer expenditures for item k at
store j can now be calculated.

Pij = Probability customers from area i travel to store j

Ci = Number of customers in area i (e.g. census track)
Bik = Annual budget for product k for customers in area i
m = Number of customer areas in the market region

 
m
E jk   Pij Ci Bik
j 1
10-18
Huff Retail Location Model

Fourth, market share of product k

purchased at store j can now be
calculated.

E jk
M jk  m

 (C B
i 1
i ik )

10-19
 Question 8.9
Location Set covering problem
 8.10, 11,12
Set covering problem

Question 1:

 A telecommunication company is considering expanding its

cable and internet service operations into a new area. The area is
divided into 10 neighbourhoods. The company is considering 7
location nodes to reach all 10 neighbourhoods. Of course it costs
a significant amount of money to open a node or make a node
operational. The company would like to minimize total cost but
at the same time reach all of the neighbourhoods. The cost of
opening a node differs based on the characteristics of the land
and the technical aspects of setting up a node.
 The costs of opening seven nodes are as follows:
Node 1 Node 2 Node 3 Node 4 Node 5 Node 6 Node 7

125 85 70 60 90 100 110

The seven nodes can reach or provide internet/cable coverage to the

following to the following areas:

Node 1 Neighbourhoods 1, 3, 4, 6, 9, 10
Node 2 Neighbourhoods 2, 4, 6, 8
Node 3 Neighbourhoods 1, 2, 5
Node 4 Neighbourhoods 3, 6, 7, 10
Node 5 Neighbourhoods 2, 3, 7, 9
Node 6 Neighbourhoods 4, 5, 8, 10
Node 7 Neighbourhoods 1, 5, 7, 8, 9

Formulate the linear programing model for the above problem .

 Xi if node I provides service
 Xi if node I does not provide service
 Min z = 125x1+ ….
 X1+x3+x7 >= 1 (coverage of ne 1)
Example: Bank Location

The long-range planning department for the Ohio

Trust Company is considering expanding its operation
into a 20-county region in northeastern Ohio. Ohio
Trust does not have, at this time, a principal place of
business in any of the 20 counties.
According to the banking laws in Ohio, if a bank
establishes a principal place of business (PPB) in any
county, branch banks can be established in that county
and in any adjacent county. To establish a new PPB,
Ohio Trust must either obtain approval for a new bank
from the state’s superintendent of banks or purchase an
existing bank.
Example: Bank Location

The 20 counties in the region and adjacent counties

are listed on the next slide. For example, Ashtabula
County is adjacent to Lake, Geauga, and Trumbull
counties; Lake County is adjacent to Ashtabula,
Cuyahoga, and Geauga counties; and so on.
As an initial step in its planning, Ohio Trust would
like to determine the minimum number of PPBs
necessary to do business throughout the 20-county
region. A 0-1 integer programming model can be used
to solve this location problem for Ohio Trust.
Example: Bank Location
Example: Bank Location

 Decision Variables
xi = 1 if a PBB is established in county i; 0 otherwise
 Problem Formulation
Example: Bank Location

 Optimal Solution
For this 20-variable, 20-constraint problem:
Establish PPBs in Ashland, Stark, and Geauga counties.
(With PPBs in these three counties, Ohio Trust can place
branch banks in all 20 counties.)
All other decision variables have an optimal value of
zero, indicating that a PPB should not be placed in these
counties.