9-1

Optimization Criteria
 Criteria
for location maximization differ based on private or
public ownership.
 Private sector
 In private sector, the location decision is governed by either minimization
of cost (e.g. in the case of locating distribution centers) or maximization of
profit (e.g. in the case of locating retail locations).
 Typical problem here would focus on the trade-off between cost of
building and operating facilities versus cost of transportation. Example,
warehouse location problem.
 This model maybe applied in services, when the decision is to locate
services like consulting, auditing, lawn care services – which require you
to travel to the customer.
 When the consumer travels to the facility, no direct cost is incurred by the
provider. Instead, distance becomes a barrier restricting potential
consumer demand and the corresponding revenue generated.
 9-2

Continued….
 Substitute Electronic Media for Travel
 Technology interphase has provided communication possibilities that
expand the coverage of service, example. Nurse practitioners can
use communication with a distant hospital to provide health care
without transporting the patient
 Working out of home or providing service at customer ‘s location ,
example, telebanking

 Impact of the Internet on Service Location

 E-commerce – website becomes the virtual location of these firms
 Location of the warehouse is a concern because you have to ship
the products, e.g. Amazon.com, eBay, FedEx
 9-3

Strategic Location Considerations

Front Office Back Office

Is travel out to customer or Is service performed on

customer travel to site? person or property?
External
Can electronic media substitute for Is co-location necessary?
Customer physical travel?
How is communication
(consumer) Is location a barrier to entry? accomplished?

Availability of labor? Are economies of scale

possible?
Internal Are self-service kiosks an
alternative? Can employees work from
Customer home?

(employee) Is offshoring an option?

 9-4

Topics for Discussion

 Picka particular service, and identify shortcomings in its site
selection.
 Howwould you proceed to estimate empirically the
parameter λ in the Huff retail location model for a branch
bank?
 Why do you think set covering is an attractive approach to
public sector facility location?
 What are the benefits of using intermediaries in the service
distribution channel?
 9-5

Effect of criteria on location

 Maximize utilization
 Maximize the total number of visits to the health care center
 The center should be located in city C, because it contains a large
number of elderly people for whom distance is a strong deterrent
 Minimize distance per capita
 Minimize the average distance per capita to the closest center
 City B should be selected, because it is centrally located between
the two large cities
 Minimize distance per visit
 Minimize the average per-visit travel distance to the nearest center
 City A should be selected as it has the largest population and has
the most mobile and frequent users of health care.
 9-6

 Public sector criteria

 In locating public facility, the decisions are governed by the needs of
the society as a whole.
 Location decisions are complicated by the lack of agreement on goals
and the difficulty of measuring benefits in dollars to make trade-offs
with facility investment.
 Because the benefits of a public service are difficult to define or
quantify directly, substitute measure of ‘utility maximization’ are used.
 Utility will be maximized if people have to travel less to reach a public
facility; or more people can travel to the public facility
 9-7

Effect of Optimization Criteria

City A
3

15
10
*
2

5
*
-15 -10 -5 5 10 15 20 25
*

-5
-10
City B City C
1. Maximize Utilization 1

(City C: elderly find distance a barrier)

2. Minimize Distance per Capita

(City B: centrally located)

3. Minimize Distance per Visit

(City A: many frequent users)

 9-8

Estimation of Geographic Demand

 Define the Target Market
 To forecast demand, we need to define target population. We use
past records to project future demand
 Select a Unit of Area
 To forecast , we need to define geographic units based on 2 factors
 Unit must be large enough to contain a sample size required for estimating
demand
 We should not have so many geographic units, that we cannot do
calculations using our computing power.

 Estimate Geographic Demand

 Regression analysis
 Map Geographic Demand on a three dimensional map
 to provide a visual representation of the geographic distribution
 9-9

Other criteria for site selection

 Sofar we have examined location objective from customer
convenience point of view, that is, distance travelled to be
minimized .
 However,there could be other criteria used for location as
discussed in the next slide.
 9-10

Facility location technique

 Single facility on a line
 Suppose you want to find a location that would minimize the
average walk to your concession from anywhere on the beach
 Locate in the center if the population is equally divided
 If population density is different, then locate the median w.r.t to the
density distribution of the bathers
s n
Z   wi ( s  xi )   wi ( xi  s )
i 0 is
 S = site of the beach mat concession
 x
i location of the i-th demand point on the beach in feet from the
origin, in this case taken to be west end of the beach
wrelative weight of demand attached to the i-th location on beach
 9-11

Site Selection Considerations

table 9.10, pp. 268
1. Access: 4. Parking:
Convenient to freeway exit and Adequate off-street parking
entrance ramps 5. Expansion:
Served by public transportation Room for expansion
2. Visibility: 6. Environment:
Set back from street Immediate surroundings
Surrounding clutter should complement the
Sign placement service
3. Traffic: 7. Competition:
Traffic volume on street that may Location of competitors
Indicate potential impulse buying 8. Government:
Traffic congestion that could be a Zoning restrictions
hindrance (e.g.., fire stations) Taxes
 9-12

Breaking the Rules

 Competitive Clustering
 When firms in the same business locate close to each other so that
customers can compare more easily, ex., car dealership, motels
 Saturation Marketing
 When a company locates its units close to each other to squeeze out
the competition, reduce advertising needs, increase customer
awareness, better inventory management.; example Au Bon Pain,
 Risk of cannibalizing your sales
 Marketing Intermediaries
 Services cannot be inventoried and are intangible, cannot be
transported, thus limiting the geographic area of service
 By using marketing intermediaries you can expand geographical
coverage; e.g. banks extend credit worldwide through Credit
Cards, HMO