8

Location Planning
and Analysis

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
 Discuss importance of location decisions.
 Discuss factors that influence location
decisions.
 Discuss recent location trends.
 Use techniques to solve typical location
problems:
 Cost-Profit-Volume Analysis.
 Center of Gravity Method.

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 Location Planning and Analysis

 Location planning is the determination of

where to geographically locate your
manufacturing or service facilities.

 Typically one of the most infrequent

activities unless you work for a retail
organization that is rapidly expanding
(e.g. Starbucks)

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 Need for Location Decisions

 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources

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

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 Making Location Decisions
 Decide on the criteria
 Identify the important factors
 Develop location alternatives
 Evaluate the alternatives
 Identify general region
 Identify a small number of community
alternatives
 Identify site alternatives
 Evaluate and make selection

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 Location Decision Factors
Community
Regional Factors Considerations

Multiple Plant Site-related

Strategies Factors

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 Regional Factors

 Location of raw materials

 Location of markets
 Labor factors
 Climate and taxes

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 Community Considerations
 Quality of life
 Services
 Attitudes
 Taxes
 Environmental regulations
 Utilities
 Developer support

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 Site Related Factors

 Land
 Transportation
 Environmental
 Legal

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 Multiple Plant Strategies
 Product plant strategy
 Market area plant strategy
 Process plant strategy

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 Service and Retail Locations
 Manufacturers – cost focused
 Service and retail – revenue focused
 Traffic volume and convenience most important
 Demographics
 Age
 Income
 Education
 Location, location, location
 Good transportation
 Customer safety
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 Comparison of Service and
Manufacturing Considerations
Table 8.2

Manufacturing/Distribution Service/Retail

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Tax rebates and other incentives Customer access/parking

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 Trends in Locations
 Foreign producers locating in U.S.
 “Made in USA”
 Currency fluctuations
 Just-in-time manufacturing techniques
 Microfactories
 Information Technology

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 Global Locations
 Reasons for globalization
 Benefits
 Disadvantages
 Risks
 Global operations issues

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 Globalization
 Facilitating Factors
 Trade agreements
 Technology
 Benefits
 Markets
 Cost savings
 Legal and regulatory
 Financial

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 Globalization
 Disadvantages
 Transportation costs
 Security
 Unskilled labor
 Import restrictions
 Criticisms
 Risks
 Political
 Terrorism
 Legal
 Cultural
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 Evaluating Locations

 Cost-Profit-Volume Analysis
 Determine fixed and variable costs
 Plot total costs
 Determine lowest total costs

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 Location Cost-Volume Analysis
 Assumptions
 Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated
 Only one product involved

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 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 o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5

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 Example 1: Solution

F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts

A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0

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 Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

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 Center of Gravity Method
Used to determine location when
minimizing shipping costs or
travel time is the primary
objective.

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 Center of Gravity Method
Identify destinations using a coordinate system (x and y axis).
y axis
6

5
(4,5)
4

3
(2,3)
2
(5,2)
1
(1,1)

1 2 3 4 5 6
x axis
If all weights are equal then:

x
 x i

(1  2  4  5)
3
n 4

y
 y i

(1  3  5  2)
 2.75
n 4
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 Center of Gravity Method
Identify destinations using a coordinate system (x and y axis).
y axis Destination Number of Trips
(1,1) 10
6
(2,3) 20
5 (4,5) 30
(4,5) (5,2) 20
4

3
(2,3)
2
(5,2)
1
(1,1)

1 2 3 4 5 6
x axis
If all weights are not equal then:

x
 x Q 1(10)  2(20)  4(30)  5(20) 270
 i i
  3.375
Q 10  20  30  20
i 80

y
 y Q 1(10)  3(20)  5(30)  2(20) 260
 i i
  3.25
Q 10  20  30  20
i 80
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