Location Planning

and
Analysis
 The Need for Location Decisions
• Location decisions arise for a variety of reasons:
• Addition of new facilities
• As part of a marketing strategy to expand markets
• Growth in demand that cannot be satisfied by expanding existing facilities
• Depletion of basic inputs requires relocation
• Shift in markets
• Cost of doing business at a particular location makes relocation attractive

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 Location Decisions:
Strategically Important
• Location decisions:
• Are closely tied to an organization’s strategies
• Low-cost
• Convenience to attract market share
• Effect capacity and flexibility
• Represent a long-term commitment of resources
• Effect investment requirements, operating costs, revenues, and operations
• Impact competitive advantage
• Importance to supply chains

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 Location: Options
• Existing companies generally have four options available in location
planning:
1. Expand an existing facility
2. Add new locations while retaining existing facilities
3. Shut down one location and move to another
4. Do nothing

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 Location Decision: General Procedure

• Steps:
1. Decide on the criteria to use for evaluating location alternatives
2. Identify important factors, such as location of markets or raw materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives
4. Evaluate the alternatives and make a decision

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 Service and Retail Locations

• Considerations:
• Nearness to raw materials is not usually a consideration
• Customer access is a
• Prime consideration for some: restaurants, hotels, etc.
• Not an important consideration for others: service call centers, etc.
• Tend to be profit or revenue driven, and so are
• Concerned with demographics, competition, traffic volume patterns, and convenience
• Clustering
• Similar types of businesses locate near one another

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 Evaluating Location Alternatives
• Common techniques:
• Locational cost-volume-profit analysis
• Factor rating
• Transportation model
• Center of gravity method

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 Locational Cost-Profit-Volume Analysis

• Locational Cost-Profit-Volume Analysis

• Technique for evaluating location choices in economic terms
• Steps:
1. Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or highest
profit) for the expected level of output

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Locational Cost-Profit-Volume Analysis

• Assumptions
1. Fixed costs are constant for the range of probable output
2. Variable costs are linear for the range of probable output
3. The required level of output can be closely estimated
4. Only one product is involved

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 Locational Cost-Profit-Volume Analysis

• For a cost analysis, compute the total cost for each alternative
location:
Total Cost = FC + 𝑣 × 𝑄
where
FC = Fixed cost
𝑣 = Variable cost per unit
𝑄 = Quantity or volume of output

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Example:
Cost-Profit-Volume Analysis
• Fixed and variable costs for four potential plant
locations are shown below:
Fixed Cost Variable Cost
Location per Year per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35

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Example: Cost-Profit-Volume Analysis
Plot of Location Total Costs

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 Example: Cost-Profit-Volume Analysis

• Range approximations Total Cost of C = Total Cost of B

• B Superior (up to 4,999 units) 150,000 + 20Q = 100,000 + 30Q
50,000 = 10Q
Q = 5,000

Total Cost of A = Total Cost of C

• C Superior (>5,000 to 11,111 units) 250,000 + 11Q = 150,000 + 20Q
100,000 = 9Q
Q = 11,111 .11

• A superior (11,112 units and up)

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 Factor Rating
• Factor Rating
• General approach to evaluating locations that includes quantitative and
qualitative inputs
• Procedure:
1. Determine which factors are relevant
2. Assign a weight to each factor that indicates its relative importance compared with all
other factors.
• Weights typically sum to 1.00
3. Decide on a common scale for all factors, and set a minimum acceptable score if
necessary
4. Score each location alternative
5. Multiply the factor weight by the score for each factor, and sum the results for each
location alternative
6. Choose the alternative that has the highest composite score, unless it fails to meet the
minimum acceptable score

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 Example: Factor Rating
• A photo-processing company intends to open a new branch store. The following table contains
information on two potential locations. Which is better?
Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to
.10 100 60
existing source
Traffic volume .05 80 80

Rental costs .40 70 90

Size .10 86 92

Layout .20 40 70

Operating Cost .15 80 90

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 Example: Factor Rating
• A photo-processing company intends to open a new branch store. The following table contains information
on two potential locations. Which is better?
Scores
(Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2
Proximity to
.10 100 60 .10(100) = 10.0 .10(60) = 6.0
existing source
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00 70.6 82.7
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 Center of Gravity Method

• Center of Gravity Method

• Method for locating a distribution center that minimizes distribution costs
• Treats distribution costs as a linear function of the distance and the
quantity shipped
• The quantity to be shipped to each destination is assumed to be fixed
• The method includes the use of a map that shows the locations of
destinations
• The map must be accurate and drawn to scale
• A coordinate system is overlaid on the map to determine relative locations

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Center of Gravity Method
Figure 8.1

a) Map showing destinations b) Coordinate system added c) Center of gravity

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 Center of Gravity Method
• If quantities to be shipped to every location are equal, you can obtain the coordinates of the
center of gravity by finding the average of the x-coordinates and the average of the y-coordinates

x=
 x i

y=
 y i

n
where
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
n = Number of destinatio ns

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 Example: Center of Gravity Method
Suppose you are attempting to find the center of
gravity for the problem depicted in Figure 8.1c.


Destination x y
x 18
D1 2 2 x= i
= = 4. 5
D2 3 5 n 4
D3 5 4
D4 8 5
y=
 y i
=
16
=4
18 16 n 4

Here, the center of gravity is (4.5,4). This is slightly

west of D3 from Figure 8.1

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 Center of Gravity Method
• When the quantities to be shipped to every location are unequal, you can obtain the coordinates
of the center of gravity by finding the weighted average of the x-coordinates and the y-
coordinates
x=
 xiQi
 Qi
y=
 yQ i i

Q i

where
Qi = Quantity t o be shipped to destinatio n i
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i

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 Example: Center of Gravity
• Suppose the shipments for the problem depicted in Figure 8.1a are not all equal. Determine the
center of gravity based on the following information.

Weekly
Destination x y Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 2,000

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 Example: Center of Gravity
x=
 xQ i i
=
2(800 ) + 3(900 ) + 5(200 ) + 8(100 ) 6,100
= = 3.05
Q i 2,000 2,000

y=
 yQ
i=
i 2(800 ) + 5(900 ) + 4(200 ) + 5(100 ) 7,400
i
= = 3.7
Q i 2,000 2,000

• The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to
3.0, so the coordinates for the center of gravity are (3.0, 3.7). This is south of destination D2 (3,
5).

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Example: Center of Gravity

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Load-Distance (ld) Method

l Identify and compare candidate locations

• Weighted-distance method
• Select a location that minimizes the sum of the loads
multiplied by the distance the load travels
• Proximity to customers /market
• Proximity to suppliers /resources
• Time may be used instead of distance

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2. Load-Distance (ld) Method
l Calculating a load-distance score
• Varies by industry
• Use the actual distance to calculate ld score
• Use rectilinear or Euclidean distances
• Find one acceptable facility location that minimizes the ld
score

⚫ Formula for the ld score

ld =  lidi
i

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Example 1
Example: A new RMC plant is to be installed in north side of Pune. The plant can
be set at one of the five potential locations. Six sites will use this facility. The
demand from each site (i.e., expected amount of RMC) and cost (measured in
terms of distance in KM to an from each location) are as follows:
Site i Distance (tij) from potential location, j Km Demand, di
j=1 2 3 4 5 In M3
1 3 5 4 1 6 15
2 5 2 4 4 2 20
3 3 6 3 4 5 10
4 5 3 8 5 6 12
5 3 9 5 2 8 10
6 9 10 7 9 2 7
Example 1

Compute transportation cost, cij (cij =tij*di)

Site i Transportation cost (cij) to location (assuming that

the facility is placed at that location)
j =1 2 3 4 5
1 45 75 60 15 90
2 100 40 80 80 40
3 30 60 30 40 50
4 60 36 96 60 72
5 30 90 50 20 80
6 63 70 49 63 14
Total, Cj =i cij 326 371 365 278* 346

Select location 4 with minimum cost = 278.

Example 1 Transportation cost (cij) to location (assuming that
Site i the facility is placed at that location)
j =1 2 3 4 5
1 45 75 60 15 90
2 100 40 80 80 40
3 30 60 30 40 50
4 60 36 96 60 72
5 30 90 50 20 80
6 63 70 49 63 14
Transportation cost, Cj =i cij 326 371 365 278 346
Fixed cost, Fj 100 150 160 200 140
Total Cost, C’j =Fj+i cij 426* 521 525 478 486

Select location 1 with minimum cost = 426

Example 2

What is the distance between (20, 10) and (80, 60)?

SOLUTION
Euclidean distance:

dAB = (xA – xB)2 + (yA – yB)2 = (20 – 80)2 + (10 – 60)2 = 78.1

Rectilinear distance:
dAB = |xA – xB| + |yA – yB| = |20 – 80| + |10 – 60| = 110

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