EVALUATING

LOCATION
6.53

ALTERNATIVES
Alvir D. Calma

Reference Book: Operations Management 11th Edition by William J. Stevenson

Techniques Helpful In
Evaluating Location
Alternatives
• Locational cost-profit-volume analysis
• Factor rating
• The center of gravity method

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LOCATIONAL COST-PROFIT-VOLUME ANALYSIS

The procedure for this analysis This method assumes the following:
involves these steps:

1. Determine the fixed and variable costs • Fixed costs are constant for the range of
associated with each location alternative. probable output.
2. Plot the total-cost lines for all location • Variable cost are linear for the range of
alternatives on the same graph. profitable output.
3. Determine which location will have the • The required level of output can be closely
lowest cost for the expected level of estimated.
output. Alternatively, determine which • Only one product is involved.
location will have the highest profit.

3
 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕= 𝑭𝑪+(𝒗 ∗ 𝑸)

Where:

FC : Fixed Cost
v : Variable Cost per Item
Q : Quantity or Volume of Output

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 EXAMPLE NO. 1
Fixed and variable costs for four potential plant
locations are shown on the table below:
1. Plot the total-cost lines for these locations on
a single graph.
Fixed Cost Variable Cost 2. Identify the range of output for which each
Location
per Year ($) per Unit alternatives is superior.
A 250,000 11 3. If expected output at the selected location is
to be 8,000 units per year, which location
B 100,000 30
would provide the lowest total cost?
C 150,000 20
D 200,000 35

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EXAMPLE NO. 1

To plot the total-cost lines, select an Fixed Cost Variable Cost

Location + = Total Cost
output that is approximately equal (FC) (Q*v)
to the expected level (e.g., 10,000 A 250,000 + (10,000*11) = 360,000
units per year). Compute the total
cost for each location at that level: B 100,000 + (10,000*30) = 400,000
C 150,000 + (10,000*20) = 350,000
D 200,000 + (10,000*35) = 550,000

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 D
EXAMPLE NO. 1
B

Fixed Cost Variable Cost

+ = Total Cost
(FC) (Q*v)

TOTAL ANNUAL COST (in $1000)

C
A 250,000 + (10,000*11) = 360,000 A

B 100,000 + (10,000*30) = 400,000

C 150,000 + (10,000*20) = 350,000

D 200,000 + (10,000*35) = 550,000

ANNUAL OUTPUT (in 1000 units)

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EXAMPLE NO. 1
D
The approximate ranges for which the alternatives
will yield the lowest costs are shown on the B
graph.

TOTAL ANNUAL COST (in $1000)

𝑇𝐴𝐶 𝐵=$ 100,000+( $ 30 ∗𝑄) C
A
𝑇𝐴𝐶 𝐶 =$ 150,000+( $ 20 ∗𝑄)
𝑇𝐴𝐶 𝐵=𝑇𝐴𝐶 𝐶
$ 100,000+ ( $ 30 ∗𝑄 )=$ 1 5 0,000+($ 2 0 ∗𝑄)
𝑄=5,000 𝑢𝑛𝑖𝑡𝑠 A
C

ANNUAL OUTPUT (in 1000 units)

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EXAMPLE NO. 1
D
The approximate ranges for which the alternatives
will yield the lowest costs are shown on the B
graph.

TOTAL ANNUAL COST (in $1000)

𝑇𝐴𝐶 𝐶 =$ 150,000+( $ 20 ∗𝑄)
C
𝑇𝐴𝐶 𝐴 =$ 250,000+($ 11 ∗𝑄 ) A
𝑇𝐴𝐶 𝐶 =𝑇𝐴𝐶 𝐴
$ 150,000+ ( $ 20 ∗𝑄 )=$ 25 0,000+( $ 11 ∗𝑄)
𝑄=11,111𝑢𝑛𝑖𝑡𝑠
Location Annual Output Range
A
C
A 0 – 5,000 units
B 5,000 – 11,111 units
B
C 11,111 units and above
D Never superior
ANNUAL OUTPUT (in 1000 units)

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EXAMPLE NO. 1
D

Which location would provide the

lowest total cost if the selected output B

is 8,000 units per year?

TOTAL ANNUAL COST (in $1000)

C

Location Annual Output Range A

A 0 – 5,000 units
B 5,000 – 11,111 units
C 11,111 units and above
D Never superior A
C

ANNUAL OUTPUT (in 1000 units)

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FACTOR RATING
• Factor rating is a general approach that is The following procedure is used to
useful for evaluating a given alternative and develop a factor rating:
comparing alternatives
1. Determine which factors are relevant
• The value of factor rating is that it provides (location of market, water supply, parking
facilities, revenue potential).
a rational basis for evaluation and facilitates 2. Assign a weight to each factor that
comparison among alternatives by indicates its relative importance compared
establishing composite value for each with all factors.
3. Decide a common scale for all factors (1 to
alternative that summarizes all related
100) and set a minimum acceptable score if
factors. necessary.
4. Score each location alternative.
• Factor rating enables decisionmakers to 5. Multiply the factor weight by the score for
incorporate their personal opinions and each factor and sum the results for each
quantitative information in the decision location alternative.
6. Choose the alternative that has the highest
process
composite score, unless it fails to meet the
minimum acceptable score.

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 EXAMPLE NO. 2 Factor Weight
Scores
(Out of 100)
Alt. 1 Alt. 2
A photo-processing company intends to open a Proximity to existing store 0.10 100 60
new branch store. The following table contains Traffic volume 0.05 80 80
information on two potential locations. Which is Rental costs 0.40 70 90
the better alternative? Size 0.10 86 92
Layout 0.20 40 70
Operating costs 0.15 80 90
In some cases, managers may prefer to establish
minimum thresholds for composite scores. If an Scores
(Out of 100)
Factor
alternative fails to meet the minimum, they can Alt. 1 Alt. 2
reject it without further consideration. If none of Proximity to existing store 100*0.10 10.0 60*0.10 6.0
the alternatives meets the minimum, this means Traffic volume 80*0.05 4.0 80*0.05 4.0
that either additional alternatives must be Rental costs 70*0.40 28.0 90*0.40 36.0
identified and evaluated or the minimum threshold Size 86*0.10 8.6 92*0.10 9.2
must be revaluated. Layout 40*0.20 8.0 70*0.20 14.0
Operating costs 80*0.15 12.0 90*0.15 13.5
70.6 82.7

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THE CENTER OF GRAVITY METHOD
• The center of gravity method is a method to determine the location of a
facility that will minimize shipping costs or travel time to various
destinations.
• The method treats distribution cost as a linear function of the distance and
the quantity shipped.
• This method includes the use of a map that shows the locations of the
destinations. The map must be accurate and drawn to scale.
• A coordinate system is overlaid on the mad to determine relative
locations.

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 If the quantities to be shipped to every locations are equal, the
coordinates of the center of gravity can be obtain by finding the
average of x coordinates and the average of the y coordinates.

𝑥=
∑ 𝑥𝑖 𝑦=
∑ 𝑦𝑖
𝑛 𝑛

: x coordinate of destination i
: y coordinate of destination I
n : number of destinations

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 EXAMPLE NO. 3
Determine the coordinates of center of gravity
for the problem depicted in the figure on the D4

right. Assume that the shipments from the center D2

of gravity to each of the four destinations will be

equal quantities.
D3

N
D1 W E

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 EXAMPLE NO. 3
• Overlaid a coordinate system on the map to
D4
determine the relative locations. 7

• Determine the coordinates of each 6

D2

destinations.
5
Destination X Y D3
4
1 2 1
3
2 3 6 N
2
3 6 4 D1
W E
1
S
4 9 7
5 4.5 0 1 2 3 4 5 6 7 8 9

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 EXAMPLE NO. 3
• Using the calculated and , plot the location of
D4
the center of gravity 7

D2
6

Destination X Y 5

1 2 1 𝑦 4
D3

2 3 6 3

3 6 4 2
N

W E
4 9 7 1
D1
S
=5 = 4.5
0 1 2 3 4 5 6 7 8 9

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 When the number of units to be shipped is not the same for all
destinations (usual case), a weighted average must be used to
determine the center of gravity, with the weights being the
quantities to be shipped. In some cases, the number of trips can
be more important than quantities, so that metrics can be used
instead of quantities.

𝑥=
∑ 𝑥𝑖 𝑄𝑖 𝑦=
∑ 𝑦𝑖 𝑄𝑖
∑ 𝑄𝑖 ∑ 𝑄𝑖

: x coordinate of destination i
: y coordinate of destination i
: quantity to be shipped to destination i

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 EXAMPLE NO. 4
Weekly
Destination X Y D4
Quantity 7

D2
1 2 1 800 6

2 3 6 900 5
D3
3 6 4 200 4

4 9 7 100 3
N
2,000 2
W E
D1
1
S

0 1 2 3 4 5 6 7 8 9

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 EXAMPLE NO. 4
𝑥=
∑ 𝑥𝑖 𝑄𝑖
Destination X Y
Weekly
Quantity
∑ 𝑄𝑖
1 2 1 800 2*800 1,600
6,400
2 3 6 900 3*900 2,700
𝑥=
3 6 4 200 6*200 1,200 2,000
4 9 7 100 9*100 900
= 2,000 = 6,400 𝑥=3.2

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 EXAMPLE NO. 4
𝑦=
∑ 𝑦𝑖 𝑄𝑖
Destination X Y
Weekly
Quantity
∑ 𝑄𝑖
1 2 1 800 1*800 800
7,700
2 3 6 900 6*900 5,400
𝑦=
3 6 4 200 4*200 800 2,000
4 9 7 100 7*100 700
= 2,000 = 7,700 𝑦 =3.85

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 EXAMPLE NO. 4
Weekly
Destination X Y D4
Quantity 7

D2
1 2 1 800 6

2 3 6 900 5
D3
3 6 4 200 4

4 9 7 100 𝑦 3
N
2
W E
D1
1
S

𝑥=3.2 𝑦 =3.85 0 1 2 3 4 5 6 7 8 9

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 KEY POINTS
1. Location decisions are strategic; they can have a significant impact on the
success or failure of a business.

2. Very often, location decisions are long term and involve substantial cost, so it is
important to devote an appropriate amount of effort to selecting a location.

3. Decision makers must not let the attractiveness of few factors cloud the decision-
making process. There are many factors to take into account in selecting a
location. It is essential to identify the key factors and their relative importance,
and then to use that information to evaluate location alternatives.

4. It is important to also factor in the impact that location choices will have on the
supply chain.

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 THANK YOU
ALVIR D. CALMA

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