8-1 Location Planning and Analysis

Operations Management
Chapter 4: Location Decision

William J. Stevenson

9th edition
8-2 Location Planning and Analysis

Need for Location Decisions

 Change of geographic distribution of demand
 New communities that attract investors because of
investment incentives
 Marketing Strategy
 Cost of Doing Business
 Growth: supply less than demand
 Depletion of Resources
 Fire or earthquake, ….
8-3 Location Planning and Analysis

Nature of Location Decisions

 Strategic Importance
 It affect the project for a long time
 It affect the practice of other functions of the
project
 It affect the daily operating cost
 Long term commitment of resources/costs
 Impact on investments, revenues, and
operations
 It impact the Supply chains
8-4 Location Planning and Analysis

Nature of Location Decisions

 Objectives
 Profit potential
 No single location may be better than others
 Identify several locations from which to choose
 Options
 Expand existing facilities
 Add new facilities
 Move
8-5 Location Planning and Analysis

Making Location Decisions

 Decide on the criteria

 Identify the important factors

 Develop location alternatives

 Evaluate the alternatives

 Make selection
8-6 Location Planning and Analysis

Location Decision Factors

Community
Regional Factors Considerations

Multiple Plant Site-related

Strategies Factors
8-7 Location Planning and Analysis

Regional Factors

 Location of raw materials

 Location of markets

 Labor factors

 Climate and taxes

8-8 Location Planning and Analysis

Community Considerations

 Quality of life
 Services

 Attitudes

 Taxes

 Environmental regulations

 Utilities

 Developer support
8-9 Location Planning and Analysis

Site Related Factors

 Land
 Transportation

 Environmental

 Legal
8-10 Location Planning and Analysis

Multiple Plant Strategies

 Product plant strategy

 Market area plant strategy

 Process plant strategy

8-11 Location Planning and Analysis
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

Customer access/parking
8-12 Location Planning and Analysis
A checklist of potential issues for decisions on foreign locations
Table 8.3

Foreign a. Policies on foreign ownership of production facilities

Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions

Customer Possible buy locally sentiment

Preferences

Labor Level of training and education of workers

Work practices
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation
8-13 Location Planning and Analysis

Evaluating Locations
 Cost-Profit-Volume Analysis
 Transportation Model
 Decision based on movement costs of raw materials
or finished goods
 Factor Rating
 Decision based on quantitative and qualitative
inputs
 Center of Gravity Method
 Decision based on minimum distribution costs
8-14 Location Planning and Analysis

Evaluating Locations

 Cost-Profit-Volume Analysis
 Determine fixed and variable costs
 Plot total costs
 Determine lowest total costs
8-15 Location Planning and Analysis

Location Cost-Volume Analysis

 Assumptions
 Fixed costs are constant
 Variable costs are linear

 Output can be closely estimated

 Only one product involved

8-16 Location Planning and Analysis

Example 1: Cost-Volume Analysis

Fixed and variable costs for

four potential locations are:

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
8-17 Location Planning and Analysis

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
8-18 Location Planning and Analysis

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)

8-19 Location Planning and Analysis

Cost-Profit Volume Analysis

The break-even output level can be determined as follows:
For B and C
100000 + 30 Q1 = 150000 + 20 Q1
Solving for Q1,you find Q1 = 5000 units per year
For A and C
250000 + 11 Q2 = 150000 + 20 Q2
Solving for Q2, you find Q2 = 11000 units per year.
Therefore, if Q < 5000, B is superior
If 5000 < Q < 11000, C is superior
If Q > 11000, A is superior
8-20 Location Planning and Analysis

Transportation Model
 Transportation costs sometimes play an important role in
location decisions.
 When a problem involves shipment of goods from multiple
receiving points, and a new location (sending or receiving)
is added to the system, the company should undertake, a
separate analysis of transportation.
 Transportation model is a special case of linear
programming model that used to minimize the total
transportation cost.
 Transportation model is used to minimize the transportation
cost if a new location is added to an existing system.
8-21 Location Planning and Analysis

Requirements for Transportation Model

 List of origins and each one’s capacity
 List of destinations and each one’s demand

 Unit cost of shipping

8-22 Location Planning and Analysis

Transportation Model Assumptions

 Items to be shipped are homogeneous
 Shipping cost per unit is the same
 Only one route between origin and destination
8-23 Location Planning and Analysis

The Transportation Problem

D
(demand)
S
(supply)
D
S
(demand)
(supply)

D
(demand)

S
(supply) D
(demand)
8-24 Location Planning and Analysis

A Transportation Table
Warehouse
A B C D
Factory 4 7 7 1 Factory 1
1 100 can
supply
12 3 8 8 100
200 units per
2
period
8 10 16 5
3 150
Total
supply
450 capacity
Demand 80 90 120 160 per
450 period
Warehouse B can use 90 Total demand
units per period per period
8-25 Location Planning and Analysis

Special Problems
 Unequal supply and demand (unbalanced)
 Dummy: Imaginary number added equal to the
difference between supply and demand when these
are unequal
 Degeneracy: The condition of too few completed
cells to allow all necessary paths to be constructed
8-26 Location Planning and Analysis

Using transportation to solve location problem

Example
 A company owns two factories, one in Al-Sadat city and the other in
Port said. The company distribute its product in three markets; Cairo,
Alexandria, and Asyoute .the following table shows the supply,
demand and cost of transportation per unit from each source to each
destination.

Alex. Cairo Asyoute supply

Al-Sadat 6 10 17 30
Port said 8 12 14 20
demand 25 10 40
8-27 Location Planning and Analysis

Example (Cont.)
 Due to the shortage of supply to satisfy the demand, the
company is thinking in building a new factory. Two
suggested locations are considered; Alamraya and Tanta
The following table shows the transportation cost from
each factory to the three markets. Determine the best
location.

Alex. Cairo Asyoute

Alamraya 10 8 15

Tanta 12 13 5
8-28 Location Planning and Analysis

Solution
1.Use DS for windows software to solve two
transportation problems; which are:
a. The first one includes Alamraya as a third
source
b. The second one includes Tanta as a third
source

2. Choose the location that has the minimum

transportation cost.
8-29 Location Planning and Analysis

Summary of Procedure
 Make certain that supply and demand are equal
 Develop an initial solution using intuitive, low-
cost approach
 Check that completed cells = R+C-1

 Evaluate each empty cell

 Repeat until all cells are zero or positive

8-30 Location Planning and Analysis

3. Factor rating
 General approach to evaluating locations that
includes quantitative and qualitative inputs.
 Factor rating enables the decision makers to
incorporate their personal opinions and
quantitative information in the decision process.
8-31 Location Planning and Analysis

Factor rating procedure

1. Determine which factors are relevant (e.g., location of
market, water supply, parking facility, revenue,…, ect.,)
2. Assign a weight to each factor that indicates its
relevant importance compared with all other factors,
typically, weights sum to 1.00.
3. Decide on a common scale for all factors (e.g., 0 to
100)
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
8-32 Location Planning and Analysis

Factor Rating
Example
 A photo-processing company intends to open a new
branch store. The table below contains information on two
potential locations. Which is the better alternative?

Factor weight Alt.1 Alt.2

Proximity to existing store .10 100 60
Traffic volume .05 80 80
Rental cost .40 70 90
Size .10 86 92
Layout .20 40 70
Operating cost .15 80 90
8-33 Location Planning and Analysis

Factor rating
 Solution: Calculate the weighted scores by multiplying
the weights by the score of each alternative.

Factor Alternative 1 Alternative 2

Proximity to existing store 10 6
Traffic volume 4 4
Rental cost 28 36
Size 8.6 9.2
Layout 8 14
Operating cost 12 13.5
Sum 70.6 82.7 (best)
8-34 Location Planning and Analysis

4. Center of Gravity method

 The method is used to determine the location of a
distribution center that will minimize the distribution cost
 It 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 constant.
 The method includes the use of a map that shows the
locations of destinations. The map must be accurate and
drawn to scale.
 The location of the (0,0) point of the coordinate system,
and its scale, is unimportant.
8-35 Location Planning and Analysis

Center of gravity procedure

 If the quantities to be shipped to every location are
equal, you can find the coordinates of the center of
gravity by finding the average of the x coordinates
and the average of the Y coordinates.
 When the number of units to be shipped is not the
same for all destinations (usually the case), a
weighted average should be used to determine the
center of gravity; with the weights being the
quantities to be shipped.
8-36 Location Planning and Analysis

Center of gravity method

Example
Suppose that one of the companies is thinking about
building a new central warehouse to supply four
distribution centers; A, B, C, and D. The following
table shows the coordinates of the four location to a
hypothesized point (0,0):
Location X coordinate Y coordinate
A 40 50
B 30 30
C 20 20
D 10 40
8-37 Location Planning and Analysis

 The following table shows the yearly requirements of

each location: find the location of the new warehouse

Location Quantity
A 35
B 15
C 15
D 85
8-38 Location Planning and Analysis

Solution

Location xi yi Qi xi.Qi yi.Qi

A 40 50 35 1400 1750

B 30 30 15 450 450

C 20 20 15 300 300

D 10 40 85 850 3400

Total 3000 5900

8-39 Location Planning and Analysis

Solution continue
 The center of gravity coordinates will be

X coordinate = sum (xi.Qi)/sum (Qi)

3000/150 = 20

Y coordinate = sum (yi.Qi)/sum (Qi)

5900/150 = 39