CHAPTER 8
Location Planning
&
Analysis
CHAPTER 8: LEARNING OBJECTIVES
LO 8.1 Identify some of the main reasons organizations
need to make location decisions
LO 8.2 Explain why location decisions are important
LO 8.3 Discuss the options that are available for location
decisions
LO 8.4 Give examples of the major factors that affect
location decisions
LO 8.5 Outline the decision process for making these
kinds of decisions
LO 8.6 Use the techniques presented to solve typical
problems
8-2
2
THE NEED FOR LOCATION DECISIONS
Location decisions arise for a variety of reasons:
Addition of new facilities
o As part of a marketing strategy to expand
markets*
o 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
8-3
LO 8.1
LOCATION DECISIONS
STRATEGICALLY IMPORTANT
Location decisions:
Are closely tied to an organization’s strategies
o Low-cost
o 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
8-4
LO 8.2
4
LOCATION DECISIONS
OBJECTIVES
Location decisions are based on:
Profit potential or cost and customer service
Finding a number of acceptable locations from
which to choose
Position in the supply chain
o End: accessibility, consumer demographics,
traffic patterns, and local customs are
important
o Middle: locate near suppliers or markets
o Beginning: locate near the source of raw
materials
Web-based retail organizations are effectively
location independent 8-5
SUPPLY CHAIN CONSIDERATIONS
Supplychain management must address supply
chain configuration:
Number and location of suppliers, production
facilities, warehouses and distribution centers
Centralized vs. decentralized distribution*
The
importance of such decisions is underscored
by their reflection of the basic strategy for
accessing customer markets
8-6
6
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
8-7
LO 8.3
GLOBAL LOCATION:
FACILITATING FACTORS
Two key factors have contributed to the
attractiveness of globalization:
Trade agreements such as
o North American Free Trade Agreement
(NAFTA)
o General Agreement on Tariffs and Trade
(GATT)
o U.S.-China Trade Relations Act
o EU and WTO efforts to facilitate trade
Technology
o Advances in communication and
information technology
8-8
LO 8.3
8
GLOBAL LOCATION:
BENEFITS
A wide range of benefits have accrued to
organizations that have globalized operations:
Markets
Cost savings
Legal and regulatory
Financial
Other
LO 8.4 8-9
GLOBAL LOCATION:
DISADVANTAGES
There are a number of disadvantages that may
arise when locating globally:
Transportation costs
Security costs
Unskilled labor
Import restrictions
Criticisms
Productivity
LO 8.4 8-10
10
GLOBAL LOCATION:
RISKS
Organizations locating globally should be aware of
potential risk factors related to:
Political instability and unrest
Terrorism
Economic instability
Legal regulation
Ethical considerations
Cultural differences
Quality
LO 8.4 8-11
11
MANAGING GLOBAL OPERATIONS
Managerial implications for global operations:
Language and cultural differences
o Risk of miscommunication
o Development of trust
o Different management styles
o Corruption and bribery
Increased travel (and related) costs
Challenges associated with managing far-flung
operations
Level of technology and resistance to
technological change
Domestic personnel may resist locating, even
temporarily
LO 8.4 8-12
12
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
LO 8.5 8-13
13
LOCATION: IDENTIFYING A COUNTRY
Factors Relating to Foreign Locations
Government a. Policies on foreign ownership of
production facilities
Local content requirements
Import restrictions
Currency restrictions
Environment regulations
Local product standards
Liability laws
b. Stability issues
Cultural • Living circumstances for foreign
differences workers and their dependents
• Ways of doing business
• Religious holidays/traditions
LO 8.5 8-14
14
LOCATION: IDENTIFYING A COUNTRY
Factors Relating to Foreign Locations
Customer Possible “buy locally” sentiment
preferences
Labor Level of training and education of
workers
Work ethic
Wage rates
Possible regulations limiting the
number of foreign employees
Language differences
Resources Availability and quality of raw
materials, energy, transportation
infrastructure
LO 8.5 8-15
15
LOCATION: IDENTIFYING A COUNTRY
Factors Relating to Foreign Locations
Financial Financial incentives, tax rates,
inflation rates, interest rates
Technological Rate of technological change, rate
of innovations
Market Market potential, competition
Safety Crime, terrorism threat
LO 8.5 8-16
16
LOCATION: IDENTIFYING A REGION
Primary regional factors:
Location of raw materials
o Necessity
o Perishability
o Transportation costs
Location of markets
o As part of a profit-oriented company’s
competitive strategy
o So not-for-profits can meet the needs of
their service users
o Distribution costs and perishability
LO 8.5 8-17
17
LOCATION: IDENTIFYING A REGION
Labor factors
Cost of labor
Availability of suitably skilled workers
Wage rates in the area
Labor productivity
Attitudes toward work
Whether unions pose a serious potential
problem
Other factors
Climate and taxes may play an important
role in location decisions
LO 8.5 8-18
18
LOCATION: IDENTIFYING A
COMMUNITY
Many communities actively attempt to attract
new businesses they perceive to be a good fit for
the community
Businesses also actively seek attractive
communities based on such factors such as:
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Development support
LO 8.5 8-19
19
LOCATION: IDENTIFYING A SITE
Primary site location considerations are
Land
Transportation
Zoning
Other restrictions
LO 8.5 8-20
20
MULTIPLE PLANT MANUFACTURING
STRATEGIES
Organizing operations
Product plant strategy
o Entire products or product lines are
produced in separate plants, and each
plant usually supplies the entire domestic
market – decentralized approach
Market area plant strategy
o Plants are designated to serve a particular
geographic segment of the market
o Plants produce most, if not all, of a
company’s products – centralized
LO 8.5
appraoch 8-21
21
MULTIPLE PLANT MANUFACTURING
STRATEGIES (CONT.)
Organizing operations
Process plant strategy
o Different plants focus on different aspects of
a process
Automobile manufacturers – engine plant,
body stamping plant, etc.
o Coordination across the system becomes a
significant issue
General-purpose plant strategy
o Plants are flexible and capable of handling a
range of products
LO 8.5 8-22
22
GEOGRAPHIC INFORMATION SYSTEM
(GIS)
GIS
A computer-based tool for collecting, storing,
retrieving, and displaying demographic data on
maps
Aids decision makers in
Targeting market segments
Identifying locations relative to their market
potential
Planning distribution networks
Portraying relevant information on a map makes
it easier for decision makers to understand
LO 8.5 8-23
23
GEOGRAPHIC INFORMATION SYSTEM
(GIS)
Logistics companies
Publishers
Real estate
Banks
Insurance
LO 8.5 8-24
24
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
LO 8.5 another 8-25
25
EVALUATING LOCATION
ALTERNATIVES
Common techniques:
1. Locational cost-volume-profit analysis
2. Transportation model
3. Factor rating
4. Center of gravity method
LO 8.6 8-26
26
1. 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
LO 8.6 8-27
27
1. LOCATIONAL COST-PROFIT-
VOLUME ANALYSIS (CONT.)
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
LO 8.6 8-28
28
1. LOCATIONAL COST-PROFIT-
VOLUME ANALYSIS (CONT.)
For a cost analysis, compute the total cost for each
alternative location:
LO 8.6 8-29
29
EXAMPLE: COST-PROFIT-VOLUME ANALYSIS
Fixed and variable costs for four potential plant
locations are shown below:
Variable
Fixed Cost
Cost
Location per Year
per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35
LO 8.6 8-30
30
EXAMPLE: COST-PROFIT-VOLUME
ANALYSIS (CONT.)
Plot of Location Total Costs
LO 8.6 8-31
31
EXAMPLE: COST-PROFIT-VOLUME
ANALYSIS (CONT.)
Range approximations
B Superior (up to 4,999 units)
C Superior (>5,000 to 11,111 units)
A superior (11,112 units and up)
LO 8.6 8-32
32
2. TRANSPORTATION MODEL
Stem from the movement of either raw materials or
finished goods.
If a facility will be the sole source or destination of
shipments,
the company can include the transportation
costs in a locational cost–volume analysis by
incorporating the transportation cost per unit
being shipped into the variable cost per unit.
If raw materials are involved, the transportation
cost must be converted into cost per unit of
output in order to correspond to other variable
costs.)
LO 8.6 8-33
33
2. TRANSPORTATION MODEL
When a problem involves
shipment of goods from multiple sending points to
multiple receiving points,
and a new location (sending or receiving point) is
to be added to the system,
the company should undertake a separate
analysis of transportation - linear programming.
LO 8.6 8-34
34
3. 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
LO 8.6 8-35
35
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
existing source
.10 100 60
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost
.15 80 90
LO 8.6 1.00 8-36
36
EXAMPLE: FACTOR RATING (CONT.)
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) =
existing .10 100 60 .10(60) = 6.0
10.0
source
Traffic
.05 80 80 .05(80) = 4.0 .05(80) = 4.0
volume
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
.15 80 90 .15(80) = 12.0 .15(90) = 13.5
Cost
1.00 70.6 82.7
LO 8.6 8-37
37
4. CENTER OF GRAVITY METHOD
Center of gravity method
Method for locating a distribution center that
minimizes distribution costs
o Treats distribution costs as a linear function
of the distance and the quantity shipped
o The quantity to be shipped to each
destination is assumed to be fixed
o The method includes the use of a map that
shows the locations of destinations
The map must be accurate and drawn to
scale
o A coordinate system is overlaid on the map
to determine relative locations
LO 8.6 8-38
38
4. CENTER OF GRAVITY METHOD
Figure 8.1 b) Coordinate system added
a) Map showing destinations c) Center of gravity
LO 8.6 8-39
39
4. 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.
LO 8.6 8-40
40
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
D1 2 2
D2 3 5
D3 5 4
D4 8 5
18 16
Here, the center of gravity is (4.5,4). This is slightly
west of D3 from Figure 8.1.
LO 8.6 8-41
41
CENTER OF GRAVITY METHOD (CONT.)
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 average of the y-
coordinates.
LO 8.6 8-42
42
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
LO 8.6 8-43
43
EXAMPLE: CENTER OF GRAVITY (CONT.)
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).
LO 8.6 8-44
44
EXAMPLE: CENTER OF GRAVITY (CONT.)
LO 8.6 8-45
45
