Chap 008

8-1 Location Planning and Analysis

William J. Stevenson

Chapter 8: Location Planning and Analysis

10th editionPrepared by : Dr. Mohamed Abdelsalam


Need for Location DecisionsNeed for Location Decisions

Existing organizations may need to make location decisions for a variety of reasons:

1.Marketing strategy: expand their markets

2.Cost of doing business in another location is more attractive

3.Growth in demand for its products or services

4.Depletion of basic inputs (fishing, mining and petroleum operations)


Nature of Location DecisionsNature of Location Decisions

Strategic Importance Long term commitment/costs Impact on investments, revenues, and operations Supply chains

Objectives Profit potential or balancing between cost and

customer service level. No single location may be better than others, but

acceptable location Identify several locations from which to choose


Location OptionsLocation Options

1. Expand existing facilities2. Add new facilities while retaining existing

ones3. Shut down at one location and move to

another 4. Do nothing


Making Location DecisionsMaking Location Decisions

General procedure for making location decisions:

1.Decide on the criteria for evaluating location alternatives

2.Identify the important factors (location of markets or raw materials)

3.Develop location alternatives

4.Evaluate the alternatives

5.Make selection


Location Decision FactorsLocation Decision Factors

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations


Location of raw materials Necessity, perishability, and transportation

costs Location of markets

Competitive advantage Labor factors

Cost, availability and productivity of labor Climate and taxes

Regional FactorsRegional Factors


Quality of life: schools, shopping, cost of living, transportation, housing

Services: Medical, fire and police Attitudes: Pro/con Taxes Environmental regulations Utilities : cost and availability Development support: low-cost loans, grants

Community ConsiderationsCommunity Considerations


Land: cost, room for expansion, parking Transportation: Type and access Environmental Legal

Site Related FactorsSite Related Factors


When companies have multiple manufacturing facilities, they can organize operations is several ways:

Product plant strategy: entire products or product lines are produced in separate plants. (Decentralized approach) Specialization of labor, materials and equipment

Market area plant strategy: plants are designed to serve particular geographic segment of a market. Operating costs are higher than product plant strategy but there is significant savings in shipping costs.

Process plant strategy: different plants concentrate on different aspects of a process. (Automobile manufacturers)

Multiple Plant StrategiesMultiple Plant Strategies


Service And Retail LocationService And Retail Location

Customer access Demographics: age, income, education Population Traffic volume and convenience Good transportation and/or parking facilities Competitors’ locations (concentration of potential

customers) Others


ForeignGovernment

a. Policies on foreign ownership of production facilitiesLocal ContentImport restrictionsCurrency restrictionsEnvironmental regulationsLocal product standards

b. Stability issuesCulturalDifferences

Living circumstances for foreign workers / dependentsReligious holidays/traditions

CustomerPreferences

Possible buy locally sentiment

Labor Level of training and education of workersWork practicesPossible regulations limiting number of foreign employeesLanguage differences

Resources Availability and quality of raw materials, energy,transportation

Table 8.3

Factors relating to foreign locationsFactors relating to foreign locations


Evaluating Location AlternativesEvaluating Location Alternatives

1. Locational Cost-Profit-Volume Analysis Technique for evaluating location choices in economic

terms

2. Transportation Model Decision based on movement costs of raw materials or

finished goods

3. Factor Rating Decision based on quantitative and qualitative inputs

4. Center of Gravity Method Decision based on minimum distribution costs


Evaluating LocationsEvaluating Locations

Cost-Profit-Volume Analysis

1. Determine fixed and variable costs for each location

2. Plot total costs lines

3. Determine the location with the lowest total costs for the expected level of output.


Location Cost-Volume AnalysisLocation Cost-Volume Analysis

Assumptions1. Fixed costs are constant

2. Variable costs are linear

3. Output can be closely estimated

4. Only one product involved

Total cost for each location

Total cost = FC + v x Q


Example 1: Cost-Volume AnalysisExample 1: Cost-Volume Analysis

Fixed and variable costs for four potential plant locations are:

L o c a t i o n F i x e dC o s t

V a r i a b l eC o s t

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 13 02 03 5


Example 1Example 1

Required:1. Plot the total-cost lines for these locations on a

single graph.

2. Indentify the range of output for which each alternative is superior (i.e., has the lowest total cost)

3. If expected output at the selected location is to be 8,000 units per year, which location would provide the lowest total cost?


SolutionSolution

1. To plot the total-cost lines, select an output that is approximately equal to the expected output level (e.g., 10,000 units per year). Compute the total cost for each location at that level.

2. Then plot each location’s fixed cost (at Output = 0) and the total cost at 10,000 units; and connect the two points with a straight line.


Example 1: SolutionExample 1: Solution

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0


Example 1: SolutionExample 1: Solution

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

BC

B SuperiorC Superior

A Superior

D


Cost-Profit Volume AnalysisCost-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 At output level 8000 units per year choose location C


Cost-Profit Volume AnalysisCost-Profit Volume Analysis

For a profit analysis compute the total profit for each location: Total profit = Q (R-v) – FC

Solved Problem 2 at the end of the chapter illustrates profit analysis.


Transportation ModelTransportation 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.

8-24 Location Planning and AnalysisRequirements for Transportation Requirements for Transportation ModelModel

List of origins and each one’s capacity List of destinations and each one’s demand Unit cost of shipping


Transportation Model AssumptionsTransportation Model Assumptions

Items to be shipped are homogeneous Shipping cost per unit is the same Only one route between origin and destination


The Transportation ProblemThe Transportation Problem

D(demand)

D(demand)

D(demand)

D(demand)

S(supply)

S(supply)

S(supply)


Warehouse

4 7 7 1100

12 3 8 8200

8 10 16 5150

450

45080 90 120 160

A B C D

1

2

3

Factory Factory 1can supply 100units per period

Total supplycapacity perperiod

Total demandper period

Demand

Warehouse B can use 90 units per period

A Transportation TableA Transportation Table


3. Factor Rating3. 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.

The value of factor rating is that it provides a rational basis for evaluation and facilitates comparison among alternatives by establishing a composite value for each alternative that summarizes all related factors.


Factor rating procedureFactor 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 relative 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


Factor RatingFactor 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 80Rental cost .40 70 90Size .10 86 92Layout .20 40 70Operating cost .15 80 90


Factor ratingFactor 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)


4. Center of Gravity method4. Center of Gravity method

The method is used to determine the location of a distribution center that will minimize the distribution cost or travel time to various destinations.

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 (i.e., will not change over time).

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.


Center of gravity procedureCenter 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.


Determine the coordinates of the center of gravity for the following problem. Assume that the shipments from the center of gravity to each of the four destinations will be equal quantities.

Destination X Y

D1 2 2

D2 3 5

D3 5 4

D4 8 5

18 16


The center of gravity is at (4.5, 4), which places it just west of destination D3.


Center of gravity methodCenter 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


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


SolutionSolution

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


Solution continueSolution 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

Chap 008

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