McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Dr. Emad Elwy Habib, PGCHE, FHEA, PhD.

Associate Professor of Business Administration.

Deputy Head Department MIS and Modules Leader.
Faculty of Management Sciences.
October University for Modern Sciences and Arts (MSA).
6th of October City, Egypt.
Production Operations Management Expert and Trainer.
Supply Chain Management Expert and Trainer.
Fellow of Higher Education - Greenwich university - UK.
E-Mails: [email protected] - [email protected]

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
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

8-3
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 8-4
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
• End: accessibility, consumer demographics, traffic
patterns, and local customs are important
• Middle: locate near suppliers or markets
• Beginning: locate near the source of raw materials
– Web-based retail organizations are effectively location independent
– Supply chain management issues such as supply chain configuration
• Centralized vs. decentralized distribution
8-5
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

8-6
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
8-7
Location: Identifying a Region (contd.)
– 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

8-8
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

8-9
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

8-10
Location: Identifying a Site
• Primary site location considerations are
– Land
– Transportation
– Zoning
– Other restrictions

8-11
Multiple Plant Manufacturing Strategies

• Organizing operations
– Product plant strategy
• Entire products or product lines are produced in
separate plants, and each plant usually supplies the
entire domestic market
– Market area plant strategy
• Plants are designated to serve a particular geographic
segment of the market
• Plants produce most, if not all, of a company’s products

8-12
Multiple Plant Manufacturing Strategies

• Organizing operations
– Process plant strategy
• Different plants focus on different aspects of a process
– automobile manufacturers – engine plant, body
stamping plant, etc.
• Coordination across the system becomes a significant
issue
– General-purpose plant strategy
• Plants are flexible and capable of handling a range of
products

8-13
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

8-14
Evaluating Location Alternatives
• Common techniques:
–Center of gravity method
–Factor rating (weighted scores)
–Locational cost-volume-profit analysis
–Transportation models

8-15
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
8-16
Center of Gravity Method

8-17
Center of Gravity Method

8-18
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=
 xi

y=
 y i

n
where
xi = x coordinates of destination i
yi = y coordinates of destination i
n = Number of destinations 8-19
Example: Center of Gravity Method
Suppose you are attempting to find the center of gravity for the problem
depicted in Figure 8.1c.
Destination
D1
x
2
y
2 x=
 x i
=
18
= 4 .5
n 4
D2 3 5
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 8-20
8-21
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
average of the y-coordinates
x=
 xQ i i

Q i

y=
 yQ i i

Q i

where
Qi = Quantity to be shipped to destination i
xi = x coordinates of destination i
yi = y coordinates of destination i
8-22
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
Total 18 16 2,000
8-23
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 south of destination D2 (3, 5).
8-24
Example: Center of Gravity

8-25
Example
Business has been good for the Black & White News Company,
which receives magazines from the publishers and distributes
them to the news racks of drugstores and supermarkets. At
present, it has five customers, each of which is serviced once a
week; expired magazines are collected and new editions are
displayed on the racks. (This problem is obviously artificially
small.) Here are the x and y coordinates of the locations of the
customers and the number of truckloads of magazines which go to
each destination. The company operates out of a single
warehouse, whose coordinates are also included. The company
has outgrown the warehouse, and the partners are discussing
whether to expand the present facilities or to construct a larger
warehouse at a new site.
8-26
 x=
xQ i i

Q i
Unqual Quantities
Example y=
yQ
Q
i

i
i

where
Weekly Qi = Quantity to be shipped to destination i
xi = x coordinates of destination i
Customer x y Loads (Q)
yi = y coordinates of destination i
A 2 3 1
x=
x i
B 5 2 3 n
Equal Quantities
C 3 6 2
y =
y i
D 10 4 6 n
E 6 5 2 where
Total 26 20 14 xi = x coordinates of destination i
Warehouse 3 4 yi = y coordinates of destination i
n = Number of destinations

a. Plot the locations of the customers on graph paper.

b. Determine the optimal location of the new warehouse. For
both equal and unequal shipments.
c. Plot the optimal location of the warehouse on your graph.
Why is it so far to the right?

8-27
. a.

Y
Customer

Problem P4a
A
B
C
x

2
5
3
3
2
6
y
Weekly
Loads

1
3
2
b. 1 + = A Destination
D 10 4 6
2 E 6 5 2
9 Total 26 20 14
C+ Warehouse 3 4
6 E+

3 A+
D+ X= ∑X/n = 26/5 = 5.2
B+
0 Y= ∑y/n = 20/5 = 4
2 4 6 8 10 12 14 X

x=
 Qx 1( 2) + 3(5) + 2( 3) + 6(10) + 2( 6)
= = 6.78
Q 1+ 3+ 2 + 6 + 2

y=
 Qy 1(3) + 3( 2) + 2(6) + 6(4) + 2(5)
= = 3.93
Q 1+ 3+ 2 + 6 + 2
8-28
Factor Rating
• Factor Rating
–General approach to evaluating locations that includes
quantitative and qualitative inputs

8-29
Factor Rating
• 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
8-30
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
0.10 100 60
Traffic volume 0.05 80 80
Rental costs 0.40 70 90
Size 0.10 86 92
Layout 0.20 40 70
Operating Cost 0.15 80 90
1.00 8-31
 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 Location 1 Location 2

Proximity to
existing source 0.10 100 60 0.10(100) = 10.0 0.10(60) = 6.0

Traffic volume 0.05 80 80 0.05(80) = 4.0 0.05(80) = 4.0

Rental costs 0.40 70 90 0.40(70) = 28.0 0.40(90) = 36.0
Size 0.10 86 92 0.10(86) = 8.6 0.10(92) = 9.2
Layout 0.20 40 70 0.20(40) = 8.0 0.20(70) = 14.0
Operating Cost 0.15 80 90 0.15(80) = 12.0 0.15(90) = 13.5
1.00 70.6 82.7
8-32
Two locations are under consideration for building a condominium. (A condominium is a building in
which each apartment is owned by the resident, rather than rented.) One location is in suburb A of
a large Eastern city, and the other is in suburb B. The marketing manager has identified the
following factors which bear upon the location decision and their relative weights.
Factor Desirable Status Weight
1. Proximity to public transportation Should be close .20
2. Space for a parking lot Should be large .40
3. Property taxes Should be low .25
4. Electricity rates Should be low .15

Each factor will be rated on a scale of 1 = unsatisfactory to 10 = outstanding. Research has revealed the
following information about each location, and the marketing manager has rated each factor at each
location.
Location Rating
Factor A B A B
1. Public transportation 1 block 6 blocks 9 2
2. Parking lot 1 acre 3 acres 3 7
3. Property taxes $600/year $800/year 6 4
4. Electric rates $.09/kwh. $.06/kwh. 5 8
8-33
 Score Weighted score
Factor Weight A B A B
1. Public Transportation .20 9 2 1.80 0.40
2. Parking lot .40 3 7 1.20 2.80
3. Property taxes .25 6 4 1.50 1.00
4. Electricity rates .15 5 8 0.75 1.20
5.25 5.40

8-34
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

8-35
Locational Cost-Profit-Volume Analysis
• Assumptions
1. Fixed costs are constant for the range of probable
output (T.C. = F.C) when V.C. =0
2. Variable costs are linear for the range of probably
output
3. The required level of output can be closely
estimated
4. Only one product is involved

8-36
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
8-37
 Total Cost = FC + v  Q
Example: Cost-Profit-Volume Analysis
where
• Fixed and = Fixed
FCvariable cost
costs for four potential plant
v = Variable cost per unit
locations are shown below:

Q = Fixed Cost or Variable

Quantity volumeCost
of outpu
Location per Year per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35

8-38
Answer: Cost-Profit-Volume Analysis
• Fixed and variable costs for four potential plant locations are
shown below: Assume that the no. of out puts 10,000 units

Fixed Variable total Cost=

Locat Cost Cost Fixed Cost +Variable cost /unit *
ion per Year per Unit quantity
A $250,000 $11 $250,000 + $11(10,000) =360,000

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

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

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

8-39
Example: Cost-Profit-Volume Analysis
Plot of Location Total Costs
1000
Total Annual Costs ($000)

800

600 A
400 B
C
200
D
0
0 2 4 6 8 10 12 14 16
Annual Output (000 units)
8-40
Example: Cost-Profit-Volume Analysis

B Superior C Superior A Superior

8-41
 Total D B
Costs

600
550

C
500

400 A
400
360

350
Least
300 Costs

200

100

Annual
Output
0 2 4 6 8 10 12 14 16
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
– C Superior (>5,000 to 11,111 units)
Total Cost of A = Total Cost of C
250,000 + 11Q = 150,000 + 20Q
100,000 = 9Q
Q = 11,111.11

8-43
Example: Cost-Profit-Volume Analysis
• Range approximations Total Cost of B = Total Cost of A
– B Superior (up to 7,895 units) 100,000 + 30Q = 250,000 + 11Q
150,000 = 19Q
Q = 7,895
– A superior (11,112 units and up)
Probability A – B – C – D
A=B A=C A=D B=C B=D C=D

8-44