mportant Points for Location Decision Preparation:

1. Strategic Importance of Location Decisions

○ Location decisions directly impact an organization's strategy. For example, if a
business wants to become a low-cost producer, it might locate near raw
materials to reduce transportation costs.
○ Example: A car manufacturing company may set up a factory close to steel
suppliers, which will reduce raw material costs.
2. Impact on Capacity and Flexibility
○ Locations may have space constraints or local regulations that could limit future
expansion or restrict product types.
○ Example: A company that plans to expand in the future should avoid urban
areas where land for expansion is scarce and expensive.
3. Long-term Commitment
○ Location decisions are often irreversible and involve substantial investments,
which makes it difficult to change later if the choice turns out to be poor.
○ Example: A company relocating its headquarters will incur high costs in terms of
moving, setting up new facilities, and potential customer loss.
4. Cost, Revenues, and Operations Impact
○ A poor location can lead to high transportation costs, labor shortages, or
operational inefficiencies.
○ Example: A food production plant far from both suppliers and customers may
face increased costs and delivery delays.
5. Objectives of Location Decisions
○ Profit-oriented businesses usually aim for the location with the highest profit
potential, while nonprofit organizations seek to balance costs with service
quality.
○ Example: A retail chain might open stores in high-traffic areas to maximize foot
traffic, while a nonprofit hospital may focus on serving underserved communities
at reasonable costs.
6. Location Criteria Depend on the Supply Chain Position
○ Different business types require different location considerations. Retail
businesses need to focus on accessibility, while suppliers may prioritize
proximity to raw materials.
○ Example: A warehouse company might select a central location to reduce
distribution costs, while an online retailer can operate from almost anywhere as
long as there are good shipping services.
7. Supply Chain Considerations
○ Deciding on a centralized vs. decentralized distribution model is critical.
Centralized locations allow for cost control, while decentralized locations can
respond better to local markets.
○ Example: A global e-commerce company might use a central distribution center
for cost savings, but decentralized centers for faster deliveries in specific regions.
8. Location Options
○ Companies typically have four options:
1. Expand an existing facility: Cost-effective if space allows.
2. Add new locations: Useful for gaining market share but can cannibalize
sales from existing stores.
 3. Shut down and move: Considered if market conditions change, such as
raw material depletion.
4. Do nothing: Maintain current location if moving offers no significant
benefits.
○ Example: A retail chain may add a new store in a growing suburban area to
capture market share, but this might hurt an existing store nearby by splitting the
customer base.

Examples to Illustrate:
● Retail Example: A convenience store chain chooses to open in high-traffic urban
areas to increase sales. However, opening a new location close to an existing store
might attract the same customers rather than expanding their market, so they carefully
analyze customer demographics and traffic patterns.
● Manufacturing Example: A furniture company decides to relocate to an area with lower
labor costs and proximity to timber suppliers. This move reduces both production costs
and the cost of transporting raw materials to the factory.

—-------------------------

Evaluating Location Alternatives

Evaluating location alternatives is a crucial process in business operations and can significantly
affect cost, efficiency, and profitability. Several techniques help organizations assess the best
location by balancing economic, logistical, and qualitative factors. These include:

1. Locational Cost-Profit-Volume Analysis

This method helps in economic comparison of different location alternatives, mainly by
comparing the total costs and profit potential. It provides a quantitative basis for decision-
making and includes fixed and variable costs, making it particularly useful for manufacturing or
service facilities where output and costs are essential to evaluate.

Steps for Locational Cost-Profit-Volume Analysis:

1. Determine Fixed and Variable Costs: Identify the fixed and variable costs associated
with each potential location.
2. Plot Total-Cost Lines: Graphically represent the total costs for each location at different
output levels.
3. Evaluate Lowest Total Cost or Highest Profit: Compare locations to see which has
the lowest total cost for a given output or highest potential profit.

Example:

Let’s consider the following location alternatives:

Location Fixed Cost per Year Variable Cost per Unit

A $250,000 $11
 B $100,000 $30

C $150,000 $20

D $200,000 $35

● To plot the total cost for each location at 10,000 units:

○ Location A: $250,000 + $11 × 10,000 = $360,000
○ Location B: $100,000 + $30 × 10,000 = $400,000
○ Location C: $150,000 + $20 × 10,000 = $350,000
○ Location D: $200,000 + $35 × 10,000 = $550,000

In this example, at 10,000 units, Location C provides the lowest total cost.

2. Factor Rating Method

This is a subjective and objective method that combines qualitative and quantitative factors
for comparing different locations. It is widely used because it incorporates multiple factors, both
measurable (like costs) and subjective (like customer convenience), into the decision-making
process.

Steps for Factor Rating:

1. Select Relevant Factors: Identify factors important for the location (e.g., market
proximity, labor availability, transportation costs).
2. Assign Weights: Assign importance to each factor (e.g., 1 to 10), with higher weights
indicating greater importance.
3. Score Each Location: Rate each location based on how well it meets each factor.
4. Multiply Scores by Weights: Calculate the weighted score for each location.
5. Summarize the Scores: The location with the highest weighted score is usually chosen.

Example:

Suppose the factors are labor availability, transportation costs, and market proximity, with
weights assigned as follows:

Factor Weight Location A Location B

Score Score

Labor Availability 0.5 70 90

Transportation 0.3 80 70
Costs

Market Proximity 0.2 90 80

For Location A:

● Weighted Score = (0.5 × 70) + (0.3 × 80) + (0.2 × 90) = 35 + 24 + 18 = 77

For Location B:

● Weighted Score = (0.5 × 90) + (0.3 × 70) + (0.2 × 80) = 45 + 21 + 16 = 82

In this example, Location B has the highest weighted score and would be selected.

3. Center of Gravity Method

This method focuses on finding the optimal central location for a facility, typically a warehouse
or distribution center, by balancing transportation costs and distances. The location chosen
minimizes the overall cost and effort involved in transporting goods between the facility and its
suppliers or customers.

Steps for Center of Gravity Method:

1. Identify Coordinates and Weights: Determine the geographic coordinates and

shipment volumes for each supply or customer point.
2. Calculate the Weighted Average: Use the coordinates and weights to find the "center"
location.
3. Locate the Facility: The center of gravity represents the optimal location.

4. Transportation Model
This is a specialized linear programming algorithm used when multiple sending and
receiving points are involved, especially in cases where new facilities are added to an existing
system. The model aims to minimize total transportation costs by analyzing different shipping
routes and combinations.

Example:

Consider a scenario where goods must be shipped from three suppliers to four warehouses.
The transportation model helps decide the optimal shipping quantities and routes to minimize
costs, while meeting demand and supply constraints.

Summary:
● Locational Cost-Profit-Volume Analysis: Focuses on minimizing total costs or
maximizing profits by comparing fixed and variable costs across locations.
● Factor Rating: Allows for both qualitative and quantitative factors in decision-making.
● Center of Gravity Method: Minimizes transportation costs by finding a central location.
● Transportation Model: Optimizes transportation costs when dealing with multiple points
in the supply chain.

—-----------------------------

Service and Retail Location Considerations

Service and retail businesses typically face different factors when making location decisions
compared to manufacturing firms. Since they often focus on customer access, demographics,
and competition, their primary goal is to maximize revenue or profit, not minimize costs as in
manufacturing.

Here are key considerations for service and retail location decisions:

1. Customer Access
In service and retail, proximity to customers is essential. Businesses like banks, supermarkets,
restaurants, and medical offices prioritize locations that are convenient for their customers.
Ease of access can be a major deciding factor for customers when choosing where to shop or
seek services.

● High-traffic areas (both vehicle and foot traffic) are particularly attractive to retail
businesses.
● For local services (like dentists or barbers), proximity to the neighborhood or
community being served is crucial.
● Some businesses, such as online services or call centers, may not prioritize customer
access because their services are remote.

2. Demographics
Demographics of a location’s customer base significantly influence decisions:

● Age, income, education, and population density can determine the demand for
products or services.
● Businesses targeting high-income customers may choose locations in affluent areas,
while those targeting younger populations might locate near universities or urban areas.

3. Competition and Convenience

In many cases, retail and service businesses rely on convenience to attract customers. For
example:

● Fast-food chains and supermarkets are often located where they can provide
convenience to passing customers.
● Businesses with unique products may not need to worry about proximity to competitors
as much, since their offering draws in customers on its own.

However, there are instances where clustering with competitors is beneficial:

● Automobile dealerships or shopping malls often locate near each other because
customers prefer to shop around, and the high traffic helps all businesses.
● Medical offices and service providers often locate near hospitals or in centralized
areas for ease of patient access.

4. Traffic Volume and Parking

For retail and service businesses, the volume of traffic and availability of parking are critical:
 ● Malls often outperform downtown areas because they offer ample free parking and are
closer to residential areas, enhancing convenience.
● Downtown locations may struggle to compete due to parking limitations, unless public
transportation access is strong.

5. Safety and Security

In urban settings, customer safety is a key factor for businesses where customers visit the
location. Restaurants, retail outlets, and medical services must consider the safety of the area
and ensure that customers feel secure when visiting their premises.

6. Impact of Multiple Outlets

Many retail firms operate multiple locations, leading to questions about optimizing their entire
portfolio. Considerations include:

● Sales, market share, and profitability: How can these be optimized across all
locations? This might involve upgrading facilities, expanding or relocating outlets, or
closing underperforming stores.
● Competition within outlets: Where should new outlets be located to expand market
share without cannibalizing sales from other stores within the same chain?
● Competitor impact: What effect will a competitor opening nearby have on sales and
profitability?