Chapter 8
Location Planning
and Analysis
Slides prepared by
Laurel Donaldson
Douglas College
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
LO 1
Explain the nature and importance of location
decisions, and outline the decision process for
making these kinds of decisions.
LO 2
Describe some of the major factors that affect location
decisions, and explain why a foreign company
would locate in Canada.
LO 3
Use the techniques presented to evaluate location
alternatives
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
2
Chapter Outline
Nature of Location Decisions
Factors Affecting Location Decisions
Service Location Considerations
Evaluating Location Alternatives
Locational Break-Even Analysis
Transportation Method
Factor Rating
Center of Gravity Method
Voronoi Polygons
Location Analysis Software
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3
Nature of Location Decisions
Decisions made infrequently in response to:
growth marketing strategy
shifts in market or in business costs
depletion of resources
Important design decision
Long term commitment/costs
Large impact on capital and operating costs
Poor choice detrimental to operations
LO 1
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4
Location Decisions in the Supply Chain
LO 1
Suppliers
Middle
Retail
• Near
source of
raw
materials
• Close to
supplier or
customer
• Accessibilit
y
• Demographic
s
• Traffic
patterns
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5
Formal Location Decision Process
Identify the
important factors
Gather information
on appropriate sites
Short list
Site visits and
meetings
Evaluate and make
selection
LO 1
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6
Location Decision Factors
LO 2
Country Factors
Community
Considerations
Regional Factors
Site-related
Factors
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7
Regional Factors
LO 2
Location
of raw
materials
Location
of
markets
Labour
factors
Other
costs
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8
Regional Factors
 Location of raw materials
 Necessity, perishability and transportation costs
 Utilities
 Location of markets
 Competition/convenience factor
 Perishability and transportation
 Need for closeness to customer
 Labour factors
 Availability, skills, costs, attitudes, presence of unions
 Other costs
 Taxes and incentives
 Land and building costs
LO 2
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9
Foreign Locations
LO 2
Political
stability
Attitude
toward
foreign
companies
Language
and cultural
differences
(eg.
corruption)
Exchange
rates and
currency
risks
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10
Community Considerations
Liveability
Availability
of skilled
workers
LO 2
• Facilities and
services
available
Attitudes
Economics
• Taxes and
incentives
• Environmental
regulations
• Land and
building costs
• Transportation
infrastructure
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11
Site Related Factors
LO 2
Site size
and room
for
expansion
Utility and
sewer
capacity
Parking
and road
access
Zoning
restrictions
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12
Comparison of Service and
Manufacturing Considerations
Manufacturing/Distribution
Service/Retail
Cost Focus
Revenue focus
Distribution modes/costs
Energy availability, costs
Demographics: age,
income, etc
Population/drawing area
Labour cost/availability/skills
Competition
Material availability/costs
Traffic volume/patterns
Customer access/parking
LO 2
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13
Why Should Foreign Companies
Locate in Canada?
 Shortened delivery time and reduced delivery costs
 Access to natural resources
 Skilled labour, educated workers
 Politically very stable, tax incentives
 Safe and secure
 Good telecommunication infrastructure
 Low cost for energy, health care
 Lower wage and exchange rates
LO 2
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14
Evaluating Locations
Locational Break-Even Analysis
Transportation Model
• Consider costs of moving raw materials or finished goods
Factor Rating
• Decision based on quantitative and qualitative inputs
Centre of Gravity Method
• Decision based on minimum distribution costs
Voronoi Polygons
• To determine trade areas
LO 3
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15
Locational Break-Even Analysis
1. Determine fixed and
variable costs
2. Plot total costs lines
3. Determine lowest total costs
 Assumptions:
Fixed costs and variable costs are constant
for the range of probable output
Only one product is involved
LO 3
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16
Locational Break Even Analysis
Fixed and variable costs for 4 potential locations
are given in the table below.
LO 3
1.
Plot the total cost lines on a single graph
2.
Identify the range of output over which each alternative is superior
3.
If expected output is 8,000 units per year, which location would provide the
lowest cost?
Location
Fixed Costs ($)
Variable Costs ($)
A
250,000
11
B
100,000
30
C
150,000
20
D
200,000
35
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17
Solution
Fixed
Costs
A
B
C
D
LO 3
$250,000
100,000
150,000
200,000
Variable
Costs
$11(10,000)
30(10,000)
20(10,000)
35(10,000)
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Total
Costs
$360,000
400,000
350,000
550,000
18
Example 1 Solution: Breakeven
LO 3
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19
Transportation Model
determines the shipments in order to
minimize total transportation cost
Considers demand and capacity constraints
For multi-facility conditions
A special –purpose algorithm of linear
programming
LO 3
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20
Factor-Rating Method
Includes a wide variety of factors
in analysis
1.
2.
3.
4.
5.
Develop a list of relevant factors
Assign a weight to each factor
Develop a scale for each factor
Score all factors for each location
Multiply score by weight for each factor
and sum for each location
6. Choose the location with the highest
composite score
LO 3
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21
Factor-Rating Example
Factor
Weight
Operating cost 25
5
Size
10
Traffic volume 39
Parking/access 21
Building cost
Totals
LO 3
Scores
(out of 10)
A1
A2
7
5
8.5
7.5
6
Weighted Scores
A1
A2
6 (25)(7) = 175
6
(5)(5) = 25
8 (10)(8.5) = 85
7 (39)(7.5) = 293
7 (21)(6) = 126
(25)(6) = 150
(5)(6) = 30
(10)(8) = 80
(39)(7) = 273
(21)(7) = 147
704
680
100
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22
Center-of-Gravity Method
Finds location of distribution center that
minimizes total distribution costs
Considers
Location of markets
Volume of goods shipped to those markets
Shipping cost (or distance)
LO 3
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23
Center-of-Gravity Method
•
Finds location of distribution center
that minimizes total distribution costs
 Overlay a coordinate system on a map
showing existing locations
 Location (0,0) arbitrary
 Map drawn to scale
 Determine coordinates of each destination
 Calculate X and Y coordinates for ‘center of
gravity’
 Weighted by quantity transported
LO 3
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24
Center-of-Gravity Method
∑xiQi
x - bar =
∑Qi
∑yiQi
y - bar =
where
LO 3
∑Qi
xi = x coordinate of destination i
yi = y coordinate of destination i
Qi = Quantity to be transported
to destination i
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25
Center-of-Gravity Method
Destination (x, y)
Daily Quantity
A (30, 120)
B (70, 110)
C (130, 130)
D (60, 40)
X-bar =
150
100
50
200
(30)(150) + (70)(100) + (130)(50) + (60)(200)
150 + 100 + 50 + 200
= 60
Y-bar =
(120)(150) + (110)(100) + (130)(50) + (40)(200)
500
= 87
If quantities are equal,
assign a weight of 1 to each location
LO 3
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26
Center-of-Gravity Method
Y
C (130, 130)
N
A (30, 120)
120 –
W
S
90 –
B (70, 110)
+
60 –
Center of gravity (60, 87)
D (60, 40)
30 –
|
–
Arbitrary (0,0) point
LO 3
E
|
30
|
60
|
90
|
120
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|
150
X
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Voronoi (or Thiessen) Polygons
Determine trade area of each store, restaurant,
etc, of a multi-facility company.
Each city or town is divided into non-overlapping
polygons
each polygon contains one facility (as its center)
any other facilities within a polygon are closer to the
center of that polygon than to any other polygon center.
LO 3
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28
Burger King Trade Areas
The thick lines mark the boundaries for each
LO 3
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29
Location Analysis Software
Geographic Information Systems (GIS)
Computer-based tool for collecting, storing,
retrieving, and displaying location-dependent
demographic data on map
Combines data from different databases
Intuitive and graphical
Modelling/optimization software
Many use linear programming
E.g. MicroAnalytics OptiSite
LO 3
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30
Learning Checklist
 List some of the main reasons organizations
need to make location decisions.
 Explain why location decisions are important.
 Discuss the options that are available for
location decisions.
 Describe some of the major factors that affect
location decisions.
 Outline the decision process for making these
kinds of decisions.
 Use the techniques presented to solve typical
problems.
31
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.