Koç University
OPSM 301 Operations Management
Class 18:
Location
(Chapter 8)
Zeynep Aksin
zaksin@ku.edu.tr
Drivers of Supply Chain Performance
Efficiency
Responsiveness
Supply chain structure
Inventory
Transportation
Facilities
Drivers
Information
The Logistics Network
The Logistics Network consists of:
 Facilities:
Vendors, Manufacturing Centers, Warehouse/
Distribution Centers, and Customers
 Raw materials and finished products that flow between
the facilities.
Sources:
plants
vendors
ports
Regional
Warehouses:
stocking
points
Field
Warehouses:
stocking
points
Customers,
demand
centers
sinks
Supply
Production/
purchase
costs
Inventory &
warehousing
costs
Transportation
costs
Inventory &
warehousing
costs
Transportation
costs
Decision Classifications
 Strategic Planning: Decisions that typically involve
major capital investments and have a long term effect
1. Determination of the number, location and size of
new plants, distribution centers and warehouses
2. Acquisition of new production equipment and the
design of working centers within each plant
3. Design of transportation facilities, communications
equipment, data processing means, etc.
Decision Classifications
 Tactical Planning: Effective allocation of manufacturing
and distribution resources over a period of several
months
1. Work-force size
2. Inventory policies
3. Definition of the distribution channels
4. Selection of transportation and trans-shipment
alternatives
Decision Classifications
 Operational Control: Includes day-to-day operational
decisions
1. The assignment of customer orders to individual
machines
2. Dispatching, expediting and processing orders
3. Vehicle scheduling
Competitive Imperatives Impacting Location
 The need to produce close to the customer due
to time-based competition, trade agreements,
and shipping costs
 The need to locate near the appropriate labor
pool to take advantage of low wage costs and/or
high technical skills
Article from Financial Times
Site selection and Location
 Site selection
– Short-term focus
– Accessibility of consumers and workers
– “Cost” driven decision
 Location
– stability
– Long-term market position
– Strategies for back-office operations
Facility Location
 Location decisions are made for facilities that produce
and deliver both products and services
 Both quantitative and qualitative factors can be important
to location decisions
 Several levels of quantitative analysis are possible
– Cost comparisons
– Break-even analysis
– Linear programming
Locational Factors
 Proximity to
Customers
 Business Climate
 Total Costs
 Infrastructure
 Quality of Labor
 Suppliers
 Other Facilities





Free Trade Zones
Political Risk
Government Barriers
Trading Blocs
Environmental
Regulation
 Host Community
Characteristics of a Good Location
 Proximity to target market
 Residences, hospitals, schools, offices,
airports, military bases
 Proximity to destination points
 Malls tourist attractions, anchor stores
 Ease of access
 Proximity to competition
 Proximity to other units of the same
type
Problem: accurate identification and trade-offs
Demand Sensitive Services
 Solution Techniques:
– Informal judgment
– Factor Rating
– Regression
 Case:
– La Quinta Hotels - Regression based
site selection
Location Evaluation Methods




Factor-rating method
Locational break-even analysis
Center of gravity method
Transportation model
Factor-Rating Method
 Most widely used location technique
 Useful for service & industrial locations
 Rates locations using factors
– Tangible (quantitative) factors
• Example: Short-run & long-run costs
– Intangible (qualitative) factors
• Example: Education quality, labor skills
Steps in Factor Rating Method
 List relevant factors
 Assign importance weight to each factor
(such as 0 – 1)
 Develop scale for each factor (such as
1 – 100)
 Score each location using factor scale
 Multiply scores by weights for each
factor & total
 Select location with maximum total
score
Demand Sensitive Service Facility
Location
Factor Rating example
Item
Income of neighborhood
Proximity to shopping centers
Accessibility
Visibility
Traffic
Scale
0-10
0-10
0-10
0-10
0-10
Multiplier
.40
.25
.15
.10
.10
Demand Sensitive Service Facility
Location
Factor Rating Example
Buyukdere
Etiler
Bostanci
Beyoglu
Income
4
8
10
6
Shopping
2
7
10
4
Access
1
9
8
4
Visibility
6
9
7
6
Traffic
3
8
8
5
Score
Buyukdere
3.15
Etiler
8.00
Bostanci
9.20
Beyoglu
5.10
Cost-Volume Analysis
Fixed and variable costs for four potential
locations:
Location
A
B
C
D
Fixed
Cost
$250,000
100,000
150,000
200,000
Variable
Cost
$11
30
20
35
Cost-Volume Analysis
$(000)
800
700
600
500
400
300
200
100
0
D
B
C
A
A Superior
C Superior
B Superior
0
2
4
6
8
10
Annual Output (000)
12
14
16
Center of Gravity Method
 Finds location of single distribution
center serving several destinations
 Used primarily for services
 Considers
– Location of existing destinations
• Example: Markets, retailers etc.
– Volume to be shipped
– Shipping distance (or cost)
• Shipping cost/unit/mile is constant
Center of Gravity Method Steps
 Place existing locations on a coordinate
grid
– Grid has arbitrary origin & scale
– Maintains relative distances
 Calculate X & Y coordinates for ‘center of
gravity’
– Gives location of distribution center
– Minimizes transportation cost
Center of Gravity Method Equations
X Coordinate
Cx 
 d ix Wi
i
 Wi
i
Y Coordinate
Cy 
 d iy Wi
i
 Wi
i
dix = x coordinate of
location i
Wi = Volume of
goods moved to or from
location i
diy = y coordinate of
location i
Example: retail stores
Store Location
Location A
Location B
Location C
Location D
Location E
Location F
No of containers shipped/month
400
300
200
100
300
100
140.00
E
C
120.00
D
100.00
CG
North-South
A
A
B
80.00
C
B
D
E
60.00
F
CG
F
40.00
20.00
0.00
0.00
20.00
40.00
60.00
East-West
80.00
100.00
120.00
140.00
Remarks
 Geographic center is not equal to the cost center
 Define distance concept carefully
Hotelling’s
Hotelling’s: round 1
A
B
Hotelling’s: round 2
A B
Hotelling’s: round 3
B A
Hotelling’s: final configuration
AB
Conclusion
 Why is McDonalds always next to Burger King?
Gloria Jeans next to Starbucks?
 Remember that others can move when you are
planning locations
 In general: dynamics of competitive location
matter