Operations
Management
Location Strategies
Objective of Location Strategy
Maximize the benefit of location
to the firm
Industrial Location Decisions

Cost focus

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Revenue varies little between
locations
Location is a major cost
factor

Affects shipping & production
costs (e.g., labor)

Costs vary greatly between
locations
Industrial Location Decisions Contd..
Tangible costs such as transportation of raw
materials and finished goods, labor, raw
materials etc.
 Intangible costs such as education
expenditures, quality of life etc..

Service Location Decisions

Revenue focus


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
Costs vary little between market
areas
Location is a major revenue factor

Affects amount of customer contact

Affects volume of business
Purchasing power
Parking, security, lighting etc..
Rent
In General - Location Decisions

Long-term decisions

Difficult to reverse

Affect fixed & variable costs

Transportation cost


As much as 25% of product price
Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of location to firm
Factors That Affect Location Decisions

Country level:

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Political risks, govt. rules, attitudes
Cultural and economic issues
Location of markets
Labor talent, productivity
Exchange rates and currency risks
Region level:

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Corporate desires (Reliance refineries in Guj. )
Attractiveness of the region (culture, taxes, climate etc.)
Labor availability
Proximity to raw materials and customers
Land and construction costs
Factors That Affect Location Decisions Contd:

Site Level



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Site, Size and Cost
Air, rail, highway systems
Proximity of services needed
Environmental impact issues
Proximity to competitors
Location Evaluation Methods

Factor-rating method

Locational break-even
analysis

Center of gravity method
© 1995 Corel Corp.
Factor-Rating Method

Most widely used location technique

Useful for service & industrial locations

Rates locations using factors
Steps in Factor Rating Method



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
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 for each location
Select location with maximum total score
Factor rating method contd..
Factors
Weight Scores (100) Wgtd Scores
A
B
A
B
Labor availability 0.25
70
60
17.5
15.0
Attitude
0.05
50
60
2.5
3.0
Per capita income 0.10
85
80
8.5
8.0
Tax
0.39
75
70
29.3
27.3
Education
0.21
60
70
12.6
14.7
Totals
1.00
70.4
68.0
Locational Break-Even Analysis
Method of cost-volume analysis used for
industrial locations
 Steps




Determine fixed & variable costs for each
location
Plot total cost for each location (Cost on vertical
axis, Annual Volume on horizontal axis)
Select location with lowest total cost for expected
production volume

Must be above break-even
Locational Break-Even Analysis
Example
You’re an analyst for AC Delco. You’re
considering a new manufacturing plant in
Birgunj, Pokhara or Biratnagar. Fixed costs
per year are 30k, 60k, & 110k respectively.
Variable costs per case are 75, 45, & 25
respectively. The price per case is 120.
What is the best location for an expected
volume of 2,000 cases per year?
© 1995 Corel Corp.
Locational Break-Even
Crossover Chart
Annual Cost
200000
150000
100000
50000
Birgunj
Lowest
cost
0
0
Pokhara lowest
cost
Biratnaga
r lowest
cost
500 1000 1500 2000 2500 3000
Volume
Center of Gravity Method
Finds location of single distribution center
serving several destinations
 Considers

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Location of existing destinations
Volume to be shipped
Shipping distance (or cost)
Center of Gravity Method Steps

Place existing locations on a coordinate grid

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Grid has origin & scale
Maintains relative distances
Calculate X & Y coordinates for ‘center of
gravity’
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
CG Method

Locations
A (30,120)
 B (90,120)
 C (130,130)
 D (60,40)

Number of containers
shipped per month
2000
1000
1000
2000
CG Method Contd..

X-Coordinate of the CG:
(30)(2000)+(90)(1000)+(130)(1000)+(60)(2000)
2000+1000+1000+2000
=66.7

Y-Coordinate of the CG:
(120)(2000)+(110)(1000)+(130)(1000)+(40)(2000)
2000+1000+1000+2000
=93.3
Service Location strategies
Purchasing power of the customers in the area.
 Service and image compatibility with the
demographics
 Competition in the area
 Quality of the competition
 Uniqueness of the firm’s and competitor’s
locations

Contd..
Bank
 Hospital
 Hotels
 Telemarketing industry
 School
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