Service Facility Location
Learning Objectives





Discuss how different customer service
criteria affect facility location.
Locate a single facility using the crossmedian approach.
Use the Huff model to evaluate the economic
feasibility of a retail service location.
Locate multiple facilities using the set
covering model.
Discuss nontraditional location strategies.
Service Facility Location Planning




Competitive positioning: prime location can
be barrier to entry.
Demand management: diverse set of market
generators.
Flexibility: plan for future economic changes
and portfolio effect.
Expansion strategy: contiguous, regional
followed by “fill-in,” or concentrated.
Geographic Representation
Location on a Plane
Y
Destination j
Yj
Euclidean

dij  ( xi  x j )  ( yi  y j )
2
Origin i
Yi
Metropolitan
dij  xi  x j  yi  y j
0
Xi
Xj
X
2

1/ 2
Effect of Optimization Criteria
City A
10
15
3
*
5
2
-10
*
-5
5
10
15
-10
City B
1. Maximize Utilization
20
25
*
-5
-15
1
City C
(City C: elderly find distance a barrier)
2. Minimize Distance per Capita
(City B: centrally located)
3. Minimize Distance per Visit
(City A: many frequent users)
Estimation of Geographic Demand

Define the Target Market
(Families receiving AFDC)

Select a Unit of Area
(Census track, ZIP code)

Estimate Geographic Demand
(Regression analysis)

Map Geographic Demand
(3D visual depiction)
Single Facility Location Using
Cross Median Approach
5
3 (W3=3)
Y miles
4
3
2 (W2=1)
2
1 (W1=7)
4 (W4=5)
1
0
0
1
2
X miles
3
4
Single Facility Location Using
Cross Median Approach
5
3 (W3=3)
Y miles
4
3
2 (W2=1)
2
1 (W1=7)
4 (W4=5)
1
0
0
1
2
3
X miles
Solution is line segment y=2, x=2,3
4
Huff Retail Location Model
First, a gravity analogy is used to
estimate attractiveness of store j for
customers in area i.
Aij= Attraction to store j for customers in area i
Sj = Size of the store (e.g. square feet)
Tij= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel
Aij 
Sj

Tij
Huff Retail Location Model
Second, to account for competitors we
calculate the probability that customers
from area i will visit a particular store j.
Pij 
Aij
n
A
j 1
ij
Huff Retail Location Model
Third, annual customer expenditures for
item k at store j can now be calculated.
Pij = Probability customers from area i travel to store j
Ci = Number of customers in area i (e.g. census track)
Bik = Annual budget for product k for customers in area i
m = Number of customer areas in the market region
m

E jk   Pij Ci Bik
j 1

Huff Retail Location Model
Fourth, market share of product k
purchased at store j can now be
calculated.
M jk 
E jk
m
 (C B
i 1
i
ik
)
Site Selection Considerations
1. Access:
Convenient to freeway exit and
parking
entrance ramps
Served by public transportation
2. Visibility:
Set back from street
Surrounding clutter
Sign placement
3. Traffic:
Traffic volume on street that may
Indicate potential impulse buying
Traffic congestion that could be a
hindrance (e.g.., fire stations)
4. Parking:
Adequate off-street
5. Expansion:
Room for expansion
6. Environment:
Immediate surroundings
should complement the
service
7. Competition:
Location of competitors
8. Government:
Zoning restrictions
Taxes
Breaking the Rules

Competitive Clustering (Among Competitors)
(e.g. Auto Dealers, Motels)

Saturation Marketing (Same Firm)
(e.g. An Bon Pain, Ice Cream Vendors)

Marketing Intermediaries
(e.g. Credit Cards, HMO)

Substitute Electronic Media for Travel
(e.g. telecommuting, e-Commerce)

Impact of the Internet on Service
Location
(e.g. Amazon.com, eBay, FedEx)
Strategic Location Considerations
Front Office
Is travel out to customer or
customer travel to site?
External
Can electronic media
Customer
substitute for physical travel?
(consumer) Is location a barrier to entry?
Internal
Customer
(employee)
Availability of labor?
Are self-service kiosks an
alternative?
Back Office
Is service performed on
person or property?
Is co-location necessary?
How is communication
accomplished?
Are economies of scale
possible?
Can employees work
from home?
Is offshoring an option?
Topics for Discussion




Pick a particular service, and identify
shortcomings in its site selection.
How would you proceed to estimate
empirically the parameter λ in the Huff retail
location model for a branch bank?
Why do you think set covering is an attractive
approach to public sector facility location?
What are the benefits of using intermediaries
in the service distribution channel?
Interactive Exercise
The class breaks into small groups and
each group comes up with examples of
service facility locations that seem to
defy the analytical models discussed in
the chapter.
Athol Furniture Site Alternatives
4
State Park
1
2
3
A
5
Bluff lake
Z7
6
9
4
Railroad
Freeway
Major street
Park boundary
River
Census block group
Existing retail outlets
Potential sites
B
8
Y
11
10
12
X
Athol Furniture Data
COMPETITORS’ STORE SIZES
Store
A
B
MAXIMUM SIZE LIMIT OF SITES
Sales area, sq ft
10,000
15,000
Site
X
Y
Z
Maximum sales area, sq ft
15,000
20,000
10,000
MINIMUM TRAVEL TIME BETWEEN POTENTIAL AND EXISTING SITES
AND BLOCK GROUPS, Min
Site
A
B
X
Y
Z
1
7
10
16
12
7
2
5
8
14
10
5
3
5
8
14
10
5
4
9
10
16
12
7
Census block group
5
6
1
3
7
3
13
8
9
5
4
2
7
4
3
7
4
1
8
5
2
6
3
4
9
7
1
4
2
3
10
10
2
4
4
10
RELATIONSHIP OF STORE SIZE TO MARGIN ON SALES, EXPENSES,
AND NET OPERATING PROFIT AS % OF SALES
Sales area,
sq ft
10,000
15,000
20,000
Margin
on sales
16.2
15.6
14.7
Expenses
12.3
12.0
11.8
Net operating profit
before taxes
3.9
3.6
2.0
11
14
2
2
2
10
12
17
5
2
5
13
Athol Furniture Demographics
MARKET DATA
Census block
group
1
2
3
4
5
6
7
8
9
10
11
12
Number of
households
730
1130
1035
635
160
105
125
470
305
1755
900
290
7,640
Average annual
income
$65,000-$70,000
45,000-50,000
80,000-85,000
150,000-over
25,000-30,000
20,000-25,000
20,000-25,000
40,000-45,000
30,000-35,000
75,000-80,000
85,000-90,000
150,000-over
Average annual furniture
expenditures per household
$180
125
280
350
75
50
60
115
90
265
215
370
Annual Profit ($)
Store Site Selection
Store Profit as a Function of
Lambda
30000
X10
X15
20000
Y10
10000
Y15
0
Y20
0.1
0.5
1
2
5
Z10
Market Share Analysis
Now
X15
Y15
Y20
A
30%
22%
21%
19%
B
70%
47%
46%
41%
31%
33%
40%
Athol