Lecture
4
Location Planning
and Analysis
Chapter 8
1
Need for Location Decisions

Cost of Doing Business

Growth

Depletion of Resources

Marketing Strategy
2
Site Selection at Staples Inc.
http://www.computerworld.com/databasetopics/businessintelligence/story/0,10801,104656,00.html

Staples plans to open 95 new stores this year after considering as many as 5,000 sites. Mistakes are costly -- closing
a failed store can set the Framingham, Mass.-based company back $500,000 to $1 million.
The office supply retailer uses GIS tools from Tactician Corp. in Andover, Mass., combined with analytic tools from
SAS Institute Inc. in Cary, N.C., to help it select store sites. The process all begins with a real estate model that
forecasts weekly sales or potential sales by ZIP code. The forecasts drive activities such as site selection, budgeting,
labor scheduling and marketing programs such as direct-mail campaigns, says Alan Gordon, director of sales
forecasting at Staples, which now has GIS tools in a half-dozen departments.
The model considers some 30 factors that affect site selection, including obvious ones such as the presence of
competitors and the demographics of the local population. "And there are things we put into our model that other
people haven't learned of yet," Gordon says.
He says Staples hones its site-selection acumen by using SAS routines to correct and enhance the geographic data
that it buys from external parties.
"The more we work in this area, the more we find problems and correct them," Gordon says. "We have explicitly
tried to make that a competitive advantage."
For example, Gordon says, commercial databases of driving times between locations allow users to vary speeds by
road type, but the databases don't take into account actual local traffic densities. Staples has written software that
incorporates local conditions, so it knows how long it takes to drive from one ZIP code to another location through
intervening ZIP codes of varying traffic density.
GIS and BI tool vendors are collaborating to integrate their products, so users don't have to. But the Tactician and
SAS tools aren't yet integrated, and Staples passes files back and forth between the two companies' tools via FTP.
But Gordon says Staples is building its own interface to allow both SAS and Tactician to access common DB2 or
Oracle tables.
3
Nature of Location Decisions

Strategic Importance




Objectives





Long term commitment/costs
Impact on investments, revenues, and operations
Supply chains
Profit potential
Minimize travel distance/cost/time
No single location may be better than others
Identify several locations from which to choose
Options



Expand existing facilities
Add new facilities
Move
4
Making Location Decisions

Decide on the objective
 Identify the important factors
 Develop location alternatives
 Evaluate the alternatives
 Make selection
5
Regional Factors

Proximity to raw materials
 Proximity to customers
 Location of markets
 Labor factors - cost, availability, skill, productivity
 Taxes at the federal, state, county, and local levels
 Construction costs and land price
 Government and political stability
 Regional competition
 Insurance
6
Community Considerations
& Site Related Factors

Demographics
 Services - schools, hospitals, recreation, etc.
 Environmental regulations
 Utilities
 Transportation system
Geographic Information System
(GIS) technology
7
Global Location Decisions
Country Decision
Critical Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor availability,
attitudes, productivity,
costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
currency risks
8
Comparison of Service and
Manufacturing Considerations
Table 8.2
Manufacturing/Distribution
Service/Retail
Cost Focus
Revenue focus
Transportation modes/costs
Demographics: age,income,etc
Energy availability, costs
Population/drawing area
Labor cost/availability/skills
Competition
Building/leasing costs
Traffic volume/patterns
Customer access/parking
9
Locations of Industry
Industry
Locations
Reason for clustering
Wine makers
Napa Valley (US)
Bordeaux region
(France)
Natural resources of land
and climate
Software firms
Silicon Valley, Boston,
Bangalore (India)
Talent resources of bright
graduates in
scientific/technical areas,
venture capitalists nearby
Race car builders
Huntington/North
Hampton region
(England)
Critical mass of talent and
information
10
Locations of Industry – Contd.
Industry
Locations
Reason for clustering
Theme parks
Orlando
A hot spot for entertainment, warm
weather, tourists, and inexpensive
labor
Electronic firms
Northern Mexico
NAFTA, duty free export to US
Computer hardware
manufacturers
Singapore, Taiwan
High technological penetration rate
and per capita GDP, skilled/educated
workforce with large pool of
engineers
Fast food chains
Sites within one
mile of each other
Stimulate food sales, high traffic
flows
General aviation
aircraft
Wichita, Kansas
Mass of aviation skills
11
Evaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs
12
Cost-Volume & Locational Break-Even
Analysis
Three locations:
Fixed Variable
City
Cost
Cost
Akron
$30,000
$75
Bowling Green
$60,000
$45
Chicago
$110,000
$25
Selling price = $120
Expected volume = 2,000 units
Total
Cost
$180,000
$150,000
$160,000
Total Cost = Fixed Cost + Variable Cost x Volume
13
Locational Break-Even Analysis
Annual cost
Graph of Break-Even Points
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
|
–
0
Akron
lowest
cost
Chicago
lowest
cost
Bowling Green
lowest cost
|
|
|
|
|
|
500
1,000
1,500
2,000
2,500
3,000
Volume
14
Evaluating Locations

Factor Rating


Center of Gravity Method


Decision based on quantitative and qualitative
inputs
Decision based on minimum distribution costs
Transportation Model

Decision based on movement costs of raw
materials or finished goods
15
Factor-Rating Method
 Popular because a wide variety of factors
can be included in the analysis
 Six steps in the method
1. Develop a list of relevant factors called
critical success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score
16
Factor-Rating Example
Critical
Success
Factor
Labor
availability
and attitude
People-to
car ratio
Per capita
income
Tax structure
Education
and health
Totals
Scores
(out of 100)
Weight France Denmark
Weighted Scores
France
Denmark
.25
70
60
.05
50
60
.10
.39
85
75
80
70
(.10)(85) = 8.5 (.10)(80) = 8.0
(.39)(75) = 29.3 (.39)(70) = 27.3
.21
60
70
(.21)(60) = 12.6 (.21)(70) = 14.7
1.00
(.25)(70) = 17.5 (.25)(60) = 15.0
(.05)(50) = 2.5
70.4
(.05)(60) = 3.0
68.0
17
Center of Gravity: An Example
Determine the center of gravity for the destinations shown on the following map.
Monthly shipments will be the quantities listed in the table.
DC #
Coordinate
Weekly
Shipment Qty
DC1
(2,2)
800
DC2
(3,5)
900
DC3
(5,4)
200
DC4
(8,5)
100
xQ
x
Q
i
i
i
i
i
DC4
DC2
DC3
DC1
yQ
y
Q
i
i
i
i
i
18
Transportation Problem
Chapter 8S

Objective:






determination of a transportation plan of a single commodity
from a number of sources
to a number of destinations,
such that total cost of transportation is minimized
Sources may be plants, destinations may be warehouses
Question:





how many units to transport
from source i
to destination j
such that supply and demand constraints are met, and
total transportation cost is minimized
19
A Transportation Table
Table 8S.1
1
Factory
Warehouse
3
2
4
4
7
7
1
100
1
3
12
8
8
200
2
10
8
16
Factory 1
can
supply
100
units per
period
5
150
3
450
Demand
80
90
120
160
450
Warehouse B’s demand is 90
units per period
Total
supply
capacity
per
period
Total demand
per period
20
Solution in Management Scientist
Total transportation cost = 4(80) + 7(0) + 7(10)+ 1(10)
+ 12(0) + 3(90) + 8(110) + 8(0) + 8(0) +10(0) + 16(0)
+5 (150) = $2300
21
Transportation Model – Tool for Site Location:
An Example




A large tire manufacturer is contemplating construction of a new manufacturing
facility.
Two leading candidate location: Cincinnati and Columbus, OH
The new facility would have a supply capacity of 160 units a week
Transportation costs
 Between each candidate location and existing locations (A, B, C), and
 between pairs of existing locations
A
B
C
Supply
per week
1
10
14
10
210
$7
2
12
17
20
140
B
17
3
11
11
12
150
C
13
Demand
per week
220
220 220
From
Columbus
to
Cost
per
unit
A
$18
A
B
8
C
13

From
Cost
Cincinnati per
to
unit
Choose the best candidate location.
22
Set up transportation table for Columbus
23
Set up transportation table for Cincinnati
Choose Columbus
24
Lecture
4
Project Management
Chapter 17
25
Project Management

How is it different?

Limited time frame
 Narrow focus, specific objectives

Why is it used?

Special needs
 Pressures for new or improves products or services

Definition of a project

Unique, one-time sequence of activities designed
to accomplish a specific set of objectives in a
limited time frame
26
Project Management

What are the Key Metrics

Time
 Cost
 Performance objectives

What are the Key Success Factors?

Top-down commitment
 Having a capable project manager
 Having time to plan
 Careful tracking and control
 Good communications
27
Project Management

What are the tools?

Work breakdown structure
 Network diagram
 Gantt charts
28
Project Manager
Responsible for:
Work
Human Resources
Communications
Quality
Time
Costs
29
Key Decisions

Deciding which projects to implement

Selecting a project manager

Selecting a project team

Planning and designing the project

Managing and controlling project resources

Deciding if and when a project should be
terminated
30
Ethical Issues

Temptation to understate costs

Withhold information

Misleading status reports

Falsifying records

Compromising workers’ safety

Approving substandard work

http://www.pmi.org/
31
PERT and CPM
PERT: Program Evaluation and Review Technique
CPM: Critical Path Method





Graphically displays project activities
Estimates how long the project will take
Indicates most critical activities
Show where delays will not affect project
PERT and CPM have been used to plan, schedule, and control
a wide variety of projects:




R&D of new products and processes
Construction of buildings and highways
Maintenance of large and complex equipment
Design and installation of new systems
32
PERT/CPM

PERT/CPM

used to plan the scheduling of individual
activities that make up a project.

Projects may have as many as several
thousand activities.
 Complicating factor in carrying out the
activities

some activities depend on the completion of
other activities before they can be started.
33
PERT/CPM

Project managers rely on PERT/CPM to help
them answer questions such as:

What is the total time to complete the project?
 What are the scheduled start and finish dates for
each specific activity?
 Which activities are critical?


must be completed exactly as scheduled to keep
the project on schedule?
How long can non-critical activities be delayed

before they cause an increase in the project
completion time?
34
Planning and Scheduling
Activity
0
2
4
6
8
10 12
14
16
18
Locate new
facilities
Interview staff
Hire and train staff
Select and order
furniture
Remodel and install
phones
Furniture setup
Move in/startup
35
20
Project Network

Project network

constructed to model the precedence of the
activities.
 Nodes represent activities
 Arcs represent precedence relationships of the
activities

Critical path for the network

a path consisting of activities with zero slack
36
Project Network – An Example
8 weeks
Locate
facilities
A
6 weeks
Order
furniture
B
F
11 weeks
Remodel
E
S
4 weeks
Interview
C
3 weeks
Furniture
setup
G
Move
in
1 week
9 weeks
Hire and
train
D
37
Management Scientist Solution
Critical Path
Path
Length
Slack
(weeks)
A-B-F-G
A-E-G
C-D-G
18
20
14
2
0
6
38
Uncertain Activity Times

Three-time estimate approach


the time to complete an activity assumed to
follow a Beta distribution
An activity’s mean completion time is:
t = (a + 4m + b)/6




a = the optimistic completion time estimate
b = the pessimistic completion time estimate
m = the most likely completion time estimate
An activity’s completion time variance is
2 = ((b-a)/6)2
39
Uncertain Activity Times

In the three-time estimate approach, the critical
path is determined as if the mean times for the
activities were fixed times.
 The overall project completion time is assumed to
have a normal distribution

with mean equal to the sum of the means along the
critical path, and
 variance equal to the sum of the variances along the
critical path.
40
Example
Immediate
Activity Predecessor
Optimistic
Time (a)
Most Likely
Time (m)
Pessimistic
Time (b)
A
--
4
6
8
B
--
1
4.5
5
C
A
3
3
3
D
A
4
5
6
E
A
0.5
1
1.5
F
B,C
3
4
5
G
B,C
1
1.5
5
H
E,F
5
6
7
I
E,F
2
5
8
J
D,H
2.5
2.75
4.5
K
G,I
3
5
7
41
Management Scientist Solution
42
Key Terminology

Network activities

ES: early start
 EF: early finish
 LS: late start
 LF: late finish

Used to determine

Expected project duration
 Slack time
 Critical path
43
The Network Diagram (cont’d)

Path



Critical path


The longest path; determines expected project duration
Critical activities


Sequence of activities that leads from the starting node
to the finishing node
AON path: S-1-2-6-7
Activities on the critical path
Slack

Allowable slippage for path; the difference the length
of path and the length of critical path
44
Advantages of PERT

Forces managers to organize

Provides graphic display of activities

Identifies

Critical activities

Slack activities
4
2
1
5
6
3
45
Limitations of PERT

Important activities may be omitted

Precedence relationships may not be correct

Estimates may include a fudge factor

May focus solely on critical path
46