Methods of Evaluating Location
Alternatives
Charles Angotto
4 Types of Methods
• The Factor-Rating Method: A location method that instills
objectivity into the process of identifying hard to evaluate costs.
• Locational Break-Even Analysis: The use of cost-volume analysis to
make an economic comparison of location alternatives.
• Center-of-Gravity Method: A mathematical technique used for
finding the location of a distribution center that will minimize
distribution costs.
• Transportation Model: The objective of the transportation model is
to determine the best pattern of shipments from several points of
supply to several points of demand.
The Factor-Rating Method
• Popular method because a wide variety of factors can
be included in the analysis.
– Qualitative and Quantitative
• Six Steps
–
–
–
–
–
–
Develop a list of relevant factors called key success factors
Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
Multiply score by weights for each factor for each location
Recommend the location with the highest point score
Example
Locational Break-Even Analysis
• Used to determine which location provides the
lowest cost
– Can be done mathematically or graphically
• Three Steps
– Determine the fixed and variable cost for each
location
– Plot the cost for each location
– Select location with the lowest total cost for expected
production volume.
Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
City
Fixed
Cost
Akron
Bowling Green
Chicago
$30,000
$60,000
$110,000
Variable
Cost
$75
$45
$25
Total Cost = Fixed Cost + (Variable Cost x Volume)
Total
Cost
$180,000
$150,000
$160,000
Annual cost
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
|
–
0
|
|
|
|
|
|
500
1,000
1,500
2,000
2,500
3,000
Volume
Center-of-Gravity Method
• Finds location of distribution center that
minimizes distribution costs
• This method takes into account the…
– Location of markets
– Volume of goods shipped to those markets
– Shipping Costs for distribution center
• Steps
– Place existing locations on a coordinate grid
– Calculate X and Y coordinates for ‘center of gravity’
Example
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
+
90 –
Center of gravity (66.7, 93.3)
60 –
30 –
–
|
Arbitrary
origin
Atlanta (60, 40)
|
|
|
|
|
30
60
90
120
150
East-West
Store Location
Chicago (30, 120)
Pittsburgh (90, 110)
New York (130, 130)
Atlanta (60, 40)
Number of Containers
Shipped per Month
2,000
1,000
1,000
2,000
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
Transportation Model
• Finds an initial feasible solution and then
makes step-by-step improvements until an
optimal solution is reached.
– Solutions will minimize total production and
shipping costs