8
Location Planning
and Analysis
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives




Discuss importance of location decisions.
Discuss factors that influence location
decisions.
Discuss recent location trends.
Use techniques to solve typical location
problems:


Cost-Profit-Volume Analysis.
Center of Gravity Method.
8-2
Location Planning and Analysis
 Location planning is the determination of
where to geographically locate your
manufacturing or service facilities.
 Typically one of the most infrequent
activities unless you work for a retail
organization that is rapidly expanding
(e.g. Starbucks)
8-3
Need for Location Decisions
 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources
8-4
Nature of Location Decisions
 Strategic Importance of location decisions



Long term commitment/costs
Impact on investments, revenues, and operations
Supply chains
 Objectives of location decisions



Profit potential
No single location may be better than others
Identify several locations from which to choose
 Location Options



Expand existing facilities
Add new facilities
Move
8-5
Making Location Decisions

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Decide on the criteria
Identify the important factors
Develop location alternatives
Evaluate the alternatives
 Identify general region
 Identify a small number of community
alternatives
 Identify site alternatives
 Evaluate and make selection
8-6
Location Decision Factors
Regional Factors
Community
Considerations
Multiple Plant
Strategies
Site-related
Factors
8-7
Regional Factors




Location of raw materials
Location of markets
Labor factors
Climate and taxes
8-8
Community Considerations

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
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Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Developer support
8-9
Site Related Factors


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Land
Transportation
Environmental
Legal
8-10
Multiple Plant Strategies
 Product plant strategy
 Market area plant strategy
 Process plant strategy
8-11
Service and Retail Locations
 Manufacturers – cost focused
 Service and retail – revenue focused
 Traffic volume and convenience most important
 Demographics
 Age
 Income
 Education
 Location, location, location
 Good transportation
 Customer safety
8-12
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
Tax rebates and other incentives
Customer access/parking
8-13
Trends in Locations
 Foreign producers locating in U.S.


“Made in USA”
Currency fluctuations
 Just-in-time manufacturing techniques
 Microfactories
 Information Technology
8-14
Global Locations

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Reasons for globalization
Benefits
Disadvantages
Risks
Global operations issues
8-15
Globalization
 Facilitating Factors
 Trade agreements
 Technology
 Benefits

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

Markets
Cost savings
Legal and regulatory
Financial
8-16
Globalization
 Disadvantages

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Transportation costs
Security
Unskilled labor
Import restrictions
Criticisms
 Risks
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Political
Terrorism
Legal
Cultural
8-17
Evaluating Locations
 Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs
8-18
Location Cost-Volume Analysis
 Assumptions
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Fixed costs are constant
Variable costs are linear
Output can be closely estimated
Only one product involved
8-19
Example 1: Cost-Volume Analysis
Fixed and variable costs for
four potential locations
L o c a tio n
A
B
C
D
F ix e d
C ost
$ 2 5 0 ,0 0
1 0 0 ,0 0
1 5 0 ,0 0
2 0 0 ,0 0
0
0
0
0
V a r ia b le
C ost
$11
30
20
35
8-20
Example 1: Solution
Fixed
Costs
A
B
C
D
$250,000
100,000
150,000
200,000
Variable
Costs
$11(10,000)
30(10,000)
20(10,000)
35(10,000)
Total
Costs
$360,000
400,000
350,000
550,000
8-21
Example 1: Solution
$(000)
800
700
600
500
400
300
200
100
0
0
D
B
C
A
A Superior
C Superior
B Superior
2
4
6
8
10
12
14
16
Annual Output (000)
8-22
Center of Gravity Method
Used to determine location when
minimizing shipping costs or
travel time is the primary
objective.
8-23
Center of Gravity Method
Identify destinations using a coordinate system (x and y axis).
y axis
6
5
(4,5)
4
3
(2,3)
2
(5,2)
1
(1,1)
1
2
3
4
5
6
x axis
If all weights are equal then:
x

x
i
n
y

y
i
n
(1  2  4  5)

3
4
(1  3  5  2)

 2.75
4
8-24
Center of Gravity Method
Identify destinations using a coordinate system (x and y axis).
y axis
Destination Number of Trips
(1,1)
10
(2,3)
20
(4,5)
30
(5,2)
20
6
5
(4,5)
4
3
(2,3)
2
(5,2)
1
(1,1)
1
2
3
4
5
6
x axis
If all weights are not equal then:
x Q 1(10)  2(20)  4(30)  5(20) 270

x


 3.375
10  20  30  20
80
Q
y Q 1(10)  3(20)  5(30)  2(20) 260

y


 3.25
10  20  30  20
80
Q
i
i
i
i
i
i
8-25