Ch t 8Chapter 8

Location Planning and Analysisand Analysis

8-1

Need for Location DecisionsNeed for Location Decisions

• Marketing StrategyMarketing Strategy

• Growth

• Depletion of Resources

• Cost of Doing Business

8-2

N t f L ti D i iNature of Location Decisions• Importancep

– Long term commitment/costs– Impact on investment requirement, operating p q , p g

costs and revenues• Objectivesj

– Profit potential– Acceptable alternativesAcceptable alternatives

• OptionsExpand existing facilities– Expand existing facilities

– Add new facilitiesMove

8-3

– Move– Do nothing

L i D i i FLocation Decision Factors

Regional Factors Community Considerations

Si l d FM l i l Pl S i Site-related FactorsMultiple Plant Strategies

8-4

Regional Factors

L i f i l• Location of raw materials• Location of markets• Labor factors• Other factorsOther factors

– climate– taxes– utilities cost and availability– input cost and availability

8-5

Community Considerations

F ili i f d i h i i • Facilities for education, shopping, recreation, transportation, religious worship, and entertainmententertainment

• Quality of police, fire, and medical servicesL l i d d h • Local attitudes toward the company

• Size of the community• Cost and availability of utilities, environmental

regulations, taxes, and incentives

8-6

Site related FactorsSite-related Factors

• Land• T t ti• Transportation• Zoning or other restrictionsg

8-7

Multiple Plant StrategiesMultiple Plant Strategies

• Product Plant Strategy• M k t A St t• Market Area Strategy• Process Plant Strategygy

8-8

Multiple Plant StrategiesMultiple Plant Strategies

• Product plant strategyti d t li d d i t – entire product lines are produced in separate

plants– decentralized approach– specialization of resourcep

8-9

Multiple Plant StrategiesMultiple Plant Strategies

• Market area strategyMarket area strategy– plants designed to serve a particular geographic

area– rapid delivery and response to customer needs– low transportation cost– operating cost high due to product varietyope at g cost g due to p oduct a ety

8-10

Multiple Plant Strategies (cont.)

• Process plant strategy– plants concentrate on different aspects of a p p

process– coordination is a major issuecoordination is a major issue– plants highly specialized; economies of scale

8-11

S i d R t il L tiService and Retail Locations

• Traffic volume and convenience • Location of other retailers or similar service Location of other retailers or similar service

providersD hi l i f d i • Demographic analysis of drawing area

• Transportation and/or parking facilitiesp / p g• Customer safety and security

8-12

Trends in LocationsTrends in Locations

F i d l ti i U S• Foreign producers locating in U.S.– “Made in USA”– Currency fluctuations

J i i f i h i• Just-in-time manufacturing techniques• MicrofactoriesMicrofactories

– narrow product focus– located near major markets

• Information highway8-13

Information highway

M th d f E l ti L ti Methods of Evaluating Location Alternatives

• Locational Cost-Profit-Volume Analysis

• The Factor Rating Method• The Factor Rating Method• The Transportation Model

– The Center of Gravity Method

8-14

Locational Cost-profit-volume Analysis

– Determine fixed and variable costs– Plot total costs– Determine lowest total costsDetermine lowest total costs

Example: Example: Fixed and variable costs for two potential locations

L ti Fi d t V i bl tLocation Fixed cost Variable costA $800,000 $14,000B $920,000 $13,000

8-15

B $920,000 $13,000

ATotal costcost

B

920,000

X

Optimal total cost line800,000

Volume (units)

Optimal total cost line

8-16

Volume (units)

At a crossover volume, X, the total cost of one alternative equals the total cost of another alternative equals the total cost of another alternative

TC TCTCA = TCB

FCA+VCA(X) = FCB+VCB(X)A A( ) B B( )VCA(X)-VCB(X) = FCB-FCA

(VCA-VCB)(X) = FCB-FCA

X = (FCB-FCA)/(VCA-VCB)X (FCB FCA)/(VCA VCB)

8-17

ATotal cost

B

920,000

120,000800,000

Volume (units)

X = (FCB-FCA)/(VCA-VCB)X = (920,000- 800,000)/(14,000 – 13,000)

8-18

( ) ( )X = 120 units

Factor rating Method (1 of 2)Factor-rating Method (1 of 2)

• Allows consideration of both quantitative and qualitative factors

• Different factors can be assigned Different factors can be assigned different weights

8-19

Factor Rating Method (2 of 2)• The six steps in the factors-rating method

Factor-Rating Method (2 of 2)The six steps in the factors rating method1 Develop a list of relevant factors2 Assign a weight to each factor to reflect its relative 2 Assign a weight to each factor to reflect its relative

importance to the company’s objectives3 Develop a scale for each factor3 eve op a sca e o eac acto4 Have management score each location for each factor,

using the scale developed in the previous stepg p p p5 Multiply the scores times the weights for each factor, and

total the score for each location6 Make a recommendation based on the maximum point

score

8-20

Example

Factor-Rating Method

Scores(out of 100)

Weightedscores

FactorProximity

Weights0.2

(out of 100)Alt 1 Alt 2100 60

scoresAlt 1 Alt 2

0.2*100=20 0.2*60=12TrafficRental cost

0.30.40 1

60 6070 9086 60

0.3*60= 18 0.3*60=180.4*70=28 0.4*90=36

Size 0.11.00

86 60 0.1*86=8.6 0.1*60=674.6 72.0

8-21

E l ti L tiEvaluating Locations• Transportation ModelTransportation Model

– Objective is to determine the best pattern of shipments to minimize production and shipments to minimize production and transportation costsA i l f th li i – A special case of the linear programming problem

– Center of gravity is one method

Candidate

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location

The Center-of-Gravity Method (1 of 2)

• Mathematical technique to minimize distribution costs

• Takes into accountlocation of markets– location of markets

– the volume of goods shipped to those marketsshipping costs– shipping costs

• Assumes that shipping cost is directly ti l t b th di t d l proportional to both distance and volume

shipped

8-23

10

8

6

2

4

0

2

0 2 4 6 8 10

8-24

8-25

Determine the coordination of the location that will minimize distribution costminimize distribution cost.

WeeklyDestination (x, y) Quantity( , y) Q y

A 5, 7 15B 6 9 20B 6, 9 20C 3, 9 25D 9, 4 30

90

8-26

10

8

10B - 20C - 25

6A - 15

2

4D - 30

0

2

0 2 4 6 8 10

8-27

h f h dThe Center-of-Gravity Method d i ifdi

n destinatioofcoordinate n destinatioofcoordinate

iyyixx

i

i

==

i bl )(d i il tifdi tn destinatio ofquanity demand iQ

yy

i

i

=

variable)(decision location of coordinate variable)(decision location ofcoordinate

xyxx

==

∑ iiQx ∑ iiQy

∑∑

ii

ii

Q

Qxx = ∑

∑i

i

ii

Q

Qyy =

8-28

∑i

∑i

8-29

Chapter 8 Chapter 8 Location Planning and Analysisg y

• Solved problems– 1, 2, 3

• Discussion questions• Discussion questions– 3, 4, 5, 6, 7, , , ,

• Assigned problems- 4, 9, 14

8-30

8-31