Facility Location

Outline

The Strategic Importance of Location

Factors That Affect Location
Decisions
Methods of Evaluating Location
Alternatives
Service Location Strategy
Geographic Information Systems

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Learning Objectives
When you complete this chapter you
should be able to:
1. Identify and explain seven major factors
that effect location decisions
2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-even analysis
graphically and mathematically

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The Strategic Importance of

Location

One of the most important decisions

a firm makes

Increasingly global in nature

Significant impact on fixed and

variable costs

Decisions made relatively

infrequently

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The Strategic Importance of

Location

Long-term decisions

Once committed to a location, many

resource and cost issues are difficult
to change

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The Strategic Importance of

Location
The objective of location strategy is
to maximize the benefit of location
to the firm
Options include
1. Expanding existing facilities
2. Maintain existing and add sites

3. Closing existing and relocating

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Location and Costs

Location decisions based on low cost

require careful consideration

Once in place, location-related costs

are fixed in place and difficult to
reduce

Determining optimal facility location is

a good investment

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Factors That Affect Location

Decisions
Globalization adds to complexity
Market economics

Communication
Rapid, reliable transportation

Ease of capital flow

Differing labor costs

Identify key success factors (KSFs)

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Location Decisions
Country Decision

Key Success Factors

1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic issues

3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
Figure 9.1
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6. Exchange rates and currency

risks
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Location Decisions
Region/
Community
Decision

Key Success Factors

1. Corporate desires
2. Attractiveness of region
3. Labor availability and costs

MN

4. Costs and availability of utilities

WI

5. Environmental regulations

MI

IL

IN

OH

6. Government incentives and fiscal

policies

7. Proximity to raw materials and

customers
Figure 9.1

8. Land/construction costs
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Location Decisions
Site Decision

Key Success Factors

1. Site size and cost

2. Air, rail, highway, and

waterway systems
3. Zoning restrictions

4. Proximity of services/
supplies needed
5. Environmental impact
issues
Figure 9.1
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TABLE 9.1

Global
Competitiveness
Index of
Countries

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Competitiveness of 142 Selected

Countries
COUNTRY

2011-2012
RANKING

Switzerland

Singapore

Sweden

Finland

USA

Japan

UK

10

Canada

12

Israel

22

China

26

Mexico

58

Vietnam

65

Russia

66

Haiti

141

Chad

142
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Factors That Affect

Location Decisions

Labor productivity

Wage rates are not the only cost

Lower productivity may increase total cost

Labor cost per day
= Cost per unit
Productivity (units per day)

South Carolina
$70
= $1.17 per unit
60 units
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Mexico
$25
= $1.25 per unit
20 units
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Factors That Affect

Location Decisions

Exchange rates and currency risks

Can have a significant impact on costs

Rates change over time

Costs

Tangible - easily measured costs such as

utilities, labor, materials, taxes

Intangible - less easy to quantify and include

education, public transportation, community,
quality-of-life

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Factors That Affect

Location Decisions

Exchange rates and currency risks

Can have a significant impact on costs

Rates change over time

Location decisions
Costs
based on costs
Tangible - easily measured costs such as
alone
can
create
utilities, labor, materials, taxes
difficult ethical
Intangible - less easy to quantify and include
situations
education, public transportation,
community,
quality-of-life

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Factors That Affect

Location Decisions

Political risk, values, and culture

National, state, local governments attitudes

toward private and intellectual property,
zoning, pollution, employment stability may
be in flux

Worker attitudes towards turnover, unions,

absenteeism

Globally cultures have different attitudes

towards punctuality, legal, and ethical issues

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Ranking Corruption
Rank
1
4
5
6
7
9
13
14
17
19
37
39
45
80
123
133

Country
2012 CPI Score (out of 100)
Demark, Finland, New Zealand
90
Least
Sweden
88
Corrupt
Singapore
87
Switzerland
86
Australia, Norway
85
Canada, Netherlands
84
Germany
79
Hong Kong
77
Japan, UK
74
USA
73
Taiwan
61
Israel
60
South Korea
56
Most
China
39
Corrupt
Vietnam
31
Russia
28

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Factors That Affect

Location Decisions

Proximity to markets

Very important to services

JIT systems or high transportation costs may

make it important to manufacturers

Proximity to suppliers

Perishable goods, high transportation costs,

bulky products

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Factors That Affect

Location Decisions

Proximity to competitors (clustering)

Often driven by resources such as natural,

information, capital, talent

Found in both manufacturing and service

industries

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Clustering of Companies
TABLE 9.3

Clustering of Companies
REASON FOR
CLUSTERING

INDUSTRY

LOCATIONS

Wine making

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

Clean energy

Colorado

Critical mass of talent and

information, with 1,000
companies

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Clustering of Companies
TABLE 9.3

Clustering of Companies
REASON FOR
CLUSTERING

INDUSTRY

LOCATIONS

Theme parks
(Disney World,
Universal Studios,
and Sea World)

Orlando, Florida

A hot spot for

entertainment, warm
weather, tourists, and
inexpensive labor

Electronics firms

Northern Mexico

NAFTA, duty free export to

U.S.

Computer hardware Singapore, Taiwan

manufacturers

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High technological
penetration rate and per
capita GDP,
skilled/educated workforce
with large pool of engineers

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Clustering of Companies
TABLE 9.3

Clustering of Companies

INDUSTRY

LOCATIONS

REASON FOR
CLUSTERING

Fast food chains

Sites within 1 mile of
(Wendys,
each other
McDonalds, Burger
King, and Pizza
Hut)

Stimulate food sales, high

traffic flows

General aviation
aircraft (Cessna,
Learjet, Boeing,
Raytheon)

Wichita, Kansas

Mass of aviation skills

Athletic footwear,
outdoor wear

Portland, Oregon

300 companies, many

owned by Nike, deep talent
pool and outdoor culture

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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 key
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. Make a recommendation based on the highest
point score

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Factor-Rating Example
TABLE 9.4

Weights, Scores, and Solution

SCORES
(OUT OF 100)

KSF

WEIGHT

FRANCE

DENMARK

WEIGHTED SCORES
FRANCE

DENMARK

Labor availability
and attitude

.25

70

60

(.25)(70) = 17.5

(.25)(60) = 15.0

People-to-car ratio

.05

50

60

(.05)(50) = 2.5

(.05)(60) = 3.0

Per capita income

.10

85

80

(.10)(85) = 8.5

(.10)(80) = 8.0

Tax structure

.39

75

70

(.39)(75) = 29.3

(.39)(70) = 27.3

Education and
health

.21

60

70

(.21)(60) = 12.6

(.21)(70) = 14.7

70.4

68.0

Totals

1.00

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A small manufacturer is considering several locations for a new

facility. They have identified four factors that they consider to
be important for their location decision. They have decided to

assign scores to the four factors, with a higher score indicating

a more favorable location. Use the information in the following

table to perform a factor rating to select the best location.

Wages
Labor Climate
Taxes
Utilities

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Weight
40
30
15
15

Location A
30
40
80
75

Location B
75
70
40
60

Location C
90
40
90
10

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A clothing chain is considering two different locations for a new retail outlet.
The organization has identified the four factors listed in the following table
as the basis for evaluation, and has assigned weights as shown on the

right side of this table. The manager has rated each location on each factor,
on a 100-point basis (higher scores are better), as shown in the right-hand
table.

a) Calculate the composite score for each alternative location.

b) Which site should be chosen?
c) Are you concerned about the sensitivity and subjectivity of this solution?
Comment.
Factor

Factor Description

Weight

Average community income

.40

75

70

Community growth potential

.25

60

80

Availability of public transportation

.15

45

90

.20

80

865
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Labor cost

Barclay Chester

Locational
Cost-Volume Analysis

An economic comparison of location

alternatives

Three steps in the method

1. Determine fixed and variable costs for each
location

2. Plot the cost for each location

3. Select location with lowest total cost for
expected production volume

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Locational Cost-Volume
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units

City
Athens
Brussels
Lisbon

Fixed
Variable
Total
Cost
Cost
Cost
$30,000
$75
$180,000
$60,000
$45
$150,000
$110,000
$25
$160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

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Locational Cost-Volume
Analysis Example
Crossover point Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000
Crossover point Brussels/Lisbon

60,000 + 45(x) = 110,000 + 25(x)

20(x) = 50,000
(x) = 2,500
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Locational Cost-Volume
Analysis Example

Annual cost

Figure 9.2

$180,000

$160,000
$150,000

$130,000

$110,000

$80,000

$60,000

$30,000

$10,000
|

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Athens
lowest
cost

Lisbon
lowest
cost

Brussels
lowest cost

500

1,000

1,500

2,000

2,500

3,000

Volume

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Location A would result in annual fixed costs of

$300,000 and variable costs of $55 per unit.

Annual fixed costs at Location B are $600,000
with variable costs of $32 per unit. Sales volume
is estimated to be 30,000 units per year. Which
location has the lower cost at this volume? How

large is its cost advantage? At what volume are

the two facilities equal in cost?
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Center-of-Gravity Method

Finds location of distribution center

that minimizes distribution costs

Considers

Location of markets

Volume of goods shipped to those

markets

Shipping cost (or distance)

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Center-of-Gravity Method

Place existing locations on a

coordinate grid

Grid origin and scale is arbitrary

Maintain relative distances

Calculate x and y coordinates for

center of gravity

Assumes cost is directly proportional

to distance and volume shipped

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Center-of-Gravity Method
d Q
x-coordinate of the =
center of gravity
Q
ix

d Q
y-coordinate of the =
center of gravity
Q
iy

where

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dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods moved to or from
location i
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Center-of-Gravity Method
TABLE 9.5

Demand for Quains Discount Department Stores

STORE LOCATION

NUMBER OF CONTAINERS
SHIPPED PER MONTH

Chicago

2,000

Pittsburgh

1,000

New York

1,000

Atlanta

2,000

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Center-of-Gravity Method
Figure 9.3

North-South

New York (130, 130)

Chicago (30, 120)

120

Pittsburgh (90, 110)

90

d1x = 30
d1y = 120
Q1 = 2,000

60
30

Atlanta (60, 40)

30

60

90

120

150

East-West

Arbitrary
origin
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Center-of-Gravity Method
(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

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Center-of-Gravity Method
Figure 9.3

North-South

New York (130, 130)

Chicago (30, 120)

120

Pittsburgh (90, 110)

90

Center of gravity (66.7, 93.3)

60

30

Atlanta (60, 40)

30

60

90

120

150

East-West

Arbitrary
origin
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Environmental Glass Products, Inc. wants to build a new

centralized facility to receive household, commercial, and
industrial glass for recycling. This center will be supplied by
trucks coming from four "collection points," where recyclable
glass is dropped off by individuals and businesses. The volume

and the map coordinates for the four collection centers are
shown below. Where should the collection center be located?
Collection point

Load

(X,Y) Coordinates

9,000

(4,8)

4,000

(7,2)

2,000

(4,1)

5,000

(7,3)

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A contractor for the military is looking for a new location

for a supply depot. The depot will supply four bases whose
tonnage (demand) and map coordinates are shown below.
If management wants the depot to have a central location,
what should be its map coordinates?
Bases

(X,Y) Coordinates

Tonnage

Fort Able

(40,110)

30,000

Base Baker

(70,50)

60,000

Camp Charlie

(90,20)

35,000

Camp Delta

(70,80)

75,000

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Transportation Model

Finds amount to be shipped from

several points of supply to several
points of demand

Solution will minimize total production

and shipping costs

A special class of linear programming

problems

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Worldwide Distribution of
Volkswagens and Parts
Figure 8.4

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Service Location Strategy

1. Purchasing power of customer-drawing area
2. Service and image compatibility with
demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firms and competitors
locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management
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Location Strategies
TABLE 8.6

Location Strategies Service vs. Goods-Producing Organizations

SERVICE/RETAIL/PROFESSIONAL

GOODS-PRODUCING

REVENUE FOCUS

COST FOCUS

Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/lighting;
appearance/ image
Cost determinants
Rent
Management caliber
Operation policies (hours, wage
rates)

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Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor; raw
material; taxes, and so on

Intangible and future costs

Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local
government

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Location Strategies
TABLE 8.6

Location Strategies Service vs. Goods-Producing Organizations

SERVICE/RETAIL/PROFESSIONAL

GOODS-PRODUCING

TECHNIQUES

TECHNIQUES

Regression models to determine

importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
ASSUMPTIONS
Location is a major determinant of
revenue
High customer-contact issues are critical
Costs are relatively constant for a given
area; therefore, the revenue
function is critical
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Transportation method
Factor-rating method
Locational costvolume analysis
Crossover charts

ASSUMPTIONS
Location is a major determinant of cost
Most major costs can be identified
explicitly for each site
Low customer contact allows focus on
the identifiable costs
Intangible costs can be evaluated
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How Hotel Chains Select Sites

Location is a strategically important decision

in the hospitality industry

La Quinta started with 35 independent

variables and worked to refine a regression
model to predict profitability

r2 = .51

The final model had only four variables

Price of the inn

Median income levels

State population per inn

Location of nearby colleges

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51% of the
profitability is
predicted by
just these
four variables!

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Geographic Information
Systems (GIS)

Important tool to help in location analysis

Enables more complex demographic analysis

Available data bases include

Detailed census data

Detailed maps

Utilities

Geographic features

Locations of major services

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Geographic Information
Systems (GIS)

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