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CHAPTER 8L O C AT I O N D E C I S I O N S

107

C H A P T E R

Location Decisions

DISCUSSION QUESTIONS
1.FedExskeylocationconceptisthecentralhubconcept,with
Memphisselectedforseveralreasons,includingitsbeinginthe
middleofthecountryandhavingveryfewhoursofbadweather
closures.
2.ThemajorreasonforU.S.firmstolocateoverseasisoften
lower labor costs, but as this chapter, Chapter 2, and
Supplement11suggest,thereareanumberofconsiderations.
3.ThemajorreasonforeignfirmsbuildintheU.S.istosatisfy
thedemandforforeigngoodsintheUnitedStateswhilereducing
transportationcostandforeignexchangerisk;inaddition, U.S.
locationsallowforeignfirmstocircumventquotasand/ortariffs.
4.Clusteringisthetendencyoffirmstolocatenearcompetitors.
5.Differentweightscanbegiventodifferentfactors.Personal
preferencesareincluded.
6.The qualitative approach usually considers many more
factors,butitsresultsarelessexact.
7.Clustering examples in the service sector include fastfood
restaurants,shoeandjewelrystoresinashoppingmall,andtheme
parks.

10.Franchise operations may add new units per year; Exxon,


McDonalds,andWalMartaddhundredsofunitsperyear,almost
a daily location decision. For such organizations, the location
decision becomes more structured, more routine. Perhaps by
repeating this process they discover what makes their strategic
locationsdecisionssuccessful.
11.Factorsaffectinglocationdecisions:nearnesstoresources,
suppliers, and customers; labor productivity; foreign exchange;
politicalrisk,unions;employment;zoning;pollution;taxes;and
clustering.
12.Thecenterofgravitymethodassumesthatcostisdirectly
proportional to both distance and volume shipped. For service
facilities, revenue is assumed to be directly proportional to
proximitytomarkets.
13.Locationalbreakevenanalysisthreesteps:

8.Factorstoconsiderwhenchoosingacountry:

Exchangerates
Governmentstability(politicalrisk)
Communications systems within the country and to the
homeoffice
Wagerates
Productivity
Transportationcosts
Language
Tariffs
Taxes
Attitudetowardsforeigninvestors/incentives
Legalsystem
Ethicalstandards
Culturalissues
Suppliesavailability
Marketlocations

9.Factorstoconsiderinaregion/communitydecision:

Corporatedesires
Attractivenessofregion
Laborissue
Utilities
Environmentalregulations
Incentives

Proximitytorawmaterials/customers
Land/constructioncosts

Step 1: Determine fixed and variable cost for each


location.
Step2:Plotthecostsforeachlocation,withcostsonthe
vertical axis of the graph and annual volume on the
horizontalaxis.
Step3:Selectthelocationthathasthelowesttotalcost
fortheexpectedproductionvolume.

14.Theissueofweightorvolumegainandweightorvolume
loss during processing is important, and supports the
manufacturingsideofthesaying(weightlossduringminingand
refining,forexample,suggestsshippingafterprocessing).ButJIT
maybemoreeasilyaccomplishedwhensuppliersareclustered
nearthecustomer.Andsomeservices(suchasInternetsales)can
take place at tremendous distances without sacrificing close
contact.
15.Besides low wage rates, productivity should be considered
also.Employeeswithpoortraining,pooreducation,orpoorwork
habitsarenotagoodbuy.Moreover,employeeswhocannotorwill
notreachtheirplaceofworkarenotmuchgoodtotheorganization.
16.Servicelocation techniques: regressionmodels todetermine
importanceofvariousfactors,factorratingmethod,trafficcounts,
demographicanalysisofdrawingarea,purchasingpoweranalysisof
area,centerofgravitymethod,andgeographicinformationsystem.
17.Thedistributorismoreconcernedwithtransportationand
storagecosts,andthesupermarketmoreconcernedwithproximity
to markets. The distributor will focus more on roads, overall
populationdensity(storedensity),whilethesupermarketwillfocus
more on neighborhood affluence, traffic patterns, etc. The

108

CHAPTER 8L O C AT I O N D E C I S I O N S

distributorwillbeconcernedwithspeedyandreliabledelivery,the
supermarket with easy access. Both will have concerns over
attitudesandzoning.Bothwillneedaccesstosimilarlaborforces;
bothwillneedsimilarmeasuresofworkforceeducation,etc.Many
othercomparisonscanbedrawn.

END-OF-CHAPTER PROBLEMS

18.This is a service location problem, and should focus on


revenues,notcosts.Customertraffic,customerincome,customer
density, are obvious beginning points. Parking/access, security/
lighting, appearance/image, rent, etc. (see Table 8.6) are other
importantvariables.

(a)Cambodia

ETHICAL DILEMMA
Location is a major issue in the U.S. today. Almost every
communityisseekingnewjobs,especiallyfromforeignfirmslike
Mercedes.AsMercedeswasdefinitelycomingtotheU.S.any
way,thebiddingwarsarenonproductivefromacentraleconomy
perspective.Therearemanyimplicationstothelocalcitizenry,
especially because they pay the bills if the financial successes
predictedarenotaccurate.Votesareusuallynottakenasthese
decisions are made by the political leaders of the community.
Objective economic analysis on the incentives versus benefits
mightlimitthegiveaways.
AstheUnitedAirlinesdiscussionsuggests,therearemany
downsides to the spread of incentives being offered by almost
everycity,state,andcountry.OrlandoandLouisvillearelikely
counting their blessings that they lost the bidding war for the
United repair base. For every happy ending (such as Vance,
Alabama,claimswithitsMercedesplant),thereisastorylikethe
oneinthisEthicalDilemma.TheInternetshouldyieldarichcrop
ofsimilarsituations.

Active Model Exercise


ACTIVEMODEL8.1CenterofGravity
1.Whatisthetotalweighteddistancefromthecurrentoldand
inadequatewarehouseinPittsburgh?
318,692
2.Iftheyrelocatetheirwarehousetothecenterofgravity,by
howmuchwillthisreducethetotalweightedshippingdistance?
By18,663from318,692to300,029.
3.Observe the graph. If the number of shipments from New
Yorkdoubles,howdoesthisaffectthecenterofgravity?
Thecenterofgravitymovesnorthandeast.
4.Thecenterofgravitydoesnotnecessarilyfindthesitewith
theminimumtotalweighteddistance.Usethescrollbarstomove
thetriallocationandseeifyoucanimprove(lower)thedistance.
64,97withatotalweighteddistanceof299,234(using
Solver).
5.IfyouhaveSolversetupinExcel,fromExcelsmainmenu,
useTools,Solver,Solveinordertoseethebestanswertothe
previousquestion.
64,97withatotalweighteddistanceof299,234.

8.1Where:Sixlaborerseachmaking$3perdaycanproduce40units.
Tenlaborerseachmaking$2.00perdaycanproduce45units.
Twolaborerseachmaking$60perdaycanmake100units.
6 $3
$0.45 unit
40
10 $2.00
(b)China
$0.44 unit
45
2 $60
(c)Montana
$1.20 unit
100
Chinaismosteconomical,assumingthattransportationcosts
arenotincluded.
8.2Cambodia
$0.45$1.50$1.95
China
$0.44$1.00$1.44
Montana
$1.20$0.25$1.45
Chinaismostfavorable,butMontanaisalmosttied.
2,000baht/20010baht/unit,
if$110baht$1/unit
India:
2,000rupees/20010rupees/unit,
if$18rupees$1.25/unit
Sacramento(U.S.A.):$200/200=$1/unit
SelecteitherThaiorU.S.company.

8.3Thailand:

8.4IfIndiahadatariffof30%,thenmakingtheitemsinIndiais
$0.05lessthanimportingthemfromanywhere.
8.5(a)BaptistChurchisbest.
Maitland
(weight
score)

Factor

Space
18
Costs
10
Traffic density
10
Neighborhood income

Site
Baptist
Church
(weight

Northside
Mall
(weight

score)

score)

21
20
16

24
7.5
12

7.5
2

10.5
9

69.5

58.5

6Zoning laws
Totals53.5

(b) The totals are now Maitland, 52.5; Baptist Church, 70.5; and
NorthsideMall,56.5.BaptistChurchslocationisevenmorepreferred.
8.6(a)Atlanta0.4(80)0.3(20)0.2(40)0.1(70)53
Charlotte0.4(60)0.3(50)0.2(90)0.1(30)60
Charlotteisbetter.
(b) Achangeto75(from60)inCharlottesincentivepackage
doesnotchangetheanswertopart(a)becauseCharlottewas
alreadythebettersite.ThenewCharlottescoreisnow66
overall,whileAtlantastaysat53.
8.7
Factor
Customer
convenience
Bank accessibility
Computer support
Rental costs
Labor costs

Philadelphia
(weight score)

New York
(weight
score)

17.5
8.0
17.0
13.5
8.0

20
18
15
8.25
5.0

CHAPTER 8L O C AT I O N D E C I S I O N S

Taxes

9.0
Totals 73.0

109

5.0
71.25

ILAshouldlocateinPhiladelphia.
8.8(a)
Location
Present Location
Wgt

Factor
1
2
3
4

40
20
30
80

Newbury
Wgt

0.30
12
0.15
3
0.20
6
0.35
28
Total Points 49

60
20
60
50

0.30
0.15
0.20
0.35
Total Points

ItappearsthatHydeParkrepresentsthebestalternative.
(b) If Present Locations public transportation score increases
from30to40,thetotalscoreincreasesby10points0.20
weight=2.0points.Sothenewscoreis51pointsforPresent
Location,whichisstillnotasgoodasHydeParksscore.

Hyde Park
Wgt
18.00
3.00
12.00
17.50
50.5
0

50
80
50
50

0.30
0.15
0.20
0.35
Total Points

15.0
12.0
10.0
17.5
54.
5

8.9(a)Theweightedaveragesare:
Akron
Biloxi
Carthage
Denver

81.5
80.0
87.5
76.0
Akron

Factor
Labor
Availability
Tech. School
Quality
Operating Cost
Land &
Construction
Ind. Incentives
Labor Cost

Weight Score

Biloxi

Carthage

Denver

Weight

Score

Score

Weight
Score

Score

Weight
Score

Score

Weight
Score

0.15

90

13.5

80

12.0

90

13.5

80

12.0

0.10

95

9.5

75

7.5

65

6.5

85

8.5

0.30

80

24.0

85

25.5

95

28.5

85

25.5

0.15
0.20
0.10
1.00

60
90
75

9.0
18.0
7.5
81.5

80
75
80

12.0
15.0
8.0
80.

90
85
85

13.5
17.0
8.5
87.5

70
60
75

10.5
12.0
7.5
76.

(b)Carthageispreferred(87.5points)intheinitialscenario.
Akron
Factor
Labor
Availability
Tech. School
Quality
Operating Cost
Land &
Construction
Ind. Incentives
Labor Cost

Weight Score

Biloxi

Carthage

Denver

Weight

Score

Score

Weight
Score

Score

Weight
Score

Score

Weight
Score

0.15

90

13.5

80

12.0

90

13.5

80

12.0

0.10

95

9.5

75

7.5

65

6.5

85

8.5

0.10

80

8.0

85

8.5

95

9.5

85

8.5

0.15
0.20
0.30
1.0
0

60
90
75

9.0
18.0
22.5
80.
5

80
75
80

12.0
15.0
24.0
79.
0

90
85
85

13.5
17.0
25.5
85.
5

70
60
75

10.5
12.0
22.5
74.0

(c)Inthesecondscenario,allfourscoresfalltosmallervalues,Carthagemorethantheothers,butitisstill
firmlyinfirstplace.Allscoresaresmallerbecauseallsiteshadoperatingcostscoresbetterthanlaborcost
scores.Whenlaborcosttakesonthehigherweight,thelowerscoreshavemoreinfluenceonthetotal.
Thenewscoresare:
Akron
80.5
Biloxi
79.0
Carthage 85.5

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CHAPTER 8L O C AT I O N D E C I S I O N S

8.10(a)
Location A
Factor

Weight

1
2
3
4
5
6

5
3
4
2
2
3

Rating

Weighted
Score

100
80
30
10
90
50
Total weighted score:

500
240
120
20
180
150
1210

Location B
Factor

Weight

1
2
3
4
5
6

5
3
4
2
2
3

Rating

Weighted
Score

80
70
60
80
60
60
Total weighted score:

400
210
240
160
120
180
131
0

Location C
Factor

Weight

1
2
3
4
5
6

5
3
4
2
2
3

Rating

Weighted
Score

80
100
70
60
80
90
Total weighted score:

400
300
280
120
160
270
153
0

Basedonthetotalweightedscores,LocationCshouldberecommended.
Notethatrawweightswereusedincomputingtheseweightedscores
(wejustmultipliedweighttimesrating).Relativeweights couldhave
beenusedinsteadbytakingeachfactorweightanddividingbythesumof
theweights(i.e.,19).Thentheweightforfactor1wouldhavebeen5/19=
0.26.LocationCwouldstillhavebeenselected.
(b)LocationBsProximitytoPortFacilitiesscoreincreasesfrom
80to90:Thetotalscoreincreasesby10(5weight)=50,to
1,360points.
(c) Tochangeitsranktofirstplace,LocationBneedstoincreasetoat
least1,530pointsfrom1,310.Evenifthescoreis100,thetotalonly
increasesto1,410,soBwillstayasthesecondchoice.Toendupin
thirdplace,iftheratingdropsbelow60,thetotalweightedscoredrops
below1,210,whichisLocationAstotalscore.
8.11(a)
Factor
Technology
Level of education
Political/legal
Social
Economic
Weighted average

Weight Taiwan Thailand Singapore


0.2
0.1
0.4
0.1
0.2

.8
.4
.4
.4
.6
2.6

1.0
.1
1.2
.2
.6
3.1

.2
.5
1.2
.3
.4
2.6

Thailandrateshighest(3.1).
(b)NowThailandsoverallscoredropsto2.7,justahead(butnot
bymuch)ofTaiwanandSingapore.
(c) Now Thailands score drops to 2.3, leaving the other two
countriesinatieforfirstplace.
8.12(a) Given the factors and weightings presented, the
followingtablesuggeststhatGreatBritainbeselected:
Factor
1 Stability of
government
2 Degree to
which the
population can
converse in
English
3 Stability of
the monetary
system
4 Communications
infrastructure
5 Transportation
infrastructure
6 Availability of
historic/
cultural sites
7 Import
restrictions
8 Availability of
suitable
quarters

Great
Hollan Britain Italy Belgium Greec
d
e
5

34

36

26

33

28

(b) IfEnglishisnotanissue,asillustratedinthefollowing
table,GreatBritain,Holland,andBelgiumshouldall
beconsideredfurther:
Factor
1 Stability of
government
3 Stability of the
monetary
system
4 Communications
infrastructure
5 Transportation
infrastructure
6 Availability of
historic/
cultural sites
7 Import
restrictions
8 Availability of
suitable
quarters

Great
Hollan BritainItaly Belgium Greec
d
e
5

30

31

23

29

25

8.13(a)
Site
A

Total Weighted Score


174

CHAPTER 8L O C AT I O N D E C I S I O N S

B
C
D

111

Site 2 is optimal for production between 125 and


233units.

185
187
165

Site3isoptimalforproductionabove233units.
SiteChasthehighesttotalweightedscoresoshouldbeselected.
(b)For200units,site2isoptimal.
(Asapracticalmatter,whenscoresareascloseasthoseforSites
8.17(a)Seethefigurebelow:
BandC,furtheranalysisiswarranted.)
(b) SiteDstotalscoreisnowraisedfrom165to175.AlthoughD
ranksslightlyhigherthanA,theresultsdonotchange.
(b)Qdropsto23,333,from33,333.
8.14(a)
(c)SiteAstotalscoreincreasesby12points,to186.Thisisnowclosetoathree
waytiebetweensitesA,BandC.Otherfactorsneedtobeintroduced.
Germany:
Italy:
Spain:
Greece:

0.05(5)
0.05(5)
0.05(5)
0.05(2)

0.05(4)
0.05(2)
0.05(1)
0.05(1)

0.2(5) 0.2(5) 0.2(1) 0.1(4) 0.1(1) 0.1(2)


0.2(5) 0.2(2) 0.2(4) 0.1(2) 0.1(4) 0.1(3)
0.2(5) 0.2(3) 0.2(1) 0.1(1) 0.1(4) 0.1(1)
0.2(2) 0.2(5) 0.2(3) 0.1(1) 0.1(3) 0.1(5)

Italyishighest.
(b)Spains cost would drop, but the result would not
changewitha4,sinceSpainisalreadylowest.Noscore
willchangeSpainslastplace.
8.15(a)Chicago=16+6+7+4=33
Milwaukee=10+13.5+6+3=32.5
Madison=12+12+4+2.5=30.5
Detroit=14+6+7+4.5=31.5
Allfourarequiteclose,withChicagoandMilwaukee
almosttied.Chicagohasthelargestrating,witha33.
(b)Withacutoffof5,Chicagoisunacceptablebecauseitscores
only4onthesecondfactor.OnlyMilwaukeehasscoresof5
or higher on all factors. Detroit and Madison are also
eliminated,aseachhasoneratingofa4.

Cost(Dallas) Cost(Detroit)
FC (Dallas) Q VC (Dallas) FC (Detroit) Q VC (Detroit)
$600,000 $28Q $800,000 $22Q
$6Q $200,000
Q $200,000 / $6
Q 33,333

since$660,000+28Q=$800,000+22Q
so,
6Q=140,000
or
Q=23,333
8.18(a)

8.16(a)The following figure indicates the volume range for


whicheachsiteisoptimal.

Forallvolumesabove10,000,siteChasthelowestcost.
10,000,000 + 2,500V = 25,000,000 + 1,000V

Site1isoptimalforproductionlessthanorequalto125units.

1,500V = 15,000,000
V = 10,000.
(b)SiteAisoptimalforvolumesfrom0to10,000Audis.
(c) SiteBis never optimal becauseitscostlinealwaysexceeds
thatofAorCforallvolumelevels.
8.19(a)CrossoveriswhereProfitBonham=ProfitMcKinney;
or800,000+15,000X=920,000+16,000X
Crossoverisat120units.
Profit Bonham 800,000+(29,000 14,000)X

800,000+15,000X
Profit McKinney 920,000+(29,000 13,000)X
920,000+16,000X

112

CHAPTER 8L O C AT I O N D E C I S I O N S

(b,c)McKinneyispreferablebeyond120units,Bonham
below120units.
(d)Bonhamhasbreakevenatabout53units;McKinney
about 58, so both are beyond breakeven at the
crossover.

8.20(a)
5 5 6 10 4 15 9 5 7 15 3 10 2 5
5 10 15 5 15 10 5
335

5.15
65
10 5 8 10 9 15 5 5 9 15 2 10 6 5
Cy
5 10 15 5 15 10 5
475

7.31
65
Theproposednewhubshouldbenear(5.15,7.31).
(b)WhentheshipmentloadsfromCityAtriple,from5to15,the
newcoordinatesare(5.13,7.67).
Cx

8.21
3 9.2 3 7.3 5 7.8 3 5.0 3 2.8
3 5.5 3 5.0 3 3.8
Cx
26
154.8

5.95
26
3 3.5 3 2.5 5 1.4 3 8.4 3 6.5 3 2.4
3 3.6 3 8.5
Cy
26
113.2

4.35
26
Thedistanceminimizinglocationisat(5.95,4.35).Thisminimizes
distancetraveled,butisstraightline,whichdoesnotreflectreali
tiesofhighwayroutes.Itdoesnotconsiderrivers,bridges,andother
geographicalimpediments.Considerplacingtheofficeasnearthe
centerofgravityaspossibleandstillbeonornearamajorhighway.
StudentswhooverlaythisontoamapofLouisianashouldrecognize
thatBatonRougewouldbeanideallocation.
8.22

A (North Park)
B (Jefferson)
C (Lincoln)
D (Washington)

(4, 11)
(5, 2)
(8, 2)
(11, 6)

500
300
300
200
1300

(a)
X=Newmiddleschooltoserve4elementaryschools.

CHAPTER 8L O C AT I O N D E C I S I O N S
(4 500) (5 300) (8 300) (11 200) 8100

6.23
1300
1300
(11 500) (2 300) (2 300) (6 200) 7900
Cy

6.08
1300
1300

Cx

Cannotlocateonthehighway,obviously
Safetypedestrianbridge
Spaceforschoolandgrounds
Traffic
Availabilityoflandanditsprice

8.23(a)
Cx =xcoordinateofcenterofgravity
[25(2,000) 25(5,000) 55(10,000) 50(7,000)
80(10,000) 70(20,000) 90(14,000)]
Cx
[2,000 5,000 10,000 7,000 10,000
20,000 14,000]
4,535,000
66.69
68,000
[45(2,000) 25(5,000) 45(10,000) 20(7,000)
50(10, 000) 20(20,000) 25(14,000)]
Cy
[2,000 5,000 10,000 7,000 10,000
20,000 14,000]
2,055,000
Cy
30.22
68,000
Thecenterofgravityis(66.69,30.22).
(b)WhenCensustracks103and105increaseby20%each,from
10,000 to 12,000 population, the new coordinates become
(66.74,31.18).Coordinatedenominatorsincrease(by2,000
+2,000)to72,000.Thexcoordinatenumeratorincreases(by
55(2,000) + 80(2,000)) to 4,805,000. The ycoordinate
numeratorincreases(by45(2,000)+50(2,000))to2,245,000.
Cx

8.24(a)Calculatetheoverallsitescoresforeachsite:
Site
A
B
C
D

Overall Score
20(5)
348
20(4)
370
20(4)
374
20(5)
330

+ 16(2) + 16(3) + + 10(5) =


+ 16(3) + 16(4) + + 10(4) =
+ 16(4) + 16(3) + + 10(3) =
+ 16(1) + 16(2) + + 10(3) =

(b)Replace 10 by w7 in the overall score calculations


above. Get overall site scores as a function of w7
thereby:
Site
A
B
C

Overall Score
20(5) + 16(2) + 16(3) + + 5w7 = 298
+ 5w7
20(4) + 16(3) + 16(4) + + 4w 7 = 330
+ 4w7
20(4) + 16(4) + 16(3) + + 3w 7 = 344
+ 3w7

(a)344+3w7298+5w7
(b)344+3w7330+4w7
(c)344+3w7300+3w7

Results:
(a)statesw723 (b)statesw714
(c)states344300(whichholdsforallvaluesofw7).
Forallpositivevaluesofw7suchthatw714.
8.25(a)Weightedscores
British International Airways
Milan
3,415
Munich
3,425

Rome
2,945
Bonn
3,915

Genoa
3,425
Berlin
3,665

Paris
3,155

Lyon
3,970

Nice
3,660

So,forpart(a)thetopthreecitiesbecome:Lyonisbest(3,970),
Bonnissecond(3,915),andBerlinisthird(3,665).
(b)Weightedscoreswithhangarweightsmodified:

Milan
3,215
Munich
3,065

British
Rome
2,825
Bonn
3,555

International Airways
Genoa
Paris
Lyon
3,345
2,795
3,730
Berlin
3,585

Nice
3,460

So,forpart(b)thetopthreecitiesbecome:Lyonisbest(3,730),
Berlinissecond(3,585),andBonnisthird(3,555).
(c)Germancitiesreweighedonfinancialincentives:

Weighted
Score

British International Airways


Munich
Bonn
Berlin
3,320
3,810
3,840

Yes,increasingthefinancialincentivefactorsto10forthethree
GermancitiesofMunich,Bonn,andBerlinchangesthetopthree
citiestoBerlin(3,840),Bonn(3,810),andLyon(3,730).

ADDITIONAL HOMEWORK PROBLEMS

Herearesolutionstoadditionalhomeworkproblemsthatappear
onourWebsite,www.pearsonglobaleditions.com/myomlab.
8.26Toaidinthisanalysis,weassignaratingtoeachgrade.
Grade

SiteCisbest

20(5) + 16(1) + 16(2) + + 3w 7 = 300


+ 3w7

Nowfindallvalues
ofw7suchthat
(a),(b),&(c)allhold:

(b) Otherconsiderations:

113

Rating

A
B
C
D

4
3
2
1

andtoeachfactor:
Factor
Rent
Walk-in
Distance

Rating
1.00
0.90
0.72

114

CHAPTER 8L O C AT I O N D E C I S I O N S

andcomputeoverallratingsforeachlocation:
1 1.0 3 0.90 3 0.72
2.24
2.62
2 1.0 4 0.90 4 0.72
Shoppingmallrating
3.24
2.62
4 1.0 1 0.90 2 0.72
CoralGablesrating
2.42
2.62
Ifyoudonotdividebythesumoftheweights,therespectiverat
ings are 5.86, 8.48, and 6.34. The shopping mall receives the
highestratingusingthissiteselectionapproach.
Downtownrating

8.27
9 9 68 2 5 8 5 2 4
6.03
31
7 9 6 8 5 5 4 5 9 4
SuburbArating
6.19
31
6 9 8 8 6 5 5 5 6 4
SuburbBrating
6.35
31
SuburbBhasthehighestrating,butweightsshouldbeexamined
usingsensitivityanalysis,asthefinalratingsareallclose.
Downtownrating

8.28
70 10 + 85 10 + 70 25 + 80 20 + 90 15 6250
=
= 78.125
80
80
60 10 + 90 10 + 60 25 + 90 20 + 80 15 6000
Site2factorrating =
=
= 75.0
80
80
85 10 + 80 10 + 85 25 + 90 20 + 90 15 6925
Site3factorrating =
=
= 86.56
80
80
90 10 + 60 10 + 90 25 + 80 20 + 75 15 6475
Site4factorrating =
=
= 80.94
80
80
Site1factorrating =

Site3hasthehighestratingfactor,86.56,andshouldbeselected.
8.29
(a)

1,000,00073X800,000112X
200,00039XorX5,128
(b)For5,000units,Perthisthebetteroption.

CHAPTER 8L O C AT I O N D E C I S I O N S

8.30

115

City

Map Coordinates

Shipping
Load

A
B
C
D
E
F
G
H

2,1
2,13
4,17
7,7
8,18
12,16
17,4
18,18

20
10
5
20
15
10
20
20
120

(a)

2(20) 2(10) 4(5) 7(20) 8(15) 12(10) 17(20) 18(20)


(20 10 5 20 15 10 20 20)
1160

9.67
120
1(20) 13(10) 17(5) 7(20) 18(15) 16(10) 4(20) 18(20)
Cy
(20 10 5 20 15 10 20 20)
1245

10.37
120
8.32
Cx

Thetotalcostequationsare:
Atlanta:TC 125,000 6 x
Burlington:TC 75,000 5 x
Cleveland:TC 100,000 4 x
Denver:TC 50,000 12 x
(b)Denverispreferableovertherangefrom03,570units.
Burlington is lowest cost at any volume exceeding
3,570, but less than 25,000 units. Atlanta is never
lowestincost. Cleveland becomes the best site only
whenvolumeexceeds25,000unitsperyear.
(c)At a volume of 5,000 units, Burlington is the least
costsite.
8.31

10 3 3 3 4 2 15 6 13 5 1 3 5 10
3 3 2 6 5 3 10
255

7.97
32
5 3 8 3 7 2 10 6 3 5 12 3 5 10
Cy
3 3 2 6 5 3 10
214

6.69
32

Cx

Theproposednewfacilityshouldbenear(7.97,6.69).

8.33Withequalweightsof1foreachofthe15factors:
Total

Average

39
52
50
41

2.60
3.47
3.33
2.73

Spain
England
Italy
Poland

Englandisthetopchoice.

116

CHAPTER 8L O C AT I O N D E C I S I O N S

8.34Withweightsgiven,theresultbecame:
Spain
2.55
England
3.55
Italy
3.30
Poland
2.80
Englandremainsthetopselection.

CASE

STUDY

FINDINGALOCATIONFORELECTRONICSCOMPONENT
MANUFACTURINGINASIA

1.

2.

3.

4.

Whatadvantagesanddisadvantagesdoeseachpotential
locationoffer?
Singapore
Advantages: labor relatively cheap, good transport
infrastructureandincentivesofferedtostay.
Disadvantages: increasinglaborcostsandincreasingutility
costs.
HongKong
Advantages: labor consistently cheap and good transport
infrastructure.
Disadvantages:nospecificdisadvantagehasbeenidentified
inthecasebutstudentsshouldattempttodiscussthisfurther.
Malaysia
Advantages: accessto rawmaterials andnatural resources
inexpensivelabor.
Disadvantages:Concernwithfrequencyofshipvisits.
Whatotherrelevantfactorsthatarenotmentionedinthecase
studymightplayaroleinthisdecision?
Theeducationoftheworkforce(bothcurrentworkforceand
futuregenerations)aswellaspoliticalstabilitywillimpact
thedecision.
Whyistransportationinfrastructuresoimportantinthis
decision?
Since ACM is reliant on logistics for raw materials and
transportingfinalproductstocustomers,transportationcosts
(bothcurrent andexpected developmentof thecosts) will
doubtlesslyhavealargeimpactonthedecision.
Thisisalongtermstrategicdecision;whatfactorsmight
changeinthenexttentotwentyyears?Howwillthis
influencethedecision?
Sincetheplantwillpayforitselfoveralongtimehorizon,
decisionrelevantcostsmustbeexaminednotonlyattheir
currentlevelbutalsohowthisisexpectedtodevelopover
thehorizon.Examplesofcostswhicharelikelytochange
andwhosechangewouldmakeorbreakthedecisionwould
includelaborcosts,utilitycosts,rawmaterialcosts,transport
costs.Alsootherdifficulttoforecastdevelopmentssuchas
exchange rates and political stability will impact the
profitability.

5. Whichalternativewouldyourecommend,underwhich
circumstances?
Answerswillvarybutstudentsshoulddiscusshowtoapproach
theproblemofselectingtheappropriatelocation.Forexample,

if possible, students should explore the use of factorrating


methodforthisproblem.

VIDEO

CASE STUDIES
LOCATINGTHENEXTREDLOBSTER
RESTAURANT

1.MapInfohas72clustersthatprovidesocioeconomicprofiling.
Theseprofiles(PSYTE)provideinterestingreadinganddatafor
classdiscussion.MapInfowouldtellyouthattheapplicationsare
virtually limitless. For instance, the BusinessMAP database
includesthefollowingdatasetstoaidfinancialinstitutionlocation
decisions:

ESRIscurrentyearand5yearoutestimatesfor
population,age,race,andincome
Branchlocation,asset,anddepositinformationfrom
RPMConsultingsBranchinfo
MarketBankdata,withinformationaboutdepositand
loanpotential
NationalCreditUnionAssociationdataonmember
assets,loans,etc.
Segmentedlifestyle/lifechangeinformation
D&Blistings
Streetlevelmaps

Datasuchastheabovehelpsthelocationdecisionbyproviding
currentandpotentialdepositandloaninformationaswellas
informationaboutthecompetition.
Sources: www.esri.com/bmapfinancial, www.esri.com/archnews,
andwww.esri.com/partners.
2. Manydifferencescanbeidentifiedinanassignmentorclass
discussion,butrestaurantswantdisposableincome,whileretail
depending on the type of retailwants high traffic, and
manufacturing wants a focus on costs, infrastructure, and low
taxes.
3. Darden has shied away from urban locations; high location
costsdonotfititscurrentmodel,butDardenhasfoundfertile
groundinfirstandsecondtiersuburbanandexurban/small(over
90% of the Red Lobsters are in these three density classes).
Incidentally, in 2010, Darden announced it will begin to open
facilitiesoutsidetheU.S.andCanada.
2

WHERETOPLACETHEHARDROCKCAFE

1.The attached report details the information that Munday


collects and analyzes about each site. As such, it provides the
answertothefirstquestion.
2.Theratingsofthefourcitiesare:
A=80.5,B=64.5,C=71.5,andD=79.5.SoCityAisaclose
firstchoiceoverCityD.Inreality,theyaresoclosethatother
considerationsmaybeincluded,orsensitivityanalysisonscores
orweightsperformed.
3.Expansionisthelifebloodofanyglobalorganization.Good
decisionsmeana10to20yearcashflow.Badonesmeana10
plusyearcommitmenttoamoneylosinglocation.

CHAPTER 8L O C AT I O N D E C I S I O N S

4.HardRockconsiderspoliticalrisk,crime,currency,andother
factors in location decisions abroad. In Russia and Colombia,
corruption is so endemic that having a local partner who can
understandandhandletheseissuesisanecessity.

117

HARD ROCK REPORT (CONTD)


HARD ROCK CAFE
4.Attendance
STANDARD
MARKET REPORT
5.FutureBookings
(OFFSHORE
)
6.ExpansionPlans
7.MajorConventions
ExecutiveSummary

Attractions
Introduction

Entertainment(Includinglocation,seats,attendance)
Purpose
1.Theaters(Includingliveperformancespace)
ProductType(e.g.,franchiseorcompanyowned,cafe,
2.Cinemas(IncludingIMAX)
hotel,casino)
3.ThemeParks
Overview of City/Market (e.g., set context) including
4.Zoo/Aquarium
history,macroeconomicsummary
5.HistoricSites

Demographics(Local,City,RegionSMSA,or
Sports (Capacity, annual attendance, location, age
equivalent)
offacility,etc.)

1.Soccer
Population(Trendanalysis,ifpossible)
2.Rugby
1.Number
3.Baseball
2.Age
4.MinorLeagues
3.Households
4.AverageHouseholdIncome
Retail(Size,tenants,visitors,seasonality)

1.RegionalShoppingCenters
EconomicIndicators(Trendanalysis,ifpossible)
2.DiscountShoppingCenters
1.CostofLivingIndex(comparedtonationalaverage)
3.ShoppingDistricts
2.Unemployment
3.SizeofWorkforce

Transportation
4.Employmentbysector
5.Majoremployers
Airport

1.Age

VisitorMarket
2.PassengersAnnually

3.Airlines(Indicatehubcity)
Tourism/BusinessVisitor(Trendanalysis,ifpossible)
4.DirectFlights
1.Number
2.Origins
Rail
3.LengthofStay
Road
4.AverageSpend
Sea/River
5.SizeofParty
Restaurants
(Aselectionofrestaurantsinkeyareasofthe
6.ReasonsforVisit
targetmarket)
7.FrequencyofRepeatVisits
8.Seasonality
1.Name
9.MethodofTransportation
2.Location
3.Type
Hotels(Trendanalysis,ifpossible)
4.Seats
1.HotelRoomInventory
5.Age
2.Occupancy
Rates (Annual and monthly for
6.EstimatedGrossSales
seasonality)
7.Averagecheck
3.RoomRates
8.SizeofBar
4.FunctionRoomDemand
9.OutsideDiningFacilities
5.RecentDevelopment
6.FutureDevelopment
Nightclubs(Aselectionofclubs/casinosetc.inkey
ConventionCenter(Trendanalysis,ifpossible)
areasofthetargetmarket)
1.Size
1.Name
2.NationalRanking
2.Location
3.DaysBookedperannum
3.Type
4.Seats/capacity
5.Age
6.EstimatedGrossSales
7.Averagecheck
8.SizeofBar
9.Musictype(e.g.,live/disco/combination)

118

CHAPTER 8L O C AT I O N D E C I S I O N S

HARD ROCK REPORT (CONTD)


RealEstateMarketOverview
1.Introduction
2.RetailRents
3.RecentDevelopments
4.FutureDevelopments

HRCComparableMarketAnalysis
1.IdentifycomparableexistingHRCmarkets
2.Explainsimilarities(e.g.regionalpopulation,visitors,
hotelrooms,seasonality,etc.)
3.PreparecityP&Lspreadsheetanalysis

Conclusion
1.Estimate of Gross Food & Beverage Revenue for
marketinGeneralwithbackupandcomparables
2.EstimateofGrossMerchandiseRevenueformarket
inGeneralwithbackupandcomparables
3.Preferredlocations
4.Sizzle(Howwillwemakeourselvesspecialinthis
market?)

ADDITIONAL CASE STUDY*


SOUTHWESTERNUNIVERSITY:E
1.Thefivefactorsappearreasonable.Manyotherscouldbein
cluded,suchaspotentialparkingorconcessionrevenue,parking,
andlongtermpotential.
2.Option1 Expand
y$1,000,000$1x
Option2 Newstadium y$5,000,000$2x
Option3 Rent
y$1,000,000 $750,000 $1x

$1015,000students5games

Weighted
Center
Ada
1.0624
Ardmore
0.4641
CHAPTER 8L O C AT I O N D E C I S I O N S
119
Denton
1.824
Durant
0.7372
Greenville
2.3239
McAlester
2.1746
Norman
2.1597
3.Based on the survey data, rating comfort
Paris and national 2.2572
imageas1s,convenienceasa2,andcostandguaranteed
Sherman
1.1183
availabilityas4s,theresults(usingA= 4,B
3,C=
2,D= 1, 2.6212
Wichita
Falls
F= 0forgrades):
Total
16.742
6
Weighted
Total
7,767.13
Sum of Ratings (Weighted Averages
in Parentheses)
Existing Site New Site
Dallas Cowboy
Site
Students
36 (3)
Boosters
34 (2.83)
Faculty/staff
43 (3.58)
*Solution to the case that appears on our Companion
Web site,
www.pearsonglobaleditions.com/heizer.

21 (1.75)
23 (1.92)
23 (1.92)

35 (2.92)
47 (3.92)
35 (2.92)

Students are almost neutral between the existing site and the
Dallassite.BoostersstronglypreferDallas.Faculty/staffstrongly
prefertheexistingsite.Nogroupranksthenewsitenearcampus
astheirfirstorsecondchoice.
4.The expansion of the existing stadium appears preferable
evenatannualattendanceof500,000fans.
5.Gardnerusedthefactorratingmethodtoratetheconstituency
responses. This was appropriate for evaluating the qualitative
values. He should consider weighting the criteria as the
administrationdidultimately.

Location,SmallDCinTexas