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Operational Management

POMG2710
Chapter (8): Location Planning and Analysis
Location Planning and Analysis

Reading materials:
Slack, N. et al, Operations Management, Chapter (6), P. 146-160

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Location Planning and Analysis
‘There are three important things in retailing – location, location and location’,
Lord Sieff, Marks and Spencer

Location decisions: represent a key part of the strategic


planning process of any organization
 New organizations  one-time problem

 Existing organization  have a bigger stake in these kinds of decisions.

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Location Planning and Analysis
Reasons for location decisions: Supply-side factors
Which vary to influence costs as
Changes in demand location varies, for example:
Growth in demand, customer demand shifting • Labor costs
• Land costs
As part of a marketing strategy to expand markets (e.g.
• Energy costs
banks, retail stores) thus adding new location to an
• Transportation costs
existing system.
• Community factors
 High-visibility operations/ service : dry cleaning expanding current
location is not profitable, so new location
The Operation
Changes in supply :
Cost of doing business at a particular location makes
Demand-side factors
relocation attractive.
Which vary to influence customer
Availability of inputs service/revenue as location varies,
 Depletion of basic inputs requires relocation shift in markets (e.g. for example:
petroleum operations) • Labor skills
• Suitability of the site itself
• Image of the location
• Convenience for customers
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Strategic Importance of Location Decisions
Location decisions: closely tied to an organization’s strategies:
 Low cost strategy:
  locate where labor or material costs are low
  locate near market or raw materials to reduce transportation cost
 Increasing profit strategy:
 locate in high traffic areas to increase market share
 Customer convenience strategy:
 locate where customers can do the purchase (e.g. ATM)

Other reasons:
 Effect capacity and flexibility
 Represent a long-term commitment of resources
 Effect investment requirements, operating costs, revenues, and operations
 Impact competitive advantage
 Importance to supply chains

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Objectives of Location Decisions
 Location decisions are based on:
 Profit potential (for profit-based organizations) or cost and customer service (for non-
profit-based organizations)
 Finding a number of acceptable locations from which to choose.
 Location criteria can depend on the position in the supply chain:

Position in
Supply Chain Where to Locate
End Focus more on accessibility, consumer demographics,
traffic patterns, and local customs are important
Middle locate near suppliers or near markets
Beginning locate near the source of raw materials

 Web-based retail organizations are effectively location independent because they can be
located anywhere

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Supply Chain Considerations
Supply chain configuration:
 determining the number and location of suppliers, production facilities, warehouses,
and distribution centers.
 The location of these facilities can involve a long-term commitment of resources, so
known risks and benefits should be considered carefully.
 Centralized distribution generally yields scale economies and tighter control, but higher
transportation costs.

 Decentralized distribution tends to be more responsive to local needs.

 Location decisions in supply chain


 reflect the basic strategy for accessing customer markets,

 will have a significant impact on costs, revenues, and responsiveness.

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Location Options
Existing companies generally have four options available in
location planning:

1. Expand an existing facility


2. Add new locations while retaining
existing facilities
3. Shut down one location and move
to another
4. Do nothing

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Global Location
Globalization: the process of global integration of the
economies of nations by allowing the unrestricted flow of
goods, services, investments and currencies between countries

Two key facilitating factors have contributed to the attractiveness of globalization:


1. Trade Agreements (e.g. North American Free Trade Agreement (NAFTA), General
Agreement on Tarriffs and Trade (GATT), and EU and WTO efforts to facilitate trade

2. Technology (Advances in communication and information technology)

Group activity- You want to shift your factory to China, India, Dubai, Cairo,What are the benefits,
disadvantages and risks associated with Global locations? Read pg. 336-337

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Global Location
 Benefits: A wide range of benefits have  Disadvantages: There are a number of
accrued to organizations that have disadvantages that may arise when locating
globalized operations: globally:
 Markets  Transportation costs
 Cost savings  Security costs
 Legal and regulatory  Unskilled labor
 Financial  Import restrictions
 Other  Criticism for locating out-of-country
 Risks: Organizations locating globally
should be aware of potential risk factors
related to:
 Political instability and unrest
 Terrorism
 Economic instability
 Legal regulation
 Ethical considerations
 Cultural differences

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Location Decision: General Procedure
Country
1. Decide on the criteria to use for evaluating location
alternatives
2. Identify important factors, such as location of markets or
raw materials
3. Develop location alternatives
Region/Community
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community
Site alternatives
4. Evaluate the alternatives and make a decision (Common
techniques: Locational cost-volume-profit analysis, Factor
rating, Center of gravity method,Transportation model)
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Service and Retail Locations
 Retail and service organizations typically place traffic volume and convenience high on the list of
important factors.
 Customer access is sometimes a prime consideration, as it is with banks and supermarkets, but
not a consideration in others, such as call centers, catalog sales, and online services
 If a business is unique, and has its own drawing power, nearness to competitors may not be a
factor
 Clustering: Similar types of business locate near each other:
 Retail businesses generally prefer locations that are near other retailers because of the higher traffic volumes and
convenience to customers
 Medical services are often located near hospitals for convenience of patients.
 Good transportation and/or parking facilities can be vital to retail establishments.
 Customer safety and security can be key factors, particularly in urban settings, for all types of
services that involve customers coming to the service location (as opposed, say, to in-home
services such as home repair and rug cleaning).

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Service and Retail Locations
For service operations, only the site selection stage might be relevant
Tend to already be focused on a specific region and community

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Factor Rating
Factor rating: a general approach that is useful for evaluating a given alternative and
comparing alternatives.
Involves both qualitative and quantitative inputs
Along location analysis, it can be applied to wide range of decisions ranging from
personal (e.g. buying a car) to professional (e.g. choosing a job).

 Steps:
1. List relevant factors
2. Assign importance weight to each factor (0 - 1)
3. Develop scale for each factor (1 - 100) and set a minimum acceptance score if
necessary
4. Score each location using factor scale
5. Multiply scores by weights for each factor & total
6. Select location with maximum total composite score, unless it fails to meet the
minimum acceptance score
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Factor Rating – Cont.
 Example: A seafood restaurant is considering opening a second
facility in Salalah. The table below shows its rating of five factor at
each of four potential sites. Which site should be selected?

Sites
Factors Weights
1 2 3 4
Affluence of local population 10 70 60 85 90
Construction and land cost 10 85 90 80 60
Traffic flow 25 70 60 85 90
Parking availability 20 80 90 90 80
Growth potentials 15 90 80 90 75

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Factor Rating – Cont.
Sites
Factors Weights
1 WS1 2 WS2 3 WS3 4 WS4
Affluence of local population 10 70 700 60 600 85 850 90 900
Construction and land cost 10 85 850 90 900 80 800 60 600
Traffic flow 25 70 1750 60 1500 85 2125 90 2250
Parking availability 20 80 1600 90 1800 90 1800 80 1600
Growth potentials 15 90 1350 80 1200 90 1350 75 1125
Total weighted score 6250 6000 6925 6475

Maximum
Total weighted score for location (1) = (10) 70 + (10) 85 + (25) 70 + (20) 80 + (15) 90 = 6250 weighted
score

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Factor Rating – Cont.
Exercise: A manager has received an analysis of several cities being considered for a new office
complex. The data (10 points maximum) are as follows:
Location Score
Factors
A B C
Business services 9 5 5
Community services 7 6 7
Real estate cost 3 8 7
Construction cost 5 6 5
Cost of living 4 7 8
Taxes 5 5 4
Neighborhood 6 7 8
a. If the manager weights the factors equally, which location should be selected?
b. If business services and construction costs are given weights that are double the weights of the
other factors, which location should be selected?
c. Referee to b, if the minimum accepted score for community services is 7, which location should
be selected

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Factor Rating – Cont.
Location Score
Factors
A B C
Business services 9 5 5
Community services 7 6 7
Real estate cost 3 8 7
Construction cost 5 6 5
Location Score
Cost of living 4 7 8 Factors Weights
Taxes 5 5 4 A WSA B WSB C WSC
Neighborhood 6 7 8 Business services 2 9 18 5 10 5 10
Total weighted score 39 44 44 Community services 1 7 7 6 6 7 7
Real estate cost 1 3 3 8 8 7 7
Construction cost 2 5 10 6 12 5 10
Cost of living 1 4 4 7 7 8 8
Taxes 1 5 5 5 5 4 4
Neighborhood 1 6 6 7 7 8 8
Total weighted score 53 55 54

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The Center of Gravity Method
The Center of Gravity Method
Determine the location of a facility that will minimize
Locate distribution center that
shipping costs or travel time to various destinations (e.g.
minimize distribution costs
Police and firefighter centers  minimize travelling time)
 Steps:
1. Use a map that shows the location of destinations (The map must be accurate and drawn to scale)
2. Overlay a coordinate system on the map
3. Determine the coordinates of each destination
4. Based on the quantities to be shipped, compute the center of gravity (i.e. the location of the
distribution center)
Center of Gravity Coordinate:
x
x i
x
xiQi
n Equal Q Different
 yi
i

y quantities y quantities


yQ i i

n Q i
where where
xi  x coordinates of destination i Qi  Quantity to be shipped to destination i
yi  y coordinates of destination i xi  x coordinates of destination i
n  Number of destinations yi  y coordinates of destination i

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The Center of Gravity Method – Cont.
Example1: A toy manufacturer produces toys in five locations throughout the country. Raw
materials (primarily barrels of powdered plastic) will be shipped from a new, centralized
warehouse whose location to be determined. The monthly quantities to be shipped to each
location are the same. A coordinate system has been established, and the coordinates of each
location have been determined as shown. Determine the coordinates of the centralized
warehouse. Calculate the distance between the new warehouse and each location

Location (x,y)
x
x i

n
A 3,7
38446
B 8,2  5
5
C 4,6
y
 yi
D 4,1 n
E 6,4 7  2  6 1 4
 4
5

Therefore, the coordinates of the centralized warehouse are (5,4).


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The Center of Gravity Method – Cont.
Example1:

The coordinates of the centralized warehouse are (5,4). Calculate the distance between the new
warehouse and each location

Location (x,y) (x-xw)2 (y-yw)2 Distance

A 3,7 (3-5) 2 = 4 (7-4) 2 = 9 3.51


B 8,2 (8-5) 2 = 9 (2-4) 2 = 4 3.51
C 4,6 (4-5) 2 = 1 (6-4) 2 = 4 2.24
D 4,1 (4-5) 2 = 1 (1-4) 2 = 9 3.16
E 6,4 (6-5) 2 = 1 (4-4) 2 =4 2.24

Location C has the lowest distance.

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The Center of Gravity Method – Cont.
Example2: An analysis of sites for a distribution center Destination Quantity
has led to two possible sites (L1 and L2 on the map). The
sites are comparable on every key factor. The one D1 900
remaining factor is the central gravity. Use the center D2 300
gravity method to select the better site. Monthly D3 700
shipments will be the quantities listed in the table. D4 600
D5 1200

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x, y
Destination Coordinates Quantity xQ yQ
D1 1,2 900 900 1,800
D2 2,4 300 600 1,200
D3 3,1 700 2,100 700
D4 4,2 600 2,400 1,200
D5 5,3 1,200 6,000 3,600
3,700 12,000 8,500

x  12,000
 3,700 = 3.24

8,500
y 

3,700 = 2.30

Plotting the coordinates on the graph given in the problem reveals that L2 is closest to the center
of gravity.

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Locational Cost-Profit-Volume Analysis
Locational Cost-Profit-Volume Analysis: Technique for evaluating location choices in
economic terms
 Steps:
1. Determine the fixed and variable costs for each
alternative
2. Plot the total-cost lines for all alternatives on the same
graph
3. Determine the location that will have the lowest total
cost (or highest profit) for the expected level of output

• Assumptions:
1. Fixed costs are constant for the
 For a cost analysis, compute the total cost for
each alternative location: range of probable output
Total Cost  FC  v  Q 2. Variable costs are linear for the
where range of probably output
FC  Fixed cost 3. The required level of output can be
v  Variable cost per unit closely estimated
Q  Quantity or volume of output 4. Only one product is involved

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Center of Gravity Method: Example 3
Suppose the shipments for the problem depicted in Figure 8.1a are not all equal. Determine the center of
gravity based on the following information.

Destination x y Weekly Quantity

D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 1,000

x
 x Q  2(800)  3(900)  5(200)  8(100)  6,100  3.05The coordinates for the center of gravity are (3.05, 3.7).
i i

Q i 2,000 2,000
You may round the x-coordinate down to 3.0, so the
coordinates for the center of gravity are (3.0, 3.7). This
y
 y Q
i
i 2(800)  5(900)  4(200)  5(100) 7,400
i
  3.7south of destination D2 (3, 5).
 Q i 2,000 2,000

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Cost-Profit-Volume Analysis – Cont.
Example: You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron,
Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable
costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best
location for an expected volume of 2,000 cases per year?
o To plot the total-cost lines, select an output that is approximately equal to the expected
output level (e.g. 3,000 cases per year). Compute total cost for each location at that level:

Fixed Cost + Variable Cost = Total Cost


A 30000 + 75(3000) = 255000
BG 60000 + 45(3000) = 195000
C 110000 + 25(3000) = 185000

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o Select Output equals to 0, and compute total cost (i.e.Total Cost = Fixed Cost only)
Fixed + Variable = Total
Cost Cost Cost
A 30000 + 75(0) = 30000
BG 60000 + 45(0) = 60000
C 110000 + 25(0) = 110000
o For each location, plot the two points of total costs and connect them with a straight line

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Cost-Profit-Volume Analysis – Cont.
o On the plot, determine the approximate ranges for which the various alternatives will
yield the lowest costs.

From the plot, at volume 2,000 cases per year, Bowling Green is the best location.

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Example - Cont.
o To determine the exact ranges, compute the break-even output level (i.e. when two total costs
are equal) of the crossing lines at the corresponding ranges.
 From Akron and Bowling Green lines:
30000 + 75Q = 60000 + 45Q  Solve for Q?
30Q = 30000
Q = 1000 cases.
From Bowling Green and Chicago lines:
60000 + 45Q = 11000 + 25Q  Solve for Q?
20Q = 50000
Q = 2500 cases.
Expected Volume Superior Location (with
Range (cases) the lowest total cost)
Up to 999 Akron
1001 – 2499 Bowling Green
2501 and up Chicago
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Cost-Profit-Volume Analysis – Cont.
o For a profit analysis, these procedures can be repeated where total profit for each
location is computed instead of total cost.

Total Profit = Q(R – v) – FC


where
R = Revenue per year

 What would be the best location using profit analysis?

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Cost-Profit-Volume Analysis – Cont.
Profit analysis. A manufacturer of staplers is about to lose its lease, so it must move to
another location.Two sites are currently under consideration. Fixed costs would be $8,000
per month at site A and $9,400 per month at site B.Variable costs are expected to be $5 per
unit at site A and $4 per unit at site B. Monthly demand has been steady at 8,800 units for the
last several years and is not expected to deviate from that amount in the foreseeable future.
Assume staplers sell for $6 per unit. Determine which location would yield the higher profit
under these conditions.

Hence, site B is expected to yield the higher monthly profit.

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Cost-Profit-Volume Analysis – Cont.
Exercise (1): A company that produces pleasure boats has decided to
expand one of its lines. Current facilities are insufficient to handle the
increased workload, so the company is considering three alternatives,A (new
location), B (subcontract), and C (expand existing facilities). Alternative A
would involve substantial fixed costs but relatively low variable costs: fixed
costs would be $250,000 per year, and variable costs would be $500 per boat.
Subcontracting would involve a cost per boat of $2,500, and expansion would
require an annual fixed cost of $50,000 and a variable cost of $1,000 per boat.
Find the range of output for each alternative that would yield the lowest total cost.
Which alternative would yield the lowest total cost for an expected annual volume of
150 boats?
What other factors might be considered in choosing between expansion and
subcontracting?

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Cost-Profit-Volume Analysis – Cont.
Exercise (1)

500

400 A (new location)


TC
($000) 300
[250] C (expansion)
200
B (sub-
contract)
100

[50] 0

33.3 100 200 300 400


B C A
No. of Boats/yr.

Subcontracting prices are probably more precise, subcontracting provides another


source of supply. Expansion would allow more control and flexibility.
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Cost-Profit-Volume Analysis – Cont.
Exercise (2): The owner of Genuine Subs, Inc., hopes to expand the
present operation by adding one new outlet. She has studied three
locations. Each would have the same labor and materials costs (food,
serving containers, napkins, etc.) of $1.76 cents per sandwich.
Sandwiches sell for $2.65 each in all locations. Rent and equipment
costs would be $5,000 per month for location A, $5,500 per month
for location B, and $5,800 per month for location C.
Determine the volume necessary at each location to realize a monthly profit
of $10,000.
If expected sales at A, B, and C are 21,000 per month, 22,000 per month, and
23,000 per month, respectively, which location would yield the greatest
profits?

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Cost-Profit-Volume Analysis – Cont.
Exercise 2
A B C
Rev/unit $2.65 $2.65 $2.65
VC/unit 1.76 1.76 1.76
FC $5,000 $5,500 $5,800

specified profit + FC A B C
a. Q= Rev/unit – VC/unit = 16,85 17,416 17,753
4

b. Profit = (Rev/unit – VC/unit)Q – FC = $13,6 $14,080 $14,670

90

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Group Exercise
New Muscat Airport

In your group, discuss the following information that was abstracted from Oman
Airports Management Company and Oman Observer, and then provide answers to the
following:
1. What was the key motive or objective to expand the current facilities of Muscat
Airport?
2. Given the cost of construction, do you think that such high cost is justifiable by the
key motive?
3. What were the location options for the Omani government prior to the decision of
expanding the current airport? List some pros and cons for each option. Based on
your list, what would be a more sensible location option?
4. Suppose that the government decided to shut down the current airport and move
it another location, what would be possible locations? And which method could be
used to select the best location?
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Group Exercise – Cont.
According to Oman Airports Management Company S.A.O.C, the
new terminal at Muscat International Airport would be completed by
2014 and will have the capacity to handle 12 million passengers
annually. Further expansions planned in three subsequent phases will
ultimately boost the airport’ capacity to 24, 36 and 48 million
passengers when the demand is required.

It was reported earlier (Oman Observer-26/11/2010) that the construction cost of this terminal is to the tune of
RO 706.3 million, covering 332,000 square meter area. The new airport with world-class standards will have 104
counters to serve passengers, supported with state-of-the-art technologies specially designed for completing travel
procedures at a quick pace.

The main building 460 meters long, 200 meters wide and 44
meters high is provided with all the services that ensure safe
processing of passengers’ transactions, flight booking and hotel
reservations and a 4-star hotel with 90 rooms which may be
expanded. The hotel rooms will be provided with all amenities
available at top hotels, besides duty free shops.
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Group Exercise – Cont.

The new terminal includes three wings for airplanes and passenger service.The suites will be
provided with 30 bridges for passengers.The Northern Ward will be 310 meters long, 50
meters wide and 26 meters high.The Western Ward is 200 meters long, 50 meters wide and 26
meters high.The Southern Ward is 325 meters long, 50 meters wide and 26 meters high.
The terminal is designed to have 6,400 car parks, besides landscaping and other amenities to
meet the maximum needs of passengers

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