LOCATION

DECISION

longterm
decision

LOCATION
DECISION

key
decision

geograp
hic

The Need for Selecting a

Suitable Location
1.When starting a new
organization or business.
2.In case of existing
organization or business.
3.In case of global location.

The Nature of
Location
Decision

Importance of Location Decision

Help expand the
market of a
business

Makes a
business more
attractive

Entails longterm
commitment

Can impact
capacity and
flexibility

Has impact on operating

costs and revenues and
operations

Objectives of location decision

Profit-Oriented: profit potential
Non-Profit: balance between cost
and level of customer
service
Most organizations do not set out with
the intention of identifying the one best
location.

Supply Chain Considerations

Centralized Distribution
- Generally yields scale
economies
- Tighter control
Decentralized Distribution
- more responsive to local
needs

Location Options
1. Expand existing facility
2. Add new locations while
retaining existing ones
3. Shut down at one location
and move to another
4. Do nothing

General Factors for All Types of

Organizations
Uncontrollable
Factors

Controllable Factors

1.Government Policy

1. Proximity to Markets

2.Climatic Conditions

2. Supply of Materials

3.Supporting

3. Transportation

Industries
4.Community Attitude
5.Community
Infrastructure

Facilities
4. Infrastructure
Availability
5. Proximity to Source
of Labor

Globalization
and Location Decision
Globalization has opened
new markets, and it has meant
increasing dispersion of
manufacturing and service
operations around the world.

Firms are attracted to foreign

locations for:
foreign markets
cheaper suppliers or labor
natural resources

Facilitating Factors
1. Trade Agreement
a formal agreement between two or more
countries about improving trade with each
other
Barrier to international trade such as
tariffs and quotas have been reduced or
eliminated
2. Technology
Technological advances in communication
and information have been very helpful
Include faxing capability, e-mail, cell

Benefits of Locating
Globally
1.Markets
2.Cost savings
3.Legal and regulatory
4.Financial

Disadvantages
1. Transportation costs
2. Security costs
3. Unskilled labor
4. Import restrictions
5. Criticisms

Risks in Global Locations

1.Political
2.Terrorism
3.Economic
4.Legal
5.Ethical
6.Cultural

ISSUES TO
CONSIDER IN
LOCATING GLOBALLY
1. Different Culture
- each culture has different set of values,
norms, ethics, and standards.

2. Language Barriers
- engaging in discussions, following
instructions, and understanding exactly
what is being said can become difficult
when employees speak different languages.

3. Different Laws and

Regulations
- include everything from
pollution regulations to labor
laws
- what is acceptable in one
culture may be completely
unacceptable or even illegal in
another

General
Procedures for
Making Location
Decisions
> Depends on the size and
nature or scope of the
business or organization
operations

New and/or Small Organizations

tend to adopt a rather informal
approach
locate where owner lives
Large organizations
formal approach

Steps
1.Decide on the criteria to use for evaluating
location alternatives, such as increased
revenues or community service.
2.Identify important factors, such as location of
markets or raw materials.
3.Develop location alternatives:
identify a country or countries for location
identify the general region for a location
identify a small number of community
alternatives
identify site alternatives among the community
alternatives

Identifying a Country, Region,

Community, and Site
Specific Locational Factors
Manufacturing
1. Favorable Labor
Climate
2. Proximity to Markets
3. Quality of Life
4. Proximity to suppliers
and resources
5. Utilities, taxes, and real
estate costs

Service
1. Proximity to
Customers
2. Proximity to Markets
3. Transportation Costs
4. Location of
Competitors

Identifying a Country, Region,

Community, and Site
IDENTIFYING A COUNTRY
Restrictions
Benefits and risks
IDENTIFYING A REGION
Location of raw materials (necessity,
perishability, and transportation costs)
Location of markets
Profit-oriented organizations
Non-profit
Labor considerations

Identifying a Country, Region,

Community, and Site
IDENTIFYING A COMMUNITY
Community size
Cost and availability of utilities
Environmental regulations
IDENTIFYING A SITE
Land
Transportation
Zoning

Geographic Information
System
- It is a computer based tool
for collecting, storing,
retrieving and displaying
demographic data on maps.

Multiple Plant
Manufacturing Strategies
Product Plant Strategy
Entire products or product lines are
produced in separate plants, and each plant
usually supplies the entire domestic market.
Market Area Plant Strategy
Plants are designed to serve a particular
geographic
segment of market.
Desirable when shipping costs are high due
to
volume, weight, and other factors

Multiple Plant
Manufacturing Strategies
Process Plant Strategy
Different plants concentrate on
different
aspects of a process
Best suited to products that have
numerous
components
General Purpose Plant Strategy
Plants are flexible and capable in

Service and Retail

Location
Customer access is sometimes a
prime
consideration
Profit/revenue focused
Usually found near the center of
markets
they serve

EVALUATING
LOCATION
ALTERNATIVES

Locational Cost-Profit-Volume
Analysis
technique for evaluating location
choices in economic terms
This method assumes the following:
1.Fixed costs are constant for the range
of probable output.
2.Variable costs are linear for the range
of probable output.
3.The required level of output can be
closely estimated.
4.Only one product is involved.

Total cost = FC + (v x Q)
Where
FC = fixed cost
v = variable cost per unit
Q = quantity or volume of
output

Procedure
1.Determine the fixed and variable costs
associated with each location alternative.

2. Plot the total-cost lines for all location

alternatives on the same graph.
Total cost = FC + (v x Q)

Total annual cost (P 000)

Locatio
FC per
n
Year
A
P 250,000

v
P 11

100,000

30

C700

150,000

20

D600

200,000

35

500

Finding for the Total

Cost
= P250,000 + (P11 x
10,000)
= P100,000 + (P30 x
10,000)
= P150,000 + (P20 x
10,000)
= P200,000 + (P35 x
10,000)

400
300
200
100
0

6
8
10
12
Annual output (000 units)

14

16

Total
Cost
P 360,000
400,000
350,000
550,000

A
B
C
D

Blue
Orange
Green
Violet

3.

Determine which location will have the

lowest cost for the expected level of
output. Alternatively, determine which
location will have the highest profit.

Break-even output level:

+ (Q) = + (Q)
For B and C:
+ (Q) = + (Q)
P100,000 + P30Q = 150,000 + P20Q
Q = 5,000 units per year

For A and C:
+ (Q) = + (Q)
P250,000 + P11Q = 150,000 + P20Q
Q = 11,111 units per year

At 8,000 units per year, which location

alternative provides the lowest total cost?

Total annual cost (P 000)

700
600

A
B
C
D

500
400
300
200
100
0

6
8
10
12
Annual output (000 units)

14

16

Blue
Orange
Green
Violet

THE TRANSPORTATION
METHOD
used to determine the minimum
transportation cost that would result
if a potential new location were to be
added to an existing system.
used to analyze each of the
configurations considered and it
reveals the minimum costs each
would provide.

Factor Rating
General approach to evaluating
locations that includes
quantitative and qualitative
inputs.
Its value is to provide a rational
basis for evaluation and
facilitates comparison among
alternative by establishing a
composite value for each

PROCEDURE USED TO
DEVELOP A FACTOR
RATING:
1.Determine which factors are relevant.
Proximity to existing store, traffic
volume, rental costs, size, layout,
operating costs
2.Assign a weight to each factor that
indicates its relative importance
compared with all other factors.
3.Decide on a common scale for all
factors and set a minimum
acceptable score if necessary.

3. Score each location alternative

4. Multiply the factor weight by the
score for each factor and sum the
results for each location alternative.

5. Choose the alternative that has

the highest composite score,
unless it fails to meet the minimum
acceptable score.

THE CENTER OF GRAVITY

METHOD
Used to determine the location of a
facility that will minimize shipping
costs or travel time to various
destinations.
treats distribution cost as a linear
function of the distance and the
quantity shipped. The quantity to be
shipped to each destination is
assumed to be fixed.

Formula use to find the

averages:

Where:

= x coordinate of destination i
= y coordinate of destination

i
n= number of destinations

Appropriate Formula

Where:
= Quantity to be shipped to
destination i
= x coordinate of destination i
= y coordinate of destination i

6
D2

D4

D1

D2

D3

D4

18

16

D3

4
3
D1
2
1
0
1

= = 4.5

10

= ?

= =4

DESTINATI
ON

WEEKLY
QUANTITY

D1

800

D2

900

D3

200

D4

100
2000

= = = 3.05

= = = 3.7

DESTINATION

Coordinates (X,Y)

Examples:

Catanduanes

(11,22)

15

Masbate

(10,7)

12

Sorsogon

(9,8)

10

Camarines Sur

(4,1)

Camarines Norte

(3,1)

THE LOAD-DISTANCE MODEL

What is load?
A procedure for evaluating
location alternatives based on
distance
To select a location that
minimizes the total amount of
loads moved weighted by the

ld score for a location =

where ld = load-distance
= load between locations a and b
= distance between locations a and b

Steps

1. Identify distances.
Rectilinear distance =

Place x y
Naga
3
1
Buhi
7
4
Legaz 12 9
pi
Iriga
5 5.5
Bato
10 8

Place
Naga
Buhi
Legazpi

Distance to Iriga
|3-5| + |1-5.5| = 2 + 4.5 = 6.5
|7-5| + |4-5.5| = 2 + 1.5 = 3.5
|12-5|+ | 9-5.5| = 7+ 4.5 = 11.5

Place
Naga
Buhi
Legazpi

Distance
|3-10| + |1-8| = 7
|7-10| + |4-8| = 3
|12-10| + | 9-8| =

to Bato
+7
= 14
+4
=7
2+ 1
=3

2.Identify loads.

Place
Naga
Buhi
Legazpi

Load between Place &

Warehouse
15
10
12

3.

Calculate the load-distance score for each

location.
ld score
for a location
=
Computing
the Load-Distance
Score for Iriga

Place
Naga
Buhi
Legazpi
Total
Total

Place
Naga
Buhi
Buhi
Legazpi
Legazpi
Total
Total

Load (
15
10
12

Distance (
6.5
97.5
3.5
35
11.5
138
Load-Distance
Load-Distance Score:
Score: 270.5
270.5

Computing the Load-Distance Score for Bato

Load (
Distance (
15
14
210
10
7
70
10
7
70
12
3
36
12
3
36
Load-Distance
Load-Distance Score:
Score: 316
316