Location Planning and Analysis

Location Planning
and Analysis
Prepared By: Gurpreet Singh

Need for Location Decisions
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources

Need for Location Decisions…
Marketing Strategy: (To expand their markets)
For firms like: Banks, Fast-food chains, Supermarkets & Retail stores etc.
Cost of Doing Business:

Cost of doing business at particular location reach a point where other
locations begin to look more attractive.
Growth:
Growth in demand for products/services which cannot be satisfied by
expansion at an existing location.
Depletion of Resources: (Depletion of basic I/Ps)

Firms like: Fishing and Logging, Mining and Petroleum etc.
Nature of Location Decisions
Strategic Importance of location decisions
Long term commitment/costs
Impact on investments, revenues, and operations
Supply chains
Objectives of location decisions
Profit potential
No single location may be better than others
Identify several locations from which to choose
Location Options
Expand existing facilities
Add new facilities
Move
Nature of Location Decisions…
Strategic Importance of location decisions:
Location decisions are closely tied to an organization’s strategies.
E.g. A strategy of being of low cost producer might result in locating
where labor or material costs are low, or locating near markets or raw
materials to reduce transportation costs.
E.g. A strategy of increasing profits by increasing market share might
result in locating in high traffic areas.
E.g. Convenience strategy = Many locations, e.g. ATMs, Fast-foods etc.
Long term commitment/costs

Impact on investments, revenues, and operations
Supply chains
Objectives of location decisions:
Profit potential:
For profit oriented organizations.
No single location may be better than others:
There may be numerous acceptable locations from which to choose.
Identify several locations from which to choose:
Rather than of identifying the one best location.
Business at end of supply chain (retail) focus on customer
demographics, traffic patterns etc. Business at the beginning of supply
chain (raw materials) will focus on source of raw materials etc.
Location Options:
Expand existing facilities:
Good option if there is room for expansion
Add new facilities:
While retaining existing facilities (Retail operations)
Move:
Shut down one location and move to another.
Doing nothing:
If there are less benefits in moving then don’t.

Making Location Decisions
Decide on the criteria to use for evaluating alternatives like:
Increased revenues or community service.
Identify the important factors like: Location of markets/raw
materials.
Develop location alternatives:
Identify the general region for a location.
Identify a small number of community alternatives.
Identify site alternatives among the community alternatives.
Evaluate the alternatives and make a selection.

Location Decision Factors
Regional Factors Community Considerations
Multiple Plant Strategies Site-related Factors

Regional Factors
Location of raw materials
Location of markets
Labor factors
Climate and taxes

Regional Factors…
Location of raw materials:
Firms locate near or at source of raw materials for 3 primary
reasons:
Necessity:
E.g. Mining operations, Farming, Forestry, Fishing etc.
Perishability:
E.g. Canning of Freezing of Fruits and Vegetables, Processing of Dairy
products, Baking etc.
Transportation Costs: (bulk
E.g. Paper production, Steel production etc.
Regional Factors…
Location of markets:
Profit oriented firms locate near markets.
Competitor/Convenience: E.g. Banks, Hotels, Drug stores etc.
Distribution costs: E.g. Sand dealers etc.
Perishability of a finished product: E.g. Bakeries, Flower shops etc.
Close customer contact: E.g. Tailor shops, Lawn & Garden service etc.
S/W can be helpful in location analysis (GIS): A computer based

tool for collecting, storing, retrieving and displaying demographic data
on maps. The data may involve: Age, Income, type of Employment,
Housing etc.
Regional Factors…
Labor factors:
Cost and availability of labor: E.g. Shift of textile industry from New
England states to Southern States due to it.
Wage rates in an area
Labor productivity
Worker attitude towards work: Absenteeism etc.
Potential employees skills: As some companies wants to train new

employees rather than previously experienced.

Regional Factors…
Climate and taxes:
E.g. Location of some firms in severe winters may cause some firms to
consider moving to a milder climate, due to delayed deliveries, work

disruptions by inability of employees to get to work etc.
Business and Personal income taxes like: Low-cost energy or Labor etc.
may cause firms to shift.

Community Considerations
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Developer support

Community Considerations…
Quality of life: Schools, Shopping, Housing, Transportation,
Entertainment, Recreation, Cost of Living etc.
Services: Medical, Fire and Police.

Attitudes: Pros/Cons.
Taxes: State/Local, Direct and Indirect.
Environmental regulations: Sate/Local.
Utilities : Cost and Availability.
Developer support: Bond issues, Low cost loans, Grants etc.

Site Related Factors
Land
Transportation
Environmental
Legal

Site Related Factors…
Land:
It includes Cost, degree of development required, Soil
characteristics and Drainage, Room for Expansion, Parking space
etc.
Transportation:
It include Access Roads, Rail Lines, Air Freight etc.
Environmental/Legal:
Zoning restrictions.

Multiple Plant Strategies
Product plant strategy
Market area plant strategy
Process plant strategy

Multiple Plant Strategies…
Product plant strategy: (Decentralized approach)
In this entire products or product lines are produced in separate
plants.
Each plant supplies to entire domestic market.
Focus on narrow set of requirements i.e. specialization of labor,
materials and equipment.

Economies of scale due to specialization i.e. lower operating costs.
Plant locations may be widely scattered or clustered close to one
another.

Market area plant strategy:
In this plants are designed to serve a particular geographic
segment of market.
Operating costs are higher.
Savings on shipping costs.
Rapid delivery and response to local needs.
Requires centralized coordination of decisions to add/delete
plants, or to expand or downsize current plants due to changing

market conditions.

Process plant strategy: (Sharing of Problems/Improvements among
plants)
In this different plants concentrate on different aspects of a
process.
E.g. Automobile manufacturers use this approach with different
plants for Engines, Transmissions, Body Stamping, Radiators etc.

Best suited to products that have numerous components i.e.
resulting in less confusion.

Individual plants are highly specialized and generate volumes.
Economies of scale.
Service and Retail Locations
Manufacturers: Cost focused concerned with Labor, Energy, Material
costs, Availability and Distribution costs.
Service and Retail: Profit/Revenue focused concerned with

demographics age, income, education, population area, competition, traffic
volume etc.
Traffic volume and convenience most important factors
Near to other retailers
Convenience to customers
Good transportation
Customer safety etc.

Some Examples:
Automobile dealerships: Tend to locate near each other.
Restaurants/Specialty Stores: Locate in and around malls i.e.
benefitting from high traffic.
Medical Services: Located near hospitals for convenience of patients.

Doctors’ Offices: Located near hospitals.
Good transportation and/or parking facilities can be vital to retail
establishments.
Customer safety and security can be key factors in urban settings etc.

Service Vs Manufacturing Considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking

Global Locations
Globalization has opened new markets and it has meant
increasing distribution of manufacturing and service
operations around the world.
Reasons for globalization
Benefits
Disadvantages
Risks
Global operations issues
Globalization
Facilitating Factors:
Trade agreements:
Barriers to international trade such as tariffs and quotas have been
reduced or eliminated with trade agreements like: NAFTA, GATT, US-
China Trade Relations Act and European Union has dropped many
trade barriers and WTO is helping to facilitate free trade.
Technology:
Technological advances in communication and IT like: Fax, E-mail,
Cell phones, Teleconferencing, Internet.

Globalization…
Benefits
Markets:
Expanding markets for goods/services of Co.
Cost savings:
Transportation, labor, raw-material costs and taxes.
Legal and regulatory:
Favorable liability and labor laws, less-restrictive environmental and
other regulations.
Financial:
Variety of incentives may be offered by national/regional/local govt. to
attract business that will create jobs and boost the economy.

Globalization…
Disadvantages
Transportation costs: High due to poor infrastructure or shipping over
great distances.
Security: At international border can slow shipment.
Unskilled labor: Impact quality and productivity.
Import restrictions: Some countries place restrictions on importation

of manufactured goods.
Criticisms: Cost savings through unfair practices.

Globalization…
Risks
Political: Political instability and political unrest can create risks for
personnel safety and safety of assets.
Terrorism: Threat in many parts of world, putting personnel and assets
at risk and decreasing willingness of domestic personnel to travel to or
work in certain areas.
Economic: Economic instability might create inflation or deflation.
Legal: Laws and regulations may change.
Cultural: Cultural differences may be there. E.g. Wal-Mart in Japan.

Foreign a. Policies on foreign ownership of production facilities
Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
Liability laws
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions
Customer Possible buy locally sentiment
Preferences
Labor Level of training and education of workers
Work ethic
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation infrastructure

Evaluating Location Alternatives
Locational Cost-Profit-Volume Analysis
The Transportation Model
Factor Rating
The Center of Gravity Method

Locational Cost-Profit-Volume Analysis
This analysis can be done numerically or graphically.
In enhances understanding of the concept and indicates the ranges
over which one of the alternatives is superior to the others.
It involves the following steps:
Determine fixed and variable costs associated with each location alternative.
Plot total-cost lines for all location alternatives on the same graph.
Determine which location will have the lowest total costs and also which
location will have the highest profit.

Locational Cost-Profit-Volume Analysis…
Assumptions:
Fixed costs are constant
Variable costs are linear
Output can be closely estimated
Only one product is involved
For a cost analysis, the total cost:

Total cost = FC + v * Q
Where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity/Volume of O/P
Example 1: Cost-Volume Analysis
Fixed and variable costs for four potential locations
L o ca tio n F ixe d V a ria b le

C o st C o st
A $ 250 ,000 $ 11
B 100 ,000 30
C 150 ,000 20
D 200 ,000 35
(Quantity = 10,000 units per year).
If expected O/P is 8,000 units per year. Which location would
provide the lowest total cost?
Example 1: Solution
Fixed Variable Total
Costs Costs Costs
A $250,000 $11(10,000) $360,000

B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000

Example 1: Solution
800 D
Annual Cost (000)
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16
Annual Output (000)

Transportation Model
Decision based on movement costs of raw materials or finished
goods.
If a facility will be the sole source or destination of shipments, the
company can include the transportation costs in a locational cost-
volume analysis by incorporating the transportation cost per unit
being shipped into variable cost per unit.
If multiple sending points to multiple receiving points are
involved then transportation model of LPP is used.

Factor Rating
It is technique that can be applied to a wide range of decisions
ranging from personal (buying a car, deciding where to live) to
professional (choosing a career, choosing among job offers).
It involves on quantitative and qualitative inputs, which vary
from situation to situation depending on the needs of each org.
It is a general approach that is useful for evaluating a given
alternative and comparing alternatives.
It enables decision makers to incorporate their personal
opinions and quantitative in the decision process.
Factor Rating…
Procedure to develop factor rating:
1. Determine which factors are relevant (e.g. location of market, water
supply, parking facilities, revenue potential).

2. Assign a weight to each factor that indicates its relative importance
concerned with all other factors. Weight sum = 1.00

3. Decide on a common scale for all factors (e.g. 0 to 100) and set the
minimum acceptable score if necessary.

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

6. Choose the alternative that has the highest score as per acceptable score.
Example: Factor Rating
A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which is
better alternative?
Scores out of 100 Weighted Scores
Factor Weight Alt 1 Alt 2 Alternative 1 Alternative 2
Proximity to existing store .10 100 60 .10(100)=10.0 .10(60)=6.0
Traffic Volume .05 80 80 .05(80)=4.0 .05(80)=4.0
Rental Costs .40 70 90 .40(70)=28.0 .40(90)=36.0
Size .10 86 92 .10(86)=8.6 .10(92)=9.2
Layout .20 40 70 .20(40)=8.0 .20(70)=14.0
Operating Costs .15 80 90 .15(80)=12.0 .15(90)=13.5
Total 1.00 70.6 82.7

Center of Gravity Method
It is a method to determine the location of a facility that will
minimize shipping costs or travel time to various destinations.
Method for locating a distribution center that minimizes
distribution costs.
This method 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.
The method includes the use of a map that shows the locations of
destinations. The map must be accurate and drawn to scale.
A coordinate system is overlaid on the map to determine relative locations.

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Location Planning

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Cost of Doing Business:

locations begin to look more attractive.

expansion at an existing location.

Depletion of Resources: (Depletion of basic I/Ps)

Long term commitment/costs

Prepared By: Gurpreet Singh

Identify a small number of community alternatives.

Identify site alternatives among the community alternatives.

Evaluate the alternatives and make a selection.

Prepared By: Gurpreet Singh

Multiple Plant Strategies Site-related Factors

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Competitor/Convenience: E.g. Banks, Hotels, Drug stores etc.

Distribution costs: E.g. Sand dealers etc.

Perishability of a finished product: E.g. Bakeries, Flower shops etc.

S/W can be helpful in location analysis (GIS): A computer based

Worker attitude towards work: Absenteeism etc.

Potential employees skills: As some companies wants to train new

Prepared By: Gurpreet Singh

consider moving to a milder climate, due to delayed deliveries, work

may cause firms to shift.

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Services: Medical, Fire and Police.

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Focus on narrow set of requirements i.e. specialization of labor,

materials and equipment.

Plant locations may be widely scattered or clustered close to one

Prepared By: Gurpreet Singh

Savings on shipping costs.

Rapid delivery and response to local needs.

Requires centralized coordination of decisions to add/delete

plants, or to expand or downsize current plants due to changing

Prepared By: Gurpreet Singh

plants for Engines, Transmissions, Body Stamping, Radiators etc.

resulting in less confusion.

Service and Retail: Profit/Revenue focused concerned with

Near to other retailers

Customer safety etc.

Prepared By: Gurpreet Singh

Medical Services: Located near hospitals for convenience of patients.

Prepared By: Gurpreet Singh

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Prepared By: Gurpreet Singh

Unskilled labor: Impact quality and productivity.

Import restrictions: Some countries place restrictions on importation

Prepared By: Gurpreet Singh

Legal: Laws and regulations may change.

Cultural: Cultural differences may be there. E.g. Wal-Mart in Japan.

Prepared By: Gurpreet Singh