SITE SELECTION FOR SERVICES

The difference between a good site and a not so good site can
make a big difference in terms of profits and long time
sustainability of the organization.
For both manufacturing and service organizations, site selection
is a strategic decision and has long term implications for the
growth and sustainability of the organization.

This is a one-time decision and cannot be changed easily in the

short-term.
 What is Facility Location?
• For manufacturing firms
– Selecting site is done infrequently
– Basis for the decision is often based on cost reduction or tax
concession from local governments or inexpensive labor
• For service firms
– Site selection problem can be frequent. It is common for retailing firms
to add several new stores in a year
– Site selection is often not based on costs but usually on how location
will help generate revenue
– It is an important operational decision
 Facility Location

• The location decision consists of two parts – finding a

location and then finding a site within it for the service
delivery system
• Service organizations may have to take location decisions due
to following reasons:
• As part of growth strategy, the organization is pursuing
• Increased demand
• Sometimes, demand at one location may fall below the
required level, hence, a new location with sufficient
demand may be needed
 General Criteria for Location Selection
• Labor availability and costs
• Labor history and culture
• Educational, recreational and cultural centers
• Electric power
• Transportation and road networks
• Health and welfare, and healthcare system, climate and weather
• Geography and environmental protection management
• State business climate, State taxes, and incentives
• Suppliers and supporting service companies
• Population and population trends
• Communication systems
• Preference of management
• Cost of living
• Community attitudes
• Cost of land and construction
• Potential for expansion

Common Mistakes to avoid in
Location Decisions
• Failure to forecast trends
• Failure to develop a company profile
• Paying too much attention to land costs
• Failure to understand the costs of moving
people
• Allowing prejudices of executives to
override what should be a business
decision
• Failure to take into account the culture of
the workers at the location
• Paying too much attention to wage rates
rather than productivity
• Failure to coordinate construction and
moving with the ongoing operations of
the business
 Types of Services
• Different types of services have very different needs regarding
site selection and use radically different methods
• Demand-Sensitive Services:
– Here the goal is to attract customers through location
– Prominent examples include most of the service firms a consumer will
visit, such as banks, restaurants, Retail Stores etc.
– The problem of site selection is most critical in this type of business,
since it is the customers who have to be enticed to travel to the
service site, rather than employees being ordered to travel to the
customer
– The difference between the best site and reasonably good site in
demand-sensitive services is the difference between profit and loss
 Types of Service Firms

Delivered Services
• In this type of services, the service firm delivers the service to the
customers at different locations.
• Here the goal is to use multiple locations to cover a geographic area
effectively
• Examples in public sector include fire and police protection, postal
facilities and emergency medicine
• Examples in private sector include food delivery, package delivery, private
medical services (e.g. Private ambulance services), and repair services
(e.g. Business computer repair, where downtime represents lost
customer orders)
• A retail “saturation strategy” that is used in many industries, such as
grocers and convenience stores, also is helped by the methods covered
in this section
 Types of Services
• Quasi-Manufacturing Services
– Here also the goal is to minimize the logistical costs of multiple
location network
– Examples include back-office processing centers of banks and
insurance companies, warehouses, hotel reservation centers and
other call centres, and many firms in the wholesaling industry
• Other types of service firm location decisions include
– locating a corporate headquarters,
– an internet based service, or
– finding a location for duplicate systems in case of a primary system
disaster, etc.
• These location decisions, are special cases
Types of Services
 • Consider finding a location for mid-priced
restaurant. A good site will have the following
Site Selection for Demand-Sensitive attributers:
• Should be close to business offices
• Should be easily accessed
• Be in an area with high traffic
• Include ample parking
• Room for expansion
Services

• Good competitive factors

• A nice local government for zoning variances and
taxes
• Be inexpensive to lease
• Unfortunately, it is difficult get a site which meets
all the above criteria
• We need a method to present and weigh the
conflicting advantages of various sites
• Two methods are used – factor rating and
regression
• A third method is also available – Geographic
Information Systems
 Criteria and its assigned weight
Office Space Middle Class Competition Visibility
Site
(0.25) Population (0.50) (0.15) (0.10)
A 4 9 5 2

B 5 5 3 2

C 1 2 3 8

D 8 2 6 3

E 4 8 1 4

F 6 8 6 3

G 8 5 7 4

H 2 4 3 3
• The calculations are shown in the table below:
• Example:
– Let us consider the problem of finding a site for a bank branch. The
important factors to be considered and corresponding independent
variables for each factor are listed as under:
Factors Independent Variables
%of population: 25 to 34
Age of Population %of population: 35 to 54
%of population: 55 and above

Rs. 20000 to 34000

Annual Income of Households Rs. 35000 to 49000
Rs. 50000 and above

Street Placement On a rating scale of 1 to 10

Pedestrian Traffic No: of pedestrians per 5 minutes
Years for which the facility is
…… Years
open
• …
• This is shown in the figure below:
• This is shown below:

• The main disadvantage of regression model is that it requires data.

Therefore, the firm must already be having several facilities in the field
before analyzing with regression model.
 Site Selection for Demand-Sensitive Services

 1 
 
Pik   Tik 
n 
1 
 
 

j 1  Tij 

• This equation can be expanded to include other factors such

as differential attractiveness of different-sized stores, or other
industry-specific factors.
 Site Selection for Delivered Services
The usual goal is to either minimize costs of multiple sites or
maximize the effectiveness of limited resources

Management must decide how many facilities to have and

where to locate those facilities

The steps to make these decisions include the following:

• Establish a service goal (e.g. Everyone within a city boundary should be

reached by ambulance within 10 minutes
• Mathematically represent a service area (customers are grouped by census
tract, zip code etc.
• Determine demand from service area
• List potential sites and determine relationship of sites to demand
 Site Selection for Delivered Services
• The figure below shows an example for finding locations for an ambulance
service. The goal is to have the fewest stations while still serving each area
in 12 minutes or less.
 Site Selection for Delivered Services
• The 12 demand groups are labeled A through L and represent
potential sites.
• Travel times are noted on the links between the demand
groups but they do not always correspond with the physical
distance between the points.
• This example is relatively simple, but the solution is typically
not obvious at first glance
• Amore realistic problem would be several times this size, and
would be more complex in terms of service standards and
capacity
• Expected Results
– The four-step process will not provide a “perfect solution”. What it
delivers is a good solution which is better than what can be
accomplished without an appropriate method
– Consider a likely alternative:
– Start with one store which is placed in the best location
– Add another store placed in the second best location, and so on
– Given a situation with two pockets of high demand and one store to
locate, one would want to locate it right in the middle so that both
markets could be served
– When a second store is added, it would make sense to locate it in one
of the high demand markets
– However, if one was planning ahead of time, the third solution is
clearly the best – have one store each in both high demand locations
• The situation is depicted in the figure below:
Delivered Services
X 
 XV i i

V
c
i

Y 
 YVi i

V
c
i
• Location of center of gravity

• A major application is the location of communication towers in urban

areas, such as Radio, TV, and cell phone towers. In this application, the
goal is to find sites that are near clusters of customers.
Site Selection for Quasi-manufacturing Services

• Many service facilities require very little face-to-face contact

with their customers – e.g. Telephone call centers, back office
operations of financial services firms such as banks, insurance
companies etc.
• For these facilities, the main purpose in site selection is to
minimize costs
• The managerial decisions to be made are how many sites, the
location of each site, and the staffing pattern of resulting
facilities
• Commercial software is available to help with this problem
Location Fixed cost (Rs.) Variable cost (per unit
Rs.)
A 200000 5

B 100000 10

C 50000 15
• Graphical solution
Real life cases are much more complex than what is shown above.
Commercial software is available to help with such problems.

The software uses three basic types of methods:

• Heuristics:
• based on ‘rule of thumb”, but often a highly complex rule
• Deterministic simulation:
• In this package, costs are input into the software so that if the user chooses a
set of locations, the software can provide the overall costs;
• the weakness of this method is the requirement that the user supply the
specific list of locations
• Mixed integer / linear programming
• Here also, the user must list of initial set of locations
 In making comparisons among locations, it
is well to group the criteria according to

• Quantifiable (e.g. Management’s estimate

Subjective of risk
Criteria • Non-quantifiable (e.g. Acceptance by
community, legal factors etc.)

Objective • Quantifiable (e.g. Cost of construction)

• Non-quantifiable (e.g. Lower cost of living)
Criteria