Location planning and analysis

Need for Location Decisions

• Marketing Strategy

• Cost of Doing Business

• Growth

• Depletion of Resources

Nature of Location Decisions

• Strategic Importance– Long term commitment/costs– Impact on investments, revenues, and operations– Supply chains

• Objectives– Profit potential– No single location may be better than others– Identify several locations from which to choose

• Options– Expand existing facilities– Add new facilities– Move

Making Location Decisions

• Decide on the criteria• Identify the important factors• Develop location alternatives• Evaluate the alternatives• Make selection

Location Decision Factors

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations

• Location of raw materials• Location of markets• Labor factors• Climate and taxes

Regional Factors

• Quality of life• Services• Attitudes• Taxes• Environmental regulations• Utilities • Developer support

Community Considerations

• Land• Transportation• Environmental• Legal

Site Related Factors

• Product plant strategy• Market area plant strategy• Process plant strategy

Multiple Plant Strategies

Comparison of Service and 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

Trends in Locations

• Foreign producers locating in another country– “Made in” effect– Currency fluctuations

• Just-in-time manufacturing techniques• Microfactories• Information Technology

3+1 methods to evaluate location alternatives

•Locational Cost-Profit-Volume Analysis•Factor rating•The Center of Gravity method•The transportation model

Locational Cost-Profit-Volume Analysis

• Numerical and graphical analysis are both feasible. We focus on the graphical one.

• The steps:1. Determine the fixed and variable costs for each

location2. Plot the total-cost lines for all location alternatives

on the same graph3. Determine which location will have the lowest total

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

Assumptions of the CPV Analysis

• Fixed costs are constant for the range of probable output

• Variable costs are linear for the range of probable output

• The required level of output can be closely estimated

• Only one product is involved

The total cost curve

• TC = FC + VC = FC + v*QC

ost

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Alternatively, the total profit is

• TP = Q * (R – v) – FC

A simple problem from the text-book

Location Fixed cost (FC) Variable cost per unit (v)

A 250,000 11

B 100,000 30

C 150,000 20

D 200,000 35

Plotting the total-cost lines

Calculate the break-even output levels

• For B and C:100,000 + 30*Q = 150,000 + 20*QQ = 5,000

• For C and A:150,000 + 20*Q = 250,000 + 11*QQ = 11,111

Which location is the best?The expected long-term volume Best location

> 11,111 A

5,000 < Exp. vol. < 11,111 C

< 5,000 B

Another problem for the same method

Location Fixed cost (FC) Variable cost per unit (v)

A 10000 30B 20000 20C 35000 15D 25000 40

The plot

Factor rating

• Can be used for a wide range of problems• The procedure:

– Determine the relevant factors– Assign a weight to each factor, indicating its importance

(usually 0-1)– Decide on a common scale of the factors and transform

them to that scale– Score each location alternative– Multiply the factor weight by the score for each factor

and sum the results for each location– Choose the alternative with the highest composite score

Example form the text-book

The Center of Gravity method

• Its aim is to determine the location of a facility that will minimize the shipping cost or travel time to various destinations.

• Frequently used in determining the location of schools, firefighter bases, public safety centres, highways, distribution centres, retail businesses…

Assumptions

• The distribution cost is a linear function of the distance and the quantity shipped

• The relative quantity shipped to each destination is fixed in time

Map and coordinates

• A map is needed that shows the locations of destinations

• A coordinate system is overlaid on the map to determine the coordinates of each destination

• The aim is to find the coordinates of the optimal location for the facility, as a weighted average of the x and y coordinates of each destinations, where the weights are the shipped quantities. This is the centre of gravity.

A sample problem

The formulas

The solution

The transportation model

A special case of the linear programming model

The transportation problem

• …involves finding the lowest-cost plan for distributing stocks of supplies from multiple origins to multiple destinations that demand them.

The optimal shipping plan• The transportation model is used to determine

how to allocate the supplies available at the origins to the customers, in such a way that total shipping cost is minimized.

• The optimal set of shipments is called the optimal shipping plan.

• There can be more optimal shipping plans.• The plan will change if any of the parameters

changes significantly.

A possible transportation problem situation

D

D

D

D

S

S

S

Defining the classic transportation problem

• The goods have more shipping points (suppliers) and more destinations (buyers).

• Prices are fixed.• The sum of the quantities supplied and the sum of quantities

demanded are equal. There are no surpluses nor shortages.• ai and bj are both positive (there are no reverse flow of goods)• the dependent variables are the transported quantities form origin i

to destination j: xij ≥ 0• All of the supplies should be sold and all of the demand should be

satisfied.

• Tha aim is to minimize the total transportation cost:

• Homogeneous goods.• Shipping costs per unit are constant.• Only one route and mode ofg transportation exists between each

origin and each destination.

Typical areas of transportation problems

• Suppliers of components and assembly plants.• Factories and shops.• Suppliers of raw materials and factories.• Food processing factories and food retailers.

Informations needed to built a model

• A list of the shipping points with their capacities (supply quantities).

• A list of the destinations with their demand. • Transportation costs per unit from each origin to each

destination

• Question: what if prices of the good are differ form supplier to supplier?

Surplus

• If the total supply is greater than the total demand, than we have to add a ‘phantom’ destination to the model the demand of which is equal to the surplus.

• The transportation cost to this phantom destination is 0 from every supplier.

• De quantities shipped to this virtual customer will be those that will not be bought by anybody.

Shortages

• The formal solution is the same as it was in the case of a surplus (with 0 transportation costs):

• But: mathematics are less adequate in the case of shortages than in the case of surplusses, because of the consequences.

The transportation table

A B C D Supply

1 4 (unit

cost)

7 7 1 100

2 12 3 8 8 200

3 8 10 16 5 150

Demand 80 90 120 160 450=

=450

Solving transportation problems

• Never try without a computer• There can be many equivalent solutions (with

the same total cost).

Creating models and solving them

Thanks for the attention!