Location decision

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 Identify several locations from which to choose

Options Expand existing facilities Add new facilities Move

Types of Facilities

• Heavy Industry Facilities

• Light Industry Facilities

• Retail And service facilities

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

General Factors affecting location decision

• Availability of basic infrastructure• Basic amenities• Proximity to raw material and markets• Residential complexes, schools, hospitals,

clubs etc.• Availability of cheap labour• Govt. policies• Env. And community• Cheap land

Locating Foreign operations

• Trade barriers• International Customers• International Competition• Regulations• Additional Resources• Low Costs• Offensive in Competitor’s home country

Factors at country level

• Political Risks, Govt. Regulations, attitudes, incentives

• Cultural and economic issues• Labour talent, productivity, cost• Availability of supplies, infrastructure• Exchange rates and currency risks

Location Decision Factors

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations

Regional Factors

• Attractiveness of region(culture, taxes, climate)

• Labour availability• Location of raw materials• Location of markets• Availability of utilities• Govt. Incentives andpolicies• Climate and taxes

Community Considerations

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

Site Related Factors

• Land• Transportation• Environmental• Legal

Multiple Plant Strategies

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

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

Evaluating Locations

• Cost-Profit-Volume Analysis– Determine fixed and variable costs

– Plot total costs

– Determine lowest total costs

Location Cost-Volume Analysis• Assumptions– Fixed costs are constant– Variable costs are linear– Output can be closely estimated– Only one product involved

Example 1: Cost-Volume Analysis

Fixed and variable costs for four potential locations

L o c a t i o n F i x e dC o s t

V a r i a b l eC o s t

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 13 02 03 5

Example 1: Solution

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0

Factor-Rating Method

• Six steps:1. Develop a list of relevant factors.2. Assign a weight to each factor reflecting its relative

importance to the firm.3. Develop a rating scale for the factors.4. Score each location on each factor based on the scale.5. Multiply the scores by the weights for each factor and total

the weighted scores for each location.6. Make a recommendation based on the maximum point

score, considering other [quantitative?] factors.

Factor Rating Example

Evaluating Locations

• Center of Gravity Method– Decision based on minimum distribution costs

• Load Distance model– Decision based on evaluating potential locations

based on load distance value.