Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Location Planning and Analysis 8 Slides prepared by Laurel Donaldson Douglas College

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Explain the nature and importance of location decisions, and outline the decision process for making these kinds of decisions. Describe some of the major factors that affect location decisions, and explain why a foreign company would locate in Canada. Use the techniques presented to evaluate location alternatives Explain the nature and importance of location decisions, and outline the decision process for making these kinds of decisions. Describe some of the major factors that affect location decisions, and explain why a foreign company would locate in Canada. Use the techniques presented to evaluate location alternatives LO 1 LO 3 LO 2 2

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Outline  Nature of Location Decisions  Factors Affecting Location Decisions  Service Location Considerations  Evaluating Location Alternatives  Locational Break-Even Analysis  Transportation Method  Factor Rating  Center of Gravity Method  Voronoi Polygons  Location Analysis Software 3

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 1 Nature of Location Decisions  Decisions made infrequently in response to:  growth marketing strategy  shifts in market or in business costs  depletion of resources  Important design decision  Long term commitment/costs  Large impact on capital and operating costs  Poor choice detrimental to operations 4

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 1 Location Decisions in the Supply Chain Suppliers Near source of raw materials Middle Close to supplier or customer Retail Accessibilit y Demographic s Traffic patterns 5

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 1 Formal Location Decision Process Identify the important factors Gather information on appropriate sites Short list Site visits and meetings Evaluate and make selection 6

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Location Decision Factors Regional Factors Site-related Factors Country Factors Community Considerations 7

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Regional Factors Location of raw materials Location of markets Labour factors Other costs 8

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Regional Factors  Location of raw materials  Necessity, perishability and transportation costs  Utilities  Location of markets  Competition/convenience factor  Perishability and transportation  Need for closeness to customer  Labour factors  Availability, skills, costs, attitudes, presence of unions  Other costs  Taxes and incentives  Land and building costs 9

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Foreign Locations Political stability Attitude toward foreign companies Language and cultural differences (eg. corruption) Exchange rates and currency risks 10

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Community Considerations Availability of skilled workers Liveability Facilities and services available Attitudes Taxes and incentives Environmental regulations Economics Land and building costs Transportation infrastructure 11

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Site Related Factors Site size and room for expansion Utility and sewer capacity Parking and road access Zoning restrictions 12

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Comparison of Service and Manufacturing Considerations Manufacturing/DistributionService/Retail Cost FocusRevenue focus Distribution modes/costsDemographics: age, income, etc Energy availability, costsPopulation/drawing area Labour cost/availability/skillsCompetition Material availability/costsTraffic volume/patterns Customer access/parking 13

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 2 Why Should Foreign Companies Locate in Canada?  Shortened delivery time and reduced delivery costs  Access to natural resources  Skilled labour, educated workers  Politically very stable, tax incentives  Safe and secure  Good telecommunication infrastructure  Low cost for energy, health care  Lower wage and exchange rates  Shortened delivery time and reduced delivery costs  Access to natural resources  Skilled labour, educated workers  Politically very stable, tax incentives  Safe and secure  Good telecommunication infrastructure  Low cost for energy, health care  Lower wage and exchange rates 14

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Evaluating Locations Locational Break-Even Analysis Transportation Model Consider costs of moving raw materials or finished goods Factor Rating Decision based on quantitative and qualitative inputs Centre of Gravity Method Decision based on minimum distribution costs Voronoi Polygons To determine trade areas 15

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Locational Break-Even Analysis  Assumptions:  Fixed costs and variable costs are constant for the range of probable output  Only one product is involved 1.Determine fixed and variable costs 2.Plot total costs lines 3.Determine lowest total costs 1.Determine fixed and variable costs 2.Plot total costs lines 3.Determine lowest total costs 16

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Locational Break Even Analysis Fixed and variable costs for 4 potential locations are given in the table below. LocationFixed Costs ($)Variable Costs ($) A250,00011 B100,00030 C150,00020 D200, Plot the total cost lines on a single graph 2.Identify the range of output over which each alternative is superior 3.If expected output is 8,000 units per year, which location would provide the lowest cost? 17

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Solution 18

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Example 1 Solution: Breakeven 19

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Transportation Model  determines the shipments in order to minimize total transportation cost  Considers demand and capacity constraints  For multi-facility conditions  A special –purpose algorithm of linear programming 20

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Factor-Rating Method  Includes a wide variety of factors in analysis 1.Develop a list of relevant factors 2.Assign a weight to each factor 3.Develop a scale for each factor 4.Score all factors for each location 5.Multiply score by weight for each factor and sum for each location 6.Choose the location with the highest composite score 1.Develop a list of relevant factors 2.Assign a weight to each factor 3.Develop a scale for each factor 4.Score all factors for each location 5.Multiply score by weight for each factor and sum for each location 6.Choose the location with the highest composite score 21

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Factor-Rating ExampleScores (out of 10)Weighted Scores FactorWeightA1A2A1A2 Operating cost 2576(25)(7) = 175(25)(6) = 150 Building cost 556(5)(5) = 25(5)(6) = 30 Size (10)(8.5) = 85(10)(8) = 80 Traffic volume (39)(7.5) = 293(39)(7) = 273 Parking/access 2167(21)(6) = 126(21)(7) = 147 Totals

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Center-of-Gravity Method  Finds location of distribution center that minimizes total distribution costs  Considers  Location of markets  Volume of goods shipped to those markets  Shipping cost (or distance) 23

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Center-of-Gravity Method  Overlay a coordinate system on a map showing existing locations  Location (0,0) arbitrary  Map drawn to scale  Determine coordinates of each destination  Calculate X and Y coordinates for ‘center of gravity’  Weighted by quantity transported  Overlay a coordinate system on a map showing existing locations  Location (0,0) arbitrary  Map drawn to scale  Determine coordinates of each destination  Calculate X and Y coordinates for ‘center of gravity’  Weighted by quantity transported Finds location of distribution center that minimizes total distribution costs 24

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Center-of-Gravity Method x - bar = ∑xiQi∑Qi∑xiQi∑Qi ∑yiQi∑Qi∑yiQi∑Qi y - bar = wherex i =x coordinate of destination i y i =y coordinate of destination i Q i =Quantity to be transported to destination i 25

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Center-of-Gravity Method Destination (x, y)Daily Quantity A (30, 120)150 B (70, 110)100 C (130, 130)50 D (60, 40)200 X-bar = (30)(150) + (70)(100) + (130)(50) + (60)(200) = 60 Y-bar = (120)(150) + (110)(100) + (130)(50) + (40)(200) 500 = 87 If quantities are equal, assign a weight of 1 to each location 26

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Center-of-Gravity Method Y X 120 – 90 – 60 – 30 – – |||||| Arbitrary (0,0) point A (30, 120) C (130, 130) B (70, 110) D (60, 40) Center of gravity (60, 87) + N W E S 27

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Voronoi (or Thiessen) Polygons  Determine trade area of each store, restaurant, etc, of a multi-facility company.  Each city or town is divided into non-overlapping polygons  each polygon contains one facility (as its center)  any other facilities within a polygon are closer to the center of that polygon than to any other polygon center. 28

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 The thick lines mark the boundaries for each Burger King Trade Areas 29

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. LO 3 Location Analysis Software  Geographic Information Systems (GIS)  Computer-based tool for collecting, storing, retrieving, and displaying location-dependent demographic data on map  Combines data from different databases  Intuitive and graphical  Modelling/optimization software  Many use linear programming  E.g. MicroAnalytics OptiSite 30

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Checklist  List some of the main reasons organizations need to make location decisions.  Explain why location decisions are important.  Discuss the options that are available for location decisions.  Describe some of the major factors that affect location decisions.  Outline the decision process for making these kinds of decisions.  Use the techniques presented to solve typical problems. 31