Service Facility Location

Time
McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved.
Learning Objectives
Explain the different between competitive clustering and
saturation marketing.
Explain the impact of the Internet on location decisions.
Describe how a geographic information system is used in
service location decisions.
Differentiate between a Euclidian and metropolitan
metric approach to measuring travel distance.
Locate a single facility using the cross-median approach.
Use the Huff retail location model to estimate revenue
and market share for a potential site.
Locate multiple facilities using the set covering model.
10-2
Service Facility Location
Planning
Competitive positioning: prime location can
be barrier to entry.
Demand management: diverse set of market
generators.
Flexibility: plan for future economic changes
and portfolio effect.
Expansion strategy: contiguous, regional
followed by fill-in, or concentrated.

10-3
Strategic Considerations
Competitive Clustering (Among Competitors)
(e.g. Auto Dealers, Motels)
Saturation Marketing (Same Firm)
(e.g. An Bon Pain, Ice Cream Vendors)
Marketing Intermediaries
(e.g. Credit Cards, HMO)
Substitute Communication for Travel
(e.g. telecommuting, e-Commerce)
Separation of Front from Back Office
(e.g. ATM, shoe repair)
Impact of the Internet on Service Location
(e.g. Amazon.com, eBay, FedEx)
10-4
Strategic Location Considerations
Front Office Back Office

External
Customer
(consumer)
Is travel out to customer or
customer travel to site?
Can electronic media
substitute for physical travel?
Is location a barrier to entry?
Is service performed on
person or property?
Is co-location necessary?
How is communication
accomplished?

Internal
Customer
(employee)
Availability of labor?
Are self-service kiosks an
alternative?
Are economies of scale
possible?
Can employees work from
home?
Is offshoring an option?
10-5
Site Selection Considerations
1. Access:
Convenient to freeway exit and
entrance ramps. Served by public
transportation.
5. Expansion:
Room for expansion
2. Visibility:
Set back from street, Surrounding
clutter, Sign placement
6. Environment:
Immediate surroundings should
compliment the service
3. Traffic:
Traffic volume on street that may
indicate potential impulse buying
7. Competition:
Location of competitors
4. Parking:
Adequate off-street parking
8. Government:
Zoning restrictions, Taxes
10-6
Regression Model for Motel Location
Competitive Factors: Room rate, hotels within
one mile, competitive room rate
Demand Generators: College, Hospital beds
within one mile, Annual tourists
Area Demographics: Family income, residential
population
Market Awareness: State population per inn,
Distance to nearest inn
Physical Attributes: Sign visibility, Distance to
downtown, Accessibility

Y= 39 + (-5.41)STATE + (5.86)PRICE + (-3.09)INCOME + (1.75) COLLEGE
10-7
Geographic Representation
Location on a Plane
Y

Destination j
Yj Euclidean


Origin i
Metropolitan
0
Xi Xj
Yi
X
| |
d x x y y
ij i j i j
= + ( ) ( )
/
2 2
1 2
d x x y y
ij i j i j
= +
10-8
Effect of Optimization Criteria





1. Maximize Utilization
(City C: elderly find distance a barrier)
2. Minimize Distance per Capita
(City B: centrally located)
3. Minimize Distance per Visit
(City A: many frequent users)
City A
City B City C



-
1
0






-
5



















5







1
0





1
5

-15 -10 -5 5 10 15 20 25
3
2
1
*
*




*
10-9
Single Facility Location Using
Cross Median Approach

0
1
2
3
4
5
6
0 2 4 6
X miles
Y

m
i
l
e
s
1 (W
1
=7)
2 (W
2
=1)

3 (W
3
=3)
4 (W
4
=5)
10-10
Single Facility Location Using
Cross Median Approach

0
1
2
3
4
5
6
0 2 4 6
X miles
Y

m
i
l
e
s
1 (W
1
=7)
2 (W
2
=1)

3 (W
3
=3)
4 (W
4
=5)
Solution is line segment y=2, x=2,3
10-11
Huff Retail Location Model
First, a gravity analogy is used to estimate
attractiveness of store j for customers in
area i.
A
ij
= Attraction to store j for customers in area i
S
j
= Size of the store (e.g. square feet)
T
ij
= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel
A
S
T
ij
j
ij
=

10-12
Huff Retail Location Model
Second, to account for competitors we
calculate the probability that customers
from area i will visit a particular store j.

P
A
A
ij
ij
ij
j
n
=
=

1
10-13
Huff Retail Location Model
Third, annual customer expenditures for item k at
store j can now be calculated.

P
ij
= Probability customers from area i travel to store j
C
i
= Number of customers in area i (e.g. census track)
B
ik
= Annual budget for product k for customers in area i
m = Number of customer areas in the market region

( )
E P C B
jk ij i ik
j
m
=
=

1
10-14
Huff Retail Location Model
Fourth, market share of product k
purchased at store j can now be
calculated.

M
E
C B
jk
jk
i ik
i
m
=
=

( )
1
10-15