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McGraw-Hill/Irwin
Service Management: Operations, Strategy, and
Information Technology, 6e

Copyright 2008 by The McGraw-Hill Companies, Inc. 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
External
Customer
(consumer)

Internal
Customer
(employee)

Back Office

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?

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
2. Visibility:
Set back from street
Surrounding clutter
Sign placement
3. Traffic:
Traffic volume on street that may
Indicate potential impulse buying
Traffic congestion that could be a
hindrance (e.g.., fire stations)

4. Parking:
Adequate off-street parking
5. Expansion:
Room for expansion
6. Environment:
Immediate surroundings
should complement the
service
7. Competition:
Location of competitors
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

dij ( xi x j ) ( yi y j )
2

1/ 2

Origin i

Yi

Metropolitan

dij xi x j yi y j
0

Xi

Xj

X
10-8

Effect of Optimization Criteria

City A

10

15

2
-10

-5

10

15

1. Maximize Utilization

-10

City B

20

25
*

-5

-15

City C

(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)

10-9

Y miles

Single Facility Location Using

Cross Median Approach
6
5
4
3
2
1
0

3 (W3=3)

2 (W2=1)
1 (W1=7)
4 (W4=5)

X miles
10-10

Y miles

Single Facility Location Using

Cross Median Approach
6
5
4
3
2
1
0

3 (W3=3)

2 (W2=1)
1 (W1=7)
4 (W4=5)

X miles
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.
Aij= Attraction to store j for customers in area i
Sj = Size of the store (e.g. square feet)
Tij= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel

Aij

Sj

Tij

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.

Pij

Aij
n

A
j 1

ij

10-13

Huff Retail Location Model

Third, annual customer expenditures for item k at
store j can now be calculated.
Pij = Probability customers from area i travel to store j
Ci = Number of customers in area i (e.g. census track)
Bik = Annual budget for product k for customers in area i
m = Number of customer areas in the market region
m

E jk Pij Ci Bik
j 1

10-14

Huff Retail Location Model

Fourth, market share of product k
purchased at store j can now be
calculated.

M jk

E jk
m

(C B
i 1

ik

)
10-15

Topics for Discussion

Pick a particular service, and identify shortcomings in

its site selection.
How would you proceed to estimate empirically the
parameter in the Huff retail location model for a
branch bank?
What are the characteristics of a service that would
make communication a good substitute for
transportation?
What are the benefits of using intermediaries in the
service distribution channel?
Go to http://www.mapinfo.com/ and find the
definition of location intelligence. What use can be
made of geographic information?
10-16

Interactive Exercise
The class breaks into small groups and
each group comes up with examples of
service facility locations that seem to
defy the analytical models discussed in
the chapter.

10-17

Athol Furniture
4
State Park

1
2

Bluff lake

Z7

Railroad
Freeway
Major street
Park boundary
River
Census block group
Existing retail outlets
Potential sites

11
10

12
X

10-18

Athol Furniture Data

COMPETITORS STORE SIZES
Store
A
B

MAXIMUM SIZE LIMIT OF SITES

Sales area, sq ft
10,000
15,000

Site
X
Y
Z

Maximum sales area, sq ft

15,000
20,000
10,000

MINIMUM TRAVEL TIME BETWEEN POTENTIAL AND EXISTING SITES

AND BLOCK GROUPS, Min
Site
A
B
X
Y
Z

1
7
10
16
12
7

2
5
8
14
10
5

3
5
8
14
10
5

4
9
10
16
12
7

Census block group

5
6
7
1
3
4
7
3
3
13
8
7
9
5
4
4
2
1

8
5
2
6
3
4

9
7
1
4
2
3

10
10
4
3
3
8

11
14
2
2
2
10

12
17
5
2
4
13

RELATIONSHIP OF STORE SIZE TO MARGIN ON SALES, EXPENSES,

AND NET OPERATING PROFIT AS % OF SALES
Sales area,
sq ft
10,000
15,000
20,000

Margin
on sales
16.2
15.6
14.7

Expenses
12.3
12.0
11.8

Net operating profit

before taxes
3.9
3.6
2.0
10-19

Athol Furniture Demographics

MARKET DATA
Census block
group
1
2
3
4
5
6
7
8
9
10
11
12

Number of
households
730
1130
1035
635
160
105
125
470
305
1755
900
290

Average annual
income
$65,000-$70,000
45,000-50,000
80,000-85,000
150,000-over
25,000-30,000
20,000-25,000
20,000-25,000
40,000-45,000
30,000-35,000
75,000-80,000
85,000-90,000
150,000-over

Average annual furniture

expenditures per household
$180
125
280
350
75
50
60
115
90
265
215
370

10-20

Store Site Selection

Annual Profit ($)

Store Profit as a Function of Lambda

X10

25000
20000
15000
10000
5000
0

X15
Y10
Y15
Y20
0.1

0.5

Z10

10-21

Market Share Analysis

Now

X15

Y15

Y20

33% 23% 22% 19%

67% 40% 39% 35%

Athol

37% 39% 46%

Are there any shortcoming in the use of the Huff mode?

10-22