Location

Chapter 11

2007 Pearson Education

 How Location
fits the Operations Management
Philosophy

Operations As a Competitive
Weapon
Operations Strategy
Project Management Process Strategy
Process Analysis
Process Performance and Quality
Constraint Management
Process Layout Supply Chain Strategy
Lean Systems Location
Inventory Management
Forecasting
Sales and Operations Planning
Resource Planning
Scheduling

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 BMW

In the late 1980s fluctuating exchange rates and rising costs

convinced BMW that it was time to consider operating a new
production facility outside the European borders.
A blank page approach was used to compile a list of 250
potential worldwide sites. Analysis pared the list down to 10
options; a location in the United States was preferred due to its
proximity to a large market segment for BMWs automobiles.
BMW spent 3 1/2 years considered the labor climate, port and
road access, geographical requirements and constraints,
airport access, and its relations with the governments.
The plant was located in Spartanburg, SC, and now employs
approximately 4,700 workers who produce more than 500
vehicles a day.

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 Location Decisions

Facility location is the process of determining

geographic sites for a firms operations.
Location decisions affect processes throughout the
organization.
Marketing must assess how the location will appeal to
customers; possibly opening new markets.
Human Resources must be attuned to the firms hiring and
training needs.
Accounting and Finance must evaluate costing.
Operations needs to be able to meet current customer
demand and provide the right amount of customer contact.

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 Factors Affecting
Location Decisions
Managers must weigh many factors when
assessing the desirability of particular
locations.
The factor must be sensitive to location.
The factor must have a high impact on the
companys ability to meet its goals.

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 Dominant Factors in
Manufacturing
Favorable labor climate. May be most important
factor in labor-intensive industries
Proximity to markets. Important when outbound
transportation rates are high.
Quality of life. Good schools, recreational facilities,
cultural events and attractive lifestyle.
Proximity to suppliers and resources. Important
when inbound transportation costs are high.
Proximity to the parent companys facilities.
Important when coordination and communication is
critical.
Utilities, taxes, and real estate costs.
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 Dominant Factors
in Services
Proximity to customers. How conveniently
customers can carry on business with a firm.
Transportation costs and proximity to markets.
Especially for warehousing and distribution
operations.
Location of Competitors. Estimating the sales
potential and impact of competition.
Critical mass is a situation whereby several competing
firms clustered in one location attract more customers than
the total number who would shop at the same stores at
scattered locations.
Site-Specific Factors. Including residential
density, traffic flow, and site visibility.
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 Geographical Information
Systems and Location Decisions
Geographical information system (GIS) is a
system of computer software, hardware, and data
that the firms personnel can use to manipulate,
analyze, and present information relevant to a
location decision. It can be used to:
Store databases
Display maps
Create models that can take information from existing
datasets, apply analytic functions, and write results into
new derived datasets.
Together, these three functionalities of data
storage, map displays, and modeling are critical
parts of an intelligent GIS, used to a varying
extent in all GIS applications.
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 GPS and Site Selection
in the Fast Food Industry
Until recently, fast-food chains used consultants to analyze
geodemographic data (demographic data in conjunction
with geographic location) for strategic planning, and making
franchise location.
Now with the availability of easy-to-use, low cost, GIS
systems that can be operated on a regular PC, small and
large fast-food chains are doing it on their own.
These programs can estimate the total dollars up for grabs
in a market by analyzing local age and income data from
the U.S. Census Bureau as well as sales data from stores
in an area.
The programs can also tell the optimal number and
locations of stores in a market, and how much in sales a
store can expect. Analyses can be run for any U.S. market
and can rank markets in order of viability.

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 Using GIS to Identify
Starbucks Locations
The Starbuck store addresses within 20 miles of Hamilton,
Ontario were obtained from the Starbucks Web site, and
imported into MapPoint.
These store locations are denoted on maps by yellow dots.
Then demographics that come with MapPoint were overlaid
on the map.
On the first map, note that Oakville has more store locations
than Hamilton even though it has lower population density,
suggesting that store location is not being driven by
population density alone.
The second map shows the demographics by average per
capita household income. Note that in this case, the store
locations are based in more affluent areas.

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 Starbucks
locations

Population density per

square kilometer for each
census subdivision.

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 Per Capita Household
Income Map

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 Onsite Expansion,
New Location, or Relocation
Managers must first decide whether to expand onsite, build
another facility, or relocate to another site.
Onsite expansion has the advantage of keeping people
together, reducing construction time and costs, and
avoiding splitting up operations.
However, as a firm expands a facility, at some point
diseconomies of scale set in.
A new plant allows it to hire more employees, install newer,
more-productive machinery and better technology, and
reduce transportation costs.
Most firms that choose to relocate are small (comprised of
less than 10 employees).
More than 80 percent of all relocations are made within 20
miles of companies original locations, which enables the firms
to retain their current employees.
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 Tyler Emergency
Medical Services (EMS)
Example 11.1
The locations of the two existing EMS facilities in
Tyler, Texas are shown on the following map.
The population density for each of the citys tracts
is also shown. The darker red areas have up to
5,000 people per square mile.
The southeast part of Tyler, census tract 18.03, has
experienced rapid growth, with its population
almost doubling in the last twelve years.
The residents of this tract have complained that it
takes too long for the EMS vehicles to reach them.

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 EMS
locations

Population Density
of Tyler, Texas

Areas of rapid
growth.
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 Tyler Emergency Medical
Services (EMS) Location
A general guideline for locating EMS facilities in
urban areas is that an EMS vehicle should be
able to answer 95 percent of its calls within 10
minutes in tracts that have a population density of
1,000 people per square mile.
Census tract 7, on the west side of the city with a
population density of 967 people per square mile,
should be included in the study as well.
Thus, the census tracts that are as dark as or darker
than census tract 7, should be within a 10-minute drive
time zone of an EMS facility.
Where should EMS locate three facilities so as to
meet its coverage goals for Tyler?
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 10 minute
response
Census Track 7 zones

With MapPoint, it is easy to

calculate a drive time zone by
just selecting the pushpin and
going under Tools on the menu Some areas not in
bar to select drive time zone in coverage zone.
terms of the number of minutes
of drive time.
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 Three EMS locations
were chosen through
a trial and error
approach and
evaluation using
MapPoint.
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 Locating a Single Facility

When the facility is part of a firms larger network

of facilities, we assume that there is no
interdependence.
The process of selecting a new facility location
involves a series of steps.
1. Identify the important location factors and categorize
them as dominant or secondary.
2. Consider alternative regions; then narrow the choices
to alternative communities and finally to specific sites.
3. Collect data on the alternatives.
4. Analyze the data collected, beginning with the
quantitative factors.
5. Bring the qualitative factors into the evaluation. The
site with the highest weighted score is best.
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 Health-Watch
Preference Matrix
Example 11.2
A new medical facility, Health-Watch, is to be located in
Erie, Pennsylvania.
The following table shows the location factors, weights, and
scores (1 = poor, 5 = excellent) for one potential site.

Location Factor Weight Score (W)(S)

Total patient miles per month 25 4 100
Facility utilization 20 3 60
Average time per emergency trip 20 3 60
Expressway accessibility 15 4 60
Land and construction costs 10 1 10
Employee preference 10 5 50
Weighted Score 340

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 Application 11.1

WS = WS = WS =

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 Application 11.2
Revisiting Distance Measures
What is the distance between (20,10) and (80,60)?
Euclidian Distance

dAB = (20 80)2 + (10 60)2

= 78.1

Rectilinear Distance

dAB = |20 80| + |10 60| = 110

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 Applying the
Load-Distance Method
Loaddistance method: A mathematical model used to
evaluate locations based on proximity factors.
A load may be shipments from suppliers, shipments between
plants or to customers, or it may be customers or employees
traveling to or from the facility.
The firm seeks to minimize its loaddistance (ld) score,
generally by choosing a location, so that large loads go short
distances.
To calculate ld score for any potential location, we use the
actual distance between any two points using a GIS system,
and simply multiply the loads flowing to and from the facility by
the distances traveled.
ld li di
i
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 Application 11.3

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 Application 11.3
Solution

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 Center of Gravity

Center of gravity: A good starting point to evaluate

locations in the target area using the load-distance model.
1. Determine the x and y coordinates of different locations
either in the form of the longitude and latitude of the
locations, or by creating an (x, y) grid.
2. The center of gravitys x-coordinate, denoted x*, is found by
multiplying each points x-coordinate (either the longitude
of the location or the x coordinate on a grid), by its load (li),
summing these products ( lixi), and then dividing by the
sum of the loads ( li). The y-coordinate, denoted y*, is
found the same way.
l x i i l y i i

x i
and y i

l i l i
i i
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 Finding the Center of Gravity
Example 11.3
The new Health-Watch facility is targeted to serve seven
census tracts in Erie, PA. Customers will travel from the
seven census-tract centers to the new facility when they
need health care.
What is the target areas center of gravity for the Health-
Watch medical facility?
We will use MapPoint in this solution and coordinates will
be represented in the form of latitude & longitude rather
than an x, y grid to calculate the center of gravity.
The target area is displayed on the map of Erie using
MapPoint. A pushpin is placed in the approximate
geographical center of the census tracts. The location
sensor is then turned on and used to obtain the
coordinates.
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 Finding the Center of Gravity for Health Watch

Census Tract Population Latitude Longitude Population Latitude Population Longitude

15 2,711 42.134 -80.041 114 ,225.27 -216,991.15
16 4,161 42.129 -80.023 175 ,298.77 -332,975.70
17 2,988 42.122 -80.055 125 ,860.54 -239,204.34
25 2,512 42.112 -80.066 105 ,785.34 -201,125.79
26 4,342 42.117 -80.052 182 ,872.01 -347,585.78
27 6,687 42.116 -80.023 281 ,629.69 -535,113.80
28 6,789 42.107 -80.051 285 ,864.42 -543,466.24
Tota l 30,190 1,271,536.05 -2,416,462.81

x* is the longitude and y* is the latitude for the center of gravity.

1,271,536.05
l x i i l y i i

x 42.1178
x i
and y i 30,190
l i l i
2,416,462.81
i i y 80.0418
30,190
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 CENSUS MAP
OF ERIE, PA

Center of Gravity
x,y coordinates:
42.1178, -80.4018

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 Application 11.4

l x 20 11 15 12 30 4
i i
x i
8.0
l 20 15 30
i
i

l y 20 8.5 15 9.5 30 1.5

i i
y i
5.5
l i 20 15 30
i

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 Using
Break-Even Analysis
Break-even analysis can help a manager
compare location alternatives on the basis of
quantitative factors that can be expressed in
terms of total cost.
1. Determine the variable costs and fixed costs for
each site.
2. Plot the total cost linesthe sum of variable and
fixed costsfor all the sites on a single graph
3. Identify the approximate ranges for which each
location has the lowest cost.
4. Solve algebraically for the break-even points
over the relevant ranges.
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 Break-Even Analysis
Example 11.4

An operations manager has narrowed the search for a new facility

location to four communities.
The annual fixed costs (land, property taxes, insurance,
equipment, and buildings) and the variable costs (labor, materials,
transportation, and variable overhead) are shown below.
Total costs are for 20,000 units.

Fixed Costs Variable Costs Total Costs

Community per Year per Unit (Fixed + Variable)
A $150,000 $62 $1,390,000
B $300,000 $38 $1,060,000
C $500,000 $24 $ 980,000
D $600,000 $30 $1,200,000
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 Step 1. Plot the total cost curves Fixed Costs Total Costs
for all the communities on a single Community per Year (Fixed + Variable)
graph. Identify on the graph the A $150,000 $1,390,000
approximate range over which each B $300,000 $1,060,000
community provides the lowest cost. C $500,000 $ 980,000
D $600,000 $1,200,000
Annual cost (thousands of dollars)

1600 A
(20, 1390)
1400
(20, 1200) D
1200 (20, 1060) B
C
1000
(20, 980)
800
Break-even point
600

400 Break-even
point
200
A best B best C best
0
2 4 6 8 10 12 14 16 18 20 22
6.25 14.3
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 Break-Even Solution
Example 11.4
Step 2. Using break-even analysis, calculate
the break-even quantities over the relevant
ranges. If the expected demand is 15,000 units
per year, what is the best location?
(A) (B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units

(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units

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 Application 11.5

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 Application 11.5

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 Locating a Facility within a
Network of Facilities
The use of GIS tools often simplifies the search for solution
when facilities are interacting.
1. Map the data for existing customers and facilities in the GIS.
2. Visually split the entire operating area into the number of
parts or sub-regions that equal the number of facilities to be
located.
3. Assign a facility location for each region based on the visual
density of customer concentration or other factors.
Alternately, determine the center of gravity for each part or
sub-region determined in step 2 as the starting location point
for the facility in that sub-region.
4. Search for alternate sites around the center of gravity to pick
a feasible location that meets the firm's managerial criteria
such as proximity to major metropolitan areas or highways.
5. Compute total load-distance scores and perform capacity
checks before finalizing the locations for each region.
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 Locating Multiples Facilities
Example 11.5
Witherspoon Automotive delivers full truckloads of parts to its
customers, and returns with a shipment of used automotive
parts for disassembly and remanufacturing.
The company presently operates out of two locations in the
Southeast--Spartanburg, South Carolina and Orlando, Florida.
Each of these locations has a re-manufacturing facility, along
with an attached warehouse that serves as a distribution center
(DC).
The Spartanburg facility covers a total of 362 customers in
Georgia, North Carolina, South Carolina, and parts of Alabama,
Tennessee and Virginia.
The Orlando facility covers a total of 66 customers mostly in
Florida, and a small portion of Alabama and Georgia.
The Spartanburg DC and Orlando DC shipped 17,219 and
4,629 full truckload respectively to their customers last year.
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 Spartanburg
service area

Orlando
service area

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 Locating Multiple Facilities
for Witherspoon Automotive
Witherspoon Automotive has decided to close the Spartanburg
facility because of its age and obsolescence, and split the
Spartanburg region into two new regions each with its own
manufacturing and distribution center. Five important location
factors that would impact their final decision are:
1. Quality of life: The new facilities should be located in a major
metropolitan area.
2. Distribution costs are a major determinant of profits, and so
the total load-distance score should be minimized.
3. Economies of scale: The size of the two new facilities should
not exceed a maximum of 9,500 truckloads of output per year.
4. The customer truckloads allocated between the two facilities
should be fairly balanced given the previous years demand
data.
5. Marketing has indicated that they are going to develop the
northern Alabama market. Thus the new distribution network
should be able to accommodate up to an additional 1,000 full
truckload shipments per year from the Alabama market.
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 Locations & number
of full truckload
shipments delivered
last year in the
Spartanburg region

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 The next step was to
partition the customers
into two regions, each with
a total demand of less
than 9,500 truckloads

The center of
the 2nd region
is around
Durham, North
Carolina.

It seems reasonable
for the management
to locate one of the
two new facilities
near Atlanta
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 Four sites were
considered based on
center of gravity and
load-distance measures.

The Concord site was

selected based on
highway access & travel.
Center of
Gravity

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 The Transportation Method

The transportation method is a quantitative

approach that can help solve multiple-facility
location problems.

The transportation method does not solve all facets

of the multiple-facility location problem.

It utilizes linear programming to minimize the cost

of shipping products from two or more plants, or
sources of supply, to two or more warehouses, or
destinations.

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 The Transportation Method

The first step in solving a transportation problem is to

format it in a standard matrix, sometimes called a tableau.
The basic steps in setting up an initial tableau are as
follows:
1. Create a row for each plant (existing or new) being
considered and a column for each warehouse.
2. Add a column for plant capacities and a row for warehouse
demands and insert their specific numerical values.
3. Each cell not in the requirements row or capacity column
represents a shipping route from a plant to a warehouse.
Insert the unit costs in the upper right-hand corner of each
of these cells.

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 The Transportation Method
Example 11.6
The Sunbelt Pool Company has a plant in Phoenix and three
warehouses. It is considering building a new 500-unit plant
because business is booming. One possible location is Atlanta.
The cost to ship one
unit from Atlanta to Initial Tableau
San Antonio.

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 The Transportation Method
Example 11.6 Solution
This optimal shipping pattern shows that Atlanta should supply all the demand
for Hot Springs and a third of the demand at Sioux Falls. Phoenix will supply
all the demand at San Antonio and two thirds of the demand at Sioux Falls.

Optimal Tableau
Atlanta should
ship 400 units
to Hot Springs
at a cost of
$4.60 per unit.

A dummy column
or dummy row is
necessary if the
supply & demand
are not equal.
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 Phoenix should
supply all of San
Antonios
demand and two
thirds of demand
for Sioux Falls.

Atlanta should
supply all of the
demand for Hot
Springs and one
third of the demand
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 Application 11.6

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 Application 11.6

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 Other Methods of
Location Analysis
Heuristics Solution guidelines, or rules of
thumb, that find feasiblebut not
necessarily the bestsolutions to
problems.
Simulation A modeling technique that
reproduces the behavior of a system.
Optimization A procedure used to
determine the best solution; generally
utilizes simplified and less realistic views
of a problem.
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 Solved Problem 1

An electronics manufacturer must expand by building a second

facility. The search has been narrowed to four locations, all of
which are acceptable to management in terms of dominant
factors. Assessment of these sites in terms of seven location
factors is shown below.

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 Solved Problem 1
Based on the weighted scores shown below, location C is the
preferred site, although location B is a close second.

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 Mile-High Beer
Solved Problem 2
The operations manager for Mile-High Beer has narrowed the
search for a new facility location to seven communities. Annual
fixed costs (land, property taxes, insurance, equipment, and
buildings) and variable costs (labor, materials, transportation,
and variable overhead) are shown below.

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 Mile-High Beer
Solved Problem 2
Which of the communities can be eliminated from further
consideration because they are dominated (both variable
and fixed costs are higher) by another community?
Aurora and Colorado Springs are dominated by Fort Collins,
as both fixed and variable costs are higher for those
communities than for Fort Collins. Englewood is dominated
by Golden.

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 Mile-High Beer
Solved Problem 2
Using break-even analysis, calculate the break-
even quantities to determine the range over
which each community provides the lowest cost.
Breakeven for Ft. $1,200,000$15Q $2,000,000$12Q
Collins/Boulder Q 266,667 barrels per year
Breakeven for $3,000,000$10Q $2,000,000$12Q
Boulder/Denver Q 500,000 barrels per year

Plot the total cost curves for all remaining
communities
on a single graph. Identify on the
graph the approximate range over which each
community provides the lowest cost.
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 Mile-High Beer
Solved Problem 2
Fort Collins is best for low volumes,
10
Location cost (in millions of dollars)

Boulder for intermediate volumes,

and Denver for high volumes
8

6 Golden
Break-
even
4 point
Break-even
point
2
Fort Collins Boulder Denver

0
1 2 3 4 5 6
2.67
Barrels of beer per year (in hundred thousands)
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 Arid Company
Solved Problem 4
The Arid Company makes canoe paddles to serve distribution
centers in Worchester, Rochester, and Dorchester from plants in
Battle Creek and Cherry Creek. Annual demand is expected to
increase as projected below. Arid is considering locating a plant
near the headwaters of Dee Creek. What are the estimated
transportation costs associated with this allocation pattern?
Destination
Source Capacity
Worchester Rochester Dorchester

$4.37 $4.25 $4.89

Battle Creek 12,000

$4.00 $5.00 $5.27

Cherry Creek 10,000

$4.13 $4.50 $3.75

Dee Creek 18,000

Demand 6,000 22,000 12,000 40,000

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 Arid Company
Solved Problem 4
Destination
Source Capacity
Worchester Rochester Dorchester

$4.37 $4.25 $4.89

Battle Creek 12,000
12,000
$4.00 $5.00 $5.27
Cherry Creek 10,000
6,000 4,000
$4.13 $4.50 $3.75
Dee Creek 18,000
6,000 12,000

Demand 6,000 22,000 12,000 40,000

Total Cost = $4(6000)+$4.25(12,000)+$5(4000)+$4.50(6000)+$3.75(12,000)=$167,000

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