Unit 7:

Location
decisions
(planning and
analysis)
 Overview of Location Decisions
 Oldtown White Coffee seems to have an outlet almost everywhere in Malaysia. In
Johor alone, teher are 24 outlets located in areas which attract many customers, such
as shopping malls and heavily poplulated student-centered areas.
 Why is the company opening so many outlets at these places? This is one of the
strategies undertaken by Oldtown White Coffee to increase its growth rate, revenues
and profits.
 Location is one of the most important decisions that an operations manager has to
make. It entails deciding on a place to build or operate a business. The best location
strategy helps to accelerate a company’s growth. Where should a plant or service
facilitiy be located?
Importance of Location Decisions

1) Location affects the fixed cost and variable cost of the organization
2) Location also has an impact on the overall risk and profit
3) Expansion
4) Changes in labour productivity, exchange rate, costs or community
attitude
5) Shifts in demographics and customer demand.
Factors affecting Location Decisions

1) Proximity to market or customers

2) Proximity to suppliers
3) Proximity to competitors
4) Labour supply
5) Availability of facilities
6) Government incentives
 Methods of Evaluating Location Alternatives
1) Break- even analysis
- Form of analysis that focuses on costs and revenue
- Th the break even point, (BEP) a firm does not make any profit or loss (zero). Meaning that BEP
is when total costs and total revenues are equal

- The following questions are normally asked when break-even analysis is applied:
a) How many product units must we sell to break even?
b) How many rooms must we rent to cover costs?
c) At what unit sales volume do we earn a profit?
- When using break even analysis in selecting the best location, a firm needs to understand these
three components
1) Fixed cost(FC),
- Is an expanse or cost that does not change with an increase or decrease in the number of
goods or services produced or sold.
- For example, rent that a constant whatever the amount of goods produced

2) Variable costs per unit

- Is a corporate expense that changes in proportion to production output.
- For example raw material costs which are purchased according to the amount of
production.

3) Selling price per unit

- is the price at which company sells each of its products or services.
Service Location Strategy
 Ifmanufacturing organizations consider proximity to
raw materials at the most important factor, service
organizations place customer access as the priority.

 Manifacturing focuses on minimizing costs, while

services focuses on minimizing costs, while service
focuses on maximizing revenues.
 Here are some of the factors or components that are considered by service
organizations to generate higher revenues

1) Demographic data of population – for example a private university offering education

services may consider the income of the population before selecting the area

2) Near competitors – For instance, laundry service organizations are normally located
near each other to benefit from concerntration of potential customers

3) Customers’ access - Good transportation and parking facilities can ease the
customers’accessibility to the service location. Focusing on these customer-related
factors may increase traffic volume
 Other components of volume and revenue for service
organizations include:
1) Service
and image compatibility with the
demographics of the customer drawing area
2) Quality of the competition
3) Uniqueness of the of the firm’s and competitor’s
locations
4) Operating policies of the firm
5) Quality of management
Exercise
 Razna Sdn. Bhd is considering three sites for its new plant. The cost
structures for the sites are as follows:
Location Fixed Cost Material Cost Labour Cost Overhead Cost
(RM) (RM) (RM) (RM)
Sungai Petani 10,000 1.80 2.70 2.50

Kulim 15,000 1.30 2.00 1.70

Alor Seta 13,000 1.50 2.30 2.20

Razna Sdn. Bhd, plans to sell the product at RM50 per unit
a)Find the break-even point for each site
b)Based on the break-even point analysis, decide the best site
c)Determine the profit for each site if the company produces 1,200 units
Questions For Review
1) List the FIVE (5) importance of location decisions
2) State the FIVE (5) factors affecting location decisions
3) Explain the method of break even analysis in evaluating location alternatives
4) Name the THREE (3) components that a firm needs to understand when using break even
analysis
5) What is the meaning of Fixed Cost?
6) What is the meaning of Variable costs?
7) What is the meaning of selling price?
8) What are the differences between tangible factors and intangible factors in factor rating
technique?
9) What are the differences between manufacturing and services in location decisions
10) List the THREE 93) components that are considered by services organization to generate
higher revenues.
Thank You