OM Chapter 2

CHAPTER 2:
LOCATION
PLANNING
Lecturer: MSc. La Thu Thuy
thuy.la@ut.edu.vn
OUTLINE
01. The need 02. The nature

for location of location
decisions decisions
03. General 04. Factors 05. Evaluating

procedure for affecting location
making location alternatives
location decisions
decisions
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1. The need for location decisions
§ As part of a marketing strategy to

expand markets (banks, fast-food
chains, supermarkets, and retail stores)
à addition of new locations
§ Growth in demand that cannot be
satisfied by expanding existing facilities
§ Depletion of basic inputs requires
relocation (fishing and logging, Mining
and petroleum, etc)
§ Shift in markets
§ Cost of doing business at a particular
location makes relocation attractive
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2. Location decisions: Strategically important
§ Are closely tied to an organization’s strategies

• Low-cost
• Convenience to attract market share
§ Effect capacity and flexibility
§ Represent a long-term commitment of resources
§ Effect investment requirements, operating costs,
revenues, and operations
§ Impact competitive advantage
§ Importance to supply chains
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2. Location decisions: Objectives
§ Profit potential or cost and customer service
§ Finding several acceptable locations from which to choose
§ Position in the supply chain
• End: accessibility, consumer demographics, traffic patterns,
and local customs are important
• Middle: locate near suppliers or markets
• Beginning: locate near the source of raw materials Web-based
retail organizations are effectively location independent
§ Supply chain management issues such as Supply chain
management issues such as supply chain configuration
• Centralized vs. decentralized distribution
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2. Location decisions: Options
•adequate room for expansion
Expand an existing facility •desirable features that are not readily available elsewhere
•Less expansion costs
Add new locations while •common in retail operations

retaining existing ones •defensive strategy
•cause: markets shift, exhaustion of raw materials, cost of

Shut down at one location operations
and move to another •cost-benefit analysis
Do nothing •maintain the status quo if not enough attractive benefits
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3. General procedure for making location decisions
Steps:
1. Decide on the criteria to use for evaluating location alternatives
2. Identify important factors, such as location of markets or raw
materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives
Evaluate the alternatives and make a decision

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4. Factors affecting location decisions
Level Factors Considerations
Regional • Location of raw materials or • Proximity, modes and costs of transportation, quantity
supplies available
• Location of markets • Proximity, distribution costs, target market, trade
• Labor practices/restrictions
• Availability (general and for specific skills), age distribution of
workforce, work attitudes, union or non-union, productivity,
wage scales, unemployment compensation laws
Community • Quality of life • Schools, churches, shopping, housing, transportation,
• Services entertainment, recreation, cost of living
• Attitudes • Medical, fire, and police
• Taxes • Pro/con
• Environmental regulations • State/local, direct and indirect State/local
• Utilities • Cost and availability
• Development support • Bond issues, tax abatement, low-cost loans, grants
Site • Land • Cost, degree of development required, soil characteristics and
• Transportation drainage, room for expansion, parking
• Environmental/legal • Type (access roads, rail spurs, air freight)
• Zoning restrictions
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Plant Manufacturing Strategies
Product Plant Strategy
Market Area Plant Strategy
Process Plant Strategy
General-Purpose Plant Strategy
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Service & Retail locations
A comparison of service/ retail considerations and manufacturing considerations
Manufacturing/Distribution Service/Retail
Cost focus Revenue focus
• Transportation modes/costs • Demographics: age, income, education
• Energy availability/costs • Population/drawing area
• Labor cost/availability/skills • Competition
• Building/leasing costs • Traffic volume/patterns
• Customer access/parking
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5. Evaluating location alternatives
Methods:
• Locational cost-profit-volume analysis
• Transportation model: northwest corner, steppingstone,
Vogel’s approximation method
• Factor rating
• The center of gravity method
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Example 1: Cost analysis
A farm implements dealer is seeking a fourth warehouse location to complement three existing warehouses.
There are three potential locations: Charlotte, NC; Atlanta, GA; and Columbia, SC.
• Charlotte would involve a fixed cost of $4,000 per month and a variable cost of $4 per unit;
• Atlanta would involve a fixed cost of $3,500 per month and a variable cost of $5 per unit;
• Columbia would involve a fixed cost of $5,000 per month and a variable cost of $6 per unit.
Use of the Charlotte location would increase system transportation costs by $19,000 per month, Atlanta by
$22,000 per month, and Columbia by $18,000 per month.
Which location would result in the lowest total cost to handle 800 units per month?
Given: Volume = 800 units per month
FC/month VC/unit Transportation cost/month

Charlotte $4,000 $4 $19,000
Atlanta 3,500 5 22,000
Columbia 5,000 6 18,000
Monthly total cost = FC + VC + Transportation cost

Charlotte: $4,000 + $4 per unit × 800 units + $19,000 = $26,200
Atlanta: 3,500 + 5 per unit × 800 units + 22,000 = 29,500
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Columbia: 5,000 + 6 per unit × 800 units + 18,000 = 27,800
à Charlotte would have the lowest total cost for this monthly volume.
Example 2: Profit analysis
A manufacturer of staplers is about to lose its lease, so it must move to another location. Two sites are
currently under consideration.
Fixed costs would be $8,000 per month at site A and $9,400 per month at site B.
Variable costs are expected to be $5 per unit at site A and $4 per unit at site B.
Monthly demand has been steady at 8,800 units for the last several years and is not expected to deviate
from that amount in the foreseeable future. Assume staplers sell for $6 per unit.
Determine which location would yield the higher profit under these conditions.
Site Revenue FC VC Profit

A $52,800 $8,000 $44,000 $800
B $52,800 $9,400 $35,200 $8,200
à site B is expected to yield the higher monthly profit
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Discussion
§ Who needs to be involved in facility

location decisions?
§ How can technology influence location
decisions?
§ Why did Samsung decide to set up the
factories in Vietnam? (Bac Ninh
particularly)
Further reading:
https://hbr.org/1979/01/look-beyond-the-
obvious-in-plant-location
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CHAPTER 2:

01. The need 02. The nature

03. General 04. Factors 05. Evaluating

§ As part of a marketing strategy to

§ Are closely tied to an organization’s strategies

Add new locations while •common in retail operations

•cause: markets shift, exhaustion of raw materials, cost of

Do nothing •maintain the status quo if not enough attractive benefits

Evaluate the alternatives and make a decision

Market Area Plant Strategy

Process Plant Strategy

General-Purpose Plant Strategy

A comparison of service/ retail considerations and manufacturing considerations

FC/month VC/unit Transportation cost/month

Monthly total cost = FC + VC + Transportation cost

Site Revenue FC VC Profit

à site B is expected to yield the higher monthly profit

§ Who needs to be involved in facility

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