ANALYSIS LOCATION

QUANTITATIVE METHOD
• Location of
production
Distribution
centers
Retailers
LOGISTICS NETWORKS IN INDONESIA
METHOD FOR  BENEFIT ANALYSIS
SELECTING THE  LOAD DISTANCE
LOCATION  CENTER OF GRAVITY
 BREAK EVEN ANALYSIS
 Determining criteria Weighing Criteria
Criteria Criteria Weight
1 Infrastructure 1 Infrastructure 0.2
2 Productivity 2 Productivity 0.2
BENEFIT 3 Quality of Suppliers 3 Quality of 0.3
Suppliers
ANALYSIS 4 Labor cost
4 Labor cost 0.2
5 Gov support
5 Gov. support 0.1
Total 1.0

Three candidate for locations of production facilities

are available. They need to set the criteria and the
weightage of each criteria. The company needs to
choose one location
 Alternative
Alternative Criteria We 1 2 3
Criteria Wei 1 2 3 igh
ght t
1 Infrastruc 0.2 7.5 10 5 1 Infrastr 0.2 7.5 10 5
ture ucture
2 Productiv 0.2 7.5 5 10 2 Product 0.2 7.5 5 10
ity ivity
ALTERNATIVE 3 Quality 0.3 7.5 7.5 10 3 Quality 0.3 7.5 7.5 10
LOCATIONS of
Suppliers
of
Supplier
s
4 Labor 0.2 7.5 5 5
cost 4 Labor 0.2 7.5 5 5
cost
5 Gov. 0.1 7.5 10 7.5
support 5 Gov. 0.1 7.5 10 7.5
support
Total 1.0
Total
Score
7.5 7.25 7.75
Decision: Choose location #3
 Management is considering three potential locations for a new cookie
factory. They have assigned scores shown below to the relevant factors on
a 0 to 10 basis (10 is best). Using the preference matrix, which location
would be preferred?

Application Location
Factor
Weight
The
Neighborhood
Sesame
Street
Ronald’s
Playhouse

Material Supply 0.1 5 9 8

Quality of Life 0.2 9 8 4

Mild Climate 0.3 10 6 8

Labor Skills 0.4 3 4 7

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 Management is considering three potential locations for a new cookie
factory. They have assigned scores shown below to the relevant factors on
a 0 to 10 basis (10 is best). Using the preference matrix, which location
would be preferred?

Location The Sesame Ronald’s

Weight
Application Factor

Material Supply 0.1

Neighborhood

5 0.5 9
Street

0.9
Playhouse

8 0.8

Quality of Life 0.2 9 1.8 8 1.6 4 0.8

Mild Climate 0.3 10 3.0 6 1.8 8 2.4

Labor Skills 0.4 3 1.2 4 1.6 7 2.8

6.5 5.9 6.8

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EXERCISE
  Identify and compare candidate locations
 Like weighted-distance method
Load-Distance  Select a location that minimizes the sum of the loads multiplied by the
distance the load travels
(ld) Method  Time may be used instead of distance

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  Calculating a load-distance score
 Varies by industry
 Use the actual distance to calculate ld score
 Use rectangular or Euclidean distances
 Different measures for distance
Load-Distance  Find one acceptable facility location that minimizes the ld score

(ld) Method
⚫ Formula for the ld score

ld =  lidi
i

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What is the distance between (20, 10) and (80, 60)?

(80, 60)

(20, 10)
 What is the distance between (20, 10) and (80, 60)?

SOLUTION
Euclidean distance:

Application dAB = (xA – xB)2 + (yA – yB)2 = (20 – 80)2 + (10 – 60)2 = 78.1

Rectilinear distance:

dAB = |xA – xB| + |yA – yB| = |20 – 80| + |10 – 60| = 110

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 Management is investigating which location would be best to position its
new plant relative to two suppliers (located in Cleveland and Toledo) and
three market areas (represented by Cincinnati, Dayton, and Lima).
Management has limited the search for this plant to those five locations.
The following information has been collected. Which is best, assuming
rectilinear distance?

Application Location x,y coordinates Trips/year

Cincinnati (11,6) 15
Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40

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 Location x,y coordinates Trips/year
SOLUTION
Cincinnati (11,6) 15
Calculations: Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40

Application
Cincinnati = 15(0) + 20(9) + 30(9) + 25(8) + 40(4) = 810
Dayton = 15(9) + 20(0) + 30(10) + 25(5) + 40(9) = 920
Cleveland = 15(9) + 20(10) + 30(0) + 25(5) + 40(5) = 660
Toledo = 15(8) + 20(5) + 30(0) + 25(0) + 40(8) = 690
Lima = 15(4) + 20(9) + 30(5) + 25(8) + 40(0) = 590

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  A good starting point
 Find x coordinate, x*, by multiplying each point’s x coordinate by its load
(lt), summing these products li xi, and dividing by li
 The center of gravity’s y coordinate y* found the same way
Center of  Generally not the optimal location

Gravity
Method li xi  l i yi
i
x* = i
 li y* =
 li
i
i

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 EXAMPLE #1
A supplier to the electric utility industry produces power generators; the
transportation costs are high. One market area includes the lower part of
the Great Lakes region and the upper portion of the southeastern region.
More than 600,000 tons are to be shipped to eight major customer
locations as shown below:
Finding the
Center of Customer Location Tons Shipped x, y Coordinates
Three Rivers, MI 5,000 (7, 13)
Gravity Fort Wayne, IN 92,000 (8, 12)
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Kingsport, TN 9,000 (12, 4)
Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)

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 Customer Location Tons Shipped x, y Coordinates
Three Rivers, MI 5,000 (7, 13)
What is the center of gravity for the Fort Wayne, IN 92,000 (8, 12)
electric utilities supplier? Using Columbus, OH 70,000 (11, 10)
rectilinear distance, what is the Ashland, KY 35,000 (11, 7)

resulting load–distance score for Kingsport, TN 9,000 (12, 4)

Finding the this location? Akron, OH

Wheeling, WV
227,000
16,000
(13, 11)
(14, 10)
Roanoke, VA 153,000 (15, 5)

Center of SOLUTION
Gravity The center of gravity is calculated as shown below:
li = 5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607
i

li xi = 5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13)

i
+ 16(14) + 153(15) = 7,504
li xi
i 7,504
x* = = = 12.4
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li 607
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i
 Customer Location Tons Shipped x, y Coordinates

What is the center of gravity for the Three Rivers, MI 5,000 (7, 13)
Fort Wayne, IN 92,000 (8, 12)
electric utilities supplier? Using Columbus, OH 70,000 (11, 10)
rectilinear distance, what is the Ashland, KY 35,000 (11, 7)
resulting load–distance score for Kingsport, TN 9,000 (12, 4)

this location? Akron, OH 227,000 (13, 11)

Finding the Wheeling, WV

Roanoke, VA
16,000
153,000
(14, 10)
(15, 5)

Center of
Gravity li yi = 5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)
i
+ 16(10) + 153(5) = 5,572
li yi
i 5,572
y* = = = 9.2
li 607
i

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 What is the center of gravity for the
electric utilities supplier? Using rectilinear
distance, what is the resulting load– Customer Location Tons Shipped x, y Coordinates
distance score for this location? Three Rivers, MI 5,000 (7, 13)
Fort Wayne, IN 92,000 (8, 12)
IF LOAD DISTANCE IS USED AS A
METHOD TO LOCATE supplier to the Columbus, OH 70,000 (11, 10)
electric utility industry . Ashland, KY 35,000 (11, 7)
Kingsport, TN 9,000 (12, 4)
WHICH CITY TO BE CHOSEN?
Akron, OH 227,000 (13, 11)

Finding the Wheeling, WV

Roanoke, VA
16,000
153,000
(14, 10)
(15, 5)

Center of
The resulting load-distance score is
Gravity
ld =  lidi = 5(5.4 + 3.8) + 92(4.4 + 2.8) + 70(1.4 + 0.8) +
i
35(1.4 + 2.2) + 9(0.4 + 5.2) + 227(0.6 + 1.8) +
16(1.6 + 0.8) + 153(2.6 + 4.2)
= 2,662.4
where
di = |xi – x*| + |yi – y*|
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 A firm wishes to find a central location for its service. Business forecasts
indicate travel from the central location to New York City on 20 occasions
per year. Similarly, there will be 15 trips to Boston, and 30 trips to New
Orleans. The x, y-coordinates are (11.0, 8.5) for New York, (12.0, 9.5) for
Boston, and (4.0, 1.5) for New Orleans. What is the center of gravity of the
three demand points?

Application SOLUTION

li xi [(20  11) + (15  12) + (30  4)]

i
x* = = = 8.0
li (20 + 15 + 30)
i

li yi
i [(20  8.5) + (15  9.5) + (30  1.5)]
y* = =
li (20 + 15 + 30)
= 5.5
i

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BREAK EVEN
ANALYSIS
  XYZ Tbk., a company doing business in expensive sports
equipment has noticed that South East Asia region market has
grown rapidly. They need to build their own factory in this region.
Three locations in three different countries are on the evaluation:
PROBLEM Bangkok, Thailand, Jakarta, Indonesia, Johor Bahru, Malaysia. The
cost related to these as shown in Table 1. Annual fixed cost
EXAMPLE consists of machines and equipment, buildings and insurance,
Average variable costs per product includes labor, transportation
and utilities. Optimistic volume of sales projection range
from2,500 to 3,000 unit per year.
 Table Annual Fixed and variable cost

Location Annual fixed cost Variable cost Per pair

Bangkok, Thailand USD 30,000 USD 75
Jakarta, Indonesia USD 60,000 USD 45
EXAMPLE Johor Bahru, Malaysia USD110,000 USD 25
(CONT.)
Question:
Determine the best location based on MINIMUM cost if
Optimistic volume of sales projection range from2,500 to 3,000
unit per year.
 Steps
1. Draw Line for BANGKOK (BKK) Equation
2. Bangkok Equation:
3. Total cost = Fixed Cost + variable Cost * Quantity
4. TC BKK (Total Cost Bangkok) = 30k +75* QBkk
5. Draw a line. If QBkk = 0 → Tot cost = 30 k.
6. If QBkk = 1000 → Total cost = 30 k + 75*1000 = 105k
172,5 k

150 k BKK

110 k
105k
90 k

60 k

30 k

0 1000
 Steps
1. Draw Line for JAKARTA (JKT) Equation
2. JKT Equation:
3. Total cost = Fixed Cost + variable Cost * Quantity
4. TC JKT (Total Cost Bangkok) = 60k +45* QJkt
5. Draw a line. If QJkt = 0 → Tot cost = 60 k.
6. If QJkt = 1000 → Total cost = 60 k + 45*1000 = 105k
7. If QJkt = 2000 → Total cost = 60 k + 45*2000 = 150k
172,5 k BKK JKT

150 k

110 k
105k
90 k

60 k

30 k
1000 2k
  We have two lines
 TC BKK = 30k +75* Qbkk
 TC JKT = 60k +45* Qjkt

 Break even 1 → TC BKK = TC JKT

Break even  30k +75 Qbkk = 60k +45 Qjkt → Qbkk = Qjkt = Qbe1 (Quantity
Break even 1)
 75 Qbe1 – 45 Qbe1 = 60k-30k
 Qbe1 = 1000 unit
 Steps
1. Draw Line for JOHOR BAHRU (JB) Equation
2. JB Equation:
3. Total cost = Fixed Cost + variable Cost * Quantity
4. TC JB (Total Cost Bangkok) = 110k + 25*Qjb
5. Draw a line. If QJB = 0 → Tot cost = 110 k.
6. If QJB = 1000 → Total cost = 110 k + 25*1000 = 135k
7. If QJB = 2000 → Total cost = 110 k + 25*2000 = 160k
172,5 k BKK JKT
JB

150 k
135k
110 k
105k
90 k

60 k

30 k
1000 1,6 k 2,2 k 2,5k
  TC BKK = 30k +75* Qbkk
 TC JKT = 60k +45* Qjkt
 TC JB = 110k + 25*Qjb

To find the  Break even 2 → TC BKK = TC JB

Break even  30k +75 Qbkk = 110k + 25Qjb → Qbkk = Qjb = Qbe2
point  Qbe2 = 1600 unit
 Break even 3 → TC JKT = TC JB
 60k +45 Qjkt = 110k + 25Qjb → Qjkt = Qjb = Qbe3
 Qbe3 = 2500 unit
 Question:
Determine the best location based on MINIMUM cost if Optimistic
volume of sales projection range from2,500 to 3,000 unit per year.
ANSWER:
Looking to the graph it shows that the lowest graph for producing
2.5 k and above IS JB = JOHOR BAHRU

172,5 k BKK JKT

JB

150 k

110 k
105k
90 k

60 k

30 k
1000 1,6 k 2,2 k 2,5k
  Compare location alternatives on the basis of quantitative factors
expressed in total costs
Using Break-  Determine the variable costs and fixed costs for each site
 Plot total cost lines
Even Analysis  Identify the approximate ranges for which each location has lowest
cost
 Solve algebraically for break-even points over the relevant ranges

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 EXAMPLE
An operations manager 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 as follows:

Break-Even
Analysis for
Community Fixed Costs per Year Variable Costs per Unit
Location A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

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 Step 1: Plot the total cost curves for all the communities on a
single graph. Identify on the graph the approximate range
Break-Even over which each community provides the lowest cost.
Analysis for Step 2: Using break-even analysis, calculate the break-even
quantities over the relevant ranges. If the expected
Location demand is 15,000 units per year, what is the best location?

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 SOLUTION
To plot a community’s total cost line, let us first compute the total cost for
two output levels: Q = 0 and Q = 20,000 units per year. For the Q = 0 level,
the total cost is simply the fixed costs. For the Q = 20,000 level, the total
Break-Even cost (fixed plus variable costs) is as follows:

Analysis for
Location Community Fixed Costs
Variable Costs
(Cost per Unit)(No. of Units)
Total Cost
(Fixed + Variable)

A $150,000
B $300,000
C $500,000
D $600,000

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 SOLUTION
To plot a community’s total cost line, let us first compute the total cost for
two output levels: Q = 0 and Q = 20,000 units per year. For the Q = 0 level,
the total cost is simply the fixed costs. For the Q = 20,000 level, the total
Break-Even cost (fixed plus variable costs) is as follows:

Analysis for
Location Community Fixed Costs
Variable Costs
(Cost per Unit)(No. of Units)
Total Cost
(Fixed + Variable)

A $150,000 $62(20,000) = $1,240,000 $1,390,000

B $300,000 $38(20,000) = $760,000 $1,060,000
C $500,000 $24(20,000) = $480,000 $980,000
D $600,000 $30(20,000) = $600,000 $1,200,000

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 Figure 1 shows the graph of A
1,600 –
the total cost lines.
(20, 1,390)

Annual cost (thousands of dollars)

1,400 –
The line for community (20, 1,200) D
A goes from (0, 150) to 1,200 – (20, 1,060)
B

Break-Even (20, 1,390). The graph

indicates that 1,000 –
(20, 980)
C

Analysis for community A is best for

low volumes, B for
800 –
Break-even

Location intermediate volumes,

600 – point

and C for high volumes. 400 – Break-even

point
We should no longer 200 –
consider community D, A best B best C best

because both its fixed |– | | | | | | | | | | |

0 2 4 6 8 10 12 14 16 18 20 22
and its variable costs
6.25 14.3
are higher than Q (thousands of units)
community C’s.
Figure 1 – Break-Even Analysis of Four
Candidate Locations
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 Step 2: The break-even quantity between A and B lies at the end of the
first range, where A is best, and the beginning of the second
range, where B is best. We find it by setting both communities’
total cost equations equal to each other and solving:

Break-Even
(A) (B)
Analysis for $150,000 + $62Q = $300,000 + $38Q

Location Q = 6,250 units

The break-even quantity between B and C lies at the end of the

range over which B is best and the beginning of the final range
where C is best. It is
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units

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 No other break-even quantities
are needed. The break-even
Step 2: The break-even quantity between A and B lies at the end of the
point between A and C lies
first range, where A is best, and the beginning of the second
above the shaded area, which
range, where B is best. We find it by setting both communities’
does not mark either the start or
total cost equations equal to each other and solving:
the end of one of the three
relevant ranges.
Break-Even (A) (B)
Analysis for $150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units
Location
The break-even quantity between B and C lies at the end of the
range over which B is best and the beginning of the final range
where C is best. It is
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units

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Exercise
Solution
THANK YOU