Topic 8:

Location Decisions

8-1
 Learning Objectives
When you complete this chapter you
should be able to:
▶ Identify and explain seven major factors
that effect location decisions
▶ Apply the factor-rating method
▶ Complete a locational break-even analysis
graphically and mathematically
▶ Use the center-of-gravity method
▶ Understand the differences between
service- and industrial-sector location
analysis
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The Strategic Importance of
Location
► One of the most important decisions
a firm makes
► Global in nature
► Significant impact on fixed and
variable costs
► Decisions made relatively
infrequently

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 Location and Costs
► Location decisions based on low cost
require careful consideration
► Once in place, location-related costs
are fixed in place and difficult to
reduce
► Determining optimal facility location is
a good investment

8-4
 Class Activity
▶ Brainstorm with your partner on the factors
that affect the location decision for the
following businesses (Choose one):
▶ IKEA, Batu Kawan
▶ Intel, Bayan Lepas
▶ JD, Gurney Plaza
▶ McDonald, Greenlane, Penang

8-5
 Location Decisions
Country Decision Key Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
Figure 8.1 risks
8-6
 Location Decisions
Region/ Key Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
MN 3. Labor availability and costs
WI 4. Costs and availability of utilities
MI 5. Environmental regulations
IL IN
OH 6. Government incentives and fiscal
policies
7. Proximity to raw materials and
customers
Figure 8.1
8. Land/construction costs
8-7
 Location Decisions
Site Decision Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

Figure 8.1

8-8
Global Competitiveness Index of
Countries (2016)

8-9
8 - 10
 Factors That Affect
Location Decisions
1. Labor productivity
► Wage rates are not the only cost
► Lower productivity may increase total cost

Labor cost per day

= Cost per unit
Productivity (units per day)

South Carolina Mexico

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units

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 Factors That Affect
Location Decisions
2. Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
3. Costs
► Tangible - easily measured costs such as
utilities, labor, materials, taxes
► Intangible - less easy to quantify and include
education, public transportation, community,
quality-of-life

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 Factors That Affect
Location Decisions
2. Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
Location decisions
3. Costs
based on costs
► Tangible - easily measured costs such as
alone can create
utilities, labor, materials, taxes
difficult ethical
► Intangible - less easy to quantify and include
situations
education, public transportation, community,
quality-of-life

8 - 13
 Factors That Affect
Location Decisions
4. Political risk, values, and culture
► National, state, local governments attitudes
toward private and intellectual property,
zoning, pollution, employment stability may be
in flux
► Worker attitudes towards turnover, unions,
absenteeism
► Globally cultures have different attitudes
towards punctuality, legal, and ethical issues

8 - 14
Corruption Perception Index

8 - 15
8 - 16
 Factors That Affect
Location Decisions
5. Proximity to markets
► Very important to services
► JIT systems or high transportation costs may
make it important to manufacturers
6. Proximity to suppliers
► Perishable goods, high transportation costs,
bulky products

8 - 17
 Factors That Affect
Location Decisions
7. Proximity to competitors (clustering/critical
mass)
► Often driven by resources such as natural,
information, capital, talent
► Found in both manufacturing and service
industries

8 - 18
 Clustering of Companies
TABLE 8.3 Clustering of Companies
REASON FOR
INDUSTRY LOCATIONS CLUSTERING
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal Studios, weather, tourists, and
and Sea World) inexpensive labor
Electronics firms Northern Mexico NAFTA, duty free export to
U.S.
Computer hardware Singapore, Taiwan High technological
manufacturers penetration rate and per
capita GDP,
skilled/educated workforce
with large pool of engineers

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 Factor-Rating Method
► Popular because a wide variety of factors
can be included in the analysis
► Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Make a recommendation based on the highest
point score
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 Factor-Rating Example
TABLE 8.4 Weights, Scores, and Solution

SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK

Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude

People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3

Education and
.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
health
Totals 1.00 70.4 68.0

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 Locational
Cost-Volume Analysis
► An economic comparison of location
alternatives
► Three steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume

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 Locational Cost-Volume
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

8 - 23
 Locational Cost-Volume
Analysis Example
Crossover point – Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000

Crossover point – Brussels/Lisbon

60,000 + 45(x) = 110,000 + 25(x)

20(x) = 50,000
(x) = 2,500

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 Locational Cost-Volume
Analysis Example
Figure 8.2
–
$180,000 –
–
$160,000 –
$150,000 –
– e
o s t curv
$130,000 – c
L i sbon
Annual cost

–
$110,000 –
– ls
s s e rv e
– Bru t cu
s
$80,000 – co
–
$60,000 – e ns ve
th ur
– A tc
s
– co
$30,000 – Athens Lisbon
Brussels
– lowest lowest
lowest cost
cost cost
$10,000 –
–
| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000

Volume
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 Center-of-Gravity Method
► Finds location of distribution center
that minimizes distribution costs
► Considers
► Location of markets
► Volume of goods shipped to those
markets
► Shipping cost (or distance)

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 Center-of-Gravity Method
► Place existing locations on a
coordinate grid
► Grid origin and scale is arbitrary
► Maintain relative distances
► Calculate x and y coordinates for
‘center of gravity’
► Assumes cost is directly proportional
to distance and volume shipped

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Center-of-Gravity Method
x-coordinate of the
center of gravity

y-coordinate of the
center of gravity

where dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods
moved to or from location i

8 - 28
 Center-of-Gravity Method

TABLE 8.5 Demand for Quain’s Discount Department Stores

NUMBER OF CONTAINERS
STORE LOCATION SHIPPED PER MONTH
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000

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Center-of-Gravity Method
North-South Figure 8.3

New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 –

d1x = 30
60 –
d1y = 120
30 – Atlanta (60, 40)
Q1 = 2,000

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin
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 Center-of-Gravity Method

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7

(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3

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Center-of-Gravity Method
North-South Figure 8.3

New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 – + Center of gravity (66.7, 93.3)

60 –

30 – Atlanta (60, 40)

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin
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 Transportation Model

► Finds amount to be shipped from

several points of supply to several
points of demand
► Solution will minimize total
production and shipping costs
► A special class of linear programming
problems

8 - 33
 Service Location Strategy
1. Purchasing power of customer-drawing area
2. Service and image compatibility with
demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’
locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management
8 - 34
 Location Strategies
TABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
REVENUE FOCUS COST FOCUS
Volume/revenue Tangible costs
Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw
Physical quality material; taxes, and so on
Parking/access; security/lighting;
appearance/ image Intangible and future costs
Attitude toward union
Cost determinants Quality of life
Rent Education expenditures by state
Management caliber Quality of state and local
Operation policies (hours, wage government
rates)

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 Location Strategies
TABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL
TECHNIQUES
Regression models to determine
importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
ASSUMPTIONS
Location is a major determinant of
revenue
High customer-contact issues are critical
Costs are relatively constant for a given
area; therefore, the revenue
function is critical
GOODS-PRODUCING
TECHNIQUES
Transportation method
Factor-rating method
Locational cost–volume analysis
Crossover charts
ASSUMPTIONS
Location is a major determinant of cost
Most major costs can be identified
explicitly for each site
Low customer contact allows focus on
the identifiable costs
Intangible costs can be evaluated

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 Geographic Information
Systems (GIS)
► Important tool to help in location analysis
► Enables more complex demographic analysis
► Available data bases include
► Detailed census data
► Detailed maps
► Utilities
► Geographic features
► Locations of major services

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Geographic Information
Systems (GIS)

8 - 38
 Recap Session
1. The focus for manufacturing location is _______
whereas for service location is ________.
A. revenue, cost
B. cost, revenue
C. labour availability, cost
D. revenue, labour availability

2. An employee produces 15 units during a shift in which he

is paid RM90. The labour content (cost to product a unit) of
the product is:
A.RM90
B.RM5
C.RM6
D.RM1.67
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 Recap Session
3. Government policies towards issues like intellectual
property, zoning, pollution, employment may change over
time. This scenario is associated with ______ in location
strategy.
A.Democratic risk
B.Currency and exchange risk
C.Political risk
D.Legal risk
4. A critical factor influencing location decision for a
company that produces bulky products is:
A.Proximity to customers
B.Proximity to competitors
C.High customer traffic flow
D.Stable exchange rate 5 - 40
 Recap Session
5. Below are examples of intangible costs EXCEPT:
A.Rental
B.Education quality
C.Availability of public transportation
D.Quality of workers

6. A company determining where to locate its distribution

center will likely use:
A.Center of gravity method
B.Factor rating method
C.Volume Cost analysis
D.Break even analysis

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 Recap Session
7. It is fairly easy to start a business in a country with
_____ competitiveness and _________ in corruption.
A.Low, high
B.High,low
C.Low, low
D.High, high

8. Evaluating location alternatives by comparing the

weighted-score for all locations is an example of using:
A.Linear regression analysis
B.Cost-volume analysis
C.Factor-rating analysis
D.Crossover analysis

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 Recap Session
9. The center of gravity method does not take into
consideration the:
A.Location of customers
B.Volume of goods shipped to the customers
C.Value of the goods shipped
D.Combination of volume and distance

10. The transportation method:

A.Minimizes total fixed costs
B.Minimizes total production and transportation costs
C.Minimizes total transportation costs
D.Maximizes revenues

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