Service Facility Location

Learning Objectives
    

Discuss how different customer service criteria affect facility location. Locate a single facility using the crossmedian approach. Use the Huff model to evaluate the economic feasibility of a retail service location. Locate multiple facilities using the set covering model. Discuss nontraditional location strategies.

Service Facility Location Planning



Competitive positioning: prime location can positioning: be barrier to entry. Demand management: diverse set of market management: generators. Flexibility: plan for future economic changes Flexibility: and portfolio effect. Expansion strategy: contiguous, regional strategy: followed by fill-in, or concentrated. fill-

Geographic Representation
Location on a Plane Y
Destination j

Yj

Euclidean

dij ! ( xi  x j )  ( yi  y j )
Yi
Origin i

1/ 2

Metropolitan

dij ! xi  x j  yi  y j
0 Xi Xj X

Effect of Optimization Criteria

City A
3
15 * 10

2
5 * -5 -15 -10 -5 5 10 15 20 * 25

City B

-10

City C
1

1. Maximize Utilization 2. Minimize Distance per Capita (City B: centrally located) 3. Minimize Distance per Visit

(City C: elderly find distance a barrier)

(City A: many frequent users)

Estimation of Geographic Demand



Define the Target Market

(Families receiving AFDC)

  

Select a Unit of Area

(Census track, ZIP code)

Estimate Geographic Demand

(Regression analysis)

Map Geographic Demand

(3D visual depiction)

Single Facility Location Using Cross Median Approach

5
3 (W3=3)

4 Y m ile s 3 2 1 0 0 1 2 X miles 3 4
1 (W1=7) 4 (W4=5) 2 (W2=1)

Single Facility Location Using Cross Median Approach

5
3 (W3=3)

4 Y m ile s 3 2 1 0 0 1 2 X miles 3 4
1 (W1=7) 4 (W4=5) 2 (W2=1)

Solution is line segment y=2, x=2,3

Huff Retail Location Model

First, a gravity analogy is used to estimate attractiveness of store j for customers in area i.
Aij= Attraction to store j for customers in area i Sj = Size of the store (e.g. square feet) Tij= Travel time from area i to store j lambda = Parameter reflecting propensity to travel

Aij !

Sj T
P ij

Huff Retail Location Model

Second, to account for competitors we calculate the probability that customers from area i will visit a particular store j.

Pij !

Aij
n

A
j !1

ij

Huff Retail Location Model

Third, annual customer expenditures for item k at store j can now be calculated.
Pij = Probability customers from area i travel to store j Ci = Number of customers in area i (e.g. census track) Bik = Annual budget for product k for customers in area i m = Number of customer areas in the market region
m j !1

E jk ! Pij Ci Bik

Huff Retail Location Model

Fourth, market share of product k purchased at store j can now be calculated.

M jk !

E jk
m

(C B
i i !1

ik

Site Selection Considerations

1. Access: Convenient to freeway exit and parking entrance ramps Served by public transportation 2. Visibility: Set back from street Surrounding clutter Sign placement 3. Traffic: Traffic volume on street that may Indicate potential impulse buying Traffic congestion that could be a hindrance (e.g.., fire stations) 4. Parking: Adequate off-street 5. Expansion: Room for expansion 6. Environment: Immediate surroundings should complement the service 7. Competition: Location of competitors 8. Government: Zoning restrictions Taxes

Breaking the Rules

    

Competitive Clustering (Among Competitors)

(e.g. Auto Dealers, Motels)

Saturation Marketing (Same Firm)

(e.g. An Bon Pain, Ice Cream Vendors)

Marketing Intermediaries
(e.g. Credit Cards, HMO)

Substitute Electronic Media for Travel

(e.g. telecommuting, e-Commerce)

Impact of the Internet on Service Location

(e.g. Amazon.com, eBay, FedEx)

Strategic Location Considerations

Front Office
Is travel out to customer or customer travel to site? External Can electronic media Customer substitute for physical travel? (consumer) Is location a barrier to entry? Availability of labor? Are self-service kiosks an selfalternative?

Back Office
Is service performed on person or property? Is co-location necessary? coHow is communication accomplished? Are economies of scale possible? Can employees work from home? Is offshoring an option?

Internal Customer (employee)

Topics for Discussion

Pick a particular service, and identify shortcomings in its site selection.  How would you proceed to estimate empirically the parameter in the Huff retail location model for a branch bank?


Interactive Exercise
The class breaks into small groups and each group comes up with examples of service facility locations that seem to defy the analytical models discussed in the chapter.