Business Location Decisions

Dr. Everette S. Gardner, Jr.

Complexity of the location problem

If there are N potential facility sites, there are (2^N) 1 different geographical configurations. Example: 4 potential sites (A,B,C,D) (2^4) 1 = 15 Number of facilities used
1 2 3 4

Alternatives
A,B,C,D AB, AC, AD, BC, BC, CD BC, ABD, ACD, BCD ABCD
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Number of Alternatives
4 6 4 1 15
2

Complexity of the location problem (cont.)

Number of

potential sites 5 10 20 50 100

Number of alternative geographical configurations 31 1,023 1,048,575 > 10^5 > 10^30

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100%
Customer service level (%)

Total distribution costs

Transportation costs

Number of warehouses

Cost-service tradeoffs in logistics planning

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Customer service axis: % of demand filled within given time frame

Dollar cost axis

Analog model for facility location

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Center.xls

Dimensional analysis in location decisions

Location decisions are based on two types of information: Tangibles (objective or quantitative) Intangibles (subjective) Dimensional analysis helps: Measure and evaluate intangibles Combine tangible and intangible measurements into an overall value index for each location
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Building a dimensional analysis model

1. 2. List the decision factors Score the decision factors:
Natural units for tangible factors (usually financial) Subjective scores for intangibles, scale of 1 to 10 1 represents the ideal 10 represents a disaster

3. 4. 5.

Weight each decision factor (scale of 1 to 5) Compute weighted ratios

(Score for option A / Score for option B)^Weight

Compute preference number

Product of weighted ratios

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Dimensional.xls

Basic calculations in dimensional analysis: U.S. Air vs. Alaska airlines

On-Time Arrival % 0.782 0.690 1.13 8.63 2.95 Denied Boardings 0.34 1.36 0.25 -8.03 68,319.04 Mishandled Baggage 3.86 3.00 1.29 -7.92 0.14 Customer Complaints 1.87 1.27 1.47 -7.17 0.06

US Airways Alaska Airlines Ratio (US Air/Alaska) Weight RatioWeight

Preference number = 2.95 x 68,319.04 x 0.14 x 0.06 = 1,705.48

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Break-even analysis
Break-even point in units = Total fixed costs Unit Variable cost price per unit

Example: FC = $25,000, P = $20, VC = $10

BE = $25,000 = 2,500 units 20 10

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Break-even analysis (cont.)

$ 100000

Sales revenue
80000 60000 40000 20000 0

Breakeven point

Profit

Total costs Variable costs Fixed costs

Losses

1000

2000

3000

4000

5000

Units of output
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Determining market areas

Laid down costs are the delivered costs of a

product.

LDC = P + RX Where P = Production cost/unit R = Transportation rate X = Distance

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Determining market areas (cont.)

Market boundaries are at points where lines of

equal LDC intersect:

x

C
$2

A
$2 $4 $6 $8

$4 $6 $8

z
$6

$4

$2

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LP models for location decisions

Simple transportation model

Sources

Destinations
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LP models for location decisions (cont.)

Transshipment model

Sources

Transshipment points

Destinations

Both models can be used to plan shipments over multiple

time periods

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Preliminary steps in locating service outlets

1. 2. 3. Group population into geographic areas (usually use census blocks) Use demographic data to determine probable facility usage for each potential location Choose objective function:
A. Maximize utilization B. Minimize distance per capita

C. Minimize distance per visit

D. Minimize average reduction in number of visits made due to location decision E. Weighted measures
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Y 20

6 2 City A 10 5 1 4 9 13

7 3

11
8

21

10
15 23 22

-10
14

12

18 17 19

10

20
25

26

16

20 City B

24

30 29 32 31

26 City C

27

-10

Figure 7. A hypothetical medical service area with 32 census blocks and three cities. City populations are (approximately) A = 17,000, B = 9,000, and C = 13,000. Distances on x-y axes are in miles.
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TABLE 12 Location coordinates in miles for three criteria and different numbers of centers*
Criterion Center number (1) Maximize utilization x I With 1 center 1 II With 2 centers 1 2 III With 3 centers 1 2 3 21.00 21.4 -9.89 22.40 -10.16 3.63 y -3.00 -3.7 10.4 -3.1 10.40 -2.75 (2) Minimize distance per capita x 0.64 17.6 9.89 21.52 -10.20 3.60 y 1.20 -3.30 10.4 -2.78 10.40 -2.80 (4) Minimize distance per encounter x -8.70 18.50 -9.90 22.30 -10.20 3.60 y 10.10 -3.30 10.40 -3.20 10.40 -2.80

* See figures 7 and 8 for locations of coordinates. ** Determined only for the first criterion.
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TABLE 12 Location coordinates in miles for three criteria and different numbers of centers* (cont.)
Criterion Center number (1) Maximize utilization x IV With 4 centers 1 22.40 2 -10.20 3 3.59 4 11.32 V With 5 centers** 1 22.40 2 -9.72 3 3.24 4 -11.62 5 11.04 y -3.14 10.40 -2.78 -2.25 -3.10 10.61 -3.19 3.24 -2.00 (2) Minimize distance per capita x 22.00 -10.10 2.69 3.76 y -3.50 10.30 -4.80 3.04 (4) Minimize distance per encounter x 21.23 -9.80 3.61 -11.35 y -3.08 10.40 - 2.70 3.00

* See figures 7 and 8 for locations of coordinates. ** Determined only for the first criterion.
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City A 3
15

Center Criterion governing center locations

10

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

City B

1 City C

Figure 8. Location of one center based on three different criteria.

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