Chapter 8

Location Planning
and Analysis

Sam Lampropoulos
© 2021 McGraw Hill
George Brown College
 Canada Royal Milk, Kingston, ON
Kingston, Ontario, has just been chosen by China’s Feihe International
to be the first goat milk infant formula manufacturing facility in North
America. The 300,000 square foot plant is expected to start operating
in 2020 and will bring with it more than 250 direct and more than
1,500 indirect jobs to the city of over 160,000.

© 2021 McGraw Hill 2

 Learning Objectives
• Explain the nature and importance of
location decisions, and outline the
decision process for making such
decisions.
• Describe some of the major factors that
affect location decisions, and discuss why
a foreign company would want to locate in
Canada.
• Use various techniques to evaluate
location alternatives.
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 Chapter Outline
 Nature of Location Decisions
 Factors Affecting Location Decisions
 Service Location Considerations
 Evaluating Location Alternatives
• Locational Break-Even Analysis
• Transportation Method
• Factor Rating
• Centre of Gravity Method
• Location Analysis Software
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 Importance of Location
 Decisions made infrequently in response
to:
• Growth marketing strategy
• Shifts in market or in business costs
• Depletion of resources
 Important design decision
• Long term commitment/costs
• Large impact on capital and operating costs
• Poor choice detrimental to operations

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 Location Decisions in the Supply Chain

Suppliers Middle Retail

• Near source • Close to • Accessibility

of raw supplier or • Demographics
materials customer • Traffic
patterns

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 Formal Location Decision Process
Identify the
important factors

Gather information
on appropriate sites

Eliminate some to
obtain a short list

Site visits and

meetings

Evaluate and make

selection
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 Location Decision Factors

Regional Community
Factors Considerations

Site-related
Country Factors
Factors

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 Regional Factors

Locatio
n of Locatio
raw n of
materia markets
ls

Labour Other
factors factors

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 Regional Factors
 Location of raw materials
• Necessity, perishability and transportation costs
• Utilities
 Location of markets
• Competition/convenience factor
• Perishability and transportation
• Need for closeness to customer
 Labour factors
• Availability, skills, costs, attitudes, presence of unions
 Other costs
• Taxes and incentives
• Land and building costs

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 Foreign Locations

Attitude
Political toward
stability foreign
companies

Language
Exchange
and cultural
rates and
differences
currency
(eg.
risks
corruption)

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 Community Considerations

Liveability
Availability • Facilities and
of skilled services
workers available

Attitudes Economics
• Taxes and • Land and
incentives building costs
• Environmental • Transportation
regulations infrastructure

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 Site Related Factors

Site size
Utility and
and room
sewer
for
capacity
expansion

Parking
Zoning
and road
restrictions
access

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 Service and Retail Locations

Customer
access and Demographics
market size

Transportation
Traffic volume systems and
“clustering”

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Comparison of Service and
Manufacturing Considerations

Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Demographics: age, income,
Distribution modes/costs
etc.
Energy availability, costs Population/drawing area

Labour cost/availability/skills Competition

Material availability/costs Traffic volume/patterns

Customer access/parking

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 Why Should Foreign Companies
Locate in Canada?
 Shortened delivery time and reduced delivery
costs
 Access to natural resources
 Skilled labour, educated workers
 Politically very stable, tax incentives,
 Safe and secure
 Good telecommunication infrastructure
 Low cost for energy, health care
 Lower wage and exchange rates
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Evaluating Location Alternatives
Locational Break-Even Analysis

Transportation Model
• Consider costs of moving raw materials or finished goods

Factor Rating
• Decision based on quantitative and qualitative inputs

Centre of Gravity Method

• Decision based on minimum distribution costs

Location Analysis Software

• Geographic information system

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Locational Break-Even Analysis
1. Determine fixed and variable costs
2. Plot total costs lines
3. Determine location with lowest
total costs

Assumptions:
• Fixed costs and variable costs
are constant for the range of
probable output
• Only one product is involved

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Locational Break Even Analysis
Fixed and variable costs for 4 potential locations
are given in the table below.
1. Plot the total cost lines on a single graph
2. Identify the range of output over which each alternative is
superior
3. If expected output is 8,000 units per year, which location
would provide the lowest cost?
Location Fixed Costs ($) Variable Costs ($)
A 250,000 11
B 100,000 30
C 150,000 20
D 200,000 35
Example 8-1
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Solution

Fixed Variable Total

Costs Costs Costs

A $250,000 $11(10,000) $360,000

B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000

Example 8-1 cont’d

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Example 1 Solution: Breakeven

Example 8-1 cont’d

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Transportation Model
Determines the shipments of raw
materials and finished goods in order
to minimize total transportation cost
 Considers demand and capacity
constraints
 For multi-facility conditions
 A special –purpose algorithm of
linear programming

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Factor-Rating Method
Scoring the factors and determining the
weighted score for each location.
1. Develop a list of relevant factors.
2. Assign a weight to each factor.
3. Develop a scale for each factor.
4. Score all factors for each location.
5. Multiply score by weight for each factor and
sum for each location.
6. Choose the location with the highest
composite score.
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Factor-Rating Example
Location A1 and A2
Scores
(out of 10) Weighted Scores
Factor Weight A1 A2 A1 A2

Proximity 0.1 100 60 (0.1)(100) = 10 (0.1)(60) = 6

Traffic volume 0.05 80 80 (0.05)(80) = 4 (0.05)(80) = 4
Rental Costs 0.40 70 90 (0.4)(70) = 28 (0.4)(90) = 36
Size 0.10 86 92 (0.1)(86) = 8.6 (0.1)(92) = 9.2
Layout 0.20 40 70 (0.2)(40) = 8 (0.2)(70) = 14
Op. Costs 0.15 80 90 (0.15)(80) = 12 (0.15)(90)=13.5
Totals 1.00 70.6 82.7

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Centre-of-Gravity Method
 Finds location of distribution centre that
minimizes total distribution costs
 Considers
• Location of markets
• Volume of goods shipped to those markets
• Shipping cost (or distance)

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Centre-of-Gravity Method
Finds location of distribution centre that
minimizes total distribution costs
 Overlay a coordinate system on a map
showing existing locations
 Location (0,0) arbitrary
 Map drawn to scale
 Determine coordinates of each destination
 Calculate X and Y coordinates for ‘centre of
gravity’
• Weighted by quantity transported

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Centre-of-Gravity Method

∑xiQi
x - bar =
∑Qi

∑yiQi
y - bar =
∑Qi
where xi = x coordinate of
destination i
yi = y coordinate of
destination i
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Q = Quantity to be 27
Centre-of-Gravity Method
Destination (x, y) Daily Quantity

D1 (2,2) 800
D2 (3,5) 900
D3 (5,5) 200
D4 (8,5) 100

(2)(800) + (3)(900) + (5)(200) + (8)(100)

X-bar =
800 + 900 + 200 + 100
= 3.05 –round to 3

(2)(800) + (5)(900) + (4)(200) + (5)(100)

Y-bar =
2,000
= 3.7
If quantities are equal,
assign a weight of 1 to each location
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Centre-of-Gravity Method

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Location Analysis Software
 Geographic Information Systems (GIS)
• Computer-based tool for collecting, storing,
retrieving, and displaying location-dependent
demographic data on map
• Combines data from different databases
• Intuitive and graphical
 Modelling/optimization software
• Many use linear programming
• E.g. LogicNet (http://www.llamasoft.com/)

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 Chapter Summary (1)
 Growth, market shifts, depletion of raw materials, and
the introduction of new products are among the
reasons organizations are concerned with location
decisions.
 Location decisions very important: involve a long-
term commitment and greatly impact costs.
 First identify a country or region that satisfies overall
needs and then identify a number of community/site
alternatives for more in-depth analysis.
 The major influences on location decisions are
location of raw materials, labour supply, market
considerations, and community/site-related factors.
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 Chapter Summary (2)
 Most retailers decide on a site far from locations of
their other stores and the competitors’ stores, taking
potential sales into account.
 Foreign locations may be attractive in terms of labour
cost, abundance of raw material, or as potential
market for a company’s products.
 Canada is an attractive location for a foreign
plant/facility as it is close to the U.S. market, has an
educated labour force & abundant natural resources.
 Methods used to evaluate location alternatives
include locational break-even analysis, factor rating,
and the centre of gravity method.
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 Learning Checklist
 List some of the main reasons organizations
need to make location decisions.
 Explain why location decisions are important.
 Discuss the options that are available for
location decisions.
 Describe some of the major factors that affect
location decisions.
 Outline the decision process for making these
kinds of decisions.
 Use the techniques presented to solve typical
problems.
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