CHAPTER 9: LOCATION - Imported goods and services now are the equivalent of about 13% of the total output
- Imported goods and services now are the equivalent of about 13% of the total output in the US
 Service providers build and remodel innumerable stores, office buildings, warehouses, and other facilities. Choosing
where to locate new manufacturing facilities, service outlets, or branch offices is a strategic decision.
 The location of a business’s facilities has a significant impact on the company’s operating costs, the prices it charges
for goods and services, and its ability to compete in the marketplace.
 Recognizing the strategic impact of location decisions, we first examine the most important trend in location patters;
the globalization of operation.
o We then consider qualitative factors that influence location choices.
o We end by presenting some analytic techniques for making single or multiple-facility location decisions.
THE GLOBALIZATION AND GEOGRAPHIC DISPERSION OF OPERATIONS
 In the past, industries tended to concentrate in specific areas, but today this tendency to concentrate in certain
geographic region is lessening.
 Geography and distance are becoming increasingly irrelevant in location decisions, owing to improve
communication technologies such as email, faxes, video conferencing, and overnight delivery.
o An important exception is manufacturing firms that utilize just-in-time systems, which rely on supplier
proximity.
 The trend of separating operations and putting thousands of miles between them applies to large corporations,
medium-sized companies and small businesses alike.
 The term Globalization describes businesses’ deployment of facilities and operations around the world.
o Worldwide exports now account for more than 30% of worldwide gross national product, up from 12% in
1962.
o At the end of 1996 total foreign investments in US service and manufacturing industries exceeded $630
billion. Europe accounts for 65% of the total, with the UK leading the way at 23%. Japanese firms account
for another 19%.
 Globalization also results in more exports to and imports from other countries, often called offshore sales and
imports.
o Offshore sales and purchases by US manufacturers have increased to 14% of total sales and 10% of total
purchases.
o The volume of corporate voice, data and teleconferencing traffic between countries is growing at an
annual rate of 15% to 20% - about double the corporate domestic rate – indicating how businesses are
increasingly bridging national boundaries.
 Globalization of services is also widespread. The value of world trade in service is roughly 20% of total world trade.
o Banking, law, information services, airlines, education, consulting, and restaurant services are particular
active globally.
FOUR DEVELOPMENTS HAVE SPURRED THE TREND TOWARD GLOBALIZATION
1. Improved Transportation and Communication Technologies
- Improvements in communications technology and transportation are breaking down the
barriers of time and space between countries.
- Telecommunications (voice and data) technology – including electronic mail, facsimile
machines, the Internet, and sophisticated toll-free telephone arrangements – allows facilities to
serve larger market areas and allows firms to centralize some operations and provide support to
branches located near their customers.
 It also permits managers around the world to communicate quickly, increasing the
opportunities for cooperation and coordination.
2. Loosened Regulations on Financial Institutions (Opened Financial Systems)
- During the 1980s, US banking regulators removed interest ceilings, which allowed banks to
attract more foreign investors by offering higher rates.
- At the same time, foreign banks removed barrier to entry. As a result, the world’s financial
systems have become more open, making it easier for firms to locate where capital, suppliers,
and resourced are cheapest.
3. Increased demand for Imported Goods
- Import penetration of the major economies is increasing, as political barriers to international
trade have crumbled.
and 14% in Japan, up considerably from earlier decades.
- Penetration has bee increased by locating production facilities in foreign countries because a
local presence reduces customer aversion to buying imports.
4. Lowered International Trade Barriers (Reduced Imports Quotas and Other Trade Barriers)
- Producing goods or service in the country where the customers live also circumvents import
quotas and other trade barriers, such as India’s restrictions on certain imports.
DISADVANTAGES OF GLOBALIZATION
 A firm may have to relinquish propriety technology if it turns over some of its component manufacturing to offshore
suppliers or if suppliers need the firm’s technology to achieve desired quality and cost goals.
 There may be political risks. Each nation can exercise its sovereignty over the people and property within its borders.
o The extreme case is nationalization, in which a government may take over a firm’s assets without paying
compensation.
o Also, a firm may alienate customers back home if jobs are lost to offshore operations.
 Employee skills may be lower in foreign countries, requiring additional training time.
 When a firm’s operations are scattered, customer response times can be longer. Effective cross-functional connections
also may be more difficult if face-to-face discussions are needed.
Hot Spots of Global Economic Activity
 Globalization fosters an increasingly interdependent world economy. One recent survey of US corporate real estate
executives puts China at the top as a foreign target for future US investments, followed by Mexico.
 Asia in general is the favorite regional target, with more than half of those surveyed planning to expand or open a
facility somewhere in Asia.
o 9 of the top 14 cities names were in Asia: Singapore ranked first, followed by Mexico City, London,
Shanghai, Hong Kong, Beijing, Seoul, Buenos Aires, Warsaw, Taipei, Moscow, Jakarta, Bombay, and
Bangkok.
o The former East Bloc countries are another important target, with 40% of the respondents planning to
begin operations in Russia within 3 years.
 EAST ASIA
o Business and government attention, which had long focused on Japan because of its manufacturing
capacity, is now focused on Korea, Taiwan, Singapore and parts of China.
 They are rapidly industrializing areas with growing economic strength, and their economies
depend heavily on the export of their manufactured goods.
 Korea could well become the first country to establish itself as an advanced industrial power
since Japan’s emergence.
o Taiwan’s exports 70% of its total output, including garments, electronics, software, and steel; it makes
20% of the world’s personal computers.
o Hong Kong, which reverted in 1997 to the People’s Republic of China, exports 90% of its manufacturing
output, although its rising costs caused much of its manufacturing base to shift to the rest of China.
o The Island State of Singapore had built itself into one of Asia’s favorite manufacturing hubs for
electronics, although low-cost competition from its neighbors is increasingly stiff.
 East Asia has attracted large amounts of investments from foreign firms, and many joint
ventures with foreign firms have been formed.
 Apple, Texas Instruments, and General Electric, as well as Matsushita of Japan, are among
the many foreign firms with plans in Singapore that are responsible for 60% of all
manufacturing output.
o Four major domestic conglomerates in Korea (Daewoo, Samsung, Hyundai, and Lucky-Star), known as
the chaebol, account for 40% of that country’s total output.
 Korea attracts foreign investment, particularly from the US and Japan.
 Daewoo has a joint venture with Suzuki to build Japanese minicars and trucks.
 Kia Motors, another Korean Firm, is partly ownsed by Ford and Mazda and build cars for the
US Market.
 MEXICO
o Although it experienced some economic problems in 1994, it has rebounded and is seen as a top location
for new operations. Its strength lies in labor-intensive operations.
 o American, Japanese, South Korean, and European firms have opened nearly 2000 plants employing
almost 500,000 workers, many in maquiladoras, or industrial parks, along the northern border of Mexico.
 The maquilas, or plants in the maquiladoras, assemble foreign parts and export finished
products to the US.
 Example: Ford opened a plant in Hermosillo to make the Escort and is expanding its
multivalve four-cylinder engine plant in Chihuahua. These plants take advantage of cheaper
Mexican labor, which lowers the sticker price of Ford’s cars and trucks.
 EUROPEAN UNION
o The EU has dropped most internal trade barriers, and significant economic expansion is expected in
Western Europe over the next 2 decades. During the late 1980s, multinational firms positioned themselves
to be treated as EU corporations, with the ability to trade freely within the EU and avoid import quotas or
duties by locating production facilities in Europe.
 For a company to quality, it must manufacture a product’s core parts within the EU.
o The 1990s brought new wave of investment as the European business climate became less regulated,
triggering price wars and placing a premium on service.
 This trend encourages US companies to open European operations in finance, retailing, and
technology.
 In financial services, US companies are eyeing opportunities in banks, insurance companies,
and brokerages.
 EASTERN EUROPE AND THE FORMER SOVIET UNION
o With the political collapse of the former communist countries in Eastern Europe and the former Soviet
Union, the region is beginning to post vibrant growth rates. Many firms began looking, increasingly to
those markets as a source of new customers, suppliers, and partners.
o Although the pace of growth may be less certain there than in other regions because of continuing political
and economic turmoil, the region’s population of 410 million promises huge market opportunities.
o Foreign companies are establishing joint ventures in local manufacturing at an accelerating pace.
MANAGING GLOBAL OPERATIONS
 All the concepts and techniques describe in this book apply to operations throughout the world. However, location
decisions involved added complexities when a firm sets up facilities abroad.
 One study revealed that the most important barrier to effective global manufacturing operation is that many firms
don’t take a global view of their market opportunities and competitors.
o Global markets impose new standards on quality and time. Managers should think about domestic markets
firsts and then global market later, if at all.
 Managers must also have a good understanding of their competitors, which requires greater
appraisal capabilities when the competitors are global rather than domestic.
 Other important challenges of managing multinational operations:
a. Language and Customs
- The ability to communicate effectively is important to all organizations.
- Several US franchisers, such as Century 21 Real Estate, Levi Strauss, and Quality Inns
International, found that even when the same language is spoken, different countries have
unique norms and customs that shape their business values.
 The goals, attitudes towards work, customer expectations, desire of risk taking, and
other business values can vary dramatically from one part of the world to another.
b. Different management Styles / Work Force Management
- Employees in different countries prefer different management styles. Managers moving to
operations in another country often must reevaluate their on-the-job behaviors, assumptions
about worker’s attitudes, and promotion practices.
- Practices that work well in one country may be ineffective in another.
c. Unfamiliar laws and regulations
- Managers in charge of overseas plants must deal with unfamiliar labor laws, tax laws, and
regulatory requirements.
- The after-tax consequences of an automation project, for instance, can be quite different from
country to country because of different tax laws.
- Legal systems also differ. Some policies and practices that are illegal in one country might be
acceptable or even mandated elsewhere in the world.
d. Different Costs / Unexpected Cost Mix
- Firms may shift some of their operations to another country because of lower inventory, labor,
materials and real estate costs.
- However, these same differences may mean that policies that worked well in one economic
environment – such as automating a process – might be a mistake in the new environment.
 In dealing with global operations, managers must decide how much of the firm’s operations to shift overseas and how
much control the home office should retain.
o At one extreme, firms can rely on their home offices for strategic direction and are highly centralized.
o At other extreme, firms can have a worldwide vision but allow each subsidiary to operate independently.
Here, the manager must be able to manage highly decentralized organizations that have a complex mix of
product strategies, cultures, and consumer’s needs.
FACTORS AFFECTING LOCATION DECISIONS
 Facility Location is the process of determining a geographic site for a firm’s operations.
o Managers of both service and manufacturing organizations must weigh many factors when assessing the
desirability of a particular site, include proximity to customers and suppliers, labor costs, and
transportation costs.
 Managers generally can disregard factors that fail to meet at least one of the following two conditions:
a. The factor must be sensitive to location. That is, managers shouldn’t consider a factor that isn’t affected by the
location decisions.
- Example: If community attitudes are uniformly good at all locations under consideration,
community attitude shouldn’t be considered as a factor.
b. The factor must have a high impact on the company’s ability to meet its goals.
- Example: although different locations will be at different distances from suppliers, if
shipments and communications can take place by overnight delivery, faxing, and other means,
distance to suppliers shouldn’t be considered as a factor.
 Managers can divide location factors into dominant and secondary factors.
o Dominant Factors are those derived from competitive priorities (cost, quality, time and flexibility) and
have a particularly strong impact on sales or costs.
 Example: a labor-intensive plant might require low wage costs to remain competitive.
o Secondary Factors also are important, but management may downplay or even ignore some of them if
other factors are more important.
 Thus for GM’s Saturn plant, which makes many parts on site, inbound transportation costs
were considered to be a secondary factor.
DOMINANT FACTORS IN MANUFACTURING (listed in order of importance)
1. Favorable Labor Climate maybe the most important factor in location decisions for labor-intensive firms in
industries such as textiles, furniture and consumer electronics.
- Labor climate is a function of wage rates, training requirements, and attitudes toward work,
worker productivity, and union strength.
- Many executives perceive weak unions or a low probability of union organizing efforts as a
distinct advantage.
 One indicator of this attitude is that, although 50% of US manufacturing plans are
unionized; only 20% of new plant being opened has unions.
2. Proximity to Markets. After determining where the demand for goods and services is greater, management must
select a location for the facility that will supply that demand.
- Locating near markets is particularly important when the final goods are bulky or heavy and
outbound transportation rates are high.
 Example: manufacturers of products such as plastic pipe and heavy metals all
emphasize proximity to their markets.
3. Quality of Life. Good schools, recreational facilities, cultural events, and an attractive life-style contribute to quality
of life.
- This factor is relatively unimportant on its own, but it can make the difference in location
decisions.
- In the US during the past 2 decades, more than 50% of new industrial jobs went to nonurban
regions. A similar shift is taking place in Japan and Europe.
 Reasons for this movement include high costs of living, high crime rates, and
general decline in the quality of life in many large cities.
 4. Proximity to suppliers and resources. Firms dependent on inputs of bulky, perishable, or heavy raw materials
emphasize proximity to suppliers and resources.
- In such cases inbound transportation costs become a dominant factor, encouraging such firms
to locate facilities near suppliers.
 Example: locating paper mills near forest and food processing facilities near farms
is practical.
- Another advantage of locating near suppliers is the ability to maintain lower inventories.
5. Proximity to the parent company’s facilities. In many companies, plants supply parts to other facilities or rely on
other facilities for management and staff support.
- These ties require frequent coordination and communication, which can become more difficult
as distance increases.
6. Utilities, taxes and real estate costs. Other important factors that may emerge include utility costs, local and state
taxes, financing incentives offered by local or state governments, relocation costs, and land costs.
7. Other Factors. Still other factor may need to be considered, including room for expansion, construction costs,
accessibility to multiple modes of transportation, the costs of shuffling people and material between plants,
insurance costs, competition for other firms for the work force, local ordinances, community attitudes and many
others.
- For global operations, firms are emphasizing local employee skills and education and the local
infrastructure.
- Many firms are concluding that large, centralized manufacturing facilities in low-cost countries
with poorly trained workers are not sustainable.
- Smaller, flexible facilities serving multiple markets allow the firm to deal with nontariff
barriers such as sales volume limitations, regional trading blocks, political risks, and exchange
rates.
DOMINANT FACTORS IN SERVICES
 The factors mentioned for manufacturers also apply to service providers, with one important addition: the impact that
the location might have on sales and customers satisfaction.
 Customer usually care about how close a service facility is, particularly if the process requires considerable customer
contact.
1. Proximity to Customers. Location is a key factor in determining how conveniently customers can carry on
business with a firm.
- Example: few people will patronize a remotely located dry cleaner or supermarket if another is
more convenient. Thus the influence of location on revenue tends to be the dominant factor.
2. Transportation Costs and Proximity to Markets. For warehousing and distribution operations,
transportation costs and proximity to markets are extremely important.
- With a warehouse nearby, many firms can hold inventory closer to the customer, thus reducing
delivery time and promoting sales.
3. Location of Competitors. One complication in estimating the sales potential at different locations is the impact
of competitors.
- Management must not only consider the current location of competitors but also try to
anticipate their reaction to the firm’s new location. Avoiding areas where competitors are
already well established often pays.
- However, in some industries, such as new-car sales showrooms and fast-food chains, locating
near competitors is actually advantageous.
 The strategy is to create a critical mass, whereby several competing firms clustered
in one location attract more customers than total number who would stop at the
same stores at scattered locations.
o Recognizing this effect, some firms use a follow-the-leader strategy
when selecting new sites.
4. Site-Specific Factors. Retailers also must consider the level of retail activity, residential density, traffic flow,
and sire visibility.
- Retail activity in the area is important, as shoppers often decide on impulse to go shopping or
to eat in a restaurant.
- Traffic flows and visibility are important because businesses’ customers arrive in cars.
 Management considers possible traffic tie-ups, traffic volume and directions by
time of day, traffic signals, intersections, and the position of traffic medians.
- Visibility involves distance from the street and size of nearby building and signs. High
residential density ensures nighttime and weekend business when the population in the area fits
the firm’s competitive priorities and target market segment.
LOCATING A SINGLE FACILITY
 Selecting On-site Expansion, New Location or Relocation
o Management must first decide whether to expand on sire, build another facility or relocate to another site.
 A survey of Fortune 500 firms showed that 45% of expansions were on sire, 43% were in new
plants at new locations, and only 12% were relocations of all facilities.
o On-site Expansion has the advantage of keeping management together, reducing construction time and
costs, and avoiding splitting up operations.
 However, a firm may over expand a facility, at which point diseconomies of scale set in.
o Poor materials handling, increasingly complex production control, and simple lack of space all are
reason for building a new plant or relocating the existing one.
o The advantage of building a new plant or moving to a new retail or office spac e are that the firm doesn’t
have to rely on production form a single plant, can hire new and possibly more productive labor, can
modernize with new technology, and can reduce transportation costs.
o Most firms that choose to relocate are small. They tend to be single-location companies cramped for
space and needing to redesign their production processes and layouts.
 More than 80% of all relocations are within 20 miles of the first location, which enables the
firm to retain its current work force.
 Comparing Several Sires
o A systematic selection process begins after there is perception or evidence that opening a retail outlet,
warehouse, office, or plant in a new location will increase profits.
o A team may be responsible for the selection decision in a large corporation, or an individual may have to
make the decision in a small company.
o The process of selecting a new facility location involved a series of steps:
1. Identify the important location factors and categorize them as a dominant or secondary.
2. Consider alternative regions; then narrow the choices to alternative communities and finally to
specific sites.
3. Collect data on the alternatives from location consultants, state development agencies, city and
county planning departments, chambers of commerce, land developers, electric power companies,
banks, and on-site visits.
4. Analyze the data collected, beginning with the quantitative factors- factors that can be measured in
dollars, such as annual transportation costs or taxes.
- These dollar values may be broken into separate cost categories and separate revenue sources.
- These financial factors can be converted to a single measure of financial merit and used to
compare two or more sites.
5. Bring the qualitative factors pertaining to each site into the evaluation.
- A qualitative factor is one that can’t be evaluated in dollar terms, such as community attitudes
or quality of life.
- To merge quantitative and qualitative factors, some managers review the expected performance
of each factor, while others assign each factor a weight of relative importance and calculate a
weighted score to each site, using a preference matrix.
- What is important in one situation may be unimportant or less important in another.
o After thoroughly evaluating between 5 and 15 sites, those making the study prepare final report
containing site recommendations, along with a summary of the data and analyses on which they are
based.
o An audiovisual presentation of key findings usually is delivered to top management in
large firms.
Applying the Load-Distance Method
 In the systematic selection process, the analyst must identify attractive candidate locations and compare them on the
basis of quantitative factors.
o The Load-Distance Method can facilitate this step.
 This is a mathematical model used to evaluate locations based on proximity factors.
  The objective is to select a location that minimizes the total weighted loads moving into and  Break-even analysis can help a manager compare location alternatives on the basis of quantitative factors that can be
out of the facility. expressed in terms of total costs.
 The distance between two points is expressed by assigning the points to grid coordinates on a  It is particularly useful when the manager wants to define the ranges over which each alternative is best.
map.  The basic steps for graphic and algebraic solutions are as follows:
 The alternative approach is the use time rather than distance. 1. Determine the variable costs and fixed costs for each site.
 Several location factors relate directly to distance: proximity to markets, average distance to target customers, - Variable Costs are the portion of the total cost that varies directly with the volume output.
proximity to suppliers and resources, and proximity to other company facilities. - Fixed Costs are the portion of the total costs that remains constant regardless of output levels.
 Distance Measure: 2. Plot the total cost line – the sum of variable and fixed costs –for all the sires on a single graph.
a. Euclidean Distance is the straight line distance, or shortest possible path, between two points. 3. Identify the approximate ranges for which each location has the lowest cost.
- To calculate this distance, we create a graph. We place a point A on the grid to represent the 4. Sole algebraically for the break-even point over the relevant ranges.
supplier’s location. Then we place point B on the grid to represent the possible warehouse
location. The distance between point A and B is the length of the hypotenuse of a right triangle, Locating a Facility Within a Network of Facilities
or:  When a firm with a network of existing facilities plans a new facility, one of two conditions exists:
dAB = √( x A – x B)2+( y A – y B)2 o Either the facilities operate independently
 Independently operating units can be located by treating each as separate single facility.
Where: dAB = distance between points A and B
o Or the facilities interact.
xA = x-coordinate of point A
yA = y-coordinate of point A  Locating interacting facilities introduces new issues, such as how to allocate work between the
xB = x-coordinate of point B facilities and how to determine the best capacity for each.
yB = y-coordinate of point B  Changing work allocations in turn affects the size (or capacity utilization) of the facilities.
 Thus multiple-facility location problem has three dimensions – location, allocation, and
b. Rectilinear Distance measures distance between two points with a series of 90 0 turns, as along city capacity – that must be solve simultaneously.
blocks. This distance is the sum of the two dashed lines representing the base and side of the triangle  In many cases, the analysts can identify a workable solution merely by looking for patterns in the cost, demand, and
in Fig.9.2 capacity data and using trial-and-error calculations. In other cases, more formal approaches are needed.
- The distance traveled in the x-direction is the absolute value of the difference in x-coordinate.
Adding this result to the absolute value of the distance in the y-coordinate gives The Transportation Method
dAB = | xA – xB | + | yA – yB |  Transportation Method is a quantitative approach that can help solve multiple-facility location problems.
 Calculating a Load-Distance Score  We use it here to determine the allocation pattern that minimizes the cost of shipping products from two or more
o Suppose that a firm planning a new location wants to select a site that minimizes the distance that loads, plants, or sources of supply, to two or more warehouses, or destinations.
particularly the larger ones, must travel to and from the site.  We focus on the setup and interpretation of the problem, leaving the rest of the solution process to a software package
 Depending on the industry, the load may be shipments from supplier, between plants, or to on a computer.
customers, or it may be customers or employees traveling to or from the facility.  The transportation method is based on linear programming.
 The firm seeks to minimize its load-distance, or ld, score, generally by choosing a location so  The transportation method doesn’t solve all facets of the multiple-facility location problem. It only finds the best
that larger loads go short distance. shipping pattern between pants and warehouses for a particular set of plant locations, each with a given capacity.
o To calculate a load-distance, ld, score for any potential location, we use either of the distance measures  The analyst must try a variety of location-capacity combinations and use the transportation method to find the optimal
and simply multiply the loads flowing to and from the facility by the distance traveled. distribution for each one.
 These loads may be expressed as tons or number of trips per week.  Distribution costs (variable shipping and possibly variable production costs) are but one important input in
o We should evaluate still other candidate locations before making a decision. evaluating a particular location-allocation combination.
 Center of Gravity  Investment costs and other fixed costs also must be considered, along with various qualitative factors.
o Testing different locations with the load-distance model is relatively simple if some systematic search o This complete analysis must be made for each reasonable location – capacity combination. Because of the
process is followed. importance of making a good decision, this extra efforts is well worth its costs.
o A good starting point is the center of gravity of the target area.  Setting Up the Initial Tableau. The first step in solving a transportation problem is to format it in a standard matrix
 The center of gravity’s x-coordinate, denoted x*, is found by multiplying each point’s x- called tableau. The basic steps in setting up an initial tableau are as follows:
coordinate (x1), by it load (l), summing these products (∑l ixi), and then dividing by the sum of 1. Create a row for each plant (existing or new) being considered and a column for each warehouse.
the loads (∑l). 2. Add a column for plan capacities and a row for warehouse demands, and then insert their specific numerical
 The y-coordinate, denoted y*, is found the same way with the y-coordinate used in the values.
numerator. The formulas are 3. Each cell not in the requirements row or capacity column represent a shipping route from a plant to a
warehouse. Insert the unit costs in the upper right hand corner of each of these cells.
 Dummy Plants or Warehouse
∑l i x i ∑l i y i o The transportation method also requires that the cum of capacities equal the sum of demands.
x* = and y* =
∑l ∑l o In many real problems, total capacity may exceed requirements, or vice versa.
o This location usually isn’t the optimal one for the Euclidean or Rectilinear distance measures, but is still is  If capacity exceeds requirements by r units, we add an extra column (a dummy warehouse)
an excellent starting point. with a demand of r units and make the shipping cost in the newly created cells.
o Calculate the load-distance scores for locations in its vicinity until you’re satisfied that your solution is  Shipments aren’t actually made, so they represent unused plant capacity.
near optimal  If requirements exceed capacity by r units, we add an extra row (a dummy plant) with a
capacity of r units.
Using Break-Even Analysis  We assign shipping costs equal to the stockouts costs of the new cell.
  If stockouts costs are unknown or are the same for all warehouse, we simply assign
shipping costs of $0 per units to each cell in the dummy row.
 The optimal solution won’t be affected because the shortage of r units is required in
all cases.
o Adding a dummy warehouse or dummy plant ensures that the sum of capacities equals the sum of
demands.
 Finding a Solution
o After the initial tableau has been setup, the goal is to find the least-cost allocation pattern that satisfies all
demand and exhausts all capacities.
o This pattern can be found by using the transportation method, which guarantees the optimal solution.
o The initial tableau is filled in with a feasible solution that satisfies all warehouse demands and exhausts all
plant capacities. Then a new tableau is created, defining a new solution that has lower total costs.
o This iterative process continues until no improvements can be made in the current solution, signaling that
the optimal solution has been found.
o When using a computer package, all that you have to input is the information for the initial tableau.
o Another method is the simplex method, although more inputs are required.
o The transportation problem is actually a special case of linear programming, which can be modeled with a
decision variable for each cell in the tableau, a constraint for each column in the tableau.
o Whichever method is used, the number of nonzero shipments in the optimal solution will never exceed the
sum of the numbers of plants and warehouses minus 1.

Other Methods of Location Analysis

 Consider the complexity that a medium-sized manufacturer faces when distributing products through warehouses, or
distribution centers, to various demand centers..
o The problem is to determine the number, size, allocation pattern, and location of the warehouses
 Transportation rates depend on the direction of shipment, product, quantity, rate breaks and geographic area.
 Three Basic Types of Computer Models Have been developed for this purpose
1. Heuristics
- It is a solution guidelines, or rules of thumb, that find feasible – but not necessarily the best –
solutions to problems.
- Their advantages include:
 Efficiency and ability to handle general views of a problem.
- The systematic search procedure utilizing a target area’s center of gravity described earlier for
single-facility location problems is a typical heuristic procedure.
- One of the first heuristics to be computerized for location problems was proposed more than 3
decades ago to handle several hundred potential warehouse sites and several thousand demand
centers.
2. Simulation
- It is a modeling technique that reproduces the behavior of a system.
- Simulation allows manipulation of certain variables and shows the effect on selected operating
characteristics.
- Simulation models allow the analysts to evaluate different location alternatives by trial and
error. It is up to the analysts to propose the most reasonable alternatives.
- Simulation handles more realistic views of a problem and involves the analyst in the solution
process itself.
 For each run, the analysts inputs the facilities to be opened, and the simulator
typically makes the allocation decisions based on some reasonable assumptions that
have been written into the computer program.
3. Optimization
- The transportation method was one of the first optimization procedures for solving one part of
multiple-facility location problems.
- In contrast to heuristics and simulation, optimization involves procedures to determine the
“best” solution. Even though this approach might appear to be preferable, it has a limitation:
 Optimization procedures generally utilized simplified and less realistic views of a
problem.
- However, the payoffs can be substantial.