Chapter 7

Location
Strategies

Location Strategy

One of the most important

decisions a firm makes
Increasingly global in nature
Significant impact on fixed and
variable costs
Decisions made relatively
infrequently
The objective is to maximize the
benefit of location to the firm

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

Location and
Innovation

Cost is not always the most important

aspect of a strategic decision
Four key attributes when strategy is
based on innovation

High-quality and specialized inputs

An environment that encourages
investment and local rivalry
A sophisticated local market
Local presence of related and supporting
industries

Factors That Affect

Location Decisions

Labor productivity
Exchange rates and currency
risks

Costs

Political risk, values, and culture

Proximity to markets

Proximity to suppliers

Proximity to competitors

Methods of
Evaluating Location
Alternatives
Factor-Rating Method
Locational Break-Even Analysis
Center-of-Gravity Method

Factor-Rating Method
Six steps in the method
1. Develop a list of relevant factors
called critical 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. Recommend the location with the
highest point score

Factor-Rating
Example 1
Five flags over Florida, a US chain of 10 family-oriented
theme parks, has decided to expand overseas by opening
its first park in Europe. It wishes to select between France
and Denmark. Management has decided few critical
success factors with their weightings and ratings. Which
country should be selected for the new park?
Scores
Critical Success Factors Weight
Labor availability and
attitude
People-to-car ratio
Per capita income
Tax structure
Education and health

(out of 100)
Denmar
France
k

0.25

70

60

0.05
0.1
0.39
0.21

50
85
75
60

60
80
70
70

Factor-Rating
Example 2
A company is planning on expanding and building a new
plant in one of three Southeast Asian countries. David
Pentico, the manager charged with making the decision ,
has determined that five key success factors can be used
to evaluate the prospective Countries. Pentico used a
rating system of 1 (least desirable country) to 5 (most
desirable) to evaluate each factor. Which Scores
country should
(out from 1-5)
Criticalfor
Success
be selected
the new plant?
Weight
Factors

Technology
Level of education
Political & legal aspects
Social & cultural aspects
Economic factors

Taiwan
0.2
0.1
0.4
0.1
0.2

4
4
1
4
3

Thailan Singapo
d
re
5
1
1
5
3
3
2
3
3
2

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)

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

Center-of-Gravity
Method
dixQi
x - coordinate =

Qi
i

diyQi
y - coordinate =

Qi
i

where

dix = x-coordinate of
location i
diy = y-coordinate of
location i
Q = Quantity of goods

Center-of-Gravity
Method Example 1
Quain's Discount Department Stores, a chain of four large
Target-type outlets, has store locations in Chicago,
Pittsburgh, New York, and Atlanta; they are currently
being supplied out of an old and inadequate warehouse in
Pittsburgh, the site of the chain's first store. The firm
wants to find some "central" location in which to build a
new warehouse. Demand rate map location of each
location is shown on the table below. Which coordinates
Number of
give the
good centralContainers
position for the new warehouse?
Store
Map
Location
Chicago
Pittsburgh
New York
Atlanta

Shipped per
Month
2,000
1,000
1,000
2,000

Coordinates
(30, 120)
(90, 110)
(130, 130)
(60, 40)

Center-of-Gravity Method Example 1

North-South

New York (130, 130)

120

Chicago (30, 120)

Pittsburgh (90, 110)

90

60

Center of gravity (66.7, 93.3)

30

Atlanta (60, 40)

30
Arbitrary
origin

60

90

120

150

East-West

Center-of-Gravity
Method Example 2
A chain of home health care firms in Louisiana
needs to locate a central office from which to
conduct internal audits and other periodic
reviews of its facilities. These facilities are
scattered throughout the state, as detailed in
the following table. Each site, except for Houma,
will be visited three times each year by a team
of workers, who will drive from the central office
City Houma
X
Y beCity
Y times a
to the site.
will
visitedX five
Natchitoch
year. Covington
Which coordinates
represent
9.2 3.5
2.8 6.5a good
es
central
location for this office?
Donaldsonvil
le
Houma
Monroe

7.3

2.5 New Iberia

5.5

2.4

7.8
5

1.4
8.4

5
3.8

3.6
8.5

Opelousas
Ruston

Locational Break-Even
Analysis
Method of cost-volume analysis
used for industrial locations
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

Locational BreakEven Analysis

Example 1
The fixed and variable cost for three
potential manufacturing plant sites for a
rattan chain weaver are shown.
Site
1
2
3

Fixed cost per Variable cost per

year
year
$ 500.00
$ 11.00
$ 1,000.00
$ 7.00
$ 1,700.00
$ 4.00

a)Over what range of production is each

location optimal?
b) For a production of 200, which site is
best?

Locational BreakEven Analysis

Example 1

Locational BreakEven Analysis

Example 2
John Kros, owner of Carolina Ignitions
Manufacturing, needs to expand his capacity. He
is considering three locations--Akron, Bowling
Green, and Chicago--for a new plant. To do so,
he determines that fixed costs per year at the
sites are $30,000, $60,000, and $110,000,
respectively; and variable costs are $75 per
unit, $45 per unit, and $25 per unit,
respectively. The expected selling price of each
ignition system produced is $120.
a)Over what range of production is each location
optimal?
b)The

company

wishes

to

find

the

most

Annual cost

Locational Break-Even
Analysis Example 2

$180,000

$160,000
$150,000
e

curv
t
s
$130,000
o co
g
a
c
i
Ch
$110,000
n
ee
r

g G ve
wlin cur
t
$80,000 Bo cos t
s

co
$60,000 ron ve
Ak cur

Akron
$30,000
Bowling Green
lowest
lowest cost

cost
$10,000
|
|
|
|
|

0
500
1,000
1,500
2,000

Volume

Chicago
lowest
cost
|

2,500

3,000

Questions/Discussion
s