Location analysis in supply chain management

1. Location

2. BMW
• In the late 1980’s fluctuating exchange rates and rising costs convinced
BMW that it was time to consider operating a new production facility
outside the European borders.
• A “blank page” approach was used to compile a list of 250 potential
worldwide sites. Analysis pared the list down to 10 options; a location in
the United States was preferred due to its proximity to a large market
segment for BMW’s automobiles.
• BMW spent 3 1/2 years considered the labor climate, port and road access,
geographical requirements and constraints, airport access, and its relations
with the governments.
• The plant was located in Spartanburg, SC, and now employs approximately
4,700 workers who produce more than 500 vehicles a day.

3. Components of Facility Decisions
• Capability:
• A dedicated facility or Flexible capacity
• Location:
A basic trade-off here is whether to centralize to gain economies of scale or to decentralize to become more responsive
by being closer to the customer
• Demand Allocation:
• Capacity

4. Location Decisions
• Facility location is the process of determining geographic sites for a firm’s
operations.
• Location decisions affect processes throughout the organization.
• Marketing must assess how the location will appeal to customers; possibly opening new
markets.
• Human Resources must be attuned to the firm’s hiring and training needs.
• Accounting and Finance must evaluate costing.
• Operations needs to be able to meet current customer demand and provide the right amount
of customer contact.

5. Dominant Factors in Services
• Proximity to customers. How conveniently customers can carry on business with
a firm.
• Transportation costs and proximity to markets.
Especially for warehousing and distribution operations.
• Location of Competitors. Estimating the sales potential and impact of
competition.
• Critical mass is a situation whereby several competing firms clustered in one location attract
more customers than the total number who would shop at the same stores at scattered
locations.
• Site-Specific Factors. Including residential density, traffic flow, and site visibility.

6. Onsite Expansion,
New Location, or Relocation
• Managers must first decide whether to expand onsite, build another facility, or
relocate to another site.
• Onsite expansion has the advantage of keeping people together, reducing
construction time and costs, and avoiding splitting up operations.
• However, as a firm expands a facility, at some point diseconomies of scale set
in.
• A new plant allows it to hire more employees, install newer, more-productive
machinery and better technology, and reduce transportation costs.
• Most firms that choose to relocate are small (comprised of less than 10
employees).
• More than 80 percent of all relocations are made within 20 miles of
companies’ original locations, which enables the firms to retain their current
employees.

7. Locating a Single Facility
• When the facility is part of a firm’s larger network of facilities, we assume that
there is no interdependence.
• The process of selecting a new facility location involves a series of steps.
1. Identify the important location factors and categorize them as 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.
4. Analyze the data collected, beginning with the quantitative factors.
5. Bring the qualitative factors into the evaluation. The site with the highest weighted score is
best.

8. Health-Watch
Preference Matrix
Example 11.2
• A new medical facility, Health-Watch, is to be located in Erie, Pennsylvania.
• The following table shows the location factors, weights, and scores (1 = poor, 5 =
excellent) for one potential site.
• Location Factor Weight Score (W)(S)
Total patient miles per month 25 4 100
Facility utilization 20 3 60
Average time per emergency trip 20 3 60
Expressway accessibility 15 4 60
Land and construction costs 10 1 10
Employee preference 10 5 50
Weighted Score 340

9. Application 11.1

10. Center of Gravity
• Center of gravity: A good starting point to evaluate locations in the target area using the load-
distance model.
1. Determine the x and y coordinates of different locations either in the form of the longitude
and latitude of the locations, or by creating an (x, y) grid.
2. The center of gravity’s x-coordinate, denoted x*, is found by multiplying each point’s x-
coordinate (either the longitude of the location or the x coordinate on a grid), by its load (li),
summing these products (Σ lixi), and then dividing by the sum of the loads (Σ li). The y-
coordinate, denoted y*, is found the same way.
x

lixi
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li
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and y
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12. Finding the Center of Gravity Example 11.3
• The new Health-Watch facility is targeted to serve seven census tracts in
Erie, PA. Customers will travel from the seven census-tract centers to the
new facility when they need health care.
• What is the target area’s center of gravity for the Health-Watch medical
facility?
• We will use MapPoint in this solution and coordinates will be represented
in the form of latitude & longitude rather than an x, y grid to calculate the
center of gravity.
• The target area is displayed on the map of Erie using MapPoint. A pushpin
is placed in the approximate geographical center of the census tracts. The
location sensor is then turned on and used to obtain the coordinates.

13. Finding the Center of Gravity for Health Watch
Census Tract Population Latitude Longitude Population  Latitude Population  Longitude
15 2,711 42.134 -80.041 114,225.27 -216,991.15
16 4,161 42.129 -80.023 175,298.77 -332,975.70
17 2,988 42.122 -80.055 125,860.54 -239,204.34
25 2,512 42.112 -80.066 105,785.34 -201,125.79
26 4,342 42.117 -80.052 182,872.01 -347,585.78
27 6,687 42.116 -80.023 281,629.69 -535,113.80
28 6,789 42.107 -80.051 285,864.42 -543,466.24
Tota l 30,190 1,271,536.05 -2,416,462.81
x

lixi
i

li
i

and y

li
i
 yi
li
i

x

1,271,536.05
30,190
 42.1178
y

2,416,462.81
30,190
 80.0418

14. Numerical
• A supplier to the electric utility industry produces power generators; the
transportation costs are high. One market area includes the lower part
of the Great Lakes region and the upper portion of the south eastern
region. More than 600,000 tons are to be shipped to eight major
customer locations as shown below; What is the center of gravity for
electric utilities supplies. Using rectilinear distance, what is the resulting
load-distance score for this location?
Customer location Tons Shipped (l-load) x,y coordinates
Three Rivers 5000 (7,13)
Fort Wayne 90000 (8,12)
Columbus 70000 (11,10)
Ashland 35000 (11,7)
Kingsport 9000 (12,4)
Akron 27000 (13,11)
Wheeling 16000 (14,10)
Roanoke 153000 (5,5)

15. Transportation Model
The Arid Company make canoe paddles to serve distribution centers in
Worchester, Rochester and Dorchester from existing plants in Battle
Creek and Cherry Creek. Arid is considering locating a plant near the
headwaters of Dee Creek. Annual capacity for each plant is shown in
the right hand column, while annual demand is shown in the bottom
row of the tableau. Transportation costs per paddle are shown in the
tableau in the small boxes. What are the estimated transportation
costs?