7.2: Facility Location and Layout


ids355: Operations Management Wikispace: “Chapter 8: Location Planning and Analysis”

Review #1 Location Cost-Volume-Profit Analysis, which should help you to understand the financial aspects of choosing a location. In addition consider the factors that influences the location of a new facility. This is important because a poor choice can make it very difficult to meet demand and manage costs effectively.

Location Planning
Every firm must use location planning techniques. There are many options for location planning. Corporations choose from expanding an existing location, shutting down one location and moving to another, adding new locations while retaining existing facilities, or doing nothing. There are a variety of methods used to decide the best location or alternatives for the corporation. Methods such as identifying the country, general region, small number of community alternatives, and site alternatives.

Several factors that influence location positioning include the location of raw materials, proximity to the market, climate, and culture. Models for evaluating whether a location is best for an organization consist of cost-profit analysis for locations, the center of gravity model, the transportation model, and factor rating.

This chapter discusses the decision to relocate a facility by considering costs and benefits. If you are planning on moving or acquiring a new facility, there are many factors to consider: the size, the geographic area, culture, transportation costs and others. After a location or locations have been chosen a cost-profit-volume analysis is done.

The main factors that affect location decisions include regional factors, community considerations, and site-related factors. Community factors consist of quality of life, services, attitudes, taxes, environmental regulations, utilities, and development support.

– There are three specific analytical techniques available to aid in evaluating location alternatives:

  1. Location Cost-Volume-Profit Analysis:
    1. The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or graphically. It involves three steps: 1) For each location alternative, determine the fixed and variable costs, 2)For all locations, plot the total-cost lines on the same graph, and 3) Use the lines to determine which alternatives will have the highest and lowest total costs for expected levels of output. Additionally, there are four assumptions one must keep in mind when using this method:
      1. Fixed costs are constant.
      2. Variable costs are linear.
      3. Required level of output can be closely estimated.
      4. There is only one product involved.
    2. Total cost = FC = v(Q)

where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown below but not in the same format)

  1. Factor Rating
    1. This method involves qualitative and quantitative inputs, and evaluates alternatives based on comparison after establishing a composite value for each alternative. Factor Rating consists of six steps:
      1. Determine relevant and important factors.
      2. Assign a weight to each factor, with all weights totaling 1.00.
      3. Determine common scale for all factors, usually 0 to 100.
      4. Score each alternative.
      5. Adjust score using weights (multiply factor weight by score factor); add up scores for each alternative.
      6. The alternative with the highest score is considered the best option.
    2. Minimum scores may be established to set a particular standard, though this is not necessary.
  2. Center of Gravity Method:
    • This technique is used in determining the location of a facility which will either reduce travel time or lower shipping costs. Distribution cost is seen as a linear function of the distance and quantity shipped. The Center of Gravity Method involves the use of a visual map and a coordinate system; the coordinate points being treated as the set of numerical values when calculating averages. If the quantities shipped to each location are equal , the center of gravity is found by taking the averages of the x and y coordinates; if the quantities shipped to each location are different , a weighted average must be applied (the weights being the quantities shipped).

Company Relocating
There are many factors that contribute to a company relocating. Some of the reasons include expanding the market and diminishing resources. For an existing company to relocate, they must weigh their options when planning to relocate elsewhere. They can expand their existing facility, add new ones and keep their existing facilities open, move to another location and shut down one location, or keep things the way they are and not do anything. Globalization has led many companies to set up operations in other countries. Two factors that make relocation appealing are advances in technology and trade agreements. By going global, companies will expand their markets and be able to cut costs in labor, transportation, and taxes. They also have gained ideas for new products and services.

· factors that influence location decisions are:
Manufacturing :
o Availability of energy and water
o Proximity to raw materials
o Transportation cost
o Traffic patterns
o Proximity to markets
o Location of competitors
·Once important factors have been determined, an organization will narrow down alternatives to a specific geographic region. These factors that influence location selection are often different depending on whether the firm is a manufacturing or service firm. When deciding on a location, mangers must take into account the culture shock employees might face after a location move. Culture shock can have a big impact on employees which might affect workers productivity, so it is important that mangers look at this.

o A decision maker must understand the benefits and risks as well as the probabilities of them occurring

v IDENTIFYING A REGION- 4 major considerations
o Location to Raw Materials: The three most important reasons for a firm to locate in a particular region includes raw materials, perishability, and transportation cost. This often depends on what business the firm is in.
o Location to Markets: Profit maximizing firms locate near markets that they want to serve as part of their competitive strategy. A Geographic information system(GIS) is a computer based tools for collecting, storing, retrieving, and displaying demographic data on maps.
o Labor Factors : Primary considerations include labor availability, wage rates, productivity, attitudes towards work, and the impact unions may have.
o Other : Climate is sometimes a consideration because bad weather can disrupt operations. Taxes are also an important factor due to the fact that taxes affect the bottom line in some financial statements.

o There are many important factors for deciding upon the community in which move a business. They include facilities for education, shopping, recreation and transportation among many others. From a business standpoint these factors include utilities, taxes, and environmental regulation.

o The main considerations in choosing a site are land, transportation, zoning and many others. When identifying a site I]it is important to consider to see if the company plans on growing at this location. If so, the firm must consider whether or not location is suitable for expansion. There are many decisions that go into choosing exactly where a firm will establish its operations. First, a company must determine the driving factors that will influence which areas are suitable locations. After these factors have been determined, the company will identify potential countries and examine the pros and cons of establishing operations in these countries. After looking at pro and cons of the different countries and deciding on a country, then decision makers will identify a region within the country. When identifying a region, decision makers must take the four major factors explained above into consideration. The last two stages of the search include choosing a community and a site.

Note: The above part is way too lengthy for this assignment.
Summary below..

Summary : There are several ways that are very helpful in evaluating location alternatives, such as locational cost-profit-volume analysis, factor rating, and the center of gravity method. First, let’s take a look at Location Cost-Profit-Volume Analysis.

This analysis can be done numerically or graphically. The procedure for locational cost-profit-volume analysis involves these steps:

1. Determine the fixed and variable costs associated with each location alternative.
2. Plot the total-cost lines for all location alternatives on the same graph.
3. Determine which location will have the lowest total cost for the expected level of output. Alternatively, determine which location will have the highest profit.

This method assumes the following:
1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.

Here’re a couple of important formulas to remember:

Total cost = Fixed cost + Variable cost per unit * Quantity or volume of output

Total profit = Quantity(Revenue per unit – Variable cost per unit) – Fixed cost

In most situations, other factors besides cost must also be considered. We will now consider another kind of cost often considered in location decisions: transportation costs.

Transportation costs sometimes play an important role in location decisions. The company can include the transportation costs in a locational cost-volume analysis by incorporating the transportation cost per unit being shipped into the variable cost per unit if a facility will be the sole source or destination of shipments. When there is a problem with shipment of goods from multiple sending points to multiple receiving points, and a new location is to be added to the system, the company should undertake a separate analysis of transportation. In this case, transportation model of linear programming is very helpful. The model is used to analyze each of the configurations considered, and it reveals the minumum costs each would provide. Then the information can be included in the evaluation of location alternatives.

Multiple Plant Manufacturing Strategies (page 381-382)
-When comapnies have several manufacturing facilities t here are several different ways for a company to organize their operations. These ways include: assigning different product lines to different plants, assigning different market areas to different plants, or assigning different processes to different plants. These strategies carry their own cost and managerial implications, but they also carry a certain competitive advantage. There are four different types of plant strategies:

  1. Product Plant Strategy
  • Products or product lines are produced in separate plants, and each plant is usually responsible for supplying the entire domestic market.
  • It is a decentralized approach as each plant focuses on a narrow set of requirements that includes specialization of labor, materials, and equipment along product lines.
  • Specialization involved in this strategy usually results in economies of scale and, compared to multipurpose plants, lower operating costs.
  • The plant locations may either be widely scattered or placed relatively close to one another.

2. Market Area Plant Strategy

  • Here, plants are designed to serve a particular geographic segment of a market.
  • The individual plants can produce either most, or all of the company’s products and supply a limited geographical area.
  • The operating costs of this strategy are often times higher than those of product plants, but savings on shipping costs for comparable products can be made.
  • This strategy is useful when shipping costs are high due to volume, weight, or other factors.
  • It can also bring the added benefits of faster delivery and response times to local needs.
  • It requires a centralized coordination of decisions to add or delete plants, or to expand or downsize current plants because of changing market conditions.

3. Process Plant Strategy

  • Here, different plants concentrate on different aspects of a process.
  • This strategy is most useful when products have numerous components; separating the production of components results in less confusion than if all the production were done in the same location.
  • A major issue with this strategy is the coordination of production throughout the system, and it requires a highly informed, centralized administration in order to be an effective operation.
  • It can bring about additional shipping costs, but a key benefit is that individual plants are highly specialized and generate volumes that brings economies of scale.

4. General-Purpose Plant Strategy

Plants are flexible and have the ability to handle a range of products

  • It allows for a quick response to products and market changes, but can be less productive than a more focused approach.
  • A benefit to this approach is the increase in learning opportunities that happens when similar operations are being done in different plants. Solutions to problems as well as improvements made at one plant can be shared with the other plants

Question 1:
From a company standpoint, which factors determine the desirability of a community as a place for its workers and managers to live?
A) The amount of parking spaces
B) Retail stores
C) Schools
D) Locals attitudes towards the company.
E) Both C and D.


Question 2:
What is NOT a risk a corporation must consider when planning a location?
A) Political
B) Exporting
C) Economic
D) Cultural
E) Economic

Question 3:
What do banks, fast-food chains, supermarkets, and retail stores view locations as?
A) One in many intricate decisions for their organizations
B) A crucial part of the marketing strategy.
C) An easier way to distribute their product or service.
D) New ideas for future investments.
E) A second home.

Question 4:
What is the third step when making location decisions?
A) Evaluate the alternatives and make a selection.
B) Identify important factors.
C) Decide on criteria for evaluating alternatives.
D) Develop location alternatives.
E) None of the above.

Question 5:
What is the center of gravity method?
A) A method that determines the location of a facility that will minimize shipping cost and travel time to various destinations.
B) A method that determines the location of a facility closest to the most number of consumers.
C) A method that determines the location of a facility closest to the main supplier
D) A method that determines the location of a facility in the middle-point of all suppliers.
E) none of the above

1.) Location analysis assumes that both qualitative and quantitative factors are important in determining an ideal location when using:
a. The Transportation Model
b. The Center of Gravity Method
c. Factor Rating
d. Cost-Profit Analysis
e. None of the above

2.) The transportation model can be applied to solve factors including:
I. Cost
II. Profit
III. Capacity
IV. Management
a. I only
b. I and II only
c. I, II, and III only
d. II, III, and IV only
e. II and IV only

3.) The Transportation Model uses the following information to determine costs:
a. A list of shipping origins
b. Demand of destinations
c. Unit costs
d. None of the above
e. All of the above

4.) Which is a TRUE assumption needed to perform Cost-Profit Volume Analysis?
a. Fixed costs are exponential
b. Variable costs are logarithmic
c. All costs are linear
d. At least 2 products are being compared
e. Revenue is NOT included in the analysis

5.) In the Factor Rating Method of location analysis, which of the following is NOT a managerial choice?
a. Assigning weight to the importance of aspects being compared
b. Adding the applied (weight x value) of various categories to get a composite for a location
c. Determining the ultimate choice for the location
d. Assigning information gathering on a location
e. All of the above are managerial choices

Question 5 needs an answer, also needs page numbers where answers are found

1) What does GIS stand for?
A. General Information Systems
B. Great Information Systems
C. Geographic Information Systems
D. General Institutions
E. None of the above

2)The primary consideration for identifying a site is?
A. Location
B. Zoning
C. Transportation
D. None of the Above
E. All of the above

3) What are the common techniques used to evaluate location alternatives?
A. Locational cost-profit-volume analysis
B. Factor ratings
C. Center of gravity method
D. Transportation model
E. All of the above

4) What is a general-purpose plant strategy?
A. A general approach to evaluating locations that include qualitative and quantitative inputs.
B. A way to evaluate rating of geographic area
C. A general approach to evaluating locations that include regional inputs.
D. A way of being capable of handling a wide range of different products.
E. None of the above

5) Method for locating a distribution center that minimizes the distribution costs.
A.Location cost-pofit-volume analysis
B. Method for finding balance between company culture and geographic culture.
C. Method that compares costs to benefits
D. All of the above.
E. None of the above

1) What is a primary factor in the regional level of location decisions?
A. Location of raw materials or supplies
B. Quality of life
C. Location of markets
D. A and C
E. None of the above

2) In a geographic information system (GIS), which is NOT involved in the data?
A. Age
B. Incomes
C. Quality of life
D. Type of employment
E. Type of housing

3) What is a disadvantage of globalization?
A. Transportation costs
B. Security costs
C. Unskilled labor
D. Import restrictions
E. All of the above

4) Mining operations, farming, forestry, and fishing are all examples of which primary reason for firms locating near or at the source of raw materials?
A. Necessity
B. Perishability
C. Transportation costs
D. Processing
E. None of the above

5) Which of the following would you establish a composite value for?
A. The transportation model
B. Factor rating
C. The center of gravity method
D. Locational Cost-Profit-Volume Analysis
E. Geographic information system

1. Which of these is a computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps?
A. Geographic Data System
B. Geographic Information System
C. Demographic Data System
E. none of the above

2. Which is a major consideration when choosing to operate in a region?
A. the minimum wage rate
B. identifying a community
C. location to raw materials
D. possible sites available
E. none of the above

3. Considering global expansion, decision makers need to be absolutely clear on the benefits and risks and the likelihood of their occurrences when deciding upon identifying:
A. a continent
B. a site
C. a community
D. a country
E. none of the above

4. A dominant factor that influences the location decision of a manufacturing firm is:
A. Climate changes
B. Location to competitors
C. Proximity to markets
D. Transportation cost
E. none of the above

5. Which of the following is Not a primary consideration when identifying a site for operations?
A. Land
B. Transportation
C. Zoning
D. Future expansion
E. All of the Above

1 . When using the Center of Gravity Method, what are the two differing variables for equal and unequal quantities shipped, respectively?
a. n 1 ; n 2
b. n;Q
c. n; n i
d. e; u e
e. n; Q i

2. Which location alternative technique involves viewing the problem in economic terms?
a. Factor Rating
b. CVP
c. GIS
d. Center of Gravity
e. Transportation Model

3. When considering foreign locations, crime, and the threat of terrorism fall under which category?
a. Safety
b. Cultural Differences
c. Market
d. Financial
e. Customer Preferences

4. When using the factor rating method of location alternative evaluation, which of the following could be considered relevant factors?
a. Location of market
b. Water supply
c. Parking facilities
d. Revenue potential
e. All of the above

5. Which of the following is not a step in the general procedure for making location decisions?
a. Develop location alternatives
b. Evaluate the alternatives and make a selection
c. Gain government approval of location alternatives
d. Decide on criteria for evaluating alternatives
e. Identify important factors (e.g., location of markets)

Chapter 8


The location of a business is crucial to it’s growth. There are many factors that come into play when choosing a suitable location. Usually it is one or a few factors that dominate the decision making process. For example, a change in market supply and/or demand, perhaps even if inputs used by the business have run out. A business can suffer greatly if the right location is not chosen. Therefore a business should evaluate all their options very carefully before making a final conclusion.

There are generally four options a manager has with regard to location planning. The first option would be to take the current facility and make it bigger. The second would be to keep the current facility and just create a (or many) new one(s). The third would be to close down the current facility entirely and build a new one. The last option would be to keep things the way they are.

Questions: Questions need to be multiple choice format.

1. What is the name of the computer-based tool used for collecting, storing, retrieving, and displaying demographic data on maps?

2. True or False: Most organizations try to find the one best location.

3. What are the three primary regional factors involved in location decision making?

4. Name three trade agreements mentioned in this chapter.

5. What are five disadvantages to having global operations?

6. Suppose that the operating costs of a company has a weight of .20. There are three possible location choices. The first location has a score of 60/100. The second location has a score of 50/100. The third location has a score of 80/100. What are the weighted scores of each location possibility?

7. What are some benefits associated with a company moving it’s operation’s globally?

8. What is the center of gravity method used for?

9. Find the center of gravity with the information provided below.

Destination x y
L1 8 5
L2 6 2
L3 4 3
L4 3 5

10. Determine the center of gravity based on the following information:

Destination x y Weekly Quantity
L1 7 6 700
L2 5 3 500
L3 8 6 800
L4 6 4 600
L5 2 2 200
Total 28 21 2,800

11. Use the table below and the cost-profit-volume analysis to determine the B Superior range approximation.

Location Fixed Costs per Year Variable Costs per Unit
1 $250,000 $20
2 $150,000 $50
3 $350,000 $25
4 $225,000 $40

12. Use the table from Question 12 and the cost-profit-volume analysis to find the C Superior range approximation.

Use the following information to answer question 1-3.
A firm paid $2000 for rent, $300 for maintenance fee in January. They sold 2000 units in the month and the cost per unit was $5. The price for the product is $10 per unit.

1. What is their total costs for the month?

a. $2300
b. $10000
c. $12300
d. $2000
e. none of the above

2. What is the firm’s total revenue for the month?

a. $20000
b. $10000
c. $2300
d. $2000
e. none of the above

3. What is the firm’s profit for the month ?

a. $20000
b. $10000
c. $12300
d. $7700
e. none of the above

4. If two alternatives yield comparable annual costs, management would be indifferent in choosing between the two in terms of _.

a. total revenue
b. total costs
c. total profit
d. total variable costs
e. total fixed costs

5. The transportation cost must be converted into cost per unit of in order to correspond to other variable costs if raw materials are involved.

a. input
b. output
c. initial input
d. both a& b
e. none of the above

6. Which of the following is NOT a governmental factor when locating in a foreign region?
a) Import restrictions
b) Currency restrictions
c) Liability laws
d) Local product standards
e) all of the above

Unit 7 Discussion


Choose a business that you would be interested in opening in your community. How would you decide where to locate that business? What would you be most concerned about in making this choice?