Operations Management / Supply Chain Management

Module 07.02 Key Concepts: Useful Methods for Evaluating Location Alternatives

There are many practical approaches that are used for making the best decision regarding Location.  We will explore some common ones presented by the text authors.

A Factor Rating process represents a relatively simple and effective approach to evaluate different options and come to a consensus in a group environment.   This is a formal process used to identify and select the best Location to meet the company’s product and service requirements.  A weighted-point analysis is recommended and presented in the text.  This process identifies and weights the critical requirements and then rates the ability of each Location to meet these requirements.  A final ranking is used to tally the weighted points for each attribute to give a total score for each option.  The processes steps are listed below and followed by an example.  This is an extremely useful tool for building consensus that is best done in a team environment.  This tool is popular because a wide variety of factors can be included in the analysis.

  • Develop a list of relevant factors called key success factors
  • Assign a weight to each factor
  • Develop a scale for each factor
  • Score each location for each factor
  • Multiply score by weights for each factor for each location
  • Make a recommendation based on the highest point score

Locational Cost-Volume Analysis looks similar to an approach that we explored in an earlier Module – “Break Even Analysis”.  This is a graphical method that shows an economic comparison of Location alternatives.  It consists of a three-step process:

  • Determine fixed and variable costs for each location
  • Plot the cost for each location
  • Select location with lowest total cost for expected production volume

Fixed and Variable Costs are calculated just as illustrated for Break Even Analysis.

The Cross-Over point between two alternatives is the volume at which the total costs for each option are the same (equal each other).

In this process you must calculate the Crossover Point for each set (pair) of options.

But this is only the first part. Now we must take this data and create some line graphs of total cost vs. Volume for each option. Of course you could do this with a simulation in excel just by specifying different Volumes and solving for Total Cost. However let’s remember something from geometry. How many data points do you need to construct a straight line? “Two” data points, right?

Well, you have calculated at least one data point for each option (Cross Over Point) and we have another one from the information provided related to Fixed Cost.  Fixed Cost is cost that you have even if the Volume is “0” right? There we have our two points for each line.

So, now we have all we need to create a graph of Volume vs. Total Cost for each Option to consider. And, by the way, it will be easy to clearly show the Volumes where one option is preferred over the others based on the parameter of “Lowest Total Cost”.

The Center-of-Gravity Method is used to find the location of a distribution center that minimizes distribution costs. It considers Location of markets, Volume of goods shipped to those markets and Shipping cost or distance. That said, the same approach is useful for other site location decisions. For example you could create an analysis to help locate a Headquarters or Technical Support Service Center. In these cases the unit of measurement will be different – you may look at the number of deliveries or the number of trips or mileage traveled, etc.

It consists of the following process steps and assumes that cost is directly proportional to the distance and volume shipped.

  • Place existing locations on a coordinate grid
  • Note: 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

The text provides a simple example to illustrate the approach.

The Transportation Model approach consists of an analysis of amounts to be shipped from several supply points to several points of demand.  The solution will minimize total production and shipping costs.  This process is complex as it utilizes linear programming models.

The same approaches used for manufacturing / distributing of products apply for Location decisions for Services.  The decision parameters may vary but the process is the same.  Some common decision criteria for Services are shown below:

  • Purchasing power of customer-drawing area
  • Service and image compatibility with demographics of the customer-drawing area
  • Competition in the area
  • Quality of the competition
  • Uniqueness of the firm’s and competitors’ locations
  • Physical qualities of facilities and neighboring businesses
  • Operating policies of the firm
  • Quality of management

Geographic Information Systems (GIS) can provide valuable data to support a detailed Location decision analysis.  These systems support more complex demographic analysis by providing data such as: Detailed census information; detailed maps; location of utilities; geographic features and location of major services.