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Chapter 08 - Location Planning and Analysis
8-1
Education.
CHAPTER 08
LOCATION PLANNING AND ANALYSIS
Teaching Notes
Facility location refers to the location of a service or manufacturing facility with respect to customers,
suppliers, and other existing facilities such that it allows the company to gain a competitive and/or
strategic edge. In making a location decision, both tangible costs (e.g., cost of operating the facility; cost
of land (if it applies); cost of labor, taxes, and utilities; cost of inbound and outbound transportation) and
intangible costs (e.g., availability of qualified labor and labor climate) must be considered. Because the
location decision usually involves making a large capital investment, it not only affects the firm’s ability
to compete but also has long-term strategic implications. Therefore, in making the location decision, we
should consider issues related to marketing, production, transportation and other relevant costs as well as
the strategy of the organization. The importance of various factors in relation to the location decision will
vary between service and manufacturing organizations and from industry to industry as well.
Reading: Innovative MCI Unit Finds Culture Shock in Colorado Springs
1. The most severe fallouts from the move to Colorado were:
a. Numerous key executives and engineers, and hundreds of the division’s minority
population refused to relocate, or fled Colorado Springs soon after relocating.
2. Mr. Liebhaber should have sought out more information by conducting surveys of workers,
managers, and engineers asking them for the following information: how likely they were to
move, ratings of factors that would affect their decision to move, ratings of factors that they
valued about their current work environment, and ratings about factors that they considered
important for quality of life issues. Mr. Liebhaber seems to have considered his own quality of
life and work issues only.
Reading: Site Selection Grows Up: Improved Tech Tools Make the Process
Faster, Better
1. Tech tools have improved the process of site selection by providing in-depth market research
analyzing traffic volumes, concentration of other retail businesses, and demographic data. In
2. Franchisors also can use geoVue and other similar tools to analyze changes in performance,
demographics, or other factors that would warrant closing or relocating a facility.
Chapter 08 - Location Planning and Analysis
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Answers to Discussion and Review Questions
1. Location decisions can have an impact on access to markets, costs (including materials, labor,
2. The fact that similar businesses are located widely underscores the futility of searching for that
“one best” location. However, it does not necessarily follow that little attention is needed in
finding a suitable location. Many organizations that have not been successful are no longer in
3. Important community factors include size of the community, public transportation, schools,
4. Manufacturing and non-manufacturing organizations tend to approach location decisions in a
similar way, but the factors that are important to each tend to differ. Although both tend to take
5. Foreign locations may offer lower taxes, access to markets, availability of raw materials, lower
6. Location rating, or factor rating, is a qualitative technique used to develop an overall composite
7. The first step is to decide on the criteria to use to evaluate location alternatives (e.g., cost, profits,
community service, etc.). The second step is to identify any important factors that will dominate
8. Locational breakeven analysis generally assumes the following:
a. Fixed costs are constant for the range of probable output.
9. Recent trends include the location of foreign manufacturing plants in the United States, having
smaller factories located close to markets, choosing nearby suppliers, low-cost labor is becoming
less of a factor in many industries, and advances in information technology make it less important
to have design, engineering, etc. close to the factory.
Taking Stock
1. Due to economies of scale, the centrally located large facility will be more efficient. The
scheduling and coordination between the large facility and suppliers or customers will be
8-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
2. Unlike the process design decision, the facility location decision is a macro decision and thus
requires the involvement of top-level management. The larger the facility, the higher the level of
3. Due to the advancement of data mining and data warehousing, and the related improvements in
computers’ ability to store and exchange data, we can generate much more useful information to
make the facility location decision.
Critical Thinking Exercises
1. The company does have some social responsibility. Because the company employs such a large
percentage of the city’s workforce, its leaving is certain to have a major impact on town
businesses. It is likely that unless new sources of employment emerge, some residents may be
2. Trade-offs involved would include:
a. The nature of current, and more importantly, the forecasted future demand.
b. Current demographics and the future expected changes in demographics for this area.
c. The nature and type of competition for this area. We will need to predict what our
8-5
Education.
2. Given: We have the following information shown below for three potential locations for a new
outlet:
A
B
C
R
$2.65
$2.65
$2.65
v
$1.76
$1.76
$1.76
Monthly FC
$5,000
$5,500
$5,800
a. Determine the monthly volume necessary at each location to realize a monthly profit of
$10,000 (round to 1 decimal).
Location A Volume:
Location B Volume:
b. Determine the expected profits at each facility given the expected monthly volumes:
A = 21,000 per month, B = 22,000 per month, & C = 23,000 per month.
Profit = Q(R – v) – FC
Location A: 21,000($2.65 – $1.76) – $5,000 = $13,690 per month
Chapter 08 - Location Planning and Analysis
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Education.
3. Given: There are two alternatives for which costs and revenue are listed below:
A
B
R
$17,000
$17,000
v
$14,000
$13,000
Annual FC
$800,000
$920,000
a. Find the volume at which the two locations have the same total cost (TC).
TC = FC + VC
TC = FC + (Q x v)
Set the two cost equations equal and solve for Q:
$800,000 + $14,000Q = $920,000 + $13,000Q
b. Range over which A and B would be superior:
Location A has the lowest fixed costs; therefore, it is preferred at lower volumes.
Conclusion:
4. Given: There are three alternatives for which costs are given below:
A (new)
B (sub)
C (expand)
v
$500
$2,500
$1,000
Annual FC
$250,000
---
$50,000
a. Step 1: Determine the total cost equation for each alternative.
TC = FC + VC
TC = FC + (Q x v)
A: TC = $250,000 + $500Q
Chapter 08 - Location Planning and Analysis
Step 2: Graph the alternatives.
Step 3: Determine over what range each alternative is preferred.
Looking at the graph, we can tell that Alternative B is preferred over the lowest range,
Alternative C is preferred over the middle range, and Alternative A is preferred over the
highest range.
First, we find the indifference (break-even) point between Alternatives B & C by setting their
total cost equations equal to each other and solving for Q.
B: TC = $2,500Q
C: TC = $50,000 + $1,000Q
their total cost equations equal to each other and solving for Q.
C: TC = $50,000 + $1,000Q
A: TC = $250,000 + $500Q
A (new location)
C (expansion)
500
400
300
TC
($000)
[250]
Chapter 08 - Location Planning and Analysis
8-8
Education.
b. Expected volume of 150 boats:
Based on the graph, Alternative C would yield the lowest total cost (TC) at a volume of 150
boats.
c. Other factors that might be considered when deciding between the expansion and
subcontracting alternatives include subcontracting costs will be known with greater certainty,
subcontracting provides a secondary (backup) source of supply, and expansion offers more
control over operations.
5. Rework Problem 4b using this additional information: Alternative A (New Location) will have an
additional $4,000 in fixed costs per year. Alternative B (Subcontracting) will have $25,000 in
fixed costs per year. Alternative C (Expansion) will have an additional $70,000 in fixed costs per
year.
Step 1: Change the costs in the table.
A (new)
B (sub)
C (expand)
v
$500
$2,500
$1,000
Annual FC
$254,000
$25,000
$120,000
Step 2: Determine the total cost equation for each alternative.
TC = FC + VC
TC = FC + (Q x v)
Step 3: Find TC for 150 units.
A: TC = $254,000 + $500(150) = $329,000
Chapter 08 - Location Planning and Analysis
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Education.
6. Given: Expected annual volume (Q) = 10,000 units. There are three lease alternatives for which
costs are given below:
Memphis
Biloxi
Birmingham
Lease building &
equipment
$40,000
$60,000
$100,000
Transportation
$50,000
$60,000
$25,000
v
$8
$4
$5
Step 1: Determine fixed cost (FC) for each alternative & add FC to table.
FC = Lease cost + transportation cost.
Memphis
Biloxi
Birmingham
Lease building &
equipment
$40,000
$60,000
$100,000
Transportation
$50,000
$60,000
$25,000
Annual FC
$90,000
$120,000
$125,000
v
$8
$4
$5
Step 2: Determine the total cost equation for each alternative.
TC = FC + VC
TC = FC + (Q x v)
Memphis: $90,000 + $8Q
Biloxi: $120,000 + $4Q
Birmingham: $125,000 + $5Q
Step 3: Find TC for 10,000 units.
Memphis: $90,000 + $8(10,000) = $170,000
Chapter 08 - Location Planning and Analysis
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Education.
7. Given: There are two alternative shop locations for which costs are shown below:
City
Outside
R
$90
$90
v
$30
$40
Monthly FC
$7,000
$4,700
a. (1) Monthly profit for Q = 200 cars:
Step 1: Determine total profit equation for each alternative.
Total profit = Q(R – v) – FC
City: Q($90 – $30) – $7,000
Outside: Q($90 – $40) – $4,700
Step 2: Determine total profit for each alternative at the expected monthly volume.
b. Determine the indifference (break-even point) between the two locations.
Set their total profit equations equal to each other and solve for Q:
Q($90 – $30) – $7,000 = Q($90 – $40) – $4,700
$60Q – $7,000 = $50Q – $4,700
