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Methods of Evaluating Location Alternatives. Charle s Angotto. 4 Types of Methods. The Factor-Rating Method: A location method that instills o bjectivity into the process of identifying hard to evaluate costs.

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Methods of Evaluating Location Alternatives

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## Methods of Evaluating Location Alternatives

Charles Angotto

### 4 Types of Methods

• The Factor-Rating Method: A location method that instills objectivity into the process of identifying hard to evaluate costs.

• Locational Break-Even Analysis: The use of cost-volume analysis to make an economic comparison of location alternatives.

• Center-of-Gravity Method: A mathematical technique used for finding the location of a distribution center that will minimize distribution costs.

• Transportation Model: The objective of the transportation model is to determine the best pattern of shipments from several points of supply to several points of demand.

### The Factor-Rating Method

• Popular method because a wide variety of factors can be included in the analysis.

• Qualitative and Quantitative

• Six Steps

• 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

• Recommend the location with the highest point score

### Locational Break-Even Analysis

• Used to determine which location provides the lowest cost

• Can be done mathematically or graphically

• Three Steps

• Determine the fixed and variable cost for each location

• Plot the cost for each location

• Select location with the lowest total cost for expected production volume.

FixedVariableTotal

CityCostCostCost

Akron\$30,000\$75\$180,000

Bowling Green\$60,000\$45\$150,000

Chicago\$110,000\$25\$160,000

### Example

Three locations:

Selling price = \$120

Expected volume = 2,000 units

Total Cost = Fixed Cost + (Variable Cost x Volume)

\$180,000 –

\$160,000 –

\$150,000 –

\$130,000 –

\$110,000 –

\$80,000 –

\$60,000 –

\$30,000 –

\$10,000 –

Chicago cost curve

Annual cost

Bowling Green cost curve

Akron cost curve

|||||||

05001,0001,5002,0002,5003,000

Volume

### Center-of-Gravity Method

• Finds location of distribution center that minimizes distribution costs

• This method takes into account the…

• Location of markets

• Volume of goods shipped to those markets

• Shipping Costs for distribution center

• Steps

• Place existing locations on a coordinate grid

• Calculate X and Y coordinates for ‘center of gravity’

North-South

New York (130, 130)

120 –

90 –

60 –

30 –

Chicago (30, 120)

Pittsburgh (90, 110)

+

Center of gravity (66.7, 93.3)

Atlanta (60, 40)

||||||

306090120150

East-West

Arbitrary origin

### Example

Number of Containers

Store LocationShipped per Month

Chicago (30, 120)2,000

Pittsburgh (90, 110)1,000

New York (130, 130)1,000

Atlanta (60, 40)2,000

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000

x-coordinate =

= 66.7

(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000

y-coordinate =

= 93.3

### Transportation Model

• Finds an initial feasible solution and then makes step-by-step improvements until an optimal solution is reached.

• Solutions will minimize total production and shipping costs