Service Facility Location

2
Site Selection Considerations
1. Access: 4. Parking:
Convenient ring roads and Adequate off-street parking
motorways 5. Expansion:
Served by public transportation Room for expansion
2. Visibility: 6. Environment:
Set back from street Immediate surroundings should
Sign placement complement the service
3. Traffic: 7. Competition:
Traffic volume on street that may Location of competitors
Indicate potential impulse buying 8. Government:
Traffic congestion that could be a Zoning restrictions
hindrance (e.g.., fire stations) Taxes
3
Competitive Role of Service
Facility Location
 Flexibility: Future economic changes
and portfolio approach (multiple sites
in different regions)
 Competitive Positioning: Prime location
can be barrier to entry
 Demand Management: Diverse set of
market generators (hotel near
convention centre)
 Focus: “Cookie-cutter” expansion
(formula facility) and cannibalization
4
Breaking the Rules
 Competitive Clustering (Among Competitors)
(e.g. Auto Dealers, Motels)
 Saturation Marketing (Same Firm)
(e.g. An Bon Pain, Ice Cream Vendors)
 Marketing Intermediaries
(e.g. Credit Cards, HMO)
 Substitute Electronic Media for
Transportation
(e.g. Internet Shopping)
5
Location Considerations
Location
Geographic structure Number of facilities Optimization criteria
network plane
rectilinear
euclidean
Public sector Private sector one many
Service capacity
Service level
Area served
6
Geographic Representation
Location on a Plane
Y

Destination j
Yj Euclidean


Origin i
Metropolitan
0
Xi Xj
Yi
X
| |
d x x y y
ij i j i j
= ÷ + ÷ ( ) ( )
/
2 2
1 2
d x x y y
ij i j i j
= ÷ + ÷
7
Effect of Optimization Criteria




1. Maximize Utilization (City C: elderly
find distance a barrier)
2. Minimize Distance per Capita (City B:
centrally located)
3. Minimize Distance per Visit (City A:
frequent users and large population)
City A
City B City C



-
1
0






-
5



















5







1
0





1
5

-15 -10 -5 5 10 15 20 25
3
2
1
*
*




*
8
Estimation of Geographic Demand
 Define the Target Market
(Families receiving AFDC)
 Select a Unit of Area
(Census track, ZIP code)
 Estimate Geographic Demand
(Regression analysis)
 Map Geographic Demand
(3D visual depiction)
9
Single Facility Location Using
Cross Median Approach

0
1
2
3
4
5
0 1 2 3 4
X miles
Y

m
i
l
e
s
1 (W
1
=7)
2 (W
2
=1)

3 (W
3
=3)
4 (W
4
=5)
Median =16/2 =8
10
Huff Retail Location Model
First, a gravity analogy is used to
estimate attractiveness of store j for
customers in area i.
A
ij
= Attraction to store j for customers in area i
S
j
= Size of the store (e.g. square feet)
T
ij
= Travel time from area i to store j
lambda = Parameter reflecting propensity to travel
A
S
T
ij
j
ij
=
ì
11
Huff Retail Location Model
Second, to account for competitors we
calculate the probability that customers
from area i will visit a particular store j.


P
A
A
ij
ij
ij
j
n
=
=
¿
1
12
Huff Retail Location Model
Third, annual customer expenditures for
item k at store j can now be calculated.
P
ij
= Probability of customer from area i travelling to store
j
C
i
= Number of customers in area i (e.g. census track)
B
ik
= Annual budget for product k for customers in area i
m = Number of customer areas in the market region

( )
E P C B
jk ij i ik
j
m
=
=
¿
1
13
Huff Retail Location Model
Fourth, market share of product k
purchased at store j can now be
calculated.

M
E
C B
jk
jk
i ik
i
m
=
=
¿
( )
1
14
Athol Furniture Site Alternatives

1
2
3
4
7
5
6
8
9
10
11
12
Bluff lake
State Park
A
B
Z
Y
X
Railroad
Freeway
Major street
Park boundary
River
Census block group
Existing retail outlets
Potential sites
4
15
Athol Furniture Data
COMPETITORS’ STORE SIZES MAXIMUM SIZE LIMIT OF SITES
Store Sales area, sq ft Site Maximum sales area, sq ft
A 10,000 X 15,000
B 15,000 Y 20,000
Z 10,000

MINIMUM TRAVEL TIME BETWEEN POTENTIAL AND EXISTING SITES
AND BLOCK GROUPS, Min
Census block group
Site 1 2 3 4 5 6 7 8 9 10 11 12
A 7 5 5 9 1 3 4 5 7 10 14 17
B 10 8 8 10 7 3 3 2 1 2 2 5
X 16 14 14 16 13 8 7 6 4 4 2 2
Y 12 10 10 12 9 5 4 3 2 4 2 5
Z 7 5 5 7 4 2 1 4 3 10 10 13


RELATIONSHIP OF STORE SIZE TO MARGIN ON SALES, EXPENSES,
AND NET OPERATING PROFIT AS % OF SALES

Sales area, Margin Net operating profit
sq ft on sales Expenses before taxes
10,000 16.2 12.3 3.9
15,000 15.6 12.0 3.6
20,000 14.7 11.8 2.0
16
Athol Furniture Demographics

MARKET DATA

Census block Number of Average annual Average annual furniture
group households income expenditures per household
1 730 $12,000-$12,500 $180
2 1130 8,500-9,000 125
3 1035 19,500-20,000 280
4 635 25,000-over 350
5 160 4,500-5,000 75
6 105 4,000-4,500 50
7 125 4,000-4,500 60
8 470 8,000-8,500 115
9 305 6,000-6,500 90
10 1755 18,500-19,000 265
11 900 15,000-15,500 215
12 290 25,000-over 370
7640

17
Store Site Selection
Store Profit as a Function of
Lambda
0
10000
20000
30000
0.1 0.5 1 2 5
A
n
n
u
a
l

P
r
o
f
i
t

(
$
)
X10
X15
Y10
Y15
Y20
Z10
18
Market Share Analysis
Now X15 Y15 Y20
A 30% 22% 21% 19%
B 70% 47% 46% 41%
Athol 31% 33% 40%