2. What is location decision
• A decision that involves selecting or choosing
places when a firm should locate based on
organizational strategy. Location decision is a
strategic issue. Hence, it should be dealt with
3. Strategic importance of location
As location decision is a strategic issue it is very significant for
organizational strategy achievement. Strategic importance of
location decision are as follows:
1. Location decision is highly related with organization’s
strategy. For example: a strategy of being low cost
producer may try to locate in such places where they can
get raw material or labor supply in a low cost.
2. Location decisions can not be changed easily if once
made. Hence, it has a long term commitment. If once a
new stall is located in a place, the organization cannot
change within short time. It requires huge financial loss
for the organization.
3. 3. A poor selection of location may results in high
transportation cost, labor cost, raw material cost. It may
also increase operating cost for the business.
4. Available location options for an
There are four location options for an organization. They are:
• Expansion of existing facility: one option for an organization is
expansion of an existing facility. This option can be selected if there
is available space for expansion and it is an attractive idea from cost
• Adding a new location: in this option a firm can open new store
along with existing stores. Although it is costly, it may increase
• Shut down one location and move to another: in this option firm
may decide to shut down an existing location and open a location in
another suitable place. It occurs when existing location has some
problems I terms of getting inputs or other issues.
• Do nothing: if a detailed analysis of potential locations fails to
identify any benefit for the existing system, firm may decide to do
nothing. This decision is made for a short time period.
5. The process of making location
The process used for location decision varies from
organization to organization. Different organizations may
use different processes. Here standardized steps for
location decisions are described:
• Selecting criteria for location decision: before starting
a location decision, managers should determine the
criteria that will be used to evaluate the location
alternatives. It is a managerial issue.
• Identify important factors: from the criteria selected in
above step, managers prioritize important factors to be
used for evaluation.
• Developing location alternatives: now a set f
alternatives are developed for location. The
alternatives may be based on a region, a number
of communities or site within a community.
• Evaluate the alternatives and make a decision:
now alternatives are evaluated based on selected
and prioritized criteria. And an appropriate
alternative is selected and implemented.
7. Factors that affect location decision
• Location decision is made based on several factors that may
affect company’s strategic choices. These factors are
classified into regional, community, site-related factors.
Location of raw materials: firms locate near raw materials to
reduce cost of operation. Locating near raw material sources
reduces the cost of transportation of materials. Besides,
perishable products can not be moved long distance. Hence,
firms locate near raw materials.
Location of markets: retail sales and service organizations
should locate near market areas they want to serve to reduce
cost and to capture customers. For example: restaurants,
bank, dry cleaners.
• Climate and tax: firms also consider location
decisions due to get tax incentives. Some firms
may not grow in cold weather. Hence, they need
to establish in areas that provide desired climate.
Community related factors
• Desirability of communities, availability of
education, medical services and transportation
services for workers need to be considered in
Site related decision
• Land: land is an important factors for location
decision. Scope for drainage, electricity, future
expansion affect land cost and demand.
Manufacturing firms should consider this factor
• Environmental and legal restriction: is there is a
restriction from environmental or legal
perspective to locate in an area firms should
consider that issue before making location
10. Different plant manufacturing
• When companies have multiple
manufacturing facilities, they can organize in
various ways. These ways are given below:
• Product plan strategy: with this strategy, a
product is produced in a separate plants.
hence, each plant produce different products
and serve the local markets for that product.
For example: plant A produces computer chip,
plant B produces hard disc.
• Market area plant strategy: with this strategy plants
are designed to serve a particular geographic area of a
market. Individual plant produce most of the products
for that geographic area. This strategy saves shipping
cost but increases operating cost.
• Process plant strategy: with this strategy different
plants focuses on different parts of the process of a
process. Usually automobile companies use this
strategy. This strategy is suitable for products that have
multiple components. For example: plant A produces
door for a car, Plant B produces engine and so on.
12. Evaluating location alternatives
There are several methods to evaluate location
alternatives. They are:
• Locational cost-profit-volume analysis
• Transportation model
• Factor rating and
• Center of gravity method
13. Locational cost-profit-volume analysis
Steps for evaluating suitable location
alternatives are as follows:
1. Determine the fixed and variable cost for al
2. Determine total cost for all locations
3. Select the location that have lowest total cost
at an expected level of output or volume.
14. Math problem
• Question 1: if expected output is 8000 units
per year which location will provide lowest
cost or which location will be suitable? Show
15. Center of gravity math problem
Destination X,Y QUANTITY SHIPPED
D1 2,2 800
D2 3,5 900
D3 5,4 200
D4 8,5 100
• Question: determine the center of gravity
destination using graph.