Practice Problems: Chapter 8, Location Strategies

Practice Problems Chapter 8—Location Strategies

Problem 1: A major drug store chain wishes to build a new warehouse to serve the whole Midwest. At the moment, it is looking at three possible locations. The factors, weights, and ratings being considered are given below:

Ratings

Factor Weights Peoria Des Moines Chicago

Nearness to markets 20 4 7 5

Labor cost 5 8 8 4

Taxes 15 8 9 7

Nearness to suppliers 10 10 6 10

Which city should they choose?

Problem 2: Balfour’s is considering building a plant in one of three possible locations. They have estimated the following parameters for each location:

Location Fixed Cost Variable Cost

Waco, Texas $300,000 $5.75

Tijuana, Mexico $800,000 $2.75

Fayetteville, Arkansas $100,000 $8.00

For what unit sales volume should they choose each location?

1 Problem 3: Our main distribution center in Phoenix, AZ is due to be replaced with a much larger, more modern facility that can handle the tremendous needs that have developed with the city’s growth. Fresh produce travels to the seven store locations several times a day making site selection critical for efficient distribution. Using the data in the following table, determine the map coordinates for the proposed new distribution center.

Store Locations Map Coordinates (x,y) Truck Round Trips per Day

Mesa (10,5) 3

Glendale (3,8) 3

Camelback (4,7) 2

Scottsdale (15,10) 6

Apache Junction (13,3) 5

Sun City (1,12) 3

Pima (5,5) 10

2 Problem 4: A company is planning on expanding and building a new plant in one of three countries in Middle or Eastern Europe. The general manager, Patricia Donegal, has decided to base her decision on six critical success factors: technology availability and support, availability and quality of public education, legal and regulatory aspects, social and cultural aspects, economic factors, and political stability. Using a rating system of 1 (least desirable) to 5 (most desirable) she has arrived at the following ratings (you may, of course, have different opinions). In which country should the plant be built?

Critical Success Factor Turkey Serbia Slovakia

Technology availability and support 4 3 4

Availability and quality of public education 4 4 3

Legal and regulatory aspects 2 4 5

Social and cultural aspects 5 3 4

Economic factors 4 3 3

Political stability 4 2 3

Problem 5: Assume that Patricia decides to use the following weights for the critical success factors: Technology availability and support 0.3 Availability and quality of public education 0.2 Legal and regulatory aspects 0.1 Social and cultural aspects 0.1 Economic factors 0.1 Political stability 0.2 Would this change her decision?

Problem 6: Patricia’s advisors have suggested that Turkey and Slovakia might be better differentiated by either (a) doubling the number of critical success factors, or (b) breaking down each of the existing critical success factors into smaller, more narrowly defined items, e.g., Availability and quality of public education might be broken into primary, secondary, and post-secondary education. How would you advise Ms. Donegal?

3 ANSWERS: Problem 1:

Ratings Weighted Ratings

Des Des Factor Weights Peoria Chicago Peoria Chicago Moines Moines

Nearness to 20 4 7 5 80 140 100 markets

Labor cost 5 8 8 4 40 40 20

Taxes 15 8 9 7 120 135 105

Nearness to 10 10 6 10 100 60 100 suppliers

Sum of Weighted ratings: 340 375 325

Therefore, it appears that based upon the weights and rating, Des Moines should be chosen.

4 Problem 2:

Transition between Waco and Tijuana:

300,000 + (5.75x ) = 800,000 + (2.75 x ) 3x = 500,000 x = 166,000

Transition between Waco and Fayetteville:

300,000 + (5.75x ) = 100,000 + (8.00 x ) 200,000 = 2.25x 88,888 = x

5 Problem 3:

New Distribution Center should be located at:

(10*3)+ (3*3) + (4*2) + (15*6) + (13*5) + (1*3) + (5*10) 255 C = = = 7.97 x 3+ 3 + 2 + 6 + 5 + 3 + 10 32

(5*3)+ (8*3) + (7*2) + (10*6) + (3*5) + (12*3) + (5*10) 214 C = = = 6.69 y 3+ 3 + 2 + 6 + 5 + 3 + 10 32

6 Problem 4:

Critical Success Factor Turkey Serbia Slovakia

Technology availability and support 4 3 4

Availability and quality of public education 4 4 3

Legal and regulatory aspects 2 4 5

Social and cultural aspects 5 3 4

Economic factors 4 3 3

Political stability 4 2 3

 = 23 19 22

Based upon her ratings of the critical success factors, Patricia should choose Turkey. From a practical perspective, given the small difference between the scores for Turkey and Slovakia, and the subjectivity of the ratings themselves, Patricia would be better advised to develop additional critical success factors, more carefully weigh the individual factors; or, in general, to acquire more information before making her decisions.

7 Problem 5:

Critical Success Factor Wgt Turkey Serbia Slovakia

Technology availability and support 0.3 4 1.2 3 0.9 4 1.2

Availability and quality of public 0.2 4 0.8 4 0.8 3 0.6 education

Legal and regulatory aspects 0.1 2 0.2 4 0.4 5 .5

Social and cultural aspects 0.1 5 0.5 3 0.3 4 0.4

Economic factors 0.1 4 0.4 3 0.3 3 0.3

Political stability 0.2 4 0.8 2 0.4 3 0.6

 = 3.9 3.1 3.6

No, in this case, use of the weighting factors does not change the recommendation. One might again suggest that additional information be considered in making the decision.

Problem 6:

(a) Doubling the number of critical success factors. There are two issues here. First, from a practical perspective there are a limited number of truly “critical” success factors – and these should be the ones presently being considered. Any additional factors should be of secondary or tertiary importance. Second, given the subjective nature of the rating process, adding additional factors would also increase the overall margin of error of the final ratings to a degree that may eliminate any gain in differentiation arising from the use of the additional factors. The use of a maximum of seven to nine critical success factors is usually appropriate. (b) Given that one’s ability to estimate or rate an aggregate is usually better than one’s ability to estimate or rate the individual components of the aggregate, this approach is unlikely to provide much help.