Service Facility Location

Learning Objectives

Discuss how different customer service criteria affect facility location.

Locate a single facility using the cross-median approach.

Use the Huff model to evaluate the economic feasibility of a retail service location.

Discuss nontraditional location strategies.

Competitive Role of Service Facility Location

Flexibility: Future economic changes and portfolio approach

Competitive Positioning: Prime location can be barrier to entry

Demand Management: Diverse set of market generators

Focus: “Cookie-cutter” expansion and cannibalization

Geographic Representation

Location on a Plane

Y

Destination j

Yj Euclidean

Origin i

Metropolitan

0Xi Xj

Yi

X

d x x y yij i j i j ( ) ( )/

2 21 2

d x x y yij i j i j

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

10

1

5

-15 -10 -5 5 10 15 20 25

3

2

1

*

*

*

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)

Site Selection Considerations

1. Access: 4. Parking:

Convenient to freeway exit and Adequate off-street parking

entrance ramps 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

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. USAA, Internet Shopping)

Single Facility Location Using Cross Median Approach

0

1

2

3

4

5

0 1 2 3 4

X miles

Y m

iles

1 (W1=7)

2 (W2=1)

3 (W3=3)

4 (W4=5)

Median =16/2 =8

Huff Retail Location Model

First, a gravity analogy is used to estimate attractiveness of store j for customers in area i.

Aij= Attraction to store j for customers in area i

Sj = Size of the store (e.g. square feet)

Tij= Travel time from area i to store j

lambda = Parameter reflecting propensity to travel

AS

Tij

j

ij

Huff Retail Location Model

Second, to account for competitors we calculate the probability that customers from area i will visit a particular store j.

PA

Aij

ij

ijj

n

1

Huff Retail Location Model

Third, annual customer expenditures for item k at store j can now be calculated.

Pij = Probability of customer from area i travelling to store j

Ci = Number of customers in area i (e.g. census track)

Bik = Annual budget for product k for customers in area i

m = Number of customer areas in the market region

E P C Bjk ij i ikj

m

1

Huff Retail Location Model

Fourth, market share of product k purchased at store j can now be calculated.

ME

C Bjk

jk

i iki

m

( )

1

Athol Furniture Site Alternatives

1

2 3

4

75

6

8

9

10

11

12

Bluff lake

State Park

A

B

Z

Y

X

RailroadFreewayMajor streetPark boundaryRiverCensus block groupExisting retail outletsPotential sites

4

Athol Furniture DataCOMPETITORS’ STORE SIZES MAXIMUM SIZE LIMIT OF SITESStore 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

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

Store Site SelectionStore Site Selection

Store Profit as a Function of Lambda

0

10000

20000

30000

0.1 0.5 1 2 5

An

nu

al P

rofi

t ($

) X10

X15

Y10

Y15

Y20

Z10

Market Share AnalysisMarket Share Analysis

Now X15 Y15 Y20

A 30% 22% 21% 19%

B 70% 47% 46% 41%

Athol 31% 33% 40%