Service Facility Location Learning Objectives n n

Service Facility Location

Learning Objectives n n 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 n Competitive Positioning: Prime location can be barrier to entry n Demand Management: Diverse set of market generators n Focus: “Cookie-cutter” expansion and cannibalization n

Geographic Representation Location on a Plane Y Destination j Yj Euclidean Origin i Yi Metropolitan 0 Xi Xj X

Effect of Optimization Criteria City A 10 15 3 2 5 * -10 * -5 5 10 15 20 25 * -5 -10 1. Maximize Utilization City C: elderly. City C (B 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) 1

Estimation of Geographic Demand n Define the Target Market (Families receiving AFDC) n Select a Unit of Area (Census track, ZIP code) n Estimate Geographic Demand (Regression analysis) n Map Geographic Demand (3 D visual depiction)

Site Selection Considerations 1. Access: Convenient to freeway exit and entrance ramps Served by public transportation 2. Visibility: Set back from street Sign placement 3. Traffic: Traffic volume on street that may Indicate potential impulse buying Traffic congestion that could be a hindrance (e. g. . , fire stations) 4. Parking: Adequate off-street parking 5. Expansion: Room for expansion 6. Environment: Immediate surroundings should complement the service 7. Competition: Location of competitors 8. Government: Zoning restrictions Taxes

Breaking the Rules n Competitive Clustering (Among Competitors) (e. g. Auto Dealers, Motels) n Saturation Marketing (Same Firm) (e. g. An Bon Pain, Ice Cream Vendors) n Marketing Intermediaries (e. g. Credit Cards, HMO) n Substitute Electronic Media for Transportation (e. g. USAA, Internet Shopping)

Single Facility Location Using Cross Median Approach 3 (W 3=3) Median =16/2 =8 2 (W 2=1) 1 (W 1=7) 4 (W 4=5)

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

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

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

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

Athol Furniture Site Alternatives 4 State Park 1 2 3 A 5 Bluff lake Z 7 6 9 4 Railroad Freeway Major street Park boundary River Census block group Existing retail outlets Potential sites B 8 Y 11 10 X 12

Athol Furniture Data COMPETITORS’ STORE SIZES Store A B MAXIMUM SIZE LIMIT OF SITES Sales area, sq ft 10, 000 15, 000 Site X Y Z Maximum sales area, sq ft 15, 000 20, 000 10, 000 MINIMUM TRAVEL TIME BETWEEN POTENTIAL AND EXISTING SITES AND BLOCK GROUPS, Min Site A B X Y Z 1 7 10 16 12 7 2 5 8 14 10 5 3 5 8 14 10 5 4 9 10 16 12 7 Census block group 5 6 1 3 7 3 13 8 9 5 4 2 7 4 3 7 4 1 8 5 2 6 3 4 9 7 1 4 2 3 10 10 2 4 4 10 RELATIONSHIP OF STORE SIZE TO MARGIN ON SALES, EXPENSES, AND NET OPERATING PROFIT AS % OF SALES Sales area, sq ft 10, 000 15, 000 20, 000 Margin on sales 16. 2 15. 6 14. 7 Expenses 12. 3 12. 0 11. 8 Net operating profit before taxes 3. 9 3. 6 2. 0 11 14 2 2 2 10 12 17 5 2 5 13

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

Store Site Selection

Market Share Analysis