CH 8

CENTER OF GRAVITY METHOD - HIGHLIGHTS

- Treats distribution costs as a linear function of the distance and the quantity shipped - The quantity to be shipped to each destination is assumed to be fixed - The method includes the use of a map that shows the locations of destinations ---The map must be accurate and drawn to scale - A coordinate system is overlaid on the map to determine relative locations

Locational Cost-Profit-Volume Assumptions (4)

1. Fixed costs are constant for the range of probable output 2. Variable costs are linear for the range of probable output 3. The required level of output can be closely estimated 4. Only one product is involved

Evaluating Location Alternatives -Common Techniques (4)

1. Locational Cost-Volume-Profit Analysis 2. Factor Rating 3. Transportation Model 4. Center of gravity method

Example A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Solution

Choose alternative 2 since it has the higher composite score

Compute total cost

For a cost analysis, compute the total cost for each alternative location: - Total Cost=FC+v×Q - FC= Fixed cost - v= Variable cost per unit - Q= Quantity or volume of output

Factor Rating

General approach to evaluating locations that includes quantitative and qualitative inputs

Obtain the Coordinates

If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity: -By finding the average of the x-coordinates and the average of the y-coordinates -if quantities are different x= the sum of xiQi/ sum of Qi and y= sum of yiOi/ sum of Qi

Center of gravity method

Method for locating a distribution center that minimizes distribution costs

Procedure (6 steps)

Step 1: Determine which factors are relevant Step 2: Assign a weight to each factor that indicates its relative importance compared with all other factors -Weights should sum to 1.00 Step 3: Decide on a common scale for all factors, and set a minimum acceptable score if necessary Step 4: Score each location alternative Step 5: Multiply the factor weight by the score for each factor, and sum the results for each location alternative Step 6: Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score

Locational Cost-Profit-Volume Analysis (3 steps)

Technique for evaluating location choices in economic terms Step 1: Determine the fixed and variable costs for each alternative Step 2: Plot the total-cost lines for all alternatives on the same graph Step 3: Determine the location that will have the lowest total cost (or highest profit) for the expected level of output

CENTER OF GRAVITY METHOD EXAMPLE Suppose you are attempting to find the center of gravity for the problem depicted in the figure.

The center of gravity is (4.5,4) - slightly west of D3.