Chapter – 9 Service Facility Location

1. 9 Service Management (5e) Operations, Strategy, Information Technology By Fitzsimmons and Fitzsimmons Chapter – 9 Service Facility Location

2. Learning Objectives • Discuss how a facility location is affected by selection of the criteria for judging customer service. • Locate a single facility using the cross-median approach. • Discuss nontraditional location strategies: competitive clustering, saturation marketing, marketing intermediaries, substitution of communication for transportation, and the impact of the Internet on service location.

3. Service Facility Location Planning • Flexibility: of a location is a measure of the degree to which the service can react to changing economic situations. Therefore, in location decisions plan for future economic changes and portfolio effect. • Competitive positioning: refers to methods by which the firm can establish itself relative to its competitors. Multiple location or prime location can be barrier to entry. • Demand management: it is the ability to control the quality, quantity, and timing of demand. For example, a hotel can control demand by locating near a diverse set of market generators that supply a steady demand . • Focus: can be developed by offering the same narrowly defined service at many locations.

4. Geographic Representation • Location options and travel distance can be represented on either a plane (flat surface) or a network. • Plane provides infinite possibilities – you can move in any direction represented by XY coordinates (sometimes called the latitude and the longitude). Distance between locations is measured in two ways: • Euclidian metric or vector – using Pythagorean theorem • Metropolitan method – more like a grid travel in a city, where we move at right angle.

5. Yi Metropolitan 0 X Xi Xj Geographic Representation Location on a Plane Y Destination j YjEuclidean Origin i

6. Location on a network • It is characterized by a solution space that is restricted to the nodes of that network. • Example, a highway system could be considered a network with major highway intersections as nodes. • The arcs of the network represent travel distance (or time) between pairs of nodes, calculated using the shortest route. • Networks can represent more accurately the geographic uniqueness of an area (e.g., the travel restrictions caused by river with few bridges or by mountainous terrain). • Unfortunately, the cost of gathering the travel times between nodes can be prohibitive

7. Multisite location • Location of a single facility is easy and can be solved using mathematics for an optimal location. • However, methods used to locate a single facility do not guarantee optimal results when we use them to find solution for multisite location problem. This complexity is added by: • Demand pattern at different sites is different • Capacity maybe different at different sites • Services at different sites maybe hierarchical and inter-dependent, example private physicians and clinics offer primary care, general hospitals provide primary care plus hospitalization, and health centers add special treatment capabilities.

8. Optimization Criteria • Criteria for location maximization differ based on private or public ownership. • Private sector • In private sector, the location decision is governed by either minimization of cost (e.g. in the case of locating distribution centers) or maximization of profit (e.g. in the case of locating retail locations). • Typical problem here would focus on the trade-off between cost of building and operating facilities versus cost of transportation. Example, warehouse location problem. • This model maybe applied in services, when the decision is to locate services like consulting, auditing, lawn care services – which require you to travel to the customer. • When the consumer travels to the facility, no direct cost is incurred by the provider. Instead, distance becomes a barrier restricting potential consumer demand and the corresponding revenue generated.

9. Public sector criteria • In locating public facility, the decisions are governed by the needs of the society as a whole. • Location decisions are complicated by the lack of agreement on goals and the difficulty of measuring benefits in dollars to make trade-offs with facility investment. • Because the benefits of a public service are difficult to define or quantify directly, substitute measure of ‘utility maximization’ are used. • Utility will be maximized if people have to travel less to reach a public facility; or more people can travel to the public facility

10. Effect of criteria on location • Maximize utilization • Maximize the total number of visits to the health care center • The center should be located in city C, because it contains a large number of elderly people for whom distance is a strong deterrent • Minimize distance per capita • Minimize the average distance per capita to the closest center • City B should be selected, because it is centrally located between the two large cities • Minimize distance per visit • Minimize the average per-visit travel distance to the nearest center • City A should be selected as it has the largest population and has the most mobile and frequent users of health care.

11. City A 3 * 2 -10 -5 5 10 15 * -15 -10 -5 5 10 15 20 25 * City C City B 1 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: many frequent users)

12. Estimation of Geographic Demand • Define the Target Market • To forecast demand, we need to define target population. We use past records to project future demand • Select a Unit of Area • To forecast , we need to define geographic units based on 2 factors • Unit must be large enough to contain a sample size required for estimating demand • We should not have so many geographic units, that we cannot do calculations using our computing power. • Estimate Geographic Demand • Regression analysis • Map Geographic Demand on a three dimensional map • to provide a visual representation of the geographic distribution

13. Facility location technique • Single facility on a line • Suppose you want to find a location that would minimize the average walk to your concession from anywhere on the beach • Locate in the center if the population is equally divided • If population density is different, then locate the median w.r.t to the density distribution of the bathers • S = site of the beach mat concession • location of the i-th demand point on the beach in feet from the origin, in this case taken to be west end of the beach • relative weight of demand attached to the i-th location on beach

14. LEAVE PAGES 260-267

15. Other criteria for site selection • So far we have examined location objective from customer convenience point of view, that is, distance travelled to be minimized . • However, there could be other criteria used for location as discussed in the next slide.

16. Site Selection Considerationstable 9.10, pp. 268

17. Breaking the Rules • Competitive Clustering • When firms in the same business locate close to each other so that customers can compare more easily, ex., car dealership, motels • Saturation Marketing • When a company locates its units close to each other to squeeze out the competition, reduce advertising needs, increase customer awareness, better inventory management.; example Au Bon Pain, • Risk of cannibalizing your sales • Marketing Intermediaries • Services cannot be inventoried and are intangible, cannot be transported, thus limiting the geographic area of service • By using marketing intermediaries you can expand geographical coverage; e.g. banks extend credit worldwide through Credit Cards, HMO

18. Continued…. • Substitute Electronic Media for Travel • Technology interphase has provided communication possibilities that expand the coverage of service, example. Nurse practitioners can use communication with a distant hospital to provide health care without transporting the patient • Working out of home or providing service at customer ‘s location , example, telebanking • Impact of the Internet on Service Location • E-commerce – website becomes the virtual location of these firms • Location of the warehouse is a concern because you have to ship the products, e.g. Amazon.com, eBay, FedEx

19. Strategic Location Considerations

20. Topics for Discussion • Pick a particular service, and identify shortcomings in its site selection. • How would you proceed to estimate empirically the parameter λ in the Huff retail location model for a branch bank? • Why do you think set covering is an attractive approach to public sector facility location? • What are the benefits of using intermediaries in the service distribution channel?