Chapter – 9

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Service Management (5e) Operations, Strategy,
Information Technology By Fitzsimmons and
Fitzsimmons

• Chapter 9
• Service Facility Location

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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.

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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.

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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.

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Geographic Representation

• Location on a Plane
• Y
• 
  
• 
  Destination j
• Yj
  Euclidean
• Origin i

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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

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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.

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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.

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• 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

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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.

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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)

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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

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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

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• LEAVE PAGES 260-267

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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.

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Site Selection Considerationstable 9.10, pp. 268
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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

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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

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Strategic Location Considerations
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Topics for Discussion

• Pick a particular service, and identify
  shortcomings in its site selection.
• How would you proceed to estimate empirically the
  parameter ? 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?