What Is the Centroid Method in Business?

Manufacturing, distribution and transportation companies must consider a variety of logistical factors in making their decision as to where to expand. They must identify where their customers are located, the cost of the new facility and how easy it is for others in the supply chain to access the new location. When building a new warehouse or storage facility, many companies use the centroid method to determine the optimal location.

Logistics involves moving goods and materials between producers, suppliers, distributors, storage facilities and sales outlets in the proper quantities at the proper time. Logistic-related decisions include transportation methods, type of warehouses and facility location. In determining a new facility’s location, companies must consider government restrictions, environmental regulations, transportation infrastructure, proximity to suppliers and relationship to existing company facilities, among other factors.

Because companies use the centroid method to quantify and address a key logistics question – the optimal location for a new facility -- the centroid method serves as a location decision tool. This methodology takes into consideration the location of existing facilities, the distances between the existing facilities and the product volume shipped between them. The centroid method uses formulas to convert the location and volume numbers into two-dimensional criteria. Companies then use the criteria to compute the two-dimensional point – the map location -- that meets the criteria.

To properly use the centroid method, first identify the existing facilities which the new facility will be mapped against. Next, map these facilities on a two-dimensional grid -- for example, graph paper or an equivalent software mapping system -- to determine their coordinates. Consult with the shipping or purchasing department to obtain the volume information on the product flow at the existing facilities in the area or region. Then, calculate the new coordinates using formulas and place them on the map.

Although manufacturers and distributors often use the centroid method to locate a new distribution center or warehouse facility, many other industries use this methodology. This includes mobile service providers to locate cell phone towers; automotive dealers to locate storage facilities; and transportation companies to locate hubs.