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Operations Management Location Strategies Chapter 8. Outline. Strategic Importance of Location. Factors That Affect Location Decisions. Methods of Evaluating Location Alternatives. The Factor-Rating Method. Locational Break-Even Analysis. Center-of-Gravity Method. The Transportation Model.

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outline
Outline
  • Strategic Importance of Location.
  • Factors That Affect Location Decisions.
  • Methods of Evaluating Location Alternatives.
    • The Factor-Rating Method.
    • Locational Break-Even Analysis.
    • Center-of-Gravity Method.
    • The Transportation Model.
    • Integer Programming.
  • Service Location Strategy.
federal express
Federal Express
  • “Invented” overnight delivery.
  • Uses “hub” concept.
    • Enables service to more locations with fewer aircraft.
    • Concentrates package flows to exploit transportation economies of scale.
    • Enables sorting economies of scale.
  • Key issue: Where to locate hubs??
location decisions
Location Decisions
  • Long-term strategic decisions.
  • Usually expensive & difficult to reverse.
  • Affect fixed & variable costs.
    • Transportation cost is up to 25% of product price.
    • Other costs: Taxes, wages, rent etc.
  • Objective: Maximize benefit of location to firm.
industrial location decisions
Industrial Location Decisions
  • Cost focus.
    • Revenue varies little between locations.
  • Production separate from consumption.
  • Location is major cost factor.
    • Costs vary greatly between locations.
      • Shipping costs.
      • Production costs (e.g., labor).
service location decisions
Service Location Decisions
  • Revenue focus.
    • Costs vary little between market areas.
  • Production/service together with consumption.
  • Location is a major revenue factor.
    • Affects amount of customer contact.
    • Affects volume of business.
organizations that locate close to markets customers
Organizations That Locate Close to Markets/Customers
  • Government agencies.
    • Police & fire departments, post offices, public libraries.
  • Retail sales and Services.
    • Fast food restaurants, supermarkets, gas stations.
    • Doctors, lawyers, barbers, banks, auto repair, etc.
  • When transporting finished goods is more expensive than transporting materials.
    • Bottling plants, breweries.
    • Electricity production.
organizations that locate close to suppliers or materials
Organizations That Locate Close to Suppliers or Materials
  • By necessity.
    • Mining, fishing, farming, etc.
  • When transporting materials is more expensive than transporting finished goods.
    • Perishable raw materials.
      • Seafood processing.
    • Heavy or bulky raw materials.
      • Steel producers.
    • Processing reduces bulk.
      • Lumber mills, paper production.
factors affecting country decision
Factors Affecting Country Decision
  • Government rules, attitudes, stability, incentives.
  • Labor availability, attitudes, productivity, cost.
  • Availability of supplies, communications, energy.
  • Culture & economy.
  • Location of markets.
  • Exchange rate.
ranking of the business environment in 20 countries 1997 2001
1 Netherlands

2 Britain

3 Canada

4 Singapore

5 U.S.

6 Denmark

7 Germany

8 France

9 Switzerland

10 Sweden

11 Finland

12 Belgium

13 New Zealand

14 Hong Kong

15 Austria

16 Australia

17 Norway

18 Ireland

19 Italy

20 Chile

Ranking of the Business Environment in 20 Countries, 1997 - 2001
factors affecting region community decision
Attractiveness of region (culture, taxes, climate, etc.).

Labor availability, costs, attitudes towards unions.

Environmental regulations of state and town.

Proximity to customers & suppliers.

Corporate desires.

Costs and availability of utilities.

Government incentives.

Land/construction costs.

Factors Affecting Region/Community Decision
factors affecting site decision
Access to air, rail, highway, and waterway systems.

Proximity to needed services/supplies.

Site size and cost.

Zoning restrictions.

Environmental impact issues.

Factors Affecting Site Decision

.

location decision example bmw
Location Decision Example - BMW

In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

country decision bmw
Market location.

U.S. is world’s largest luxury car market & is growing.

Labor.

U.S. has lower manufacturing labor costs.

$17/hr. (U.S.) vs. $27 (Germany).

U.S. may have higher labor productivity.

11 holidays (U.S.) vs. 31 (Germany).

Other.

Lower shipping cost ($2,500/car less).

New plant & equipment would increase productivity (lower cost/car $2,000-3000).

Country Decision - BMW
region community decision bmw
Region/Community Decision - BMW
  • Labor.
    • Lower wages in South Carolina (SC).
      • About $17,000/yr in SC vs. $27,051/yr in U.S. (based on 1993).
  • Government incentives.
    • $135 million in state & local tax breaks.
    • Free-trade zone from airport to plant.
      • No duties on imported components or on exported cars.
location evaluation methods
Location Evaluation Methods
  • Factor-rating method.
  • Locational break-even analysis.
  • Center of gravity method.
  • Transportation model.
factor rating method
Factor-Rating Method
  • Most widely used location technique.
  • Useful for service & industrial locations.
  • Rates locations using factors.
    • Intangible (qualitative) factors.
      • Example: Education quality, labor skills.
    • Tangible (quantitative) factors.
      • Example: Short-run & long-run costs.
  • Based on weighted average.
steps in factor rating method
Steps in Factor Rating Method
  • List relevant factors.
  • Assign importance weight to each factor (0-1).
    • Make weights sum to one.
  • Set a scale for scoring each factor (1-10 or 1-100).
  • Score each location using factor scale.
  • Multiply scores by weights for each factor & sum.
  • Select location with maximum total score.
  • Consider sensitivity to weights and scores.
factors affecting location
Factors Affecting Location
  • Labor costs and availability, including wages, productivity, attitudes, age, distribution, unionization, and skills.
  • Site costs, including land cost, parking, drainage, expansion opportunities, etc.
  • Proximity to raw materials and suppliers.
  • Proximity to markets.
  • State and local government fiscal policies (including incentives, taxes, unemployment compensation).
factors affecting location continued
Factors Affecting Location - continued
  • Utilities, including availability and costs.
  • Transportation availability (road, rail, air, water, pipeline).
  • Quality-of-life issues (education, cost of living, health care, sports, cultural activities, housing, entertainment, religious facilities, etc.).
  • Foreign exchange, including rates and stability.
  • Government, including stability, honesty, attitudes toward new business, etc.
factor rating example

Factor

weight

A

B

C

Cost

0.3

Proximity to trans.

0.2

Taxes

0.1

Labor

0.4

Factor Rating Example

Three locations: A, B and C; Four factors.

1. Assign weights to each factor.

2. Score each location on each factor.

3. Multiply the weight and score and sum for each location.

factor rating example1
Factor Rating Example

Three locations: A, B and C; Four factors.

A is best; B and C are similar.

Note that if the labor score for A was 5, not 6, then all locations are similar.

locational break even analysis
Locational Break-Even Analysis
  • Cost-volume analysis used for location.
  • Steps:
    • Determine fixed & variable costs for each location.
    • Find break-even point.
    • Plot cost for each location.
    • Select location with lowest total cost for expected production volume.
      • Must be above break-even.
locational break even analysis example
Locational Break-Even Analysis Example

You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120.

What is the best location for an expected volume of 2,000 cases per year?

locational break even analysis example1
Locational Break-Even Analysis Example

A=Akron: Total Cost = TC = 30000 + 75x

B=Bowling Green: Total Cost = TC = 60000 + 45x

C=Chicago: Total Cost = TC = 110000 + 25x

For all: Total Revenue = TR = 120x

At x=2000 cases/year:

A: Profit = 240,000 - (30,000 + 150,000) = 60,000

B: Profit = 240,000 - (60,000 + 90,000) = 90,000

C: Profit = 240,000 - (110,000 + 50,000) = 80,000

B is Best

locational break even analysis example2
Locational Break-Even Analysis Example

You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120.

Over what range of output is each location preferred?

locational break even analysis example3
Locational Break-Even Analysis Example

A=Akron: TC = 30000 + 75x

B=Bowling Green: TC = 60000 + 45x

C=Chicago: TC = 110000 + 25x

A is best at x=0.

A < B for x < 1000/yr and A < C for x < 1600/yr, so

A is best over range 0<x<1000/yr.

B < C for x < 2500/yr so,

B is best over range 1000<x<2500/yr.

C is best over range 2500/yr < x

locational crossover chart

Chicago

Bowling Green

Bowling Green lowest cost

Akron lowest cost

Chicago lowest cost

Locational Crossover Chart

200,000

Akron

150,000

$

100,000

50,000

0

0

500

1000

1500

2000

2500

3000

Volume

locational crossover chart1

Chicago

Bowling Green

Bowling Green lowest cost

Akron lowest cost

Chicago lowest cost

Locational Crossover Chart

200,000

Revenue

Akron

150,000

$

100,000

50,000

0

0

500

1000

1500

2000

2500

3000

Volume

locational break even analysis example4
Locational Break-Even Analysis Example

A is unprofitable for low volumes.

Use break-even analysis with A to find

break-even point = 666.67/yr.

A is best and profitable over range 666.67<x<1000/yr.

B is best and profitable over range 1000<x<2500/yr.

C is best and profitable over range 2500/yr < x.

center of gravity method
Center of Gravity Method
  • Finds location ofsingle facility serving several destinations.
  • Used for services and distribution centers.
  • Requires:
    • Location of existing destinations (Markets, retailers etc.)
    • Volume to be shipped.
    • Shipping distance (or cost).
center of gravity method steps
Center of Gravity Method Steps
  • Find X and Y coordinates for all destinations.
    • Can use an arbitrary coordinate grid.
  • Calculate center of gravity location for facility as weighted average of X & Y coordinates.
    • Approximately minimizes transportation cost.
  • Location is not necessarily optimal, but is usually close.
center of gravity method equations
Center of Gravity Method Equations

X Coordinate

dix = x coordinate of location i

Wi = Volume of goods moved to or from location i

diy = y coordinate of location i

Y Coordinate

center of gravity example

New York (130,130)

Chicago (30,120)

120

Pittsburgh (90,110)

60

Atlanta (60,40)

0

0

60

120

Center of Gravity Example

Given 4 cities with volume demanded and (x,y) coordinates. Find location for one warehouse to minimize total distance to supply these cities.

LocationVolume

Chicago 200

Pittsburgh 100

New York 100

Atlanta 200

center of gravity example1
Center of Gravity Example

LocationVolume X-Coordinate Y-Coordinate

Chicago 200 30 120

Pittsburgh 100 90 110

New York 100 130 130

Atlanta 200 60 40

X coordinate of warehouse:

Cx=(200x30+100x90+100x130+200x60)/(200+100+100+200) = 66.7

Y coordinate of warehouse:

Cy=(200x120+100x110+100x130+200x40)/(200+100+100+200) = 93.3

center of gravity example2

New York (130,130)

Chicago (30,120)

120

Pittsburgh (90,110)

60

Atlanta (60,40)

0

0

60

120

Center of Gravity Example

LocationVolume

Chicago 2000

Pittsburgh 1000

New York 1000

Atlanta 2000

X

Center of gravity = (66.7, 93.3)

transportation model
Transportation Model
  • Finds amount to be shipped from severalsources to several destinations.
  • Used primarily for industrial locations.
  • Type of linear programming model.
    • Objective: Minimize total production & shipping costs.
    • Constraints:
      • Production capacities at sources (factories).
      • Demand requirements at destinations.
transportation model example

Chicago

London

St. Louis

Atlanta

Transportation Model Example

800

500

1000

Supply is in green

Demand is in red

300

200

900

300

From To Cost per unit flow

Chicago London $40

Chicago St. Louis $10

St. Louis Chicago $8

St. Louis Atlanta $20

Atlanta London $35

Chicago Chicago $1

St. Louis St. Louis $1

Atlanta Atlanta $1

transportation model example1

Demand

Supply

$40

London 1000

800 Chicago

$1

$10

Chicago 500

$8

300 St. Louis

$35

$1

St. Louis 200

900 Atlanta

$20

$1

Atlanta 300

Transportation Model Example

xij= Flow from origin i to destination j.

Objective is minimize cost for all flows.

Constraints for supply at each origin (3) and demand at each destination (4).

integer programming for location
Integer Programming for Location
  • x1= 1 if a warehouse is located at Boston; 0 otherwise.
  • x2= 1 if a warehouse is located at Hartford; 0 otherwise.
  • x3= 1 if a warehouse is located at Albany; 0 otherwise.
  • Minimize the cost to locate warehouses:
  • Minimize C1x1 + C2x2 + C3x3
  • At most two warehouses can be opened:
  • x1 + x2+x3  2
  • Either Boston or Hartford should have a warehouse:
  • x1 + x2 1
location for service organizations
Location for Service Organizations

Focus on Revenue and Volume of Business, which are determined by:

  • Purchasing power and demographics of customer drawing area.
  • Competition in the area (amount and quality).
  • Relative attractiveness of the firm’s and competitor’s locations.
    • Uniqueness of location and offerings.
    • Physical qualities of facilities and neighboring businesses.
    • Operating policies and quality of management.
service vs industrial location
Service Location

Techniques

Regression models to determine importance of different factors.

Factor rating.

Traffic counts & demographic analysis of drawing area.

Center of gravity.

Assumptions

Location is major determinate of revenue.

High customer contact issues dominate.

Costs are relatively constant for a given area.

Industrial Location

Techniques

Linear and Integer Programming (Transportation method).

Factor rating.

Breakeven and crossover analysis.

Center of gravity.

Assumptions

Location is major determinate of cost.

Costs can be identified for each site.

Low customer contact allows focus on costs.

Intangible costs can be objectively evaluated.

Service vs. Industrial Location
telemarketing and internet industries
Telemarketing and Internet Industries
  • Require neither face-to-face contact with customers (or employees) nor movement of material.
  • Keys are:
    • Labor costs and productivity.
    • Information systems infrastructure (including training and management).
    • Government incentives (including taxes).
geographic information systems gis
Geographic Information Systems - GIS
  • New tool to help in location analysis.
  • Combines spatial (locational) data and attribute data (for example, demographics).
  • Uses spatial analyses to identify best or satisfactory locations.
  • Allows intuitive graphical display using maps.
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