PRODUCTION AND OPERATIONS MANAGEMENT

1. PRODUCTION AND OPERATIONS MANAGEMENT Ch. 9: Location Strategies POM - J. Galván

2. Learning Objectives • Where must we locate our facilities so as to satisfy our corporate strategy? POM - J. Galván

3. Industrial Location Decisions • Cost focus • Revenue varies little between locations • Location is a major cost factor • Affects shipping & production costs (e.g., labor) • Costs vary greatly between locations © 1995 Corel Corp. POM - J. Galván

4. Service Location Decisions • Revenue focus • Costs vary little between market areas • Location is a major revenue factor • Affects amount of customer contact • Affects volume ofbusiness POM - J. Galván

5. In General - Location Decisions • Long-term decisions • Difficult to reverse • Affect fixed & variable costs • Transportation cost • As much as 25% of product price • Other costs: Taxes, wages, rent etc. • Objective: Maximize benefit of location to firm POM - J. Galván

6. Region/Community Country Site . Location Decision Sequence POM - J. Galván

7. © 1995 Corel Corp. Factors Affecting Country • Government • Culture & economy • Market location • Labor availability, attitudes, productivity, and cost • Infrastructure • Exchange rate POM - J. Galván

8. Hourly Compensation ($)Manufacturing Workers (1994) Labor Productivity • Low wages often over-emphasized • Labor productivity important • Labor cost per unit should be criterion: Labor cost/day Units made/day Germany 27.37 Japan 21.38 U.S. 17.10 Hong Kong 4.79 Mexico 2.57 POM - J. Galván

9. © 1995 Corel Corp. Region Location Decisions • Corporate desires • Attractiveness • Labor • Utility costs • Government incentives • Proximity to customers & suppliers • Land/construction $$$ POM - J. Galván

10. Factors Affecting Site • Site size • Site cost • Transportation in/out • Proximity of services • Environmental impact © 1995 Corel Corp. POM - J. Galván

11. © 1995 Corel Corp. Location Decision Example In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. POM - J. Galván

12. Country Decision Factors • Other • Lower shipping cost ($2,500/car less) • New plant & equipment would increase productivity (lower cost/car $2,000-3000) • Market location • U.S. is world’s largest luxury car market • Growing (baby boomers) • Labor • Lower manufacturing labor costs • $17/hr. (U.S.) vs. $27 (Germany) • Higher labor productivity • 11 holidays (U.S.) vs. 31 (Germany) POM - J. Galván

13. Region/Community Decision Factors • Labor • Lower wages in South Carolina (SC) • About $17,000/yr (SC) vs. $27,051/yr (US) • Based on 1993 metropolitan averages for all workers • 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 POM - J. Galván

14. Organizations That Need To Be Close to Markets • Government agencies • Police & fire departments • Post Office • Retail Sales and Serivce • Fast food restaurants, supermarkets, gas stations • Drug stores, shopping malls • Bakeries POM - J. Galván

15. Organizations That Need To Be Close to Markets - continued • Services • Doctors, lawyers, accountants, barbers • Banks, auto repair, motels • Manufacturers • Makers of bulky or heavy products • Japanese car makers • German car makers • Auto parts suppliers POM - J. Galván

16. Location Evaluation Methods • Factor-rating method • Locational break-even analysis • Center of gravity method • Transportation model POM - J. Galván

17. 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 POM - J. Galván

18. Steps in Factor Rating Method • List relevant factors • Assign importance weight to each factor • Develop scale for each factor (0-1, etc.) • Score each location using factor scale • Multiply scores by weights for each factor & total • Select location with maximum total score POM - J. Galván

19. Factors Affecting Location Selection • Environmental regulations • Utilities • Site costs • Transportation availability • Quality-of-life • Foreign exchange • Quality of government • Labor costs • Labor availability • Proximity to materials and suppliers • Proximity to markets • Government fiscal policies • Environmental regulations POM - J. Galván

20. Locational Break-Even Analysis • Method of cost-volume analysis used for industrial locations • Steps • Determine fixed & variable costs for each location • Plot total cost for each location • Select location with lowest total cost for expected production volume • Must be above break-even POM - J. Galván

21. © 1995 Corel Corp. 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? POM - J. Galván

22. Akron Chicago Bowling Green Bowling Green lowest cost Akron lowest cost Chicago lowest cost Locational Break-Even Crossover Chart POM - J. Galván

23. Akron Chicago Bowling Green Lowest cost envelop Bowling Green lowest cost Akron lowest cost Chicago lowest cost Locational Break-Even Crossover Chart POM - J. Galván

24. Center of Gravity Method • Finds location ofsingle distribution center serving several destinations • Used primarily for services • Considers • Location of existing destinations • Example: Markets, retailers etc. • Volume to be shipped • Shipping distance (or cost) • Shipping cost/unit/mile is constant POM - J. Galván

25. Center of Gravity Method Steps • Place existing locations on a coordinate grid • Grid has arbitrary origin & scale • Maintains relative distances • Calculate X & Y coordinates for ‘center of gravity’ • Gives location of distribution center • Minimizes transportation cost POM - J. Galván

26. 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 POM - J. Galván

27. 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 capacity at source (factory) • Demand requirement at destination POM - J. Galván

28. Components of Volume and Revenue for a Service Firm • Purchasing power of customer drawing area • Service and image compatibility with demographics of the customer drawing area • Competition in the area • Quality of the competition • Uniqueness of the firm’s and competitor’s locations • Physical qualities of facilities and neighboring businesses • Operating policies of the firm • Quality of management POM - J. Galván

29. Service/Retail/Professional Revenue Focus Volume/revenue Drawing area, purchasing power Competition; advertising/pricing Physical quality Parking/access; security/ lighting; appearance/image Cost determinants Rent Management caliber Operations policies (hours, wage rates) Industrial Revenue Focus Tangible costs Transportation cost of raw materials Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, etc. Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government Location Strategies – Service vs. Industrial POM - J. Galván

30. Service/Retail/Professional Techniques Correlation analysis to determine importance of factors for a particular type of operation Traffic counts Demographic analysis of drawing area Purchasing power analysis of drawing area Assumptions Location is a major determinate of revenue Issues manifesting from high customer contact dominate Costs are relatively constant for a given area; therefore, revenue function is critical Industrial Techniques Linear Programming (Transportation method) Weighted approach to intangibles Breakeven analysis Crossover charts Assumptions Location is a major determinate of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on costs Intangible costs can be objectively evaluated Location Strategies –Service vs. Industrial POM - J. Galván

31. Major Methods of Solving Location Problems • Weighted methods which: • Assign weights and points to various factors • Determine tangible costs • Investigate intangible costs • Center of Gravity Method • Find best distribution center location • Location breakeven methods • Special case of breakeven analysis • Transportation method • A specialized linear programming method POM - J. Galván

32. Telemarketing and Internet Industries • Require neither face-to-face contact with customers (or employees) nor movement of material • Presents a whole new perspective on the location problem POM - J. Galván

33. Geographic Information Systems • New tool to help in location analysis • Enables combination of many parameters POM - J. Galván