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DOM 511: OPERATIONS MANAGEMENT PRACTICE

This article explores the importance of facilities location for contemporary manufacturing and services firms in the global market. It identifies the key factors and decision-making process involved in choosing the right location. The article also discusses different evaluation methods, such as location break-even analysis, factor-rating method, and centroid method, to help in making informed location decisions.

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DOM 511: OPERATIONS MANAGEMENT PRACTICE

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  1. DOM 511: OPERATIONS MANAGEMENT PRACTICE MagutuObara Peterson /S.O Nyamwange University of Nairobi School of Business Département of Management Science Jan April 2013 magutumop2011

  2. FACILITIES LOCATION

  3. Facilities Location • Top question on the strategic agendas of contemporary manufacturing & services firms in this age of global markets & global production • Question of location linked to 2 competitive imperatives; • 1. need to produce closer to customers due to time based competition, trade agreements & shipping costs • 2. Need to locate near appropriate labor pool to take advantage of low wage costs or high technical skills 32

  4. Facilities Location Location Decision Process Typically conducted hierarchically & involves 4 basic decisions where appropriate; • Global (nation) location • Regional location • District or community location • Local site selection 32

  5. Macro FACTORS for Location Decision • Proximity to customers – buyers want their goods delivered yesterday & their needs incorporated in products being developed & built 2. Business climate – presence of similar-sized businesses, companies in same industry, other foreign companies, probusinessgovt legislation, subsidies, tax incentives etc 3. Total costs – inbound/outbound distribution cost, land, construction, labor, taxes, energy costs make up regional costs 4. Infrastructure – adequate road, rail, air, & sea transport, energy & telecommunications 5. Quality of labor – educational & skills levels of labor pool must match coy needs 6. Suppliers – a high-quality and competitive supplier base. Also supports lean production 32

  6. MACRO FACTORS 7. Raw materials – necessity, perishability 8. Free trade zones 9. Political risk 10. Government, cultural barriers 11. Environmenal regualtion barriers 32

  7. MiCRO FACTORS • Land • Transportation • Services • Restrictions • Community receptivity to business barriers 32

  8. Manufacturing Vs SERVICES

  9. Steps in Making Location Decision • Determine the criteria that will be used to evaluate alternatives • Identify the factors that are important eg location to markets, raw materials • Develop location alternatives • Identify the general region for a location • Identify a small number of community- site alternatives • Evaluate the alternatives & make a selection 32

  10. Evaluation of Location Alternatives • Issue is to find locations that will minimize on costs & maximize on revenues • Service industries tend to consider the revenue generating potential – production & consumption closely linked to market • Goods producing industries concentrate on cost minimization – costs are accumulated in the product which can be shipped to various markets 32

  11. Evaluation of Location Alternatives • We make use of economic analysis methods • Location Break even analysis • Factor rating Method • Transportation method • Centroid Method or center of gravity method 32

  12. Location Break – Even Analysis • Concerned with the impact that operating variables ( costs, selling price, volume ) have on operating income • If revenue per unit is independent of location then only costs need to be considered 32

  13. Cost-Profit-Volume Analysis • Determine fixed and variable costs • Plot total costs • Determine lowest total costs

  14. Example 1: Cost-Volume Analysis Fixed and variable costs for three potential locations in thousands

  15. Factor-Rating Method Popular because a wide variety of factors can be included in the analysis • Considers quantitative & Qualitative factors • Six steps in the method

  16. Factor-Rating Method • Develop a list of relevant factors called critical success factors • Assign a weight to each factor • Develop a scale for each factor • Score each location for each factor • Multiply score by weights for each factor for each location • Recommend the location with the highest point (composite) score

  17. Location Factor Rating • Identify important factors • Weight factors (0.00 - 1.00) • Subjectively score each factor (0 - 100) • Sum weighted scores

  18. SCORES (0 TO 100) LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3 Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service .30 .20 .15 .15 .10 .05 .05 80 100 60 75 65 85 50 65 91 95 80 90 92 65 90 75 72 80 95 65 90 Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24 Location Factor Rating: Example

  19. WEIGHTED SCORES Site 1 Site 2 Site 3 24.00 20.00 9.00 11.25 6.50 4.25 2.50 77.50 19.50 18.20 14.25 12.00 9.00 4.60 3.25 80.80 27.00 15.00 10.80 12.00 9.50 3.25 4.50 82.05 Location Factor Rating: Example(cont.) Site 3 has the highest factor rating

  20. CENTER OF GRAVITY METHOD • Determines the X & Y coordinates(location) of a single facility • Method does not explicitly address customer service objectives • Assists managers in balancing cost & service objectives • Distance is a major criterion though demand (volume, transactions etc ) is also considered • COG is defined as the location that minimizes the weighted distance between the facility & its supply & demand points

  21. CENTER OF GRAVITY METHOD Procedure • Place the locations of existing supply & demand points on a coordinate system • Origin & scale are arbitrary as long as the relative distances are correctly represented. • COG is determined by; Cx = ∑Xi Wi /∑Wi Cy = ∑Yi Wi /∑Wi

  22. y n n   xiWi yiWi i = 1 i = 1 2 (x2, y2), W2 y2 x = y = n n   Wi Wi i = 1 i = 1 1 (x1, y1), W1 y1 3 (x3, y3), W3 y3 x1 x2 x3 x Grid-Map Coordinates where, x, y = coordinates of new facility at center of gravity xi, yi= coordinates of existing facility i Wi = annual weight shipped from facility i

  23. y A B C D x 200 100 250 500 y 200 500 600 300 Wt 75 105 135 60 700 C 600 (135) B 500 (105) 400 Miles D (60) 300 A (75) 200 100 x 0 100 200 300 400 500 600 700 Miles Center-of-Gravity Technique: Example

  24. n  xiWi i = 1 (200)(75) + (100)(105) + (250)(135) + (500)(60) 75 + 105 + 135 + 60 n x = = = 238  Wi i = 1 n  yiWi i = 1 (200)(75) + (500)(105) + (600)(135) + (300)(60) 75 + 105 + 135 + 60 y = = = 444 n  Wi i = 1 Center-of-Gravity Technique: Example (cont.)

  25. CENTER OF GRAVITY METHOD Two factories distribute output to 4 towns as shown. Board has authorized construction of a warehouse to serve the four markets. Identify the warehouse location using COG method

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