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PRODUCTION AND OPERATIONS MANAGEMENT. Ch. 9: Location Strategies. Learning Objectives. Where must we locate our facilities so as to satisfy our corporate strategy?. Industrial Location Decisions. Cost focus Revenue varies little between locations Location is a major cost factor

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Production and operations management


Ch. 9: Location Strategies

POM - J. Galván

Learning objectives
Learning Objectives

  • Where must we locate our facilities so as to satisfy our corporate strategy?

POM - J. Galván

Industrial location decisions
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

Service location decisions
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

In general location decisions
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

Location decision sequence





Location Decision Sequence

POM - J. Galván

Factors affecting country

© 1995 Corel Corp.

Factors Affecting Country

  • Government

  • Culture & economy

  • Market location

  • Labor availability, attitudes, productivity, and cost

  • Infrastructure

  • Exchange rate

POM - J. Galván

Labor productivity

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







Hong Kong




POM - J. Galván

Region location decisions

© 1995 Corel Corp.

Region Location Decisions

  • Corporate desires

  • Attractiveness

  • Labor

  • Utility costs

  • Government incentives

  • Proximity to customers & suppliers

  • Land/construction $$$

POM - J. Galván

Factors affecting site
Factors Affecting Site

  • Site size

  • Site cost

  • Transportation in/out

  • Proximity of services

  • Environmental impact

© 1995 Corel Corp.

POM - J. Galván

Location decision example

© 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

Country decision factors
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

Region community decision factors
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

Organizations that need to be close to markets
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

Organizations that need to be close to markets continued
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

Location evaluation methods
Location Evaluation Methods

  • Factor-rating method

  • Locational break-even analysis

  • Center of gravity method

  • Transportation model

POM - J. Galván

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

POM - J. Galván

Steps in factor rating method
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

Factors affecting location selection
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

Locational break even analysis
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

Locational break even analysis example

© 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

Locational break even crossover chart



Bowling Green

Bowling Green lowest cost

Akron lowest cost

Chicago lowest cost

Locational Break-Even Crossover Chart

POM - J. Galván

Locational break even crossover chart1



Bowling Green

Lowest cost envelop

Bowling Green lowest cost

Akron lowest cost

Chicago lowest cost

Locational Break-Even Crossover Chart

POM - J. Galván

Center of gravity method
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

Center of gravity method steps
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

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

POM - J. Galván

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 capacity at source (factory)

      • Demand requirement at destination

POM - J. Galván

Components of volume and revenue for a service firm
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

Location strategies service vs industrial

Service/Retail/Professional Revenue Focus


Drawing area, purchasing power

Competition; advertising/pricing

Physical quality

Parking/access; security/ lighting; appearance/image

Cost determinants


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

Location strategies service vs industrial1

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


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


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

Major methods of solving location problems
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

Telemarketing and internet industries
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

Geographic information systems
Geographic Information Systems

  • New tool to help in location analysis

  • Enables combination of many parameters

POM - J. Galván