OM 2005 08

Operations ManagementLocation StrategiesChapter 8: 

Operations Management Location Strategies Chapter 8

Learning Objectives: 

Learning Objectives Identify or Define: Objective of location strategy International location issues Clustering Geographic Information Systems Describe or explain: Three methods of solving the location problem Factor-rating method Locational breakeven analysis Center -of-gravity method Describe the factors affecting location decisions

Key Questions of this Unit: 

Key Questions of this Unit Why are location decisions important? How can we select among alternative locations?

Federal Express: 

Federal Express Stresses “hub” concept Advantages: enables service to more locations with fewer aircraft enables matching of aircraft flights with package loads reduces mishandling and delay in transit because there is total control of packages from pickup to delivery

Why? Objective of Location Strategy: 

Why? Objective of Location Strategy Improve the benefit of location to the firm

Locating Manufacturing Facilities: 

Locating Manufacturing Facilities Products that decrease in weight and volume during manufacturing tend to be located near the sources of raw materials. Products that increase in weight and volume during manufacturing tend to be located near the consumers. One site cost disadvantage such as transportation may be offset by a cost savings advantage specific to the site such as low labor costs. A location analysis should consider both qualitative and quantitative factors

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.

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 of business

Customer Requirements and Location Strategies for Service Organizations : 

Customer Requirements and Location Strategies for Service Organizations Exhibit 7.2 Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no. 2 (February 1997), pp. 32–35.

Types of Service Facilities: 

Types of Service Facilities Facilities with a Direct Interface with the Customer Brick and mortar facilities (front-of-the-house) that require the customer to be present. Facilities with Indirect Customer Contact Services that link only indirectly with the customer who is not required to be present. Facilities with No Customer Contact Back-of-the-house operations that are involved with the processing and distribution of goods.

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: Improve benefit of location to firm

Qualitative Location Factors: 

Qualitative Location Factors Local Infrastructure Institutional (e.g., reliable electrical power grid) Transportational (e.g., railway systems) Worker Education and Skills Education and skills of local workers. Product Content Requirements The minimum percentage of product that must be produced in a country in order for the product to be sold in that country. Political/Economic Stability

Quantitative Location Factors: 

Quantitative Location Factors Labor Costs Labor costs vary dramatically, depending on location. Cheap labor often lacks needed education and skills. Distribution Costs Distance and the time required to deliver products can offset lower location costs. Facility Costs Special economic zones (SEZ) Duty-free areas established to attract foreign investment in the form of manufacturing facilities. Exchange Rates Variations in rates can have a significant effect on sales and profits. Tax Rates Taxes vary considerably between countries and within countries. All forms of taxes should be considered (property, payroll, inventory, and investment taxes).

Comparison of 1995 Hourly Wages for Manufacturing Workers: 

Comparison of 1995 Hourly Wages for Manufacturing Workers Source: Bureau of Labor Statistics, September 7, 2000.

Location Decision Sequence: 

Location Decision Sequence

Factors That Affect Location Decisions: 

Factors That Affect Location Decisions

Factors Affecting Country: 

Factors Affecting Country Government rules, attitudes, political risk, incentives Culture & economy Market location Labor availability, attitudes, productivity, and cost Availability of supplies, communications, energy Exchange rates and currency risks

Region Location Decisions: 

Region Location Decisions Corporate desires Attractiveness of region (culture, taxes, climate, etc.) Labor, availability, costs, attitudes towards unions Costs and availability of utilities Environmental regulations of state and town Government incentives Proximity to raw materials & customers Land/construction costs

Factors Affecting Site: 

Factors Affecting Site Site size and cost Air, rail, highway, and waterway systems Zoning restrictions Nearness of services/supplies needed Environmental impact issues © 1995 Corel Corp.

Location Decision Example: 

Location Decision Example BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. Country Decision Factors 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) Other Lower shipping cost ($2,500/car less) New plant & equipment would increase productivity (lower cost/car $2,000-3000) Region/Community Decision Factors Labor Lower wages in South Carolina (SC) 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

CSF in Location Analysis: 

CSF in Location Analysis

CSF in Location Analysis - Continued: 

CSF in Location Analysis - Continued

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 Service Fast food restaurants, supermarkets, gas stations Drug stores, shopping malls Bakeries Services Doctors, lawyers, accountants, barbers Banks, auto repair, motels

How? Location Evaluation Methods: 

How? Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method Transportation model © 1995 Corel Corp. Most widely used location technique Useful for service & industrial locations Rates locations using factors - Tangible (quantitative) factors Example: Short-run & long-run costs - Intangible (qualitative) factors Example: Education quality, labor skills

Factors Affecting Location Selection: 

Factors Affecting Location Selection Labor costs (including wages, unionization, productivity) Labor availability (including attitudes, age, distribution, and skills) Proximity to raw materials and suppliers Proximity to markets Government fiscal policies (including incentives, taxes, unemployment compensation) Environmental regulations Utilities (including gas, electric, water, and their costs) Site costs (including land, expansion, parking, drainage) Transportation availability (including rail, air, water, and interstate roads) Quality-of-life issues in the community (including all levels of education, cost of living, health care, sports, cultural activities, transportation, housing, entertainment, religious facilities) Foreign exchange Including rates and stability Quality of government (including stability, honesty, attitudes toward new business - whether overseas or local).

Steps in Factor Rating Method: 

Steps in Factor Rating Method Identify and list relevant factors Assign importance weight to each factor (such as 0 – 1) Develop scale for each factor (such as 1 – 100) Score each location using factor scale Multiply scores by weights for each factor & total Sum the weighted scores and select the location with the highest score.

Factor-Rating System Example: 

Factor-Rating System Example The Low-Credit Card Interest Bank

Location Evaluation Methods: 

Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method Transportation model © 1995 Corel Corp. Method of cost-volume analysis used for industrial locations Steps: - Determine fixed & variable costs for each location - Plot total cost for each location (Cost on vertical axis, Annual Volume on horizontal axis) - 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?

Location Evaluation Methods: 

Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method Transportation model © 1995 Corel Corp. Finds location of single 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

Evaluating Potential Locations: 

Evaluating Potential Locations Center of Gravity Method Used to determine the optimal location of a facility based on minimizing the transportation costs between where the goods are produced and where they are sold or redistributed. Locate each existing operation on an X and Y coordinate grid map. Calculate X coordinate of center of gravity Calculate Y coordinate of center of gravity

Center of Gravity Method Steps and Equations: 

Center of Gravity Method Steps and Equations dix = x coordinate of location i Wi = Volume of goods moved to or from location i diy = y coordinate of location i X Coordinate Y Coordinate 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

Coordinate Locations of Four Quain’s Department Stores and the Center of Gravity: 

Coordinate Locations of Four Quain’s Department Stores and the Center of Gravity

Location Evaluation Methods: 

Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method Transportation model © 1995 Corel Corp. Finds amount to be shipped from several sources 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

Worldwide Distribution of Volkswagens and Parts: 

Worldwide Distribution of Volkswagens and Parts

Components of Volume and Revenue for a Service Firm: 

Components of Volume and Revenue for a Service Firm 1. Purchasing power of customer drawing area 2. Service and image compatibility with demographics of the customer drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firm’s and competitor’s locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management

Location Strategies – Service vs. Industrial: 

Location Strategies – Service vs. Industrial 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) Goods-Producing Location Cost 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

Slide38: 

Service/Retail/Professional Techniques Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of drawing area Center of gravity method Geographic information systems Goods Producing Location Techniques Linear Programming (Transportation method) Factor-rating method Locational breakeven analysis Crossover charts

Slide39: 

Service/Retail/Professional Assumptions Location is a major determinate of revenue High customer-contact issues are critical Costs are relatively constant for a given area; therefore, the revenue function is critical Goods-Producing Location Assumptions Location is a major determinate of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on identifiable costs Intangible costs can be evaluated

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

Computer Programs for Site Selection: 

Computer Programs for Site Selection Geographic Information Systems (GIS) Computer tool that assesses alternative locations for service operations. Provides a “bird’s eye view” of a particular region of interest. Distribution of a Bank’s Housing Loans in an Area Distribution of Sales for Regional Mall by Area

Demand for Health Care in a Region and the Services That Are Available: 

Demand for Health Care in a Region and the Services That Are Available Source: Getting to Know Arc View GIS (Redlands, CA: Environmental Systems Research Institute, Inc., 1997.

Final Thought: 

Final Thought The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest. © 1995 Corel Corp.