Catedra 8 - Layout

CATEDRA 8

PLANIFICACION DE LA CAPACIDAD, UBICACION Y LAYOUT

Capacidad (Capacity)Capacidad (Capacity)

● Diseño de la capacidad. (Design and Effective Diseño de la capacidad. (Design and Effective Capacity). Capacity).

● Estrategia y capacidad (Capacity and Estrategia y capacidad (Capacity and Strategy). Strategy).

● Planificación (Planificación (CapacityCapacity Planning).Planning).● Analisis de equilibrio (Breakeven Analysis for Analisis de equilibrio (Breakeven Analysis for

Single-Product & Multiproduct).Single-Product & Multiproduct).● Arboles de decision (Decision Trees to Arboles de decision (Decision Trees to

Capacity Decisions).Capacity Decisions).

Definición

The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time

Determines fixed costs

Determines if demand will be satisfied

Three time horizons

Modify capacityModify capacity Use capacityUse capacity

Horizontes de planeación

Intermediate-Intermediate-range range planningplanningMPMP

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range Short-range planningplanningCPCP

Schedule jobsSchedule personnel Allocate machinery

Long-range Long-range planningplanningLPLP

Add facilitiesAdd long lead time equipment

Figure S7.1Figure S7.1

Design and Effective Capacity

Design capacity is the maximum theoretical output of a systemNormally expressed as a rate

Effective capacity is the capacity a firm expects to achieve given current operating constraintsOften lower than design capacity

Utilization and Efficiency

Utilization is the percent of design capacity achieved

Efficiency is the percent of effective capacity achieved

Utilization = Actual Output/Design Capacity

Efficiency = Actual Output/Effective Capacity

Ejemplo (Bakery)

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls

Ejemplo (Bakery)

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts


Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%

Ejemplo (Bakery)

Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shifts


Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%

Efficiency Efficiency = 148,000/175,000 = 84.6%= 148,000/175,000 = 84.6%

Ejemplo (Bakery)

Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shiftsEfficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%

Expected Output = Expected Output = ((Effective CapacityEffective Capacity)()(EfficiencyEfficiency))

= (175,000)(.75) = 131,250= (175,000)(.75) = 131,250 rolls rolls

Capacity and Strategy

Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization

Capacity decisions must be integrated into the organization’s mission and strategy

Managing DemandManaging Demand

Demand exceeds capacityDemand exceeds capacity Curtail demand by raising prices, scheduling Curtail demand by raising prices, scheduling

longer lead timelonger lead time

Long term solution is to increase capacityLong term solution is to increase capacity

Capacity exceeds demandCapacity exceeds demand Stimulate marketStimulate market

Product changesProduct changes

Adjusting to seasonal demandsAdjusting to seasonal demands Produce products with complimentary demand Produce products with complimentary demand

patternspatterns

Economies and Diseconomies of Scale

Economies Economies of scaleof scale

Diseconomies Diseconomies of scaleof scale

25 - Room 25 - Room Roadside MotelRoadside Motel 50 - Room 50 - Room

Roadside MotelRoadside Motel

75 - Room 75 - Room Roadside MotelRoadside Motel

Number of RoomsNumber of Rooms2525 5050 7575

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Capacity ConsiderationsCapacity Considerations

Forecast demand accuratelyForecast demand accurately

Understanding the technology and Understanding the technology and capacity incrementscapacity increments

Find the optimal operating level Find the optimal operating level (volume)(volume)

Build for changeBuild for change

Tactics for Matching Capacity to Demand

1.1. Making staffing changesMaking staffing changes

2.2. Adjusting equipment and processesAdjusting equipment and processes Purchasing additional machineryPurchasing additional machinery

Selling or leasing out existing equipmentSelling or leasing out existing equipment

3.3. Improving methods to increase Improving methods to increase throughputthroughput

4.4. Redesigning the product to facilitate more Redesigning the product to facilitate more throughputthroughput

Complementary Demand Patterns

4,000 4,000 –

3,000 3,000 –

2,000 2,000 –

1,000 1,000 –

J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J

Sal

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Sal

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Time (months)Time (months)

By combining By combining both, the both, the

variation is variation is reducedreduced

Snowmobile Snowmobile salessales

Jet ski Jet ski salessales


Approaches to Capacity Expansion

(a)(a) Leading demand with Leading demand with incremental expansionincremental expansion

Dem

and

Dem

and

Expected Expected demanddemand

New New capacitycapacity

(b)(b) Leading demand with Leading demand with one-step expansionone-step expansion

Dem

and

Dem

and



(d)(d) Attempts to have an average Attempts to have an average capacity with incremental capacity with incremental expansionexpansion

Dem

and

Dem

and

New New capacitycapacity Expected Expected

demanddemand

(c)(c) Capacity lags demand with Capacity lags demand with incremental expansionincremental expansion

Dem

and

Dem

and





(a)(a) Leading demand with incremental Leading demand with incremental expansionexpansion




Dem

and

Dem

and

Time (years)Time (years)11 22 33


(b)(b) Leading demand with one-step Leading demand with one-step expansionexpansion




Dem

and

Dem

and



(c)(c) Capacity lags demand with incremental Capacity lags demand with incremental expansionexpansion



Dem

and

Dem

and




(d)(d) Attempts to have an average capacity with Attempts to have an average capacity with incremental expansionincremental expansion




Dem

and

Dem

and


Break-Even Analysis Technique for evaluating process and equipment alternatives

Objective is to find the point in dollars and units at which cost equals revenue

Requires estimation of fixed costs, variable costs, and revenue.

Fixed costs are costs that continue even if no units are produced

•Depreciation, taxes, debt, mortgage payments

Variable costs are costs that vary with the volume of units produced

•Labor, materials, portion of utilities

•Contribution is the difference between selling price and variable cost

Break-Even Analysis

Costs and revenue are linear functionsGenerally not the case in the real world

We actually know these costsVery difficult to accomplish

There is no time value of money

Assumptions

Break-Even AnalysisTotal revenue lineTotal revenue line

Total cost lineTotal cost line

Variable costVariable cost

Fixed costFixed cost

Break-even pointBreak-even pointTotal cost = Total revenueTotal cost = Total revenue

–

900 900 –

800 800 –

700 700 –

600 600 –

500 500 –

400 400 –

300 300 –

200 200 –

100 100 –

–

| | | | | | | | | | | |

00 100100 200200 300300 400400 500500 600600 700700 800800 900900 10001000 11001100

Co

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Volume (units per period)Volume (units per period)Figure S7.5Figure S7.5

Break-Even Analysis

BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == Break-even Break-even point in dollarspoint in dollarsPP == Price per Price per unit (after all discounts)unit (after all discounts)

xx == Number of units Number of units producedproducedTRTR == Total Total revenue = Pxrevenue = PxFF== Fixed costsFixed costsVV == Variable Variable costscostsTCTC == Total Total costs = F + Vxcosts = F + Vx

TR = TCTR = TCoror

Px = F + VxPx = F + Vx

Break-even point Break-even point occurs whenoccurs when

BEPBEPxx = =FF

P - VP - V

Break-Even Analysis

BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == Break-even Break-even point in dollarspoint in dollarsPP == Price per Price per unit (after all discounts)unit (after all discounts)

xx == Number of units Number of units producedproducedTRTR == Total Total revenue = Pxrevenue = PxFF== Fixed costsFixed costsVV == Variable Variable costscostsTCTC == Total Total costs = F + Vxcosts = F + VxBEPBEP$$ = BEP= BEPx x PP

= P= P

==

= =

FF((P - VP - V))/P/P

FFP - VP - V

FF1 -1 - V/P V/P

ProfitProfit = TR - TC= TR - TC

= Px - = Px - ((F + VxF + Vx))

= Px - F - Vx= Px - F - Vx

= = ((P - VP - V))x - Fx - F

Break-Even Example

Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEPBEP$$ = == =FF

1 - (1 - (V/PV/P))$10,000$10,000

1 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]

$10,000$10,0004.00 - (1.50 + .75)4.00 - (1.50 + .75)

Break-Even Example

Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit

BEPBEP$$ = == =FF

1 - (1 - (V/PV/P))$10,000$10,000

1 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]

= = $22,857.14= = $22,857.14$10,000$10,000

.4375.4375

BEPBEPxx = = = 5,714= = = 5,714FF

P - VP - V

Break-Even Example

50,000 50,000 –

40,000 40,000 –

30,000 30,000 –

20,000 20,000 –

10,000 10,000 –

–

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00 2,0002,000 4,0004,000 6,0006,000 8,0008,000 10,00010,000

Do

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UnitsUnits

Fixed costsFixed costs

Total Total costscosts

RevenueRevenue

Break-even Break-even pointpoint

Break-Even Example

BEPBEP$$ ==FF

∑∑ 1 - x (1 - x (WWii))VVii

PPii

Multiproduct Case

wherewhere VV = variable cost per unit= variable cost per unitPP = price per unit= price per unitFF = fixed costs= fixed costs

WW = percent each product is of total dollar sales= percent each product is of total dollar salesii = each product= each product

Multiproduct Example

Annual ForecastedAnnual ForecastedItemItem PricePrice CostCost Sales UnitsSales Units

SandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2.852.85 1.001.00 3,0003,000

Fixed costs Fixed costs = $3,500= $3,500 per month per month


Annual ForecastedAnnual ForecastedItemItem PricePrice CostCost Sales UnitsSales Units

SandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2.852.85 1.001.00 3,0003,000

Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117 potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120

$46,300 1.000 .625

Annual WeightedSelling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)

Fixed costs Fixed costs = $3,500= $3,500 per month per month


BEP$ =F

∑ 1 - x (Wi)Vi

Pi

= = $67,200$3,500 x 12

.625

Daily sales = = $215.38

$67,200312 days

.446 x $215.38$2.95 = 32.6 ≈ 33

sandwichesper day

Decision Trees and Capacity Decision

-$14,000

$13,000

$18,000

-$90,000-$90,000Market unfavorable (.6)Market unfavorable (.6)

Market favorable (.4)Market favorable (.4)$100,000$100,000

Large plant

Large plant

Market favorable (.4)Market favorable (.4)

Market unfavorable (.6)Market unfavorable (.6)

$60,000$60,000

-$10,000-$10,000

Medium plantMedium plant

Market favorable (.4)Market favorable (.4)

Market unfavorable (.6)Market unfavorable (.6)

$40,000$40,000

-$5,000-$5,000

$0$0

Do nothing

Do nothing

Localizacion (Location)

Factors That Affect Location DecisionsFactors That Affect Location Decisions Labor ProductivityLabor Productivity

Exchange Rates and Currency RisksExchange Rates and Currency Risks

CostsCosts

AttitudesAttitudes

Proximity to MarketsProximity to Markets

Proximity to SuppliersProximity to Suppliers

Proximity to Competitors (Clustering)Proximity to Competitors (Clustering)

Localizacion (Location)

Methods Of Evaluating Location Methods Of Evaluating Location AlternativesAlternatives The Factor-Rating MethodThe Factor-Rating Method Locational Break-Even AnalysisLocational Break-Even Analysis Center-of-Gravity MethodCenter-of-Gravity Method The Transportation MethodThe Transportation Method

Localizacion decision estrategica (Location Strategy)

One of the most important decisions a One of the most important decisions a firm makesfirm makes

Increasingly global in natureIncreasingly global in nature

Long term impact and decisions are Long term impact and decisions are difficult to changedifficult to change

The objective is to maximize the benefit The objective is to maximize the benefit of location to the firmof location to the firm

Localizacion decision estrategica

Long-term decisions Long-term decisions

Decisions made infrequentlyDecisions made infrequently

Decision greatly affects both fixed and Decision greatly affects both fixed and variable costs variable costs

Once committed to a location, many Once committed to a location, many resource and cost issues are difficult resource and cost issues are difficult to changeto change

Location DecisionsCountry DecisionCountry Decision Critical Success FactorsCritical Success Factors

1.1. Political risks, government Political risks, government rules, attitudes, incentivesrules, attitudes, incentives

2.2. Cultural and economic Cultural and economic issuesissues

3.3. Location of marketsLocation of markets

4.4. Labor availability, attitudes, Labor availability, attitudes, productivity, costsproductivity, costs

5.5. Availability of supplies, Availability of supplies, communications, energycommunications, energy

6.6. Exchange rates and Exchange rates and currency riskscurrency risks

Location DecisionsRegion/ Region/

Community Community DecisionDecision

Critical Success FactorsCritical Success Factors

1.1. Corporate desiresCorporate desires

2.2. Attractiveness of region Attractiveness of region

3.3. Labor availability, costs, Labor availability, costs, attitudes towards unionsattitudes towards unions

4.4. Costs and availability of utilitiesCosts and availability of utilities

5.5. Environmental regulationsEnvironmental regulations

6.6. Government incentives and Government incentives and fiscal policiesfiscal policies

7.7. Proximity to raw materials and Proximity to raw materials and customerscustomers

8.8. Land/construction costsLand/construction costs

MN

WI

MI

IL INOH

Figure 8.1Figure 8.1

Location DecisionsSite DecisionSite Decision Critical Success FactorsCritical Success Factors

1.1. Site size and costSite size and cost

2.2. Air, rail, highway, and Air, rail, highway, and waterway systemswaterway systems

3.3. Zoning restrictionsZoning restrictions

4.4. Nearness of services/ Nearness of services/ supplies neededsupplies needed

5.5. Environmental impact Environmental impact issuesissues


Factors That Affect Location Decisions

Labor productivityLabor productivity Wage rates are not the only costWage rates are not the only cost

Lower productivity may increase total costLower productivity may increase total cost

Labor cost per dayLabor cost per day

Productivity (units per day)Productivity (units per day)= cost per unit= cost per unit

ConnecticutConnecticut

= $1.17= $1.17 per unit per unit$70$70

6060 units units

JuarezJuarez

= $1.25= $1.25 per unit per unit$25$25

2020 units units


Exchange rates and currency risksExchange rates and currency risks Can have a significant impact on cost Can have a significant impact on cost

structurestructure

Rates change over timeRates change over time

CostsCosts Tangible - easily measured costs such as Tangible - easily measured costs such as

utilities, labor, materials, taxesutilities, labor, materials, taxes

Intangible - less easy to quantify and include Intangible - less easy to quantify and include education, public transportation, community, education, public transportation, community, quality-of-lifequality-of-life


AttitudesAttitudes National, state, local governments toward National, state, local governments toward

private and intellectual property, zoning, private and intellectual property, zoning, pollution, employment stabilitypollution, employment stability

Worker attitudes towards turnover, unions, Worker attitudes towards turnover, unions, absenteeismabsenteeism

Globally cultures have different attitudes Globally cultures have different attitudes towards punctuality, legal, and ethical issuestowards punctuality, legal, and ethical issues


Proximity to marketsProximity to markets Very important to servicesVery important to services

JIT systems or high transportation costs may JIT systems or high transportation costs may make it important to manufacturersmake it important to manufacturers

Proximity to suppliersProximity to suppliers Perishable goods, high transportation costs, Perishable goods, high transportation costs,

bulky productsbulky products


Proximity to competitorsProximity to competitors Called clusteringCalled clustering

Often driven by resources such as natural, Often driven by resources such as natural, information, capital, talentinformation, capital, talent

Found in both manufacturing and service Found in both manufacturing and service industriesindustries

Factor-Rating Method Popular because a wide variety of factors can Popular because a wide variety of factors can

be included in the analysisbe included in the analysis Six steps in the methodSix steps in the method

1.1. Develop a list of relevant factors called critical Develop a list of relevant factors called critical success factorssuccess factors

2.2. Assign a weight to each factorAssign a weight to each factor

3.3. Develop a scale for each factorDevelop a scale for each factor

4.4. Score each location for each factorScore each location for each factor

5.5. Multiply score by weights for each factor for each Multiply score by weights for each factor for each locationlocation

6.6. Recommend the location with the highest point Recommend the location with the highest point scorescore

Factor-Rating Example

CriticalCritical ScoresScoresSuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor WeightWeight FranceFrance DenmarkDenmark FranceFrance DenmarkDenmark

Labor Labor availability availability and attitude and attitude .25.25 7070 6060 (.25)(70) = 17.5(.25)(70) = 17.5 (.25)(60) = 15.0(.25)(60) = 15.0People-toPeople-to car ratiocar ratio .05.05 5050 6060 (.05)(50) = 2.5(.05)(50) = 2.5 (.05)(60) = 3.0(.05)(60) = 3.0Per capitaPer capita incomeincome .10.10 8585 8080 (.10)(85) = 8.5(.10)(85) = 8.5 (.10)(80) = 8.0(.10)(80) = 8.0Tax structureTax structure .39.39 7575 7070 (.39)(75) = 29.3(.39)(75) = 29.3 (.39)(70) = 27.3(.39)(70) = 27.3EducationEducation and healthand health .21.21 6060 7070 (.21)(60) = 12.6(.21)(60) = 12.6 (.21)(70) = 14.7(.21)(70) = 14.7TotalsTotals 1.001.00 70.470.4 68.068.0

Locational Break-Even Analysis

Method of cost-volume analysis used for Method of cost-volume analysis used for industrial locationsindustrial locations

Three steps in the methodThree steps in the method

1.1. Determine fixed and variable costs for each Determine fixed and variable costs for each locationlocation

2.2. Plot the cost for each location Plot the cost for each location

3.3. Select location with lowest total cost for Select location with lowest total cost for expected production volumeexpected production volume

Locational Break-Even Analysis Example

Three locations:Three locations:

AkronAkron $30,000$30,000 $75$75 $180,000$180,000

Bowling GreenBowling Green $60,000$60,000 $45$45 $150,000$150,000

ChicagoChicago $110,000$110,000 $25$25 $160,000$160,000

Selling price Selling price = $120= $120

Expected volumeExpected volume = 2,000 = 2,000 unitsunits

FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost

Total Cost = Fixed Cost + Variable Cost x VolumeTotal Cost = Fixed Cost + Variable Cost x Volume

Locational Break-Even Analysis Example

–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

An

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00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000

VolumeVolume

Akron Akron lowest lowest costcost

Bowling Green Bowling Green lowest costlowest cost

Chicago Chicago lowest costlowest cost

Akron c

ost

Akron c

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curv

e

curv

e

Bowling Green

Bowling Green

cost curve

cost curve


Center-of-Gravity Method

Finds location of distribution center Finds location of distribution center that minimizes distribution coststhat minimizes distribution costs

ConsidersConsiders Location of marketsLocation of markets

Volume of goods shipped to those Volume of goods shipped to those marketsmarkets

Shipping cost (or distance)Shipping cost (or distance)


Place existing locations on a Place existing locations on a coordinate gridcoordinate grid Grid origin and scale is arbitrary Grid origin and scale is arbitrary

Maintain relative distancesMaintain relative distances

Calculate X and Y coordinates for Calculate X and Y coordinates for ‘center of gravity’‘center of gravity’ Assumes cost is directly proportional to Assumes cost is directly proportional to

distance and volume shippeddistance and volume shipped


x - coordinate =x - coordinate =∑∑ddixixQQii

∑∑QQii

ii

ii

∑∑ddiyiyQQii

∑∑QQii

ii

ii

y - coordinate =y - coordinate =

wherewhere ddixix == x-coordinate of location ix-coordinate of location i

ddiyiy == y-coordinate of location iy-coordinate of location i

QQii == Quantity of goods moved to or Quantity of goods moved to or from location ifrom location i


North-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–

| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago Chicago (30, 120)(30, 120)New York New York (130, 130)(130, 130)

Pittsburgh Pittsburgh (90, 110)(90, 110)

Atlanta Atlanta (60, 40)(60, 40)


Number of ContainersNumber of ContainersStore LocationStore Location Shipped per MonthShipped per Month

Chicago Chicago (30, 120)(30, 120) 2,0002,000Pittsburgh Pittsburgh (90, 110)(90, 110) 1,0001,000New York New York (130, 130)(130, 130) 1,0001,000Atlanta Atlanta (60, 40)(60, 40) 2,0002,000

x-coordinate =x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000

= = 66.766.7

y-coordinate =y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000

= = 93.393.3


North-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–

| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago Chicago (30, 120)(30, 120)New York New York (130, 130)(130, 130)

Pittsburgh Pittsburgh (90, 110)(90, 110)

Atlanta Atlanta (60, 40)(60, 40)

Center of gravity Center of gravity (66.7, 93.3)(66.7, 93.3)+

Transportation Model

Finds amount to be shipped from Finds amount to be shipped from several points of supply to several several points of supply to several points of demandpoints of demand

Solution will minimize total production Solution will minimize total production and shipping costsand shipping costs

A special class of linear programming A special class of linear programming problemsproblems

Transportation Model

Service Location Strategy

1. Purchasing power of customer-drawing area1. Purchasing power of customer-drawing area

2. Service and image compatibility with demographics of 2. Service and image compatibility with demographics of the customer-drawing areathe customer-drawing area

3. Competition in the area3. Competition in the area

4. Quality of the competition4. Quality of the competition

5. Uniqueness of the firm’s and competitors’ locations5. Uniqueness of the firm’s and competitors’ locations

6. Physical qualities of facilities and neighboring 6. Physical qualities of facilities and neighboring businessesbusinesses

7. Operating policies of the firm7. Operating policies of the firm

8. Quality of management8. Quality of management

Location Strategies

Service/Retail/Professional LocationService/Retail/Professional Location Goods-Producing Location Goods-Producing Location

Revenue FocusRevenue Focus Cost Focus Cost Focus

Volume/revenueVolume/revenueDrawing area; purchasing powerDrawing area; purchasing powerCompetition; advertising/pricingCompetition; advertising/pricing

Physical qualityPhysical qualityParking/access; security/lighting; Parking/access; security/lighting; appearance/imageappearance/image

Cost determinantsCost determinantsRentRentManagement caliberManagement caliberOperations policies (hours, wage rates)Operations policies (hours, wage rates)

Tangible costsTangible costsTransportation cost of raw materialTransportation cost of raw materialShipment cost of finished goodsShipment cost of finished goodsEnergy and utility cost; labor; raw Energy and utility cost; labor; raw material; taxes, and so onmaterial; taxes, and so on

Intangible and future costsIntangible and future costsAttitude toward unionAttitude toward unionQuality of lifeQuality of lifeEducation expenditures by stateEducation expenditures by stateQuality of state and local governmentQuality of state and local government

Table 8.4Table 8.4

Location Strategies


TechniquesTechniques Techniques Techniques

Regression models to determine Regression models to determine importance of various factorsimportance of various factors

Factor-rating methodFactor-rating methodTraffic countsTraffic countsDemographic analysis of drawing areaDemographic analysis of drawing areaPurchasing power analysis of areaPurchasing power analysis of areaCenter-of-gravity methodCenter-of-gravity methodGeographic information systemsGeographic information systems

Transportation methodsTransportation methodsFactor-rating methodFactor-rating methodLocational break-even analysisLocational break-even analysisCrossover chartsCrossover charts

Table 8.4Table 8.4

Location Strategies


AssumptionsAssumptions Assumptions Assumptions

Location is a major determinant of Location is a major determinant of revenuerevenue

High customer-contact issues are criticalHigh customer-contact issues are criticalCosts are relatively constant for a given Costs are relatively constant for a given

area; therefore, the revenue function is area; therefore, the revenue function is criticalcritical

Location is a major determinant of costLocation is a major determinant of costMost major costs can be identified Most major costs can be identified

explicitly for each siteexplicitly for each siteLow customer contact allows focus on the Low customer contact allows focus on the

identifiable costsidentifiable costsIntangible costs can be evaluatedIntangible costs can be evaluated

Table 8.4Table 8.4

How Hotel Chains Select Sites

Location is a strategically important decision Location is a strategically important decision in the hospitality industryin the hospitality industry

La Quinta started with 35 independent La Quinta started with 35 independent variables and worked to refine a regression variables and worked to refine a regression model to predict profitabilitymodel to predict profitability

The final model had only four variablesThe final model had only four variables Price of the innPrice of the inn

Median income levelsMedian income levels

State population per innState population per inn

Location of nearby collegesLocation of nearby colleges

r2 = .5151% of the

profitability is predicted by

just these four variables!

Date post:	21-Feb-2015
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Catedra 8 - Layout

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