Operations ManagementSession 5

Henry Y.

LOCATION STRATEGIES

The Strategic Importance of Location

Location options include (1) expanding an existing facility instead of moving; (2) maintaining current sites while adding another facility elsewhere; (3) closing the existing facility and moving to another location.

The objective of location strategy is to maximize the benefit of location to the firm.

Location and CostsLocation and Innovation

Factors that affect location decisionsGlobalization : (1) market

economics; (2) better international communications; (3) more rapid, reliable travel and shipping; (4) ease of capital flow between countries; (5) high differences in labor costs.

Labor productivity : unitper Cost day)per (unitsty Productivi

dayper cost Labor

...Exhange Rates and Currency RiskCost (tangible and intangible)Ethical IssuesAttitudesProximity to MarketsProximity to SuppliersProximity to Competitors (Clustering)

Methods of Evaluating Location Alternatives

The Factor-Rating Method Most widely used location technique Useful for service & industrial locations Steps :

a) Develop a list of relevant factors called critical success factors (CSFs)

b) Assign a weight to each factor to reflect its relative importance to the company.

c) Develop a scale for each factor (ex 10 to 100)d) Have management score each location for each

factor and total the score for each location.e) Multiply the score by the weight for each factor.f) Make a recommendation based on the

maximum point score.

...2. Locational Break-Even Analysis Method of cost-volume analysis

used for industrial locations Steps

a) Determine fixed & variable costs for each location

b) Plot total cost for each location (Cost on vertical axis, Annual Volume on horizontal axis)

c) Select location with lowest total cost for expected production volume.Must be above break-even

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?

Locational Break-Even Crossover Chart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

Annu

al C

ost

Akron

Chicago

Bowling Green

Bowling Green lowest cost

Chicago lowest costAkron lowest

cost

...3. Center of Gravity Method• 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

Center of Gravity Method Equations

dix = x coordinate of location I

Qi = Volume of goods moved to or from location i

diy = y coordinate of location i

X Coordinate

Y Coordinate

ii

iiix

x Q

QdC

ii

iiiy

y Q

QdC

...

4. Transportation Model• 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

Service Location DecisionsIndustrial-sector location analysis is on

minimizing cost, while in the service sector is on maximizing revenue.

Geographic Information Systems

Some Extension of Location DecisionLocation strategies of broad-line retailers (Kiran Karandea and J.R. Lombardb, 2004)Broad-line specialists tend to use proximity (distance) in trade areas with high income, high population density, high per capita income, with younger populations, and high home ownership.Warehouse location selection (Tuncay Özca,et al, 2011)Based on multicriteria decision making. Criterias including: unit price, stock holding capacity, average distance to stop, average distance to main suppliers, movement flexibility)

International Chain Hotel Location Selection (Chou et al., 2008)

Perspective Factor Criteria Note

Geographial condition

• Surrounding env.

• Rest resources

Proximity to public facilities

Distance to competitorPublic securityNatural res. characteristicsNearby rest facilities

Park, Dept. Store, etc

Regional competitivenessGood or badHot spring, etcRoad access

TrafficConditions

• Access

• Convenience

Distance to airportDistance to downtownDistance to tourism sitesParking area

Spend timeProsperous or notEasy to goEasy to park

Hote Characteristic

• Internal dev.•External dev.

Indoor leisure; restaurant, etc

Operations Management

• Human res.• Op. conditions

Sufficient, skill and qualityLand cost, regulation

...Location planning for urban distribution

centers (