POM - J. Galván 1 PRODUCTION AND OPERATIONS MANAGEMENT Ch. 9: Location Strategies.

POM - J. GalvánPOM - J. Galván 11

PRODUCTION AND PRODUCTION AND OPERATIONS OPERATIONS

MANAGEMENTMANAGEMENT

Ch. 9: Location StrategiesCh. 9: Location Strategies


Learning ObjectivesLearning Objectives

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


¨ 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

Industrial Location DecisionsIndustrial Location Decisions

© 1995 Corel Corp.


Service Location DecisionsService Location Decisions

RevenueRevenue focus focus• Costs vary little between market areasCosts vary little between market areas

Location is a major Location is a major revenue factorrevenue factor• Affects amount of Affects amount of

customer contactcustomer contact• Affects volume ofAffects volume of

businessbusiness


In General - Location DecisionsIn General - Location Decisions

Long-term decisionsLong-term decisions Difficult to reverseDifficult to reverse Affect fixed & variable costsAffect fixed & variable costs

• Transportation cost Transportation cost As much as 25% of product priceAs much as 25% of product price

• Other costs: Taxes, wages, rent etc.Other costs: Taxes, wages, rent etc. Objective: Maximize benefit of Objective: Maximize benefit of

location to firmlocation to firm


Location Decision SequenceLocation Decision Sequence

Country Region/Community

.

Site


Factors Affecting CountryFactors Affecting Country

¨ Government¨ Culture & economy¨ Market location¨ Labor availability,

attitudes, productivity, and cost

¨ Infrastructure¨ Exchange rate

© 1995 Corel Corp.


Labor ProductivityLabor Productivity

Low wages often Low wages often over-emphasizedover-emphasized

Labor productivity Labor productivity importantimportant

Labor cost per Labor cost per unit should be unit should be criterion:criterion:

Labor cost/dayLabor cost/day Units made/day Units made/day

Germany 27.37

Japan 21.38

U.S. 17.10

Hong Kong 4.79

Mexico 2.57

Hourly Compensation ($)Hourly Compensation ($)Manufacturing Workers (1994)Manufacturing Workers (1994)


Corporate desiresCorporate desires AttractivenessAttractiveness LaborLabor Utility costsUtility costs Government incentivesGovernment incentives Proximity to customers Proximity to customers

& suppliers& suppliers Land/construction $$$Land/construction $$$

Region Location DecisionsRegion Location Decisions

© 1995 Corel Corp.


Site sizeSite size Site costSite cost Transportation Transportation

in/outin/out Proximity of Proximity of

servicesservices Environmental Environmental

impactimpact

Factors Affecting SiteFactors Affecting Site

© 1995 Corel Corp.


In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

Location Decision ExampleLocation Decision Example

© 1995 Corel Corp.


Country Decision FactorsCountry Decision Factors Market locationMarket location

• U.S. is world’s largest luxury U.S. is world’s largest luxury car marketcar market

• Growing (baby boomers)Growing (baby boomers) LaborLabor

• Lower manufacturing labor Lower manufacturing labor costscosts $17/hr. (U.S.) vs. $27 $17/hr. (U.S.) vs. $27

(Germany)(Germany)

• Higher labor productivityHigher labor productivity 11 holidays (U.S.) vs. 11 holidays (U.S.) vs.

31 (Germany) 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 Region/Community Decision FactorsFactors

LaborLabor• Lower wages in South Carolina (SC)Lower wages in South Carolina (SC)

About $17,000/yr (SC) vs. $27,051/yr (US)About $17,000/yr (SC) vs. $27,051/yr (US)• Based on 1993 metropolitan averages for Based on 1993 metropolitan averages for

all workersall workers

Government incentivesGovernment incentives• $135 million in state & local tax breaks$135 million in state & local tax breaks• Free-trade zone from airport to plantFree-trade zone from airport to plant

No duties on imported components or on No duties on imported components or on exported carsexported cars


Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets

Government agenciesGovernment agencies• Police & fire departmentsPolice & fire departments• Post OfficePost Office

Retail Sales and SerivceRetail Sales and Serivce• Fast food restaurants, supermarkets, gas Fast food restaurants, supermarkets, gas

stationsstations• Drug stores, shopping mallsDrug stores, shopping malls• BakeriesBakeries


ServicesServices• Doctors, lawyers, accountants, barbersDoctors, lawyers, accountants, barbers• Banks, auto repair, motelsBanks, auto repair, motels

ManufacturersManufacturers• Makers of bulky or heavy productsMakers of bulky or heavy products• Japanese car makersJapanese car makers• German car makersGerman car makers• Auto parts suppliersAuto parts suppliers

Organizations That Need To Be Organizations That Need To Be Close to Markets - continuedClose to Markets - continued


¨ Factor-rating method

¨ Locational break-even analysis

¨ Center of gravity method

¨ Transportation model

Location Evaluation MethodsLocation Evaluation Methods


Factor-Rating MethodFactor-Rating Method

Most widely used location techniqueMost widely used location technique Useful for service & industrial Useful for service & industrial

locationslocations Rates locations using factorsRates locations using factors

• Intangible (qualitative) factorsIntangible (qualitative) factors Example: Education quality, labor skillsExample: Education quality, labor skills

• Tangible (quantitative) factorsTangible (quantitative) factors Example: Short-run & long-run costsExample: Short-run & long-run costs


Steps in Factor Rating MethodSteps in Factor Rating Method

List relevant factorsList relevant factors Assign importance weight to each factorAssign importance weight to each factor Develop scale for each factor (0-1, etc.)Develop scale for each factor (0-1, etc.) Score each location using factor scaleScore each location using factor scale Multiply scores by weights for each factor Multiply scores by weights for each factor

& total& total Select location with maximum total scoreSelect location with maximum total score


Factors Affecting Location SelectionFactors Affecting Location Selection Labor costsLabor costs Labor availabilityLabor availability Proximity to materials Proximity to materials

and suppliersand suppliers Proximity to marketsProximity to markets Government fiscal Government fiscal

policiespolicies Environmental Environmental

regulationsregulations

¨ Environmental regulations

¨ Utilities¨ Site costs¨ Transportation

availability¨ Quality-of-life¨ Foreign exchange¨ Quality of

government


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

StepsSteps• Determine fixed & variable costs for each Determine fixed & variable costs for each

locationlocation• Plot total cost for each locationPlot total cost for each location• Select location with lowest total cost for Select location with lowest total cost for

expected production volumeexpected production volumeMust be above break-evenMust be above break-even

Locational Break-Even AnalysisLocational Break-Even Analysis


Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample

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?

© 1995 Corel Corp.


0

50000

100000

150000

200000

0 1000 2000 3000

Volume

Ann

ual C

ost

Akron

Chicago

Bowling Green

Akron lowest cost

Bowling Green lowest cost

Chicago lowest cost

Locational Break-Even Locational Break-Even Crossover ChartCrossover Chart


0

50000

100000

150000

200000

0 1000 2000 3000

Volume

Ann

ual C

ost

Akron

Chicago

Bowling Green

Akron lowest cost

Bowling Green lowest cost

Chicago lowest cost

Lowest cost envelop

Locational Break-Even Locational Break-Even Crossover ChartCrossover Chart


Center of Gravity MethodCenter of Gravity Method

Finds location ofFinds location of singlesingle distribution distribution center serving several destinationscenter serving several destinations

Used primarily for servicesUsed primarily for services ConsidersConsiders

• Location of existing destinationsLocation of existing destinations Example: Markets, retailers etcExample: Markets, retailers etc..

• Volume to be shippedVolume to be shipped• Shipping distance (or cost)Shipping distance (or cost)

Shipping cost/unit/mile is constantShipping cost/unit/mile is constant


Center of Gravity Method StepsCenter of Gravity Method Steps

Place existing locations on a Place existing locations on a coordinate gridcoordinate grid• Grid has arbitrary origin & scale Grid has arbitrary origin & scale • Maintains relative distancesMaintains relative distances

Calculate Calculate XX & & YY coordinates for coordinates for ‘center of gravity’‘center of gravity’• Gives location of distribution centerGives location of distribution center• Minimizes transportation costMinimizes transportation cost


Center of Gravity Method Center of Gravity Method EquationsEquations

ddixix = x coordinate of = x coordinate of

location ilocation i

WWii == Volume of Volume of

goods moved to or goods moved to or from location i from location i

ddiyiy = y coordinate of = y coordinate of

location ilocation i

X CoordinateX Coordinate

Y CoordinateY Coordinate

ii

iiix

x W

WdC

ii

iiiy

y W

WdC


Transportation ModelTransportation Model

Finds amount to be shipped from Finds amount to be shipped from severalseveral sources to several destinationssources to several destinations

Used primarily for industrial locationsUsed primarily for industrial locations Type of linear programming modelType of linear programming model

• Objective: Minimize total production Objective: Minimize total production & shipping costs& shipping costs

• ConstraintsConstraintsProduction capacity at source (factory)Production capacity at source (factory)Demand requirement at destinationDemand requirement at destination


Components of Volume and Components of Volume and Revenue for a Service FirmRevenue for a Service Firm

Purchasing power of customer drawing areaPurchasing power of customer drawing area Service and image compatibility with demographics of Service and image compatibility with demographics of

the customer drawing areathe customer drawing area Competition in the areaCompetition in the area Quality of the competitionQuality of the competition Uniqueness of the firm’s and competitor’s locationsUniqueness of the firm’s and competitor’s locations Physical qualities of facilities and neighboring Physical qualities of facilities and neighboring

businessesbusinesses Operating policies of the firmOperating policies of the firm Quality of managementQuality of management


Location Strategies – Service Location Strategies – Service vs. Industrialvs. Industrial

Service/Retail/Service/Retail/Professional Revenue Professional Revenue

FocusFocus Volume/revenueVolume/revenue

Drawing area, purchasing Drawing area, purchasing powerpower

Competition; Competition; advertising/pricingadvertising/pricing

Physical qualityPhysical quality Parking/access; security/ Parking/access; security/

lighting; appearance/imagelighting; appearance/image Cost determinantsCost determinants

RentRent Management caliberManagement caliber Operations policies (hours, Operations policies (hours,

wage rates)wage rates)

Industrial Revenue FocusIndustrial Revenue Focus Tangible costsTangible costs

Transportation cost of raw Transportation cost of raw materialsmaterials

Shipment cost of finished Shipment cost of finished goodsgoods

Energy and utility cost; labor; Energy and utility cost; labor; raw material; taxes, etc.raw material; taxes, etc.

Intangible and future costsIntangible and future costs Attitude toward unionAttitude toward union Quality of lifeQuality of life Education expenditures by Education expenditures by

statestate Quality of state and local Quality of state and local

governmentgovernment


Location Strategies –Location Strategies –Service vs. IndustrialService vs. Industrial

Service/Retail/Professional Service/Retail/Professional TechniquesTechniques

Correlation analysis to determine Correlation analysis to determine importance of factors for a importance of factors for a particular type of operationparticular type of operation

Traffic countsTraffic counts Demographic analysis of drawing Demographic analysis of drawing

areaarea Purchasing power analysis of Purchasing power analysis of

drawing areadrawing areaAssumptionsAssumptions

Location is a major determinate of Location is a major determinate of revenuerevenue

Issues manifesting from high Issues manifesting from high customer contact dominatecustomer contact dominate

Costs are relatively constant for a Costs are relatively constant for a given area; therefore, revenue given area; therefore, revenue function is criticalfunction is critical

Industrial TechniquesIndustrial Techniques Linear Programming Linear Programming

(Transportation method)(Transportation method) Weighted approach to intangiblesWeighted approach to intangibles Breakeven analysisBreakeven analysis Crossover chartsCrossover charts

AssumptionsAssumptions Location is a major determinate Location is a major determinate

of costof cost Most major costs can be Most major costs can be

identified explicitly for each siteidentified explicitly for each site Low customer contact allows Low customer contact allows

focus on costsfocus on costs Intangible costs can be Intangible costs can be

objectively evaluatedobjectively evaluated


Major Methods of Solving Location Major Methods of Solving Location ProblemsProblems

Weighted methods which:Weighted methods which:• Assign weights and points to various factorsAssign weights and points to various factors• Determine tangible costsDetermine tangible costs• Investigate intangible costsInvestigate intangible costs

Center of Gravity MethodCenter of Gravity Method• Find best distribution center locationFind best distribution center location

Location breakeven methodsLocation breakeven methods• Special case of breakeven analysisSpecial case of breakeven analysis

Transportation methodTransportation method• A specialized linear programming methodA specialized linear programming method


Telemarketing and Internet Telemarketing and Internet IndustriesIndustries

Require neither face-to-face contact Require neither face-to-face contact with customers (or employees) nor with customers (or employees) nor movement of materialmovement of material

Presents a whole new perspective on Presents a whole new perspective on the location problemthe location problem


Geographic Information Geographic Information SystemsSystems

New tool to help in location analysisNew tool to help in location analysis Enables combination of many Enables combination of many

parametersparameters

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POM - J. Galván 1 PRODUCTION AND OPERATIONS MANAGEMENT Ch. 9: Location Strategies.

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