Transcript LOCATION STRATEGIES

LOCATION STRATEGIES
Operations Management
Session 5
Henry Y.
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 Costs
 Location and Innovation
Factors that affect location decisions
 Globalization : (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 :
Labor cost per day
 Cost per unit
Productivity (unitsper day)
...
 Exhange Rates and Currency Risk
 Cost (tangible and intangible)
 Ethical Issues
 Attitudes
 Proximity to Markets
 Proximity to Suppliers
 Proximity to Competitors (Clustering)
Methods of Evaluating Location Alternatives
The Factor-Rating Method
 Most widely used location technique
 Useful for service & industrial locations
 Steps :
a)
b)
c)
d)
e)
f)
Develop a list of relevant factors called critical success factors
(CSFs)
Assign a weight to each factor to reflect its relative importance
to the company.
Develop a scale for each factor (ex 10 to 100)
Have management score each location for each factor and total
the score for each location.
Multiply the score by the weight for each factor.
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
200000
Annual Cost
150000
100000
Bowling Green
lowest cost
50000
Akron lowest
cost
0
0
500
1000
1500
Volume
2000
Chicago
lowest cost
2500
3000
...
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
X Coordinate
d Q

Q
ix
Cx
i
i
i
i
dix = x coordinate of location I
Qi = Volume of goods moved to or from location i
Y Coordinate
d Q

Q
iy
Cy
i
i
i
i
diy = y coordinate of location i
...
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 Decisions
 Industrial-sector location analysis is on minimizing cost, while in
the service sector is on maximizing revenue.
 Geographic Information Systems
Some Extension of Location Decision
Location 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
Geographial
condition
Traffic
Conditions
Factor
Criteria
Note
• Surrounding env.
Proximity to public facilities Park, Dept. Store, etc
• Rest resources
Distance to competitor
Public security
Natural res. characteristics
Nearby rest facilities
Regional competitiveness
Good or bad
Hot spring, etc
Road access
• Access
Distance to airport
Distance to downtown
Distance to tourism sites
Parking area
Spend time
Prosperous or not
Easy to go
Easy to park
• Convenience
Hote
Characteristic
• Internal dev.
•External dev.
Indoor leisure; restaurant,
etc
Operations
Management
• Human res.
• Op. conditions
Sufficient, skill and quality
Land cost, regulation
...
Location planning for urban distribution centers (