Transcript Introduction to - University of Central Oklahoma

Chapter 8
Location Planning and Analysis
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Location Decisions
• Long-term decisions
• Difficult to reverse - Expensive
• Affect fixed & variable costs
– Transportation cost: As much as 25% of product price
– Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of location to the firm
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Manufacturing vs Service Location
Industrial Location Decision
 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
Service Location Decisions
 Revenue focus
 Location is a major revenue factor
 Affects amount of customer contact
 Affects volume of business
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Manufacturing and Service Considerations
Manufacturing / Distribution
Cost Focus
Service / Retail
Revenue focus
Transportation modes/costs
Demographics: age,income,etc
Energy availability/costs
Population/drawing area
Labor cost/availability/skills
Competition
Building costs/leasing costs
Traffic volume/patterns
Customer access/parking
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Factors that Affect Location Decisions
• McDonald’s
• United Airlines – Lufthansa
• Micron
• Hitachi
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Example – BMW in South Carolina
BMW decided to build its first major manufacturing plant
outside Germany in Spartanburg, South Carolina.
Country 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)
© 1995
Corel
Corp.
Region Factors
 Labor

– Higher labor productivity
Lower wages in South Carolina
 Government incentives
• 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
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$135 million in tax breaks
 Free-trade zone - airport to
plant
 No duties on imported
components or on exported cars
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Globalization
Disadvantages
Benefits
Criticisms
Transportation cost
Security / Instability
Unskilled labor
Import restrictions
Markets
Transportation cost
Cost savings
Legal and regulatory
Financial
Risks
Facilitating Factors
Legal
Currency rate
Cultural
Political
Terrorism
Trade agreements
Technology
Banking systems
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Global Factors to Consider
Foreign
Government
Policies on foreign ownership of production facilities
Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
Liability laws
Government stability
Cultural
Differences
Living circumstances for foreign workers / dependents
Religious holidays/traditions
Customers
Possible buy locally sentiment
Labor
Level of training and education of workers
Work ethic
Possible regulations limiting number of foreign employees
Language differences
Resources
Raw material, energy, transportation infrastructure
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Trends in Locations
• Just-in-time manufacturing techniques
• Microfactories
• Information Technology
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Location Evaluation Methods
Some decision tools:
1. Factor-rating method
2. Location break-even analysis (Cost-Profit-Volume)
3. Center of gravity method
4. Transportation model
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1. Factor-Rating Method
It is the most widely used location technique
It is used for service & industrial locations
It rates locations using two categories of factors:
1.
2.
Tangible (quantitative) factors, like cost
Intangible (qualitative) factors, like labor skill and schools
Steps of the Factor-Rating Method:
1.
2.
3.
4.
5.
6.
List relevant factors
Assign importance weight to each factor (such as 0 – 1)
Develop a score-scale for the factors (such as 1 – 100)
Score each location using factor scale
Multiply scores by weights for each factor, then total
Select location with maximum total score
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2. Location Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Steps for Break-Even Analysis
1.
2.
3.
Determine fixed & variable costs for each location
Plot total cost for each location
Select location with lowest total cost for expected production
volume
Exercise: 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?
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3. Center of Gravity Method
It finds the location of a single distribution center serving several destinations.
It is used primarily for services and distribution centers.
It considers:
Location of existing destinations: Markets, retailers etc.
Volume to be shipped.
Shipping distance (or cost). Assumes shipping cost/unit/mile is constant .
Steps for the Center of Gravity Method:
1. Place existing locations on a coordinate grid
•
Grid can have an arbitrary origin & scale (maintain relative distances)
2. Calculate X & Y coordinates for ‘center of gravity’ using the given
formulas
•
•
They give the X & Y location of distribution center
This location minimizes the transportation cost
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3. Center of Gravity Method Equations
X Coordinate:
xQ
x
Q
i
i
i
i
i
Y Coordinate:
yQ
y
Q
i
i
i
i
i
xi = x coordinate of location i
yi = y coordinate of location i
Qi = Volume of goods moved to or from location i
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4. Transportation Model
• Finds amount to be shipped from
several sources to several destinations.
• Used primarily for industrial locations.
• The solution uses linear programming
– Objective: Minimize total shipping costs
– Constraints
• Production capacity at source (factory)
• Demand requirement at destination
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