Transcript Operations Management Location Strategies Chapter 8 8-1 Outline Strategic Importance of Location. Factors That Affect Location Decisions. Methods of Evaluating Location Alternatives.  The Factor-Rating Method.  Locational Break-Even Analysis.  Center-of-Gravity Method.  The.

Operations
Management
Location Strategies
Chapter 8
8-1
Outline
Strategic Importance of Location.
Factors That Affect Location Decisions.
Methods of Evaluating Location Alternatives.

The Factor-Rating Method.

Locational Break-Even Analysis.

Center-of-Gravity Method.

The Transportation Model.

Integer Programming.
Service Location Strategy.
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Federal Express
“Invented” overnight delivery.
Uses “hub” concept.

Enables service to more locations with fewer aircraft.

Concentrates package flows to exploit transportation
economies of scale.

Enables sorting economies of scale.
Key issue: Where to locate hubs??
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Location Decisions
 Long-term strategic decisions.
 Usually expensive & difficult to reverse.
 Affect fixed & variable costs.

Transportation cost is up to 25% of product price.

Other costs: Taxes, wages, rent etc.
 Objective: Maximize benefit of location to firm.
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Industrial Location Decisions
 Cost focus.

Revenue varies little between locations.
 Production separate from
consumption.
 Location is major cost factor.

Costs vary greatly between locations.

Shipping costs.

Production costs (e.g., labor).
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Service Location Decisions
 Revenue focus.

Costs vary little between market areas.
 Production/service together with
consumption.
 Location is a major revenue factor.

Affects amount of customer contact.

Affects volume of business.
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Organizations That Locate Close
to Markets/Customers
Government agencies.

Police & fire departments, post offices, public libraries.
Retail sales and Services.

Fast food restaurants, supermarkets, gas stations.

Doctors, lawyers, barbers, banks, auto repair, etc.
 When transporting finished goods is more
expensive than transporting materials.

Bottling plants, breweries.

Electricity production.
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Organizations That Locate Close
to Suppliers or Materials
By necessity.

Mining, fishing, farming, etc.
When transporting materials is more
expensive than transporting finished goods.

Perishable raw materials.
 Seafood processing.

Heavy or bulky raw materials.
 Steel producers.

Processing reduces bulk.
 Lumber mills, paper production.
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Location Decision Sequence
Region/Community
Country
Site
8-9
Factors Affecting Country Decision
 Government rules, attitudes, stability, incentives.
 Labor availability, attitudes, productivity, cost.
 Availability of supplies, communications, energy.
 Culture & economy.
 Location of markets.
 Exchange rate.
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Labor Costs - Figure 8.2
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Ranking of the Business Environment
in 20 Countries, 1997 - 2001
11 Finland
12 Belgium
13 New Zealand
14 Hong Kong
15 Austria
16 Australia
17 Norway
18 Ireland
19 Italy
20 Chile
1 Netherlands
2 Britain
3 Canada
4 Singapore
5 U.S.
6 Denmark
7 Germany
8 France
9 Switzerland
10 Sweden
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Factors Affecting
Region/Community Decision
 Attractiveness of region (culture, taxes, climate, etc.).
 Labor availability, costs, attitudes towards unions.
 Environmental regulations of state and town.
 Proximity to customers & suppliers.
 Corporate desires.
 Costs and availability of utilities.
 Government incentives.
 Land/construction costs.
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Factors Affecting Site Decision
 Access to air, rail, highway, and waterway systems.
 Proximity to needed services/supplies.
 Site size and cost.
 Zoning restrictions.
 Environmental impact issues.
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.
Location Decision Example - BMW
In 1992, BMW decided to build
its first major manufacturing
plant outside Germany in
Spartanburg, South Carolina.
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Country Decision - BMW
 Market location.

U.S. is world’s largest luxury car market & is growing.
 Labor.

U.S. has lower manufacturing labor costs.


$17/hr. (U.S.) vs. $27 (Germany).
U.S. may have higher labor productivity.

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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Region/Community Decision - BMW
 Labor.

Lower wages in South Carolina (SC).

About $17,000/yr in SC vs. $27,051/yr in U.S. (based on
1993).
 Government incentives.
$135 million in state & local tax breaks.
 Free-trade zone from airport to plant.


No duties on imported components or on exported cars.
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Location Evaluation Methods
 Factor-rating method.
 Locational break-even analysis.
 Center of gravity method.
 Transportation model.
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Factor-Rating Method
 Most widely used location technique.
 Useful for service & industrial locations.
 Rates locations using factors.

Intangible (qualitative) factors.


Example: Education quality, labor skills.
Tangible (quantitative) factors.
 Example: Short-run & long-run costs.
 Based on weighted average.
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Steps in Factor Rating Method
 List relevant factors.
 Assign importance weight to each factor (0-1).

Make weights sum to one.
 Set a scale for scoring each factor (1-10 or 1-100).
 Score each location using factor scale.
 Multiply scores by weights for each factor & sum.
 Select location with maximum total score.
 Consider sensitivity to weights and scores.
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Factors Affecting Location
 Labor costs and availability, including wages,
productivity, attitudes, age, distribution,
unionization, and skills.
 Site costs, including land cost, parking, drainage,
expansion opportunities, etc.
 Proximity to raw materials and suppliers.
 Proximity to markets.
 State and local government fiscal policies
(including incentives, taxes, unemployment
compensation).
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Factors Affecting Location continued
 Utilities, including availability and costs.
 Transportation availability (road, rail, air, water,
pipeline).
 Quality-of-life issues (education, cost of living,
health care, sports, cultural activities, housing,
entertainment, religious facilities, etc.).
 Foreign exchange, including rates and stability.
 Government, including stability, honesty, attitudes
toward new business, etc.
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Factor Rating Example
Three locations: A, B and C; Four factors.
1. Assign weights to each factor.
2. Score each location on each factor.
3. Multiply the weight and score and sum for each location.
Factor
weight A
Cost
0.3
Proximity to trans.
0.2
Taxes
0.1
Labor
0.4
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B
C
Factor Rating Example
Three locations: A, B and C; Four factors.
Factor
weight A
B
C
Cost
0.3 10
9
7
Proximity to trans.
0.2
7
3
10
Taxes
0.1
7
5
10
Labor
0.4
6
8
5
7.5
7 7.1
A is best; B and C are similar.
Note that if the labor score for A was 5, not 6, then all locations are similar.
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Locational Break-Even Analysis
 Cost-volume analysis used for location.
 Steps:

Determine fixed & variable costs for each location.

Find break-even point.

Plot cost for each location.

Select location with lowest total cost for expected
production volume.
 Must be above break-even.
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Locational Break-Even Analysis
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?
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Locational Break-Even Analysis
Example
A=Akron:
B=Bowling Green:
C=Chicago:
For all:
Total Cost = TC = 30000 + 75x
Total Cost = TC = 60000 + 45x
Total Cost = TC = 110000 + 25x
Total Revenue = TR = 120x
At x=2000 cases/year:
A: Profit = 240,000 - (30,000 + 150,000) = 60,000
B: Profit = 240,000 - (60,000 + 90,000) = 90,000
C: Profit = 240,000 - (110,000 + 50,000) = 80,000
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B is
Best
Locational Break-Even Analysis
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.
Over what range of output is each location
preferred?
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Locational Break-Even Analysis
Example
A=Akron:
B=Bowling Green:
C=Chicago:
TC = 30000 + 75x
TC = 60000 + 45x
TC = 110000 + 25x
A is best at x=0.
A < B for x < 1000/yr and A < C for x < 1600/yr, so
A is best over range 0<x<1000/yr.
B < C for x < 2500/yr so,
B is best over range 1000<x<2500/yr.
C is best over range 2500/yr < x
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Locational Crossover Chart
200,000
$
150,000
100,000
50,000
0
0
Akron lowest
cost
Bowling Green
lowest cost
500
1500
1000
2000
Volume
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Chicago
lowest cost
2500
3000
Locational Crossover Chart
200,000
$
150,000
100,000
50,000
Akron lowest
cost
Bowling Green
lowest cost
500
1500
Chicago
lowest cost
0
0
1000
2000
Volume
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2500
3000
Locational Break-Even Analysis
Example
A is unprofitable for low volumes.
Use break-even analysis with A to find
break-even point = 666.67/yr.
A is best and profitable over range 666.67<x<1000/yr.
B is best and profitable over range 1000<x<2500/yr.
C is best and profitable over range 2500/yr < x.
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Center of Gravity Method
 Finds location of single facility serving several
destinations.
 Used for services and distribution centers.
 Requires:

Location of existing destinations (Markets, retailers etc.)

Volume to be shipped.

Shipping distance (or cost).
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Center of Gravity Method Steps
 Find X and Y coordinates for all destinations.

Can use an arbitrary coordinate grid.
 Calculate center of gravity location for
facility as weighted average of X & Y
coordinates.

Approximately minimizes transportation cost.
 Location is not necessarily optimal, but is
usually close.
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Center of Gravity Method Equations
X Coordinate
Cx 
dix = x coordinate of location i
 d ix Wi
i
 Wi
Wi = Volume of goods
moved to or from location i
i
Y Coordinate
Cy 
 d iy Wi
i
diy = y coordinate of location i
 Wi
i
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Center of Gravity Example
Given 4 cities with volume demanded and (x,y) coordinates.
Find location for one warehouse to minimize total distance
to supply these cities.
New York (130,130)
Chicago (30,120)
120
Location Volume
Chicago 200
Pittsburgh 100
New York 100
Atlanta
200
Pittsburgh (90,110)
60
Atlanta (60,40)
0
0
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60
120
Center of Gravity Example
Location Volume
Chicago
200
Pittsburgh 100
New York
100
Atlanta
200
X-Coordinate
30
90
130
60
Y-Coordinate
120
110
130
40
X coordinate of warehouse:
Cx=(200x30+100x90+100x130+200x60)/(200+100+100+200) = 66.7
Y coordinate of warehouse:
Cy=(200x120+100x110+100x130+200x40)/(200+100+100+200) = 93.3
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Center of Gravity Example
Location Volume
Chicago 2000
Pittsburgh 1000
New York 1000
Atlanta
2000
New York (130,130)
Chicago (30,120)
120
X
Pittsburgh (90,110)
Center of gravity = (66.7, 93.3)
60
Atlanta (60,40)
0
0
60
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120
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 capacities
at sources (factories).
 Demand requirements at destinations.
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Transportation Model Example
800
500
Chicago
1000
London
Supply is in green
Demand is in red
300
200
St. Louis
900 Atlanta
300
From
Chicago
Chicago
St. Louis
St. Louis
Atlanta
Chicago
St. Louis
Atlanta
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To
London
St. Louis
Chicago
Atlanta
London
Chicago
St. Louis
Atlanta
Cost per unit flow
$40
$10
$8
$20
$35
$1
$1
$1
Transportation Model Example
Demand
Supply
$40
800 Chicago
300 St. Louis
London 1000
Chicago 500
$8
St. Louis 200
900 Atlanta
Atlanta 300
xij = Flow from origin i to destination j.
Objective is minimize cost for all flows.
Constraints for supply at each origin (3) and demand at each
destination (4).
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Integer Programming for Location
x1 = 1 if a warehouse is located at Boston; 0 otherwise.
x2 = 1 if a warehouse is located at Hartford; 0 otherwise.
x3 = 1 if a warehouse is located at Albany; 0 otherwise.
 Minimize the cost to locate warehouses:
Minimize C1 x1 + C2 x2 + C3 x3
 At most two warehouses can be opened:
x1 + x2 + x3  2
 Either Boston or Hartford should have a warehouse:
x1 + x2  1
8-42
Location for Service Organizations
Focus on Revenue and Volume of Business, which
are determined by:
 Purchasing power and demographics of customer
drawing area.
 Competition in the area (amount and quality).
 Relative attractiveness of the firm’s and competitor’s
locations.

Uniqueness of location and offerings.

Physical qualities of facilities and neighboring businesses.

Operating policies and quality of management.
8-43
Service vs. Industrial Location
Service Location
Techniques
Industrial Location
Techniques
 Regression models to determine
importance of different factors.
 Factor rating.
 Traffic counts & demographic analysis of
drawing area.
 Center of gravity.
 Linear and Integer Programming
(Transportation method).
 Factor rating.
 Breakeven and crossover analysis.
 Center of gravity.
Assumptions
Assumptions
 Location is major determinate of cost.
 Location is major determinate of revenue.  Costs can be identified for each site.
 High customer contact issues dominate.  Low customer contact allows focus on
costs.
 Costs are relatively constant for a given
 Intangible costs can be objectively
area.
evaluated.
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Telemarketing and Internet
Industries
Require neither face-to-face contact with
customers (or employees) nor movement of
material.
 Keys are:

Labor costs and productivity.

Information systems infrastructure (including
training and management).

Government incentives (including taxes).
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Geographic Information Systems GIS
New tool to help in location analysis.
Combines spatial (locational) data and
attribute data (for example, demographics).
Uses spatial analyses to identify best or
satisfactory locations.
Allows intuitive graphical display using
maps.
8-46