Transcript © 1997 Prentice-Hall, Inc. Principles of Operations Management Selecting the Location Chapter 6 6-1 Learning Objectives © 1997 Prentice-Hall, Inc.  Explain location decisions  Describe the factors affecting location decisions  Explain.

© 1997 Prentice-Hall, Inc.
Principles of
Operations Management
Selecting the Location
Chapter 6
6-1
Learning Objectives
© 1997 Prentice-Hall, Inc.

Explain location decisions

Describe the factors affecting location
decisions

Explain the methods of evaluating
location alternatives


Factor rating method
Center of gravity method
6-2
Thinking Challenge
© 1997 Prentice-Hall, Inc.
Where do you want to live
after graduation? Why?
© 1995 Corel Corp.
6-3
Alone
Group Class
© 1997 Prentice-Hall, Inc.

Cost focus


Industrial
Location Strategies
Revenue varies little
between locations
Location is a major
cost factor


© 1995 Corel Corp.
Affects shipping &
production costs (e.g., labor)
Costs vary greatly between
locations
6-4
© 1997 Prentice-Hall, Inc.

Revenue focus


Service
Location Strategies
Costs vary little between market areas
Location is a major
revenue factor


Affects amount of
customer contact
Affects volume of
business
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6-5
Location Decisions
© 1997 Prentice-Hall, Inc.

Long-term decisions

Difficult to reverse

Affect fixed & variable costs


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Transportation cost
 As much as 25% of product price
Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of
location to firm
6-6
Factors Affecting Country
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
Government

Culture & economy

Market location

Labor
 Productivity
 Cost

Infrastructure
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
Exchange rate
6-7
Labor Productivity
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
Low wages often
over-emphasized
Hourly Compensation ($)
Mfg. Workers (1994)

Labor productivity
important
Germany
27.37
Japan
21.38
U.S.
17.10

Labor cost per
unit should be
criterion:
Labor cost/day
Units made/day
6-8
Hong Kong
4.79
Mexico
2.57
© 1997 Prentice-Hall, Inc.
Factors Affecting
Region/Community

Corporate desires

Attractiveness

Labor

Utility costs

Gov’t incentives

Proximity to
customers & suppliers

Land/construction $$$
6-9
© 1995 Corel Corp.
© 1997 Prentice-Hall, Inc.
Factors Affecting
Site

Site size

Site cost

Transportation in/out

Proximity of
services

Environmental
impact
© 1995 Corel Corp.
6 - 10
Location Methods
© 1997 Prentice-Hall, Inc.

Factor weighting
method

Locational breakeven analysis

Center of gravity
method

Transportation
model
© 1995 Corel Corp.
6 - 11
Factor Rating Method
© 1997 Prentice-Hall, Inc.

Most widely used location technique

Useful for service & industrial
locations

Rates locations using factors

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Intangible (qualitative) factors
 Example: Education quality, labor skills
Tangible (quantitative) factors
 Example: Short-run & long-run costs
6 - 12
© 1997 Prentice-Hall, Inc.
Factor Rating Method
Steps

List relevant factors

Assign importance weight to each factor

Develop scale for each factor (0-1, etc.)
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Score each location using factor scale

Multiply scores by weights for each
factor & total

Select location with maximum total
score
6 - 13
© 1997 Prentice-Hall, Inc.
Factor Rating Method
Example
You’re an analyst for John
Deere. You’re considering
locating a new mfg. plant in
Omaha (NE) or Denver (CO).
Factor
Wgt NE CO
Mfg. costs
.7 $60k $62k
Cost of living .1 .7
.6
Labor avail. .2 1
.8
Where should you locate?
6 - 14
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© 1997 Prentice-Hall, Inc.
Factor Rating Method
Solution
Omaha
Factor Wgt Econ Score
(0-1)
TOTAL
6 - 15
Denver
Wgt Econ Score Wgt
Score
(0-1) Score
© 1997 Prentice-Hall, Inc.
Factor Rating Method
Thinking Challenge
You’re owner of a hot tub
store. You’re considering
relocating to Phoenix (AZ)
or Santa Fe (NM).
Factor
Wgt AZ NM
Population
.4 984k 56k
Competition .1 .3
.8
Life style
.5 .2
.9
Where should you locate?
6 - 16
Alone
Group Class
© 1995 Corel Corp.
© 1997 Prentice-Hall, Inc.
Thinking Challenge
Solution*
Phoenix
Factor Wgt Econ Score
(0-1)
TOTAL
6 - 17
Santa Fe
Wgt Econ Score Wgt
Score
(0-1) Score
Center of Gravity Method
© 1997 Prentice-Hall, Inc.



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
6 - 18
© 1997 Prentice-Hall, Inc.

Place existing locations on a
coordinate grid
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Center of Gravity Method
Steps
Grid has arbitrary origin & scale
Maintains relative distances
Calculate X & Y coordinates for
‘center of gravity’
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Gives location of distribution center
Minimizes transportation cost
6 - 19
© 1997 Prentice-Hall, Inc.
Center of Gravity Method
Equations
X Coordinate
 dix  Wi
Cx  i
 Wi
i
Y Coordinate
 diy  Wi
Cy  i
 Wi
6 - 20
i
dix = x coordinate
of location i
Wi = Volume of
goods moved to
or from location i
diy = y coordinate
of location i
© 1997 Prentice-Hall, Inc.
Center of Gravity Method
Example
You’re an analyst for
Home Depot. You want
to find the best location
of a warehouse serving
retail stores in Lincoln
(coord. 90, 60), Columbia
(coord. 150, 30), & Austin
(coord. 90, 10). Monthly
demand is 2k, 3k, 5k
units respectively.
6 - 21
© 1995
Corel
Corp.
Columbia,
SC
Austin,
TX
Warehouse?
Lincoln, NE
© 1997 Prentice-Hall, Inc.
Center of Gravity Method
Solution
90
Lincoln Store
(90,60)
2k demand
60
Austin Store
(90,10)
5k demand
30
Columbia Store
(150,30)
3k demand
0
0
6 - 22
30
60
90
120
150
© 1995
Corel
Corp.
Thinking Challenge
© 1997 Prentice-Hall, Inc.
You’re a planner for
Sears. You want to find
the best location of a
warehouse serving retail
stores in Seattle (50, 60),
Aberdeen (20, 35), &
Spokane (160, 50).
Monthly demand is
494k, 18k, 171k units
respectively.
6 - 23
Alone
Group Class
© 1995 Corel Corp.
Conclusion
© 1997 Prentice-Hall, Inc.

Explained location decisions

Described the factors affecting
location decisions

Explained the methods of evaluating
location alternatives


Factor rating method
Center of gravity method
6 - 25