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8-1

Operations

Management

Location StrategiesChapter 8



8-2

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.



8-3

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??



8-4

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.



8-5

Industrial Location Decisions

Cost focus.

Revenue varies little between locations.

Production separate fromconsumption.

Location is major cost factor.

Costs vary greatly between locations. Shipping costs.

Production costs (e.g., labor).



8-6

Service Location Decisions

Revenue focus.

Costs vary little between market areas.

Production/service together withconsumption.

Location is a major revenue factor.

Affects amount of customer contact.

Affects volume of business.



8-7

Organizations That Locate Closeto 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 moreexpensive than transporting materials.

Bottling plants, breweries.

Electricity production.



8-8

Organizations That Locate Closeto Suppliers or Materials

By necessity. Mining, fishing, farming, etc.

When transporting materials is moreexpensive than transporting finished goods. Perishable raw materials.

Seafood processing.

Heavy or bulky raw materials. Steel producers.

Processing reduces bulk. Lumber mills, paper production.



8-9

Location Decision Sequence

Country Region/Community

Site



8-10

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.



8-11

Labor Costs - Figure 8.2



8-12

Ranking of the Business Environmentin 20 Countries, 1997 - 2001

1 Netherlands

2 Britain

3 Canada

4 Singapore

5 U.S.

6 Denmark

7 Germany8 France

9 Switzerland

10 Sweden

11 Finland

12 Belgium

13 New Zealand

14 Hong Kong15 Austria

16 Australia

17 Norway18 Ireland

19 Italy

20 Chile



8-13

Factors AffectingRegion/Community Decision

Labor availability, costs, attitudes towards unions.

Proximity to customers & suppliers.

Costs and availability of utilities.

Land/construction costs.

Government incentives (taxes).

Environmental regulations.

Corporate desires.

Attractiveness of region (culture,climate, etc.).



8-14

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.

.





8-16

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 to major market ($2,500/car less).

New plant & equipment increase productivity (lower cost/car $2,000-3000).





8-18

Location Evaluation Methods

Factor-rating method.

Locational break-even analysis.

Center of gravity method. Transportation model.



8-19

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.



8-20

Steps in Factor Rating Method

1. List relevant factors & assign importance weight (0-1).- Higher weight = More importance.

- Make weights sum to one.

Score each location using factor scale (1-10 or 1-100).- Higher score = Better site.

1. Multiply scores by weights for each factor & sum.

2. Focus on location(s) with highest total scores.3. Consider sensitivity to weights and scores.



8-21

Factors Affecting Location

Labor costs and availability: wages, productivity,attitudes, age, distribution, unionization, skills, etc.

Site costs: 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, unemploymentcompensation).

Factors Affecting Location



8-22

Factors Affecting Location -continued

Utilities 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, attitudestoward new business, etc.



8-23

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 B C

Cost 0.3

Proximity to trans. 0.2

Taxes 0.1

Labor 0.4



8-24

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.



8-25

Break-even/Crossover analysis 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 expectedproduction volume.

Must be above break-even.

Locational Break-Even Analysis

Locational Break Even Analysis



8-26

Locational Break-Even AnalysisExample

You’re an analyst for AC Delco. You’reconsidering a new manufacturing plant inAkron, Bowling Green, or Chicago. Fixedcosts 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 expectedvolume of 2,000 cases per year?




8-27


A=Akron: Total Cost = TC = 30000 + 75x B=Bowling Green: Total Cost = TC = 60000 + 45x

C=Chicago: Total Cost = TC = 110000 + 25x

For all: 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

B isbest




8-28


You’re an analyst for AC Delco. You’reconsidering a new manufacturing plant inAkron, Bowling Green, or Chicago. Fixedcosts 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 locationpreferred?





L ti l C Ch t



8-31

Locational Crossover Chart

0

50,000

100,000

150,000

200,000

0 500 1000 1500 2000 2500 3000

Volume

$

Akron lowestcost

Bowling Greenlowest cost

Chicagolowest cost




8-32

Locational Break Even AnalysisExample

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.



8-33

Center of Gravity Method

Locates a single facility to serve manydestinations (customers).

Used for services and distribution centers.

Requires:

Location of existing destinations (Markets, retailers etc.)

Volume to be shipped.

Shipping distance (or cost).





8-35

Center of Gravity Method Equations

Qi = Volume of goods moved to or from location i

X Coordinate =

Y Coordinate =

i

i

i

iix

xQ

Qd

C

i

i

i

iiy

yQ

Qd

C

dix = x coordinate of

location i

diy = y coordinate of

location i





C t f G it E l



8-38

Center of Gravity Example

Location Volume

Chicago 2000

Pittsburgh 1000

New York 1000Atlanta 2000

Chicago (30,120)

New York (130,130)

Pittsburgh (90,110)

Atlanta (60,40)

0 12060

60

120

0

X

Center of gravity = (66.7, 93.3)







Integer Programming for Location



8-42

Integer Programming for Location

x 1 = 1 if a warehouse is located at Boston; 0 otherwise.

x 2 = 1 if a warehouse is located at Hartford; 0 otherwise.

x 3 = 1 if a warehouse is located at Albany; 0 otherwise.

Minimize the cost to locate warehouses:

Minimize C 1 x 1 + C 2 x 2 + C 3 x 3

At most two warehouses can be opened:

x 1 + x 2 + x 3 2

Either Boston or Hartford should have a warehouse:

x 1 + x 2 1



Service vs. Industrial Location



8-44

Service vs. Industrial Location

Service LocationTechniques

Regression models to determineimportance of different factors.

Factor rating.

Traffic counts & demographic analysis of drawing area.

Center of gravity.

Assumptions Location is major determinate of revenue.

High customer contact issues dominate.

Costs are relatively constant for a givenarea.

Industrial LocationTechniques

Linear and Integer Programming(Transportation method).

Factor rating.

Breakeven and crossover analysis. Center of gravity.

Assumptions Location is major determinate of cost.

Costs can be identified for each site.

Low customer contact allows focus oncosts.

Intangible costs can be objectivelyevaluated.

Telemarketing and InternetI d i



8-45

Industries

Require neither face-to-face contact withcustomers (or employees) nor movement of material.

Keys are:

Labor costs and productivity.

Information systems infrastructure (includingtraining and management).

Government incentives (including taxes).

Geographic Information Systems -



8-46

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 usingmaps.



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