1. Operations Management Location Strategies

2. Objective of Location Strategy
Maximize the benefit of location to the firm

3. Industrial Location Decisions
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

4. Industrial Location Decisions Contd..
Tangible costs such as transportation of raw materials and finished goods, labor, raw materials etc.
Intangible costs such as education expenditures, quality of life etc..

5. Service Location Decisions
Revenue focus
Costs vary little between market areas
Location is a major revenue factor
Affects amount of customer contact
Affects volume of business
Purchasing power
Parking, security, lighting etc..
Rent

6. In General - Location Decisions
Long-term decisions
Difficult to reverse
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 firm

7. Factors That Affect Location Decisions
Country level:
Political risks, govt. rules, attitudes
Cultural and economic issues
Location of markets
Labor talent, productivity
Exchange rates and currency risks
Region level:
Corporate desires (Reliance refineries in Guj. )
Attractiveness of the region (culture, taxes, climate etc.)
Labor availability
Proximity to raw materials and customers
Land and construction costs

8. Factors That Affect Location Decisions Contd:
Site Level
Site, Size and Cost
Air, rail, highway systems
Proximity of services needed
Environmental impact issues
Proximity to competitors

9. Location Evaluation Methods
Factor-rating method
Locational break-even analysis
Center of gravity method
This slide can be used to frame a discussion of methods to evaluate location decisions.
© 1995 Corel Corp.

10. Factor-Rating Method Most widely used location technique
Useful for service & industrial locations
Rates locations using factors
This technique might be viewed as an extension of the Critical Success Factors methodology where the factors are weighted and rated.

11. Steps in Factor Rating Method
List relevant factors
Assign importance weight to each factor (such as 0 – 1)
Develop scale for each factor (such as 1 – 100)
Score each location using factor scale
Multiply scores by weights for each factor & total for each location
Select location with maximum total score
One way to derive an example of this technique is to ask students to identify the factors which caused them to select your particular college or university, and work through the appropriate analysis.

12. Factor rating method contd..
Factors
Weight
Scores (100)
Wgtd Scores A B
Labor availability
0.25 70 60
17.5
15.0
Attitude
0.05 50
2.5
3.0
Per capita income
0.10 85 80
8.5
8.0
Tax
0.39 75
29.3
27.3
Education
0.21
12.6
14.7
Totals
1.00
70.4
68.0

13. Locational Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Steps
Determine fixed & variable costs for each location
Plot total cost for each location (Cost on vertical axis, Annual Volume on horizontal axis)
Select location with lowest total cost for expected production volume
Must be above break-even
Basically breakeven where costs depend upon location.

14. Locational Break-Even Analysis Example
You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Birgunj, Pokhara or Biratnagar. Fixed costs per year are 30k, 60k, & 110k respectively. Variable costs per case are 75, 45, & 25 respectively. The price per case is What is the best location for an expected volume of 2,000 cases per year?
© 1995 Corel Corp.
An example

15. Locational Break-Even Crossover Chart
50000
100000
150000
200000
500
1000
1500
2000
2500
3000
Volume
Annual Cost
Birgunj
Biratnagar
Pokhara
Pokhara lowest cost
Biratnagar lowest cost
Birgunj Lowest cost
Graphical solution to the example

16. Center of Gravity Method
Finds location of single distribution center serving several destinations
Considers
Location of existing destinations
Volume to be shipped
Shipping distance (or cost)
This is a good point at which to raise the issue of choosing a decision methodology. Point out to students that the Center of Gravity method is helpful in a limited number of situations (where geography and transportation costs are important?)- where the critical factor methodology is more general. (but the critical factor method is more qualitative)

17. Center of Gravity Method Steps
Place existing locations on a coordinate grid
Grid has origin & scale
Maintains relative distances
Calculate X & Y coordinates for ‘center of gravity’

18. Center of Gravity Method Equations
X Coordinate
dix = x coordinate of location i
Wi = Volume of goods moved to or from location i
diy = y coordinate of location i
Y Coordinate

19. CG Method Locations Number of containers shipped per month

20. CG Method Contd.. X-Coordinate of the CG: Y-Coordinate of the CG:
(30)(2000)+(90)(1000)+(130)(1000)+(60)(2000)
=66.7
Y-Coordinate of the CG:
(120)(2000)+(110)(1000)+(130)(1000)+(40)(2000)
=93.3

21. Service Location strategies
Purchasing power of the customers in the area.
Service and image compatibility with the demographics
Competition in the area
Quality of the competition
Uniqueness of the firm’s and competitor’s locations

22. Contd..
Bank
Hospital
Hotels
Telemarketing industry
School