Operations Management Location Strategies Chapter 8

Learning Objectives When you complete this chapter, you should be able to : Identify or Define: –Objective of location strategy –International location issues –Clustering –Geographic Information Systems Describe or explain: –Three methods of solving the location problem Factor-rating method Locational breakeven analysis Center -of-gravity method – Describe the factors affecting location decisions

Federal Express Stresses “hub” concept Advantages: –enables service to more locations with fewer aircraft –enables matching of aircraft flights with package loads –reduces mishandling and delay in transit because there is total control of packages from pickup to delivery

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

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 © 1995 Corel Corp.

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

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 = Cost or Revenue = $’s! for either Manufacturing or service.

Location Decision Sequence Country © 1995 Corel Corp. Region/Community © 1995 Corel Corp. Site © 1995 Corel Corp.

Factors That Affect Location Decisions

Factors Affecting Country Government rules, attitudes, political risk, incentives Culture & economy Market location Labor availability, attitudes, productivity, and cost Availability of supplies, communications, energy Exchange rates and currency risks

Region Location Decisions Corporate desires Attractiveness of region (culture, taxes, climate, etc.) Labor, availability, costs, attitudes towards unions Costs and availability of utilities Environmental regulations of state and town Government incentives Proximity to raw materials & customers Land/construction costs © 1995 Corel Corp.

Factors Affecting Site Site size and cost Air, rail, highway, and waterway systems Zoning restrictions Nearness of services/supplies needed Environmental impact issues © 1995 Corel Corp.

Location Decision Example BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. © 1995 Corel Corp.

Country Decision 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) –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, ) –Laws of U.S.A.

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 capacity at source (factory) Demand requirement at destination

Components of Volume and Revenue for a Service Firm 1. Purchasing power of customer drawing area 2. Service and image compatibility with demographics of the customer drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firm’s and competitor’s locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management

Location Strategies – Service vs. Industrial Service/Retail/Professional Revenue Focus oVolume/revenue oDrawing area, purchasing power oCompetition; advertising/pricing oPhysical quality oParking/access; security/ lighting; appearance/image oCost determinants oRent oManagement caliber oOperations policies (hours, wage rates) Goods-Producing Location Cost Focus  Tangible costs oTransportation cost of raw materials oShipment cost of finished goods oEnergy and utility cost; labor; raw material; taxes, etc. oIntangible and future costs oAttitude toward union oQuality of life oEducation expenditures by state oQuality of state and local government

Major Methods of Solving Location Problems Weighted methods which: –Assign weights and points to various factors –Determine tangible costs –Investigate intangible costs Center of Gravity Method –Find best distribution center location Location breakeven methods –Special case of breakeven analysis Transportation method –A specialized linear programming method

Telemarketing and Internet Industries Require neither face-to-face contact with customers (or employees) nor movement of material Presents a whole new perspective on the location problem

Geographic Information Systems New tool to help in location analysis Enables combination of many parameters

Final Thought The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.

Operations Management Layout Strategy Chapter 9

Learning Objectives When you complete this chapter, you should be able to : Identify or Define: –Fixed-position layout –Process-oriented layout –Work cells –Focused work center –Office layout –Retail layout –Warehouse layout –Product-oriented layout –Assembly-line factory

Learning Objectives When you complete this chapter, you should be able to : Describe or explain: –How to achieve a good layout for the process facility –How to balance production flow in a repetitive or product-oriented facility

McDonald’s - New Kitchen Layout –No food prepared ahead except patty –Elimination of some steps, shortening of others –New bun toasting machine (11 seconds vs 30 seconds) –Repositioning condiment containers (one motion, not two) –Sandwiches assembled in order –Production levels controlled by computer –Discard only meat when sandwiches do not sell fast enough –Savings of $100,000,000 per year in food costs

Innovation at McDonald’s Indoor seating (1950’s) Drive-through window (1970s) Adding breakfast to the menu (1980s) Adding play areas (1990s) (three out of the four are layout decisions)

Objectives of the Layout Strategy Develop an economical layout which will meet the requirements of: –product design and volume (product strategy) –process equipment and capacity (process strategy) –quality of work life (human resource strategy) –building and site constraints (location strategy)

Types of Layouts Fixed-position layout – Product does not move Process-oriented layout – Product low volume specialized Office layout –People Information Layout Retail layout – Customer preference and access Layout Warehouse layout – Material handling & space Product-oriented layout – Product Layout is for max efficiency high volume

What is Facility Layout ? Location or arrangement of everything within & around buildings Objectives are to maximize –Customer satisfaction –Utilization of space, equipment, & people –Efficient flow of information, material, & people –Employee morale & safety

Strategic Importance of Layout Proper layout enables: Higher utilization of space, equipment,and people Improved flow of information, materials, or people Improved employee morale and safer working conditions Improved customer/client interaction Flexibility

Layout Strategies

Requirements of a Good Layout 3an understanding of capacity and space requirements 3selection of appropriate material handling equipment 3decisions regarding environment and aesthetics 3identification and understanding of the requirements for information flow 3identification of the cost of moving between the various work areas

Constraints on Layout Objectives Product design & volume Process equipment & capacity Quality of work life Building and site

Areas of Concern in Layout Strategy Layout Strategy Material Flow Communication Work Cell Safety Material Attributes Warehousing Service Areas

Operations Management Human Resources and Job Design Chapter 10

Learning Objectives When you complete this chapter, you should be able to : Identify or Define: –Job design –Job specialization –Job expansion –Tools of methods analysis –Ergonomics –Labor standards –Andon

Learning Objectives - Continued When you complete this chapter, you should be able to : Describe or explain: –Requirements of good job design –The visual workplace

Southwest Airlines Profitable for 26 years while United, Northwest, and U.S. Air lost billions. Strategy: Human resources –Culture of caring for people in the totality of their lives, not just at work. –Spends more to recruit and train than any other airline

Southwest Airlines Empowered employees Wages higher than industry average Stock options for some employees Employees treated like customers Everybody understands what everybody else’s problems are No gimmicks!

People and Work System Aspects Job Design Labor Standards

Productivity in Relation to Annual Turnover Rate

Job Design Specifying the tasks that make up a job for an individual or group Involves determining –What is to be done (i.e., responses) –How it is to be done (i.e., tools etc.) –Why it is to be done (i.e., purpose) Results in job description –Shows nature of job in task-related behaviors

Components of Job Design Job specialization Job expansion – enrichment-enlargement Psychological components Self-directed teams Motivation and incentive systems Ergonomics and work methods Praise?

Job Expansion Process of adding more variety to jobs Intended to reduce boredom associated with labor specialization Methods –Job enlargement –Job enrichment –Job rotation –Employee empowerment

Job Rotation Geriatrics © 1995 Corel Corp. Pediatrics © 1995 Corel Corp. Maternity © 1995 Corel Corp.

Employee Empowerment Control Decision-Making Planning

Psychological Components of Job Design Individuals have values, attitudes, and emotions that affect job results –Example: Work is a social experience that affects belonging needs Effective worker behavior comes mostly from within the individual –Scientific management argued for external financial rewards First examined in ‘Hawthorne studies’

Self-Directed Teams Group of empowered individuals working together for a common goal May be organized for short-term or long-term objectives Reasons for effectiveness –Provide employee empowerment –Provide core job characteristics –Meet psychological needs (e.g., belonging)

Motivation Worker performance depends on –Motivation –Ability –Work environment Motivation is the set of forces that compel behavior Money may serve as a psychological & financial motivator

Motivation and Money Taylor’s scientific management (1911) –Workers are motivated mainly by money –Suggested piece-rate system Maslow’s theory (1943) –People are motivated by hierarchy of needs, which includes money Herzberg (1959) –Money either dissatisfies or is neutral in its effect

Maslow’s Hierarchy of Needs Self-Actualization Use of abilities Self-fulfillment Social Group Interaction Job Status Safety Physical Safety Job Security Physiology Food Shelter Ego Self Respect

Ergonomics and Work Methods Worker performance depends on –Motivation –Ability –Work environment Foundation laid by Frederick Taylor –Match employees to task –Develop work methods –Establish work standards

Ergonomics Study of work Also called ‘human factors’ Involves human-machine interface Examples –Mouse –Keyboard

What is Work Measurement? Determining the amount of worker time required to generate one unit of output Provides labor standards –Target amount of time required to perform a job under normal working conditions

Uses of Labor Standards Costing labor content of products Planning staffing needs Cost & time estimates for bids Planning production Wage-incentive plans Employee efficiency

Sources of Labor Standards Historical experience Time studies Predetermined time standards (MTM) Work sampling

Labor Standards - Historical Experience Labor standards are based on how many labor-hours were needed in past Least preferred method Advantages –Easy and inexpensive to obtain standard Disadvantages –Unknown accuracy due to unusual occurrences, unknown pace etc.

A Final Thought Two stonecutters were asked what they were doing. The first said, ‘I’m cutting this stone into blocks.’ The second one replied, ‘I’m on a team that’s building a cathedral.’ — Old Story