DOM 511: OPERATIONS MANAGEMENT PRACTICE Magutu Obara Peterson /S.O Nyamwange University of Nairobi School of Business Département of Management Science Jan April magutumop2011

FACILITIES LOCATION

32 Facilities Location Top question on the strategic agendas of contemporary manufacturing & services firms in this age of global markets & global production Question of location linked to 2 competitive imperatives; – 1. need to produce closer to customers due to time based competition, trade agreements & shipping costs – 2. Need to locate near appropriate labor pool to take advantage of low wage costs or high technical skills

32 Facilities Location Location Decision Process Typically conducted hierarchically & involves 4 basic decisions where appropriate; 1.Global (nation) location 2.Regional location 3.District or community location 4.Local site selection

32 Macro FACTORS for Location Decision 1.Proximity to customers – buyers want their goods delivered yesterday & their needs incorporated in products being developed & built 2. Business climate – presence of similar-sized businesses, companies in same industry, other foreign companies, probusiness govt legislation, subsidies, tax incentives etc 3. Total costs – inbound/outbound distribution cost, land, construction, labor, taxes, energy costs make up regional costs 4. Infrastructure – adequate road, rail, air, & sea transport, energy & telecommunications 5. Quality of labor – educational & skills levels of labor pool must match coy needs 6. Suppliers – a high-quality and competitive supplier base. Also supports lean production

32 MACRO FACTORS 7. Raw materials – necessity, perishability 8. Free trade zones 9. Political risk 10. Government, cultural barriers 11. Environmenal regualtion barriers

32 MiCRO FACTORS Land Transportation Services Restrictions Community receptivity to business barriers

Manufacturing Vs SERVICES Manufacturing/DistributionService/Retail Cost FocusRevenue focus Transportation modes/costsDemographics: age,income,etc Energy availability, costsPopulation/drawing area Labor cost/availability/skillsCompetition Building/leasing costsTraffic volume/patterns Customer access/parking

32 Steps in Making Location Decision Determine the criteria that will be used to evaluate alternatives Identify the factors that are important eg location to markets, raw materials Develop location alternatives – Identify the general region for a location – Identify a small number of community- site alternatives Evaluate the alternatives & make a selection

32 Evaluation of Location Alternatives Issue is to find locations that will minimize on costs & maximize on revenues Service industries tend to consider the revenue generating potential – production & consumption closely linked to market Goods producing industries concentrate on cost minimization – costs are accumulated in the product which can be shipped to various markets

32 Evaluation of Location Alternatives We make use of economic analysis methods – Location Break even analysis – Factor rating Method – Transportation method – Centroid Method or center of gravity method

32 Location Break – Even Analysis Concerned with the impact that operating variables ( costs, selling price, volume ) have on operating income If revenue per unit is independent of location then only costs need to be considered

Cost-Profit-Volume Analysis – Determine fixed and variable costs – Plot total costs – Determine lowest total costs

Example 1: Cost-Volume Analysis Fixed and variable costs for three potential locations in thousands ABC FIXED VARIABLE

Factor-Rating Method Popular because a wide variety of factors can be included in the analysis – Considers quantitative & Qualitative factors – Six steps in the method

Factor-Rating Method  Develop a list of relevant factors called critical success factors  Assign a weight to each factor  Develop a scale for each factor  Score each location for each factor  Multiply score by weights for each factor for each location  Recommend the location with the highest point (composite) score

Location Factor Rating  Identify important factors  Weight factors ( )  Subjectively score each factor ( )  Sum weighted scores

Location Factor Rating: Example Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service LOCATION FACTOR WEIGHT Site Site Site 3 SCORES (0 TO 100) Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24

Location Factor Rating: Example (cont.) Site Site Site 3 WEIGHTED SCORES Site 3 has the highest factor rating

CENTER OF GRAVITY METHOD  Determines the X & Y coordinates(location) of a single facility  Method does not explicitly address customer service objectives  Assists managers in balancing cost & service objectives  Distance is a major criterion though demand (volume, transactions etc ) is also considered  COG is defined as the location that minimizes the weighted distance between the facility & its supply & demand points

CENTER OF GRAVITY METHOD Procedure  Place the locations of existing supply & demand points on a coordinate system  Origin & scale are arbitrary as long as the relative distances are correctly represented.  COG is determined by; C x = ∑X i W i /∑W i C y = ∑Y i W i /∑W i

Grid-Map Coordinates where, x, y =coordinates of new facility at center of gravity x i, y i =coordinates of existing facility i W i =annual weight shipped from facility i  n WiWiWiWi i = 1  xiWixiWixiWixiWi n x =  n WiWiWiWi i = 1  yiWiyiWiyiWiyiWi n y = x1x1x1x1 x2x2x2x2 x3x3x3x3x y2y2y2y2y y1y1y1y1 y3y3y3y3 1 (x 1, y 1 ), W 1 2 (x 2, y 2 ), W 2 3 (x 3, y 3 ), W 3

Center-of-Gravity Technique: Example ABCD x y Wt y x A B C D (135) (105) (75) (60) Miles Miles

Center-of-Gravity Technique: Example (cont.) x = = = 238 n  WiWi i = 1  xiWixiWi n  n WiWi  yiWiyiWi n y = = = 444 (200)(75) + (500)(105) + (600)(135) + (300)(60) (200)(75) + (100)(105) + (250)(135) + (500)(60)

CENTER OF GRAVITY METHOD Two factories distribute output to 4 towns as shown. Board has authorized construction of a warehouse to serve the four markets. Identify the warehouse location using COG method