Location Analysis Decision-making Need to identify factors that are important for the location decision being made Relevant factors will be influenced by Type of facility Geography involved

Types Of Facilities Heavy manufacturing Light industry auto plants, steel mills, oil refineries Light industry small components manufacturing, assembly and packaging Warehouse & distribution centers Retail & service

Factors In Manufacturing & Light Industry Plant Location Labor availability, cost and attitude Raw material & finished goods shipment modes Proximity to raw materials Utilities Construction costs Land costs

Factors In Warehouse Location Transportation costs Proximity to markets

Factors In Retail & Service Location Proximity to customers Accessibility for customers Attractiveness of facility

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

Global Location Factors Government stability Government regulations Political & economic systems Economic stability & growth Exchange rates Culture Climate Export import regulations Duties & tariffs Raw material availability Position of global markets Number and proximity of suppliers Transportation & distribution system Labor cost & education Available technology Commercial travel Technical expertise Cross-border trade regulations Group trade agreements

Ranking of Countries in the 2010 - 2011 Global Competitiveness Report (World Economic Forum*) 1 Switzerland 2 Sweden 3 Singapore 4 U.S. 5 Germany 6 Japan 7 Finland 8 Netherlands 9 Denmark 10 Canada 11 Hong Kong 12 United Kingdom 13 Taiwan, China 14 Norway 15 France 16 Australia 17 Qatar 18 Austria 19 Belgium 20 Luxembourg * http://www3.weforum.org/en/initiatives/gcp/Global Competitiveness Report/index.htm

Regional Location Factors Labor (availability, education, cost & attitude) Proximity of customers Construction/leasing costs Land costs Modes and quality of transportation Transportation costs Proximity of suppliers Taxes Incentive packages Governmental regulations Environmental regulations Raw material availability Climate Infrastructure Education system

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 © 1995 Corel Corp. In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. BMW’s decisions

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 $2,000-3000)

Region/Community Decision Factors Labor Lower wages in South Carolina (SC) About $17,000/yr. (SC) vs. $27,051/yr. (US) Based on 1993 metropolitan averages for all workers Government incentives $135 million in state & local tax breaks Free-trade zone from airport to plant No duties on imported components or on exported cars

Location Evaluation Methods Factor-rating method Center of gravity method Transportation model

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 This technique might be viewed as an extension of the Critical Success Factors methodology where the factors are weighted and rated.

Steps in Factor Rating Method List relevant factors Assign importance weight to each factor (0 - 1) Develop scale for each factor (1 - 100) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score

Location Factor Example Scores (0 to 100) Location Factor Weight Site 1 Site 2 Site 3 Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service .30 .20 .15 .10 .05 80 100 60 75 65 85 50 65 91 95 80 90 92 90 75 72 80 95 65

Location Factor Example Weighted Scores Location Factor Site 1 Site 2 Site 3 Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service Total Score 24.00 20.00 9.00 11.25 6.50 4.25 2.50 77.50 19.50 18.20 14.25 12.00 9.00 4.60 3.25 80.80 27.00 15.00 10.80 12.00 9.50 3.25 4.50 *82.05

Center of Gravity Method Finds location of single distribution center serving several destinations Used primarily for services & warehousing Considers Location of existing destinations Example: Markets, retailers etc. Volume to be shipped Shipping distance (or cost) Shipping cost/unit/mile is constant

Center of Gravity Method Steps Place existing locations on a coordinate grid Grid has arbitrary origin & scale Maintains relative distances Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Minimizes transportation cost

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

Center-of-Gravity Example A B C D X 200 100 250 500 Y 200 500 600 300 Wt 75 105 135 60 y 700 500 600 400 300 200 100 C B o Center D A x 700 500 600 400 300 200 100

Location Analysis Technique Transportation Method Identify a location for a new facility so that the location minimizes the company’s overall cost of production and transportation for the supply chain. To perform this analysis, one must be able to model a given set of facilities and identify the shipping strategy that will minimize the total shipping costs.

Balanced Transportation Models A transportation problem is balanced if Total supply at all of the sources = Total demand at all of the destinations The mill problem is currently balanced with Total Supply = Total Demand = 600 tons In this case, all of the units are shipped from the sources and all of the destinations receive their demand

Unbalanced Transportation Models If Total supply at all of the sources > Total demand at all of the destinations, the problem is feasible. There will be unshipped units at some of the source locations though. (Resolve model with Kansas City supply set equal to 200 tons) If Total supply at all of the sources < the problem will be infeasible. (Resolve model with Kansas City supply set equal to 100 tons)

Solving an Infeasible Unbalanced Transportation Model The model needs to be balanced in order to identify an optimal shipping strategy. An extra source must be added into the model to supply the current shortage. Extra capacity needed = Total demand at all destinations – Total supply at all current sources To create this additional source of supply/capacity, either Acquire a new facility and include it in the network design and spreadsheet model’s table structure or add a Dummy source into the model’s table structure

Solving the Mill Transportation Problem when Kansas City has only 100 tons capacity In this problem, the total demand exceeds the total supply by 600 – 550 = 50 tons Insert a dummy grain elevator with a capacity of 50 tons and a unit shipping cost of $0 to each mill. Edit the spreadsheet model and Solver dialog box to include this new imaginary source. The identified optimal solution will identify how many tons to ship from each grain elevator to each of the mills. The tons shipped from the dummy elevator are units that will not actually be distributed; these are the amounts that the receiving mills will be short in the eventual distribution.

Building a new grain elevator when Kansas City has only 100 tons capacity In this problem, the total demand still exceeds the total supply by 600 – 550 = 50 tons Insert a possible location for a new grain elevator with a capacity of at least 50 tons along with the identified unit shipping costs from this location to each mill. Edit the spreadsheet model and Solver dialog box to include the new grain elevator at this location. The identified optimal solution will identify how many tons to ship from each grain elevator, including the additional elevator at the new location, to each of the mills so as to minimize total costs

HHN, Inc. Cabinet Problem Read the HHN, Inc. Cabinet problem Is the current transportation problem with the three plants and four market areas balanced? How would you identify whether Beijing or Fountainbleu is a better location for a fourth plant?