OPSM 301 Operations Management Koç University OPSM 301 Operations Management Class 18: Location (Chapter 8) Zeynep Aksin zaksin@ku.edu.tr

Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Drivers

The Logistics Network The Logistics Network consists of: Facilities: Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers Raw materials and finished products that flow between the facilities.

Customers, demand centers sinks Field Warehouses: stocking points Sources: plants vendors ports Regional Warehouses: stocking points Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Transportation costs Inventory & warehousing costs

Decision Classifications Strategic Planning: Decisions that typically involve major capital investments and have a long term effect 1. Determination of the number, location and size of new plants, distribution centers and warehouses 2. Acquisition of new production equipment and the design of working centers within each plant 3. Design of transportation facilities, communications equipment, data processing means, etc.

Decision Classifications Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months 1. Work-force size 2. Inventory policies 3. Definition of the distribution channels 4. Selection of transportation and trans-shipment alternatives

Decision Classifications Operational Control: Includes day-to-day operational decisions 1. The assignment of customer orders to individual machines 2. Dispatching, expediting and processing orders 3. Vehicle scheduling

Competitive Imperatives Impacting Location The need to produce close to the customer due to time-based competition, trade agreements, and shipping costs The need to locate near the appropriate labor pool to take advantage of low wage costs and/or high technical skills Article from Financial Times 3

Site selection and Location Short-term focus Accessibility of consumers and workers “Cost” driven decision Location stability Long-term market position Strategies for back-office operations

Facility Location Location decisions are made for facilities that produce and deliver both products and services Both quantitative and qualitative factors can be important to location decisions Several levels of quantitative analysis are possible Cost comparisons Break-even analysis Linear programming

Locational Factors Proximity to Customers Business Climate Total Costs Infrastructure Quality of Labor Suppliers Other Facilities Free Trade Zones Political Risk Government Barriers Trading Blocs Environmental Regulation Host Community

Characteristics of a Good Location Proximity to target market Residences, hospitals, schools, offices, airports, military bases Proximity to destination points Malls tourist attractions, anchor stores Ease of access Proximity to competition Proximity to other units of the same type Problem: accurate identification and trade-offs

Demand Sensitive Services Solution Techniques: Informal judgment Factor Rating Regression Case: La Quinta Hotels - Regression based site selection

Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method Transportation model

Factor-Rating Method Most widely used location technique Useful for service & industrial locations Rates locations using factors Tangible (quantitative) factors Example: Short-run & long-run costs Intangible (qualitative) factors Example: Education quality, labor skills

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 Select location with maximum total score

Demand Sensitive Service Facility Location Factor Rating example Item Scale Multiplier Income of neighborhood 0-10 .40 Proximity to shopping centers 0-10 .25 Accessibility 0-10 .15 Visibility 0-10 .10 Traffic 0-10 .10

Demand Sensitive Service Facility Location Factor Rating Example Buyukdere Etiler Bostanci Beyoglu Income 4 8 10 6 Shopping 2 7 Access 1 9 Visibility Traffic 3 5 Buyukdere 3.15 Etiler 8.00 Bostanci 9.20 Beyoglu 5.10 Score

Cost-Volume Analysis Fixed and variable costs for four potential locations: Location Fixed Cost Variable A B C D $250,000 100,000 150,000 200,000 $11 30 20 35

Cost-Volume Analysis $(000) 800 700 600 500 400 300 200 100 D B C A 2 D B C A A Superior C Superior B Superior 2 4 6 8 10 12 14 16 Annual Output (000)

Center of Gravity Method Finds location of single distribution center serving several destinations Used primarily for services 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

Example: retail stores Store Location No of containers shipped/month Location A 400 Location B 300 Location C 200 Location D 100 Location E 300 Location F 100

Remarks Geographic center is not equal to the cost center Define distance concept carefully

Hotelling’s

Hotelling’s: round 1 A B

Hotelling’s: round 2 A B

Hotelling’s: round 3 B A

Hotelling’s: final configuration B

Conclusion Why is McDonalds always next to Burger King? Gloria Jeans next to Starbucks? Remember that others can move when you are planning locations In general: dynamics of competitive location matter