Operations Management Session 5 Henry Y. LOCATION STRATEGIES

The Strategic Importance of Location Location options include (1) expanding an existing facility instead of moving; (2) maintaining current sites while adding another facility elsewhere; (3) closing the existing facility and moving to another location. The objective of location strategy is to maximize the benefit of location to the firm. Location and Costs Location and Innovation

Factors that affect location decisions Globalization : (1) market economics; (2) better international communications; (3) more rapid, reliable travel and shipping; (4) ease of capital flow between countries; (5) high differences in labor costs. Labor productivity :

... Exhange Rates and Currency Risk Cost (tangible and intangible) Ethical Issues Attitudes Proximity to Markets Proximity to Suppliers Proximity to Competitors (Clustering)

Methods of Evaluating Location Alternatives The Factor-Rating Method Most widely used location technique Useful for service & industrial locations Steps : a) Develop a list of relevant factors called critical success factors (CSFs) b) Assign a weight to each factor to reflect its relative importance to the company. c) Develop a scale for each factor (ex 10 to 100) d) Have management score each location for each factor and total the score for each location. e) Multiply the score by the weight for each factor. f) Make a recommendation based on the maximum point score.

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

Example You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year?

Locational Break-Even Crossover Chart Volume Annual Cost Akron Chicago Bowling Green Bowling Green lowest cost Chicago lowest cost Akron lowest cost

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 Equations d ix = x coordinate of location I Q i = Volume of goods moved to or from location i d iy = y coordinate of location i X Coordinate Y Coordinate

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

Service Location Decisions Industrial-sector location analysis is on minimizing cost, while in the service sector is on maximizing revenue. Geographic Information Systems

Some Extension of Location Decision Location strategies of broad-line retailers (Kiran Karandea and J.R. Lombardb, 2004) Broad-line specialists tend to use proximity (distance) in trade areas with high income, high population density, high per capita income, with younger populations, and high home ownership. Warehouse location selection ( Tuncay Özca,et al, 2011) Based on multicriteria decision making. Criterias including: unit price, stock holding capacity, average distance to stop, average distance to main suppliers, movement flexibility)

International Chain Hotel Location Selection (Chou et al., 2008) PerspectiveFactorCriteriaNote Geographial condition Surrounding env. Rest resources Proximity to public facilities Distance to competitor Public security Natural res. characteristics Nearby rest facilities Park, Dept. Store, etc Regional competitiveness Good or bad Hot spring, etc Road access Traffic Conditions Access Convenience Distance to airport Distance to downtown Distance to tourism sites Parking area Spend time Prosperous or not Easy to go Easy to park Hote Characteristic Internal dev. External dev. Indoor leisure; restaurant, etc Operations Management Human res. Op. conditions Sufficient, skill and quality Land cost, regulation

... Location planning for urban distribution centers (