Operations Management Location Strategies

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

Industrial Location Decisions Contd.. Tangible costs such as transportation of raw materials and finished goods, labor, raw materials etc. Intangible costs such as education expenditures, quality of life etc..

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 Purchasing power Parking, security, lighting etc.. Rent

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

Factors That Affect Location Decisions Country level: Political risks, govt. rules, attitudes Cultural and economic issues Location of markets Labor talent, productivity Exchange rates and currency risks Region level: Corporate desires (Reliance refineries in Guj. ) Attractiveness of the region (culture, taxes, climate etc.) Labor availability Proximity to raw materials and customers Land and construction costs

Factors That Affect Location Decisions Contd: Site Level Site, Size and Cost Air, rail, highway systems Proximity of services needed Environmental impact issues Proximity to competitors

Location Evaluation Methods Factor-rating method Locational break-even analysis Center of gravity method This slide can be used to frame a discussion of methods to evaluate location decisions. © 1995 Corel Corp.

Factor-Rating Method Most widely used location technique Useful for service & industrial locations Rates locations using factors 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 (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 for each location Select location with maximum total score One way to derive an example of this technique is to ask students to identify the factors which caused them to select your particular college or university, and work through the appropriate analysis.

Factor rating method contd.. Factors Weight Scores (100) Wgtd Scores A B Labor availability 0.25 70 60 17.5 15.0 Attitude 0.05 50 2.5 3.0 Per capita income 0.10 85 80 8.5 8.0 Tax 0.39 75 29.3 27.3 Education 0.21 12.6 14.7 Totals 1.00 70.4 68.0

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

Locational Break-Even Analysis Example You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Birgunj, Pokhara or Biratnagar. 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? © 1995 Corel Corp. An example

Locational Break-Even Crossover Chart 50000 100000 150000 200000 500 1000 1500 2000 2500 3000 Volume Annual Cost Birgunj Biratnagar Pokhara Pokhara lowest cost Biratnagar lowest cost Birgunj Lowest cost Graphical solution to the example

Center of Gravity Method Finds location of single distribution center serving several destinations Considers Location of existing destinations Volume to be shipped Shipping distance (or cost) This is a good point at which to raise the issue of choosing a decision methodology. Point out to students that the Center of Gravity method is helpful in a limited number of situations (where geography and transportation costs are important?)- where the critical factor methodology is more general. (but the critical factor method is more qualitative)

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

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

CG Method Locations Number of containers shipped per month

CG Method Contd.. X-Coordinate of the CG: Y-Coordinate of the CG: (30)(2000)+(90)(1000)+(130)(1000)+(60)(2000) 2000+1000+1000+2000 =66.7 Y-Coordinate of the CG: (120)(2000)+(110)(1000)+(130)(1000)+(40)(2000) =93.3

Service Location strategies Purchasing power of the customers in the area. Service and image compatibility with the demographics Competition in the area Quality of the competition Uniqueness of the firm’s and competitor’s locations

Contd.. Bank Hospital Hotels Telemarketing industry School