Location Planning and Analysis McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

You should be able to: 1. Identify some of the main reasons organizations need to make location decisions 2. Explain why location decisions are important 3. Discuss the options that are available for location decisions 4. Give examples of the major factors that affect location decisions 5. Outline the decision process for making these kinds of decisions 6. Use the techniques presented to solve typical problems 8-2 Student Slides

Steps: 1. Decide on the criteria to use for evaluating location alternatives 2. Identify important factors, such as location of markets or raw materials 3. Develop location alternatives a. Identify the country or countries for location b. Identify the general region for location c. Identify a small number of community alternatives d. Identify the site alternatives among the community alternatives 4. Evaluate the alternatives and make a decision 8-3 Student Slides

National Decision Regional Decision Community Decision Site Decision Political, social, economic stability; Currency exchange rates;..... Climate; Customer concentrations; Degree of unionization;..... Transportation system availability; Preference of management;..... Site size/cost; Environmental impact; Zoning restrictions;.....

Factors relating to foreign locations Governmenta.Policies on foreign ownership of production facilities Local content requirements Import restrictions Currency restrictions Environment regulations Local product standards Liability laws a.Stability issues Cultural differencesLiving circumstances for foreign workers and their dependents Ways of doing business Religious holidays/traditions Customer preferencesPossible “buy locally” sentiment LaborLevel of training and education of workers Work ethic Wage rates Possible regulations limiting the number of foreign employees Language differences ResourcesAvailability and quality of raw materials, energy, transportation infrastructure FinancialFinancial incentives, tax rates, inflation rates, interest rates TechnologicalRate of technological change, rate of innovations MarketMarket potential, competition SafetyCrime, terrorism threat 8-5 Student Slides

Primary regional factors: Location of raw materials Necessity Perishability Transportation costs Location of markets As part of a profit-oriented company’s competitive strategy So not-for-profits can meet the needs of their service users Distribution costs and perishability 8-6 Student Slides

Labor factors Cost of labor Availability of suitably skilled workers Wage rates in the area Labor productivity Attitudes toward work Whether unions pose a serious potential problem Other factors Climate and taxes may play an important role in location decisions 8-7 Student Slides

Many communities actively attempt to attract new businesses they perceive to be a good fit for the community Businesses also actively seek attractive communities based on such factors such as: Quality of life Services Attitudes Taxes Environmental regulations Utilities Development support 8-8 Student Slides

Primary site location considerations are Land Transportation Zoning Other restrictions 8-9 Student Slides

Considerations: Customer access: Prime consideration for some: restaurants, hotels, etc. Not an important consideration for others: service call centers, etc. Demographics, competition, traffic/volume and convenience Clustering Similar types of businesses locate near one another 8-10 Student Slides

Mining, Quarrying, and Heavy Manufacturing Near their raw material sources Abundant supply of utilities Land and construction costs are inexpensive Light Manufacturing Availability and cost of labor Warehousing Proximity to transportation facilities Incoming and outgoing transportation costs... more

R&D and High-Tech Manufacturing Ability to recruit/retain scientists, engineers, etc. Near companies with similar technology interests Retailing and For-Profit Services Near concentrations of target customers Government and Health/Emergency Services Near concentrations of constituents

Common techniques: 1. Locational cost-volume-profit analysis 2. Transportation model 3. Factor rating 4. Center of gravity method 8-13 Student Slides

Based on fixed cost and variable cost. Steps: 1. Determine the fixed and variable costs for each alternative 2. Plot the total-cost lines for all alternatives on the same graph 3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output Cost model: Total cost = FC + v * Q Example 1 on page Student Slides

Example 1 on page 351 Locationfixe cost/yr.variable cost/unit A250K$11 B100K$30 C150K$20 D200K$35 Annual volume: 8,000 unit per year Total cost A250K$11 (8K)=360K B100K$30(8K)=400K C150K$20(8K)=350K D200K$35(8K)=550K Decision Alternative C is the best Conduct sensitivity analysis? 8-15 Student Slides A250K $11 (8K) =360K

Factor Rating General approach to evaluating locations that includes quantitative and qualitative inputs Procedure: 1. Determine which factors are relevant 2. Assign a weight to each factor that indicates its relative importance compared with all other factors. Weights typically sum to Decide on a common scale for all factors, and set a minimum acceptable score if necessary 4. Score each location alternative 5. Multiply the factor weight by the score for each factor, and sum the results for each location alternative 6. Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score 8-16 Student Slides

Economic factors Site acquisition, preparation and construction costs Labor costs, skills and availability Utilities costs and availability Transportation costs Taxes

Non-economic factors Labor attitudes and traditions Training and employment services Community’s attitude Schools and churches Recreation and cultural attractions Amount and type of housing available

Possibly important qualitative factors: Housing Climate Community activities Education and health services Recreation Churches Union activities Community attitudes

Managers often wrestle with the task of trading off qualitative factors against quantitative ones Methods for systematically displaying the relative advantages and disadvantages, both qualitative and quantitative, of each location alternative have been developed The relative-aggregate-scores approach is one such method

Quantitative and Qualitative Factors Location A Location B Econ. Wgt. Econ. Wgt. Factor Weight Data Score Score Data Score Score Prod.cost/ton.45$ $ Transp.cost/ton.35$ $ Labor Avail Union Activity Total Score

Center of Gravity Method Method for locating a distribution center that minimizes distribution costs Treats distribution costs as a linear function of the distance and the quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method includes the use of a map that shows the locations of destinations The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative locations 8-22 Student Slides

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