1. Chapter 8 Location Planning and Analysis
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2. Location Decisions Long-term decisions
Difficult to reverse - Expensive
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 the firm
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3. Manufacturing vs Service Location
Industrial Location Decision
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
Service Location Decisions
Revenue focus
Location is a major revenue factor
Affects amount of customer contact
Affects volume of business
Non-Profit Organizations
It is helpful to begin this discussion by asking students how and under what conditions location impacts costs and revenues. Once they have begun to consider these issues, then the decision for industrial or service organizations can be explored.
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4. Manufacturing and Service Considerations
Manufacturing / Distribution
Cost Focus
Service / Retail
Revenue focus
Transportation modes/costs
Demographics: age,income,etc
Energy availability/costs
Population/drawing area
Labor cost/availability/skills
Competition
Building costs/leasing costs
Traffic volume/patterns
Customer access/parking

5. Factors that Affect Location Decisions
McDonald’s
United Airlines – Lufthansa
Micron
Hitachi
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6. Example – BMW in South Carolina
BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.
© 1995 Corel Corp.
Country 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,
VW in Puebla
Region Factors
Labor
Lower wages in South Carolina
Government incentives
$135 million in tax breaks
Free-trade zone - airport to plant
No duties on imported components or on exported cars
BMW’s decisions
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7. Globalization Benefits Disadvantages Facilitating Factors Risks
Markets
Transportation cost
Cost savings
Legal and regulatory
Financial
Disadvantages
Criticisms
Security / Instability
Unskilled labor
Import restrictions
Facilitating Factors
Trade agreements
Technology
Banking systems
Risks
Legal
Currency rate
Cultural
Political
Terrorism
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8. Global Factors to Consider

9. Trends in Locations Just-in-time manufacturing techniques
Microfactories
Information Technology
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10. Location Evaluation Methods
Some decision tools:
1. Factor-rating method
2. Location break-even analysis (Cost-Profit-Volume)
3. Center of gravity method
4. Transportation model
This slide can be used to frame a discussion of methods to evaluate location decisions.
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11. 1. Factor-Rating Method It is the most widely used location technique
It is used for service & industrial locations
It rates locations using two categories of factors:
Tangible (quantitative) factors, like cost
Intangible (qualitative) factors, like labor skill and schools
Steps of the Factor-Rating Method:
List relevant factors
Assign importance weight to each factor (such as 0 – 1)
Develop a score-scale for the factors (such as 1 – 100)
Score each location using factor scale
Multiply scores by weights for each factor, then total
Select location with maximum total score
This technique might be viewed as an extension of the Critical Success Factors methodology where the factors are weighted and rated.
Solve problem 8.10 part b
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12. 2. Location Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Steps for Break-Even Analysis
Determine fixed & variable costs for each location
Plot total cost for each location
Select location with lowest total cost for expected production volume
Exercise: 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?
Basically breakeven where costs depend upon location.
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13. 3. Center of Gravity Method
It finds the location of a single distribution center serving several destinations.
It is used primarily for services and distribution centers.
It considers:
Location of existing destinations: Markets, retailers etc.
Volume to be shipped.
Shipping distance (or cost). Assumes shipping cost/unit/mile is constant .
Steps for the Center of Gravity Method:
1. Place existing locations on a coordinate grid
Grid can have an arbitrary origin & scale (maintain relative distances)
2. Calculate X & Y coordinates for ‘center of gravity’ using the given formulas
They give the X & Y location of distribution center
This location minimizes the transportation 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)
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14. 3. Center of Gravity Method Equations
X Coordinate:
Solve this problem
Y Coordinate:
xi = x coordinate of location i
yi = y coordinate of location i
Qi = Volume of goods moved to or from location i
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15. 4. Transportation Model Finds amount to be shipped from
several sources to several destinations.
Used primarily for industrial locations.
The solution uses linear programming
Objective: Minimize total shipping costs
Constraints
Production capacity at source (factory)
Demand requirement at destination
Again, this method, while quantitative, is unable to handle many of the important factors.
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