1. PRODUCTION AND OPERATIONS MANAGEMENT
Ch. 9: Location Strategies
POM - J. Galván

2. Learning Objectives
Where must we locate our facilities so as to satisfy our corporate strategy?
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3. 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
© 1995 Corel Corp.
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4. 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
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5. 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
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6. Location Decision Sequence
Region/Community .
Country
Site
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7. Factors Affecting Country
Government
Culture & economy
Market location
Labor availability, attitudes, productivity, and cost
Infrastructure
Exchange rate
© 1995 Corel Corp.
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8. Hourly Compensation ($) Manufacturing Workers (1994)
Labor Productivity
Low wages often over-emphasized
Labor productivity important
Labor cost per unit should be criterion:
Labor cost/day Units made/day
Hourly Compensation ($) Manufacturing Workers (1994)
Germany
27.37
Japan
21.38
U.S.
17.10
Hong Kong
4.79
Mexico
2.57
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9. Region Location Decisions
Corporate desires
Attractiveness
Labor
Utility costs
Government incentives
Proximity to customers & suppliers
Land/construction $$$
© 1995 Corel Corp.
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10. Factors Affecting Site
Site size
Site cost
Transportation in/out
Proximity of services
Environmental impact
POM - J. Galván
© 1995 Corel Corp. 13

11. Location Decision Example
© 1995 Corel Corp.
In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.
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12. Country Decision 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, )
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13. Region/Community Decision Factors
Labor
Lower wages in South Carolina (SC)
About $17,000/yr (SC) vs. $27,051/yr (US)
Based on 1993 metropolitan averages for all workers
Government incentives
$135 million in state & local tax breaks
Free-trade zone from airport to plant
No duties on imported components or on exported cars
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14. Organizations That Need To Be Close to Markets
Government agencies
Police & fire departments
Post Office
Retail Sales and Serivce
Fast food restaurants, supermarkets, gas stations
Drug stores, shopping malls
Bakeries
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15. Organizations That Need To Be Close to Markets - continued
Services
Doctors, lawyers, accountants, barbers
Banks, auto repair, motels
Manufacturers
Makers of bulky or heavy products
Japanese car makers
German car makers
Auto parts suppliers
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16. Location Evaluation Methods
Factor-rating method
Locational break-even analysis
Center of gravity method
Transportation model
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17. Factor-Rating Method Most widely used location technique
Useful for service & industrial locations
Rates locations using factors
Intangible (qualitative) factors
Example: Education quality, labor skills
Tangible (quantitative) factors
Example: Short-run & long-run costs
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18. Steps in Factor Rating Method
List relevant factors
Assign importance weight to each factor
Develop scale for each factor (0-1, etc.)
Score each location using factor scale
Multiply scores by weights for each factor & total
Select location with maximum total score
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19. Factors Affecting Location Selection
Environmental regulations
Utilities
Site costs
Transportation availability
Quality-of-life
Foreign exchange
Quality of government
Labor costs
Labor availability
Proximity to materials and suppliers
Proximity to markets
Government fiscal policies
Environmental regulations
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20. 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
Select location with lowest total cost for expected production volume
Must be above break-even
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21. Locational Break-Even Analysis 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?
© 1995 Corel Corp.
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22. Locational Break-Even Crossover Chart
Akron
Chicago
Bowling Green
Akron lowest cost
Bowling Green lowest cost
Chicago lowest cost
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23. Locational Break-Even Crossover Chart
Akron
Chicago
Bowling Green
Akron lowest cost
Bowling Green lowest cost
Chicago lowest cost
Lowest cost envelop
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24. 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
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25. 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
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26. 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
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27. 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
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28. Components of Volume and Revenue for a Service Firm
Purchasing power of customer drawing area
Service and image compatibility with demographics of the customer drawing area
Competition in the area
Quality of the competition
Uniqueness of the firm’s and competitor’s locations
Physical qualities of facilities and neighboring businesses
Operating policies of the firm
Quality of management
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29. Location Strategies – Service vs. Industrial
Industrial Revenue Focus
Tangible costs
Transportation cost of raw materials
Shipment cost of finished goods
Energy and utility cost; labor; raw material; taxes, etc.
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local government
Service/Retail/Professional Revenue Focus
Volume/revenue
Drawing area, purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/ lighting; appearance/image
Cost determinants
Rent
Management caliber
Operations policies (hours, wage rates)
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30. Location Strategies – Service vs. Industrial
Service/Retail/Professional Techniques
Correlation analysis to determine importance of factors for a particular type of operation
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of drawing area
Assumptions
Location is a major determinate of revenue
Issues manifesting from high customer contact dominate
Costs are relatively constant for a given area; therefore, revenue function is critical
Industrial Techniques
Linear Programming (Transportation method)
Weighted approach to intangibles
Breakeven analysis
Crossover charts
Assumptions
Location is a major determinate of cost
Most major costs can be identified explicitly for each site
Low customer contact allows focus on costs
Intangible costs can be objectively evaluated
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31. Major Methods of Solving Location Problems
Weighted methods which:
Assign weights and points to various factors
Determine tangible costs
Investigate intangible costs
Center of Gravity Method
Find best distribution center location
Location breakeven methods
Special case of breakeven analysis
Transportation method
A specialized linear programming method
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32. Telemarketing and Internet Industries
Require neither face-to-face contact with customers (or employees) nor movement of material
Presents a whole new perspective on the location problem
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33. Geographic Information Systems
New tool to help in location analysis
Enables combination of many parameters
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