8-*Operations Management

Location StrategiesChapter 8

8-*OutlineStrategic Importance of Location.Factors That Affect Location Decisions.Methods of Evaluating Location Alternatives.The Factor-Rating Method.Locational Break-Even Analysis.Center-of-Gravity Method.The Transportation Model.Integer Programming.Service Location Strategy.

8-*Federal ExpressInvented overnight delivery.Uses hub concept.Enables service to more locations with fewer aircraft.Concentrates package flows to exploit transportation economies of scale.Enables sorting economies of scale.Key issue: Where to locate hubs??

8-*Location DecisionsLong-term strategic decisions.Usually expensive & difficult to reverse.Affect fixed & variable costs.Transportation cost is up to 25% of product price.Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location to firm.

8-*Industrial Location DecisionsCost focus.Revenue varies little between locations.Production separate from consumption.Location is major cost factor.Costs vary greatly between locations. Shipping costs.Production costs (e.g., labor).

8-*Service Location DecisionsRevenue focus.Costs vary little between market areas.Production/service together with consumption.Location is a major revenue factor.Affects amount of customer contact.Affects volume of business.

8-*Organizations That Locate Close to Markets/CustomersGovernment agencies.Police & fire departments, post offices, public libraries.Retail sales and Services.Fast food restaurants, supermarkets, gas stations.Doctors, lawyers, barbers, banks, auto repair, etc.When transporting finished goods is more expensive than transporting materials.Bottling plants, breweries.Electricity production.

8-*Organizations That Locate Close to Suppliers or MaterialsBy necessity.Mining, fishing, farming, etc.

When transporting materials is more expensive than transporting finished goods.Perishable raw materials.Seafood processing.Heavy or bulky raw materials.Steel producers.Processing reduces bulk.Lumber mills, paper production.

8-*Location Decision Sequence

8-*Factors Affecting Country DecisionGovernment rules, attitudes, stability, incentives.Labor availability, attitudes, productivity, cost.Availability of supplies, communications, energy.Culture & economy.Location of markets.Exchange rate.

8-*Labor Costs - Figure 8.2

8-*Ranking of the Business Environment in 20 Countries, 1997 - 20011 Netherlands2 Britain3 Canada4 Singapore5 U.S.6 Denmark7 Germany8 France9 Switzerland10 Sweden11 Finland12 Belgium13 New Zealand14 Hong Kong15 Austria16 Australia17 Norway18 Ireland19 Italy20 Chile

8-*Factors Affecting Region/Community DecisionAttractiveness of region (culture, taxes, climate, etc.).Labor availability, costs, attitudes towards unions.Environmental regulations of state and town.Proximity to customers & suppliers. Corporate desires.Costs and availability of utilities.Government incentives.Land/construction costs.

8-*Factors Affecting Site DecisionAccess to air, rail, highway, and waterway systems.Proximity to needed services/supplies. Site size and cost.Zoning restrictions.Environmental impact issues..

8-*Location Decision Example - BMWIn 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

8-*Country Decision - BMWMarket location.U.S. is worlds largest luxury car market & is growing.Labor.U.S. has lower manufacturing labor costs.$17/hr. (U.S.) vs. $27 (Germany).U.S. may have 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 $2,000-3000).

8-*Region/Community Decision - BMWLabor.Lower wages in South Carolina (SC).About $17,000/yr in SC vs. $27,051/yr in U.S. (based on 1993).

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.

8-*Location Evaluation MethodsFactor-rating method.Locational break-even analysis.Center of gravity method.Transportation model.

8-*Factor-Rating MethodMost 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.Based on weighted average.

8-*Steps in Factor Rating MethodList relevant factors.Assign importance weight to each factor (0-1).Make weights sum to one.Set a scale for scoring each factor (1-10 or 1-100).Score each location using factor scale.Multiply scores by weights for each factor & sum.Select location with maximum total score.Consider sensitivity to weights and scores.

8-*Factors Affecting LocationLabor costs and availability, including wages, productivity, attitudes, age, distribution, unionization, and skills.Site costs, including land cost, parking, drainage, expansion opportunities, etc.Proximity to raw materials and suppliers.Proximity to markets.State and local government fiscal policies (including incentives, taxes, unemployment compensation).

8-*Factors Affecting Location - continuedUtilities, including availability and costs.Transportation availability (road, rail, air, water, pipeline). Quality-of-life issues (education, cost of living, health care, sports, cultural activities, housing, entertainment, religious facilities, etc.).Foreign exchange, including rates and stability.Government, including stability, honesty, attitudes toward new business, etc.

8-*Factor Rating ExampleThree locations: A, B and C; Four factors. 1. Assign weights to each factor. 2. Score each location on each factor. 3. Multiply the weight and score and sum for each location.

8-*Factor Rating ExampleThree locations: A, B and C; Four factors.A is best; B and C are similar.Note that if the labor score for A was 5, not 6, then all locations are similar.

Sheet1

FactorweightABC

Cost0.31097

Proximity to trans.0.27310

Taxes0.17510

Labor0.4685

7.577.1

Sheet2

Sheet3

8-*Cost-volume analysis used for location.Steps:Determine fixed & variable costs for each location.Find break-even point. Plot cost for each location.Select location with lowest total cost for expected production volume.Must be above break-even.Locational Break-Even Analysis

8-*Locational Break-Even Analysis ExampleYoure an analyst for AC Delco. Youre 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?

8-*Locational Break-Even Analysis ExampleA=Akron: Total Cost = TC = 30000 + 75xB=Bowling Green: Total Cost = TC = 60000 + 45xC=Chicago:Total Cost = TC = 110000 + 25xFor all: Total Revenue = TR = 120x

At x=2000 cases/year:A: Profit = 240,000 - (30,000 + 150,000) = 60,000B: Profit = 240,000 - (60,000 + 90,000) = 90,000 C: Profit = 240,000 - (110,000 + 50,000) = 80,000B is Best

8-*Locational Break-Even Analysis ExampleYoure an analyst for AC Delco. Youre 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.

Over what range of output is each location preferred?

8-*Locational Break-Even Analysis ExampleA=Akron: TC = 30000 + 75xB=Bowling Green: TC = 60000 + 45xC=Chicago:TC = 110000 + 25x

A is best at x=0.A < B for x < 1000/yr and A < C for x < 1600/yr, soA is best over range 0

8-*Locational Crossover Chart050,000100,000150,000200,000050010001500200025003000Volume$Akron

8-*Locational Crossover Chart050,000100,000150,000200,000050010001500200025003000Volume$AkronRevenue

8-*Locational Break-Even Analysis ExampleA is unprofitable for low volumes.Use break-even analysis with A to find break-even point = 666.67/yr.

A is best and profitable over range 666.67

8-*Center of Gravity MethodFinds location of single facility serving several destinations.Used for services and distribution centers. Requires:Location of existing destinations (Markets, retailers etc.)Volume to be shipped.Shipping distance (or cost).

8-*Center of Gravity Method StepsFind X and Y coordinates for all destinations.Can use an arbitrary coordinate grid.Calculate center of gravity location for facility as weighted average of X & Y coordinates. Approximately minimizes transportation cost.Location is not necessarily optimal, but is usually close.

8-*Center of Gravity Method Equationsdix = x coordinate of location i

Wi=Volume of goods moved to or from location i

diy = y coordinate of location iX CoordinateY Coordinate

8-*Center of Gravity ExampleLocation VolumeChicago 200Pittsburgh 100New York 100Atlanta 200Given 4 cities with volume demanded and (x,y) coordinates. Find location for one warehouse to minimize total distance to supply these cities.

8-*Center of Gravity ExampleLocation VolumeX-CoordinateY-CoordinateChicago 200 30 120Pittsburgh 100 90 110New York 100 130 130Atlanta 200 60 40X coordinate of warehouse: Cx=(200x30+100x90+100x130+200x60)/(200+100+100+200) = 66.7

Y coordinate of warehouse: Cy=(200x120+100x110+100x130+200x40)/(200+100+100+200) = 93.3

8-*Center of Gravity ExampleLocation VolumeChicago 2000Pittsburgh 1000New York 1000Atlanta 2000XCenter of gravity = (66.7, 93.3)

8-*Transportation ModelFinds 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 capacities at sources (factories).Demand requirements at destinations.

8-*Transportation Model ExampleFromTo Cost per unit flowChicagoLondon$40ChicagoSt. Louis$10St. LouisChicago$8St. LouisAtlanta$20Atlanta London$35ChicagoChicago$1St. LouisSt. Louis$1AtlantaAtlanta$1Supply is in greenDemand is in red8005003002009003001000

8-*Transportation Model Examplexij = Flow from origin i to destination j.Objective is minimize cost for all flows.Constraints for supply at each origin (3) and demand at each destination (4).

8-*Integer Programming for Locationx1 = 1 if a warehouse is located at Boston; 0 otherwise. x2 = 1 if a warehouse is located at Hartford; 0 otherwise.x3 = 1 if a warehouse is located at Albany; 0 otherwise. Minimize the cost to locate warehouses:Minimize C1 x1 + C2 x2 + C3 x3

At most two warehouses can be opened: x1 + x2 + x3 2

Either Boston or Hartford should have a warehouse: x1 + x2 1

8-*Location for Service OrganizationsFocus on Revenue and Volume of Business, which are determined by:Purchasing power and demographics of customer drawing area.Competition in the area (amount and quality).Relative attractiveness of the firms and competitors locations.Uniqueness of location and offerings.Physical qualities of facilities and neighboring businesses.Operating policies and quality of management.

8-*Service vs. Industrial LocationService Location TechniquesRegression models to determine importance of different factors. Factor rating.Traffic counts & demographic analysis of drawing area.Center of gravity.AssumptionsLocation is major determinate of revenue.High customer contact issues dominate.Costs are relatively constant for a given area. Industrial LocationTechniques Linear and Integer Programming (Transportation method).Factor rating. Breakeven and crossover analysis.Center of gravity.AssumptionsLocation is major determinate of cost.Costs can be identified for each site.Low customer contact allows focus on costs.Intangible costs can be objectively evaluated.

8-*Telemarketing and Internet IndustriesRequire neither face-to-face contact with customers (or employees) nor movement of material. Keys are:Labor costs and productivity.Information systems infrastructure (including training and management). Government incentives (including taxes).

8-*Geographic Information Systems - GISNew tool to help in location analysis.Combines spatial (locational) data and attribute data (for example, demographics).Uses spatial analyses to identify best or satisfactory locations.Allows intuitive graphical display using maps.

***Students should be asked to suggest why the hub concept provides the advantages noted. They should also be asked to consider the limitations of the hub concept.**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.**This and the following slide suggest organizations which need to be physically close to their markets*This and the following slide suggest organizations which need to be physically close to their markets*Stress that the location decision process is basically another process in which one attempts to continuously narrow the range of alternatives considered.*Students, especially those from other countries, should be able to contribute significantly to a discussion of factors affecting ones choice of country.*Discussion of this slide might include comments on the impact of information technology on the priorities attached to the factors listed.*What impact does the increasing rate of environmental change have on a firms site choice? For example, would one build a single site, or a collection of sites which might be tied together by technology? Does one have to choose a site near desired services, or can these services often be secured through technology?*BMWs decisions***This slide can be used to frame a discussion of methods to evaluate location decisions.*This technique might be viewed as an extension of the Critical Success Factors methodology where the factors are weighted and rated.*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.*Basically breakeven where costs depend upon location.*An example*An example*An example*An example*Graphical solution to the example*Graphical solution to the example*An example*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)***Again, this method, while quantitative, is unable to handle many of the important factors.*This slide makes the distinction between an industrial and a service organization. Students may be asked to cite examples for each of the qualities listed.**Given the significant impact of the World Wide Web, this slide should be discussed in detail.*