operations management location strategies. objective of location strategy maximize the benefit of...
TRANSCRIPT
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
© 1995 Corel Corp.
Factor-Rating Method
Most widely used location technique
Useful for service & industrial
locations
Rates locations using factors
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
Factor rating method contd..
Factors Weight
Scores (100)
Wgtd Scores
A B A B
Labor availability
0.25 70 60 17.5 15.0
Attitude 0.05 50 60 2.5 3.0
Per capita income
0.10 85 80 8.5 8.0
Tax 0.39 75 70 29.3 27.3
Education 0.21 60 70 12.6 14.7
Totals 1.00 70.4 68.0
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
Locational Break-Even Analysis
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.
Locational Break-Even Crossover Chart
0
50000
100000
150000
200000
0 500 1000 1500 2000 2500 3000
Volume
Ann
ual C
ost
Birgunj
Biratnagar
Pokhara
Pokhara lowest cost
Biratnagar lowest
cost
Birgunj Lowest
cost
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)
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
dix = x coordinate of location i
Wi = Volume of goods moved to or from location i
diy = y coordinate of location i
X Coordinate
Y Coordinate
ii
iiix
x W
WdC
ii
iiiy
y W
WdC
CG Method
Locations Number of containers shipped per month
A (30,120) 2000B (90,120) 1000C (130,130) 1000D (60,40) 2000
CG Method Contd..
X-Coordinate of the CG:(30)(2000)+(90)(1000)+(130)(1000)+(60)(2000)
2000+1000+1000+2000=66.7Y-Coordinate of the CG:
(120)(2000)+(110)(1000)+(130)(1000)+(40)(2000)
2000+1000+1000+2000=93.3
Service Location strategies
Purchasing power of the customers in the area.
Service and image compatibility with the demographics
Competition in the areaQuality of the competitionUniqueness of the firm’s and
competitor’s locations
Contd..
BankHospitalHotelsTelemarketing industrySchool