Operation Management D
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Chapter8LocationPlanning1.pdf
Operations Management MGT 320
CHAPTER 8
Location Planning and Analysis
Chapter 8: Learning Objectives 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
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The Need for Location Decisions
• Location decisions arise for a variety of reasons: • Addition of new facilities
• As part of a marketing strategy to expand markets
• Growth in demand that cannot be satisfied by expanding existing facilities
• Depletion of basic inputs requires relocation
• Shift in markets
• Cost of doing business at a particular location makes relocation attractive
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Location Decisions: Strategically Important
• Location decisions: • Are closely tied to an organization’s strategies
• Low-cost
• Convenience to attract market share
• Effect capacity and flexibility
• Effect investment requirements, operating costs, revenues, and operations
• Impact competitive advantage
• Importance to supply chains
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Location Decisions: Objectives
• Location decisions are based on: • Finding a number of acceptable locations from which to choose
• Position in the supply chain
• End: accessibility, consumer demographics, traffic patterns, and local customs are important
• Middle: locate near suppliers or markets
• Beginning: locate near the source of raw materials
• Web-based retail organizations are effectively location independent
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Amazon's HQ2
Supply Chain Considerations
• Supply chain management must address supply chain configuration:
• Number and location of suppliers, production facilities, warehouses and distribution centers
• Centralized vs. decentralized distribution
• The importance of such decisions is underscored by their reflection of the basic strategy for accessing customer markets
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Location: Options
• Existing companies generally have four options available in location planning: 1. Expand an existing facility
2. Add new locations while retaining existing facilities
3. Shut down one location and move to another
4. Do nothing
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Global Location: Facilitating Factors
• Two key factors have contributed to the attractiveness of globalization: • Trade Agreements such as
• North American Free Trade Agreement (NAFTA)
• General Agreement on Tarriffs and Trade (GATT)
• U.S.-China Trade Relations Act
• EU and WTO efforts to facilitate trade
• Technology
• Advances in communication and information technology
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Global Location: Benefits
• A wide range of benefits have accrued to organizations that have globalized operations: • Markets
• Cost savings
• Legal and regulatory
• Financial
• Other
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Global Location: Disadvantages
• There are a number of disadvantages that may arise when locating globally: • Transportation costs
• Security costs
• Unskilled labor
• Import restrictions
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Global Location: Risks
• Organizations locating globally should be aware of potential risk factors related to: • Political instability and unrest
• Terrorism
• Economic instability
• Legal regulation
• Ethical considerations
• Cultural differences
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Location Decision: General Procedure
• 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
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Location: Identifying a Country
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Factors relating to foreign locations
Government a. 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 differences Living circumstances for foreign workers and their dependents Ways of doing business Religious holidays/traditions
Customer preferences Possible “buy locally” sentiment
Labor Level of training and education of workers Work ethic Wage rates Possible regulations limiting the number of foreign employees Language differences
Resources Availability and quality of raw materials, energy, transportation infrastructure
Financial Financial incentives, tax rates, inflation rates, interest rates
Technological Rate of technological change, rate of innovations
Market Market potential, competition
Safety Crime, terrorism threat
Location: Identifying a Region
• Primary regional factors: • Location of raw materials
• Necessity
• 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
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Location: Identifying a Region (contd.)
Labor factors Cost of labor
Availability of suitably skilled workers
Wage rates in the area
Labor productivity
Attitudes toward work
Other factors Climate and taxes may play an important role in location decisions
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Location: Identifying a Community
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
Environmental regulations
Utilities
Development support
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Location: Identifying a Site
• Primary site location considerations are • Land
• Transportation
• Zoning
• Other restrictions
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Service and Retail Locations
• Considerations: • Nearness to raw materials is not usually a consideration
• Customer access is a • Prime consideration for some: restaurants, hotels, etc.
• Not an important consideration for others: service call centers, etc.
• Clustering • Similar types of businesses locate near one another
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Evaluating Location Alternatives
• Common techniques: • Locational cost-volume-profit analysis
• Factor rating
• Center of gravity method
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Locational Cost-Profit-Volume Analysis
• Locational Cost-Profit-Volume Analysis • Technique for evaluating location choices in economic terms
• 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
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Locational Cost-Profit-Volume Analysis
• Assumptions 1. Fixed costs are constant for the range of probable output
2. Variable costs are linear for the range of probably output
3. The required level of output can be closely estimated
4. Only one product is involved
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Locational Cost-Profit-Volume Analysis
• For a cost analysis, compute the total cost for each alternative location:
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output of or volumeQuantity
unitper cost Variable
cost FixedFC
where
FCCost Total
Q
v
Qv
Example: Cost-Profit-Volume Analysis • Fixed and variable costs for four potential plant locations are shown
below:
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Location Fixed Cost per Year
Variable Cost per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35
Example: Cost-Profit-Volume Analysis
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Plot of Location Total Costs
Example: Cost-Profit-Volume Analysis
• Range approximations • B Superior (up to 4,999 units)
• C Superior (>5,000 to 11,111 units)
• A superior (11,112 units and up)
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000,5
10000,50
30000,10020000,150
B ofCost Total C ofCost Total
Q
Q
11.111,11
9000,100
20000,15011000,250
C ofCost Total A ofCost Total
Q
Q
Factor Rating
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 1.00
3. 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
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Example: Factor Rating
• A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?
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Scores (Out of 100)
Factor Weight Location 1 Location 2
Proximity to existing source
.10 100 60
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00
Example: Factor Rating
• A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?
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Scores (Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2
Proximity to existing source
.10 100 60 .10(100) = 10.0 .10(60) = 6.0
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00 70.6 82.7
Center of Gravity Method
• 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
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Center of Gravity Method
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a) Map showing destinations b) Coordinate system added c) Center of gravity
Center of Gravity Method
• If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates
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nsdestinatio ofNumber
n destinatio of coordinate
n destinatio of coordinate
where
n
iyy
ixx
n
y y
n
x x
i
i
i
i
Example: Center of Gravity Method
Destination x y
D1 2 2
D2 3 5
D3 5 4
D4 8 5
18 16
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4 4
16
5.4 4
18
n
y y
n
x x
i
i
Here, the center of gravity is (4.5,4). This is
slightly west of D3 from Figure 8.1
Suppose you are attempting to find the center of
gravity for the problem depicted in Figure 8.1c.
Center of Gravity Method
• When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates
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iyy
ixx
iQ
Q
Qy y
Q
Qx x
i
i
i
i
ii
i
ii
n destinatio of coordinate
n destinatio of coordinate
n destinatio toshipped be oQuantity t
where
Example: Center of Gravity
• Suppose the shipments for the problem depicted in Figure 8.1a are not all equal. Determine the center of gravity based on the following information.
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Destination x y Weekly
Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 2,000
Example: Center of Gravity
The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7). This south of destination D2 (3, 5).
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7.3 000,2
400,7
000,2
)100(5)200(4)900(5)800(2
05.3 000,2
100,6
000,2
)100(8)200(5)900(3)800(2
i Q
Qy y
Q
Qx x
i
ii
i
ii
Example: Center of Gravity
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