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Operations Management: Sustainability and Supply Chain Management

Twelfth Edition

Chapter 8

Location Strategies

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Outline

Global Company Profile: FedEx

The Strategic Importance of Location

Factors That Affect Location Decisions

Methods of Evaluating Location Alternatives

Service Location Strategy

Geographic Information Systems

Location Provides Competitive Advantage for FedEx

Central hub concept

Enables service to more locations with fewer aircraft

Enables matching of aircraft flights with package loads

Reduces mishandling and delay in transit because there is total control of packages from pickup to delivery

Learning Objectives (1 of 2)

8.1 Identify and explain seven major factors that effect location decisions

8.2 Compute labor productivity

8.3 Apply the factor-rating method

8.4 Complete a locational break-even analysis graphically and mathematically

Learning Objectives (2 of 2)

8.5 Use the center-of-gravity method

8.6 Understand the differences between service- and industrial-sector location analysis

The Strategic Importance of Location (1 of 3)

One of the most important decisions a firm makes

Increasingly global in nature

Significant impact on fixed and variable costs

Decisions made relatively infrequently

The Strategic Importance of Location (2 of 3)

Long-term decisions

Once committed to a location, many resource and cost issues are difficult to change

The Strategic Importance of Location (3 of 3)

The objective of location strategy is to maximize the benefit of location to the firm

Options include

Expanding existing facilities

Maintain existing and add sites

Closing existing and relocating

Location and Costs

Location decisions require careful consideration

Once in place, location-related costs are fixed in place and difficult to reduce

Effort spent determining optimal facility location is a good investment

Factors That Affect Location Decisions

Globalization adds to complexity

Drivers of globalization

Market economics

Communication

Rapid, reliable transportation

Ease of capital flow

Differing labor costs

Identify key success factors (K S F s)

Location Decisions (1 of 3)

Figure 8.1 Some Considerations and Factors That Affect Location Decisions

Key Success Factors

Political risks, government rules, attitudes, incentives

Cultural and economic issues

Location of markets

Labor talent, attitudes, productivity, costs

Availability of supplies, communications, energy

Exchange rates and currency risks

Country Decision

Location Decisions (2 of 3)

Figure 8.1 [continued]

Key Success Factors

Corporate desires

Attractiveness of region

Labor availability and costs

Costs and availability of utilities

Environmental regulations

Government incentives and fiscal policies

Proximity to raw materials and customers

Land/construction costs

Region/Community Decision

Location Decisions (3 of 3)

Figure 8.1 [continued]

Key Success Factors

Site size and cost

Air, rail, highway, and waterway systems

Zoning restrictions

Proximity of services/supplies needed

Environmental impact issues

Customer density and demographics

Site Decision

Global Competitiveness Index of Countries (1 of 2)

Table 8.1 Competitiveness of 144 Selected Countries, Based on Annual Surveys of 13,000 Business Executives

Country	2015 Ranking
Switzerland	1
Singapore	2
U.S.	3
Finland	4
Germany	5
Japan	6
Canada	15
Israel	27

Global Competitiveness Index of Countries (2 of 2)

Table 8.1 [continued]

Country	2015 Ranking
China	28
Russia	53
Mexico	61
Vietnam	68
Haiti	137
Chad	143
Guinea	144

Factors That Affect Location Decisions (1 of 6)

Labor productivity

Wage rates are not the only cost

Lower productivity may increase total cost

South Carolina

Mexico

Factors That Affect Location Decisions (2 of 6)

Exchange rates and currency risks

Can have a significant impact on costs

Rates change over time

Costs

Tangible – easily measured costs such as utilities, labor, materials, taxes

Intangible – not as easy to quantify and include education, public transportation, community, quality-of-life

Factors That Affect Location Decisions (3 of 6)

Location decisions based on costs alone can create difficult ethical situations

Factors That Affect Location Decisions (4 of 6)

Political risk, values, and culture

National, state, local governments’ attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux

Worker attitudes toward turnover, unions, absenteeism

Globally cultures have different attitudes toward punctuality, legal, and ethical issues

Ranking Corruption

Factors That Affect Location Decisions (5 of 6)

Proximity to markets

Very important to services

J I T systems or high transportation costs may make it important to manufacturers

Proximity to suppliers

Perishable goods, high transportation costs, bulky products

Factors That Affect Location Decisions (6 of 6)

Proximity to competitors (clustering)

Often driven by resources such as natural, information, capital, talent

Found in both manufacturing and service industries

Clustering of Companies (1 of 3)

Table 8.3 Clustering of Companies

Industry	Locations	Reason for Clustering
Wine making	Napa Valley (U.S.) Bordeaux region (France)	Natural resources of land and climate
Software firms	Silicon Valley, Boston, Bangalore, Israel	Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby
Clean energy	Colorado	Critical mass of talent and information, with 1,000 companies

Clustering of Companies (2 of 3)

Table 8.3 [continued]

Industry	Locations	Reason For Clustering
Theme parks (Disney World, Universal Studios, and Sea World)	Orlando, Florida	A hot spot for entertainment, warm weather, tourists, and inexpensive labor
Electronics firms (Sony, I B M, H P, Motorola, and Panasonic)	Northern Mexico	N A F T A, duty free export to U.S.
Computer hardware manufacturers	Singapore, Taiwan	High technological penetration rate and per capita G D P, skilled/educated workforce with large pool of engineers

Clustering of Companies (3 of 3)

Table 8.3 [continued]

Industry	Locations	Reason For Clustering
Fast food chains (Wendy’s, McDonald’s, Burger King, Pizza Hut)	Sites within 1 mile of each other	Stimulate food sales, high traffic flows
General aviation aircraft (Cessna, Learjet, Boeing, Raytheon)	Wichita, Kansas	Mass of aviation skills
Athletic footwear, outdoor wear	Portland, Oregon	300 companies, many owned by Nike, deep talent pool and outdoor culture

Factor-Rating Method

Popular because a wide variety of factors can be included in the analysis

Six steps in the method

Develop a list of relevant factors called key success factors

Assign a weight to each factor

Develop a scale for each factor

Score each location for each factor

Multiply score by weights for each factor and total the score for each location

Make a recommendation based on the highest point score

Factor-Rating Example

Table 8.4 Weights, Scores, and Solution

Locational Cost-Volume Analysis

An economic comparison of location alternatives

Three steps in the method

Determine fixed and variable costs for each location

Plot the cost for each location

Select location with lowest total cost for expected production volume

Locational Cost-Volume Analysis Example (1 of 3)

Three locations:

Selling price = $120

Expected volume = 2,000 units

City	Fixed Cost	Variable Cost	Total Cost
Athens	$30,000	$75	$180,000
Brussels	$60,000	$45	$150,000
Lisbon	$110,000	$25	$160,000

Locational Cost-Volume Analysis Example (2 of 3)

Crossover point – Athens/Brussels

Crossover point – Brussels/Lisbon

Locational Cost-Volume Analysis Example (3 of 3)

Figure 8.2 Crossover Chart for Locational Cost–Volume Analysis

Center-of-Gravity Method (1 of 7)

Finds location of distribution center that minimizes distribution costs

Considers

Location of markets

Volume of goods shipped to those markets

Shipping cost (or distance)

Center-of-Gravity Method (2 of 7)

Place existing locations on a coordinate grid

Grid origin and scale are arbitrary

Maintain relative distances

Calculate x and y coordinates for ‘center of gravity’

Assumes cost is directly proportional to distance and volume shipped

Center-of-Gravity Method (3 of 7)

x-coordinate of the center of gravity

y-coordinate of the center of gravity

Where

Center-of-Gravity Method (4 of 7)

Table 8.5 Demand for Quain’s Discount Department Stores

Store Location	Number of Containers Shipped Per Month
Chicago	2,000
Pittsburgh	1,000
New York	1,000
Atlanta	2,000

Center-of-Gravity Method (5 of 7)

Figure 8.3 Coordinate Locations of Four Quain’s Department Stores and Center of Gravity

Center-of-Gravity Method (6 of 7)

Center-of-Gravity Method (7 of 7)

Figure 8.3 [continued]

Transportation Model

Finds amount to be shipped from several points of supply to several points of demand

Solution will minimize total production and shipping costs

A special class of linear programming problems

Worldwide Distribution of Volkswagens and Parts

Figure 8.4 Volkswagen, the Third Largest Automaker in the World, Finds It Advantageous to Locate Its Plants Throughout the World

Service Location Strategy

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 competitors’ locations

Physical qualities of facilities and neighboring businesses

Operating policies of the firm

Quality of management

Location Strategies (1 of 2)

Table 8.6 Location Strategies – Service vs. Goods-Producing Organizations

Service/Retail/Professional	Goods-producing
Revenue Focus	Cost Focus
Volume/revenue Drawing area; purchasing power Competition; advertising/pricing Physical quality Parking/access; security/lighting; appearance/ image Cost determinants Rent Management caliber Operation policies (hours, wage rates)	Tangible costs Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, and so on Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government

Location Strategies (2 of 2)

Table 8.6 [continued]

Service/Retail/Professional	Goods-producing
Techniques	Techniques
Regression models to determine importance of various factors Factor-rating method Traffic counts Demographic analysis of drawing area Purchasing power analysis of area Center-of-gravity method Geographic information systems	Transportation method Factor-rating method Locational cost–volume analysis Crossover charts
Assumptions	Assumptions
Location is a major determinant of revenue High customer-contact issues are critical Costs are relatively constant for a given area; therefore, the revenue function is critical	Location is a major determinant of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on the identifiable costs Intangible costs can be evaluated

How Hotel Chains Select Sites (1 of 2)

Location is a strategically important decision in the hospitality industry

La Quinta started with 35 independent variables and worked to refine a regression model to predict profitability

The final model had only four variables

Price of the inn

Median income levels

State population per inn

Location of nearby colleges

How Hotel Chains Select Sites (2 of 2)

51% of the profitability is predicted by just these four variables!

Geographic Information Systems (G I S) (1 of 2)

Important tool to help in location analysis

Enables more complex demographic analysis

Available data bases include

Detailed census data

Detailed maps

Utilities

Geographic features

Locations of major services

Geographic Information Systems (G I S) (2 of 2)

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