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Location Strategies

PowerPoint presentation to accompany

Heizer, Render, Munson

Operations Management, Twelfth Edition, Global Edition

Principles of Operations Management, Tenth Edition, Global Edition

PowerPoint slides by Jeff Heyl

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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

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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

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Learning Objectives

When you complete this chapter you should be able to:

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

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When you complete this chapter you should be able to:

Learning Objectives

8.5 Use the center-of-gravity method

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

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The Strategic Importance of Location

One of the most important decisions a firm makes

Increasingly global in nature

Significant impact on fixed and variable costs

Decisions made relatively infrequently

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The Strategic Importance of Location

Long-term decisions

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

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The Strategic Importance of Location

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

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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

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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 (KSFs)

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Location Decisions

Country Decision

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

Figure 8.1

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Location Decisions

Region/ Community Decision

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

Figure 8.1

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Location Decisions

Site Decision

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

Figure 8.1

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Global Competitiveness Index of Countries

TABLE 8.1
Competitiveness of 144 Selected Countries
COUNTRY		2015 RANKING
Switzerland		1
Singapore		2
U.S.		3
Finland		4
Germany		5
Japan		6
Canada		15
Israel		27
China		28
Russia		53
Mexico		61
Vietnam		68
Haiti		137
Chad		143
Guinea		144

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Factors That Affect Location Decisions

Labor productivity

Wage rates are not the only cost

Lower productivity may increase total cost

Labor cost per day

Productivity (units per day)

= Labor cost per unit

South Carolina

= $1.17 per unit

$70

60 units

Mexico

= $1.25 per unit

$25

20 units

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Factors That Affect Location Decisions

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

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Factors That Affect Location Decisions

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

Location decisions based on costs alone can create difficult ethical situations

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Factors That Affect Location Decisions

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

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Ranking Corruption

Rank Country 2015 CPI Score (out of 100)

1 Demark 91

2 Finland 90

3 Sweden 89

4 New Zealand 88

5 Netherlands, Norway, 87

7 Switzerland 86

8 Singapore 85

9 Canada 83

10 Germany, UK 81

16 USA 76

18 Japan 75

17 USA 74

30 Taiwan 62

37 South Korea 56

83 China 37

119 Russia 29

Least Corrupt

Most Corrupt

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Factors That Affect Location Decisions

Proximity to markets

Very important to services

JIT systems or high transportation costs may make it important to manufacturers

Proximity to suppliers

Perishable goods, high transportation costs, bulky products

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Factors That Affect Location Decisions

Proximity to competitors (clustering)

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

Found in both manufacturing and service industries

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Clustering of Companies

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

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Clustering of Companies

TABLE 8.3	Clustering of Companies
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, IBM, HP, Motorola, and Panasonic)		Northern Mexico	NAFTA, duty free export to U.S.
Computer hardware manufacturers		Singapore, Taiwan	High technological penetration rate and per capita GDP, skilled/educated workforce with large pool of engineers

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Clustering of Companies

TABLE 8.3	Clustering of Companies
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

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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

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Factor-Rating Example

TABLE 8.4	Weights, Scores, and Solution
				SCORES (OUT OF 100)		WEIGHTED SCORES
KEY SUCCESS FACTOR		WEIGHT		FRANCE	DENMARK	FRANCE		DENMARK
Labor availability and attitude			.25	70	60	(.25)(70) = 17.5		(.25)(60) = 15.0
People-to-car ratio			.05	50	60	(.05)(50) = 2.5		(.05)(60) = 3.0
Per capita income			.10	85	80	(.10)(85) = 8.5		(.10)(80) = 8.0
Tax structure			.39	75	70	(.39)(75) = 29.3		(.39)(70) = 27.3
Education and health			.21	60	70	(.21)(60) = 12.6		(.21)(70) = 14.7
Totals			1.00				70.4		68.0

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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

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Locational Cost-Volume Analysis Example

Three locations:

Athens $30,000 $75 $180,000

Brussels $60,000 $45 $150,000

Lisbon $110,000 $25 $160,000

Fixed Variable Total

City Cost Cost Cost

Total Cost = Fixed Cost + (Variable Cost x Volume)

Selling price = $120

Expected volume = 2,000 units

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Locational Cost-Volume Analysis Example

Crossover point – Athens/Brussels

30,000 + 75(x1) = 60,000 + 45(x1)

30(x1) = 30,000

x1 = 1,000

60,000 + 45(x2) = 110,000 + 25(x2)

20(x2) = 50,000

x2 = 2,500

Crossover point – Brussels/Lisbon

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Locational Cost-Volume Analysis Example

–

$180,000 –

–

$160,000 –

$150,000 –

–

$130,000 –

–

$110,000 –

–

$80,000 –

–

$60,000 –

–

$30,000 –

–

$10,000 –

–

Annual cost

| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000

Volume

Athens lowest cost

Brussels

lowest cost

Lisbon lowest

cost

Lisbon cost curve

Athens

cost curve

Brussels

cost curve

Figure 8.2

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Center-of-Gravity Method

Finds location of distribution center that minimizes distribution costs

Considers

Location of markets

Volume of goods shipped to those markets

Shipping cost (or distance)

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Center-of-Gravity Method

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

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Center-of-Gravity Method

where xi = x-coordinate of location i

yi = y-coordinate of location i

Qi = Quantity of goods moved to or from location i

x-coordinate of the center of gravity

y-coordinate of the center of gravity

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Center-of-Gravity Method

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

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Center-of-Gravity Method

North-South

East-West

120 –

90 –

60 –

30 –

–

| | | | | |

30 60 90 120 150

Arbitrary origin

Chicago (30, 120)

New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

Figure 8.3

x1 = 30

y1 = 120

Q1 = 2,000

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Center-of-Gravity Method

x-coordinate =

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000

= 66.7

y-coordinate =

(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000

= 93.3

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Center-of-Gravity Method

North-South

East-West

120 –

90 –

60 –

30 –

–

| | | | | |

30 60 90 120 150

Arbitrary origin

Chicago (30, 120)

New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

Center of gravity (66.7, 93.3)

Figure 8.3

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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

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Worldwide Distribution of Volkswagens and Parts

Figure 8.4

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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

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Location Strategies

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

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Location Strategies

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

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How Hotel Chains Select Sites

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

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How Hotel Chains Select Sites

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

R2 = .51

51% of the

profitability is

predicted by

just these

four variables!

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Geographic Information Systems (GIS)

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

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Geographic Information Systems (GIS)

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