Quality Management and Location Planning (critical thinking 9)

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Location Planning and Analysis

Chapter 8

8-‹#›

You should be able to:

LO 8.1 Identify some of the main reasons organizations need to make location decisions

LO 8.2 Explain why location decisions are important

LO 8.3 Discuss the options that are available for location decisions

LO 8.4 Give examples of the major factors that affect location decisions

LO 8.5 Outline the decision process for making these kinds of decisions

LO 8.6 Use the techniques presented to solve typical problems

Chapter 8: Learning Objectives

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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

LO 8.1

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Location decisions:

Are closely tied to an organization’s strategies

Low-cost

Convenience to attract market share

Effect capacity and flexibility

Represent a long-term commitment of resources

Effect investment requirements, operating costs, revenues, and operations

Impact competitive advantage

Importance to supply chains

Location Decisions: Strategically Important

LO 8.2

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Location decisions are based on:

Profit potential or cost and customer service

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

Location Decisions: Objectives

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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:

Expand an existing facility

Add new locations while retaining existing facilities

Shut down one location and move to another

Do nothing

LO 8.3

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Two key factors have contributed to the attractiveness of globalization:

Trade agreements such as

North American Free Trade Agreement (NAFTA)

General Agreement on Tariffs and Trade (GATT)

U.S.-China Trade Relations Act

EU and WTO efforts to facilitate trade

Technology

Advances in communication and information technology

Global Location: Facilitating Factors

LO 8.3

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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

LO 8.4

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There are a number of disadvantages that may arise when locating globally:

Transportation costs

Security costs

Unskilled labor

Import restrictions

Criticism for locating out-of-country

Global Location: Disadvantages

LO 8.4

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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

LO 8.4

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Managerial implications for global operations:

Language and cultural differences

Risk of miscommunication

Development of trust

Different management styles

Corruption and bribery

Increased travel (and related) costs

Challenges associated with managing far-flung operations

Level of technology and resistance to technological change

Domestic personnel may resist locating, even temporarily

Managing Global Operations

LO 8.4

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Steps:

Decide on the criteria to use for evaluating location alternatives

Identify important factors, such as location of markets or raw materials

Develop location alternatives

Identify the country or countries for location

Identify the general region for location

Identify a small number of community alternatives

Identify the site alternatives among the community alternatives

Evaluate the alternatives and make a decision

Location Decision: General Procedure

LO 8.5

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Location: Identifying a Country

Factors Relating to Foreign Locations
Government	Policies on foreign ownership of production facilities Local content requirements Import restrictions Currency restrictions Environment regulations Local product standards Liability laws 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

LO 8.5

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Primary regional factors:

Location of raw materials

Necessity

Perishability

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

Distribution costs and perishability

Location: Identifying a Region

LO 8.5

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Location: Identifying a Region (cont.)

Labor factors

Cost of labor

Availability of suitably skilled workers

Wage rates in the area

Labor productivity

Attitudes toward work

Whether unions pose a serious potential problem

Other factors

Climate and taxes may play an important role in location decisions

LO 8.5

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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

Attitudes

Taxes

Environmental regulations

Utilities

Development support

Location: Identifying a Community

LO 8.5

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Primary site location considerations are

Land

Transportation

Zoning

Other restrictions

Location: Identifying a Site

LO 8.5

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Organizing operations

Product plant strategy

Entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market

Market area plant strategy

Plants are designated to serve a particular geographic segment of the market

Plants produce most, if not all, of a company’s products

Multiple Plant Manufacturing Strategies

LO 8.5

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Organizing operations

Process plant strategy

Different plants focus on different aspects of a process

Automobile manufacturers – engine plant, body stamping plant, etc.

Coordination across the system becomes a significant issue

General-purpose plant strategy

Plants are flexible and capable of handling a range of products

Multiple Plant Manufacturing Strategies (cont)

LO 8.5

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GIS

A computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps

Aids decision makers in

Targeting market segments

Identifying locations relative to their market potential

Planning distribution networks

Portraying relevant information on a map makes it easier for decision makers to understand

Geographic Information System (GIS)

LO 8.5

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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.

Tend to be profit or revenue driven, and so are

Concerned with demographics, competition, traffic volume patterns, and convenience

Clustering

Similar types of businesses locate near one another

Service and Retail Locations

LO 8.5

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Common techniques:

Locational cost-volume-profit analysis

Factor rating

Transportation model

Center of gravity method

Evaluating Location Alternatives

LO 8.6

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Locational cost-profit-volume analysis

Technique for evaluating location choices in economic terms

Steps:

Determine the fixed and variable costs for each alternative

Plot the total-cost lines for all alternatives on the same graph

Determine the location that will have the lowest total cost (or highest profit) for the expected level of output

Locational Cost-Profit-Volume Analysis

LO 8.6

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Locational Cost-Profit-Volume Analysis (cont.)

Assumptions

Fixed costs are constant for the range of probable output

Variable costs are linear for the range of probable output

The required level of output can be closely estimated

Only one product is involved

LO 8.6

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For a cost analysis, compute the total cost for each alternative location:

Locational Cost-Profit-Volume Analysis (cont.)

LO 8.6

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Example: Cost-Profit-Volume Analysis

Fixed and variable costs for four potential plant locations are shown below:

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

LO 8.6

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Example: Cost-Profit-Volume Analysis (cont.)

Plot of Location Total Costs

LO 8.6

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Range approximations

B Superior (up to 4,999 units)

C Superior (>5,000 to 11,111 units)

A superior (11,112 units and up)

Example: Cost-Profit-Volume Analysis (cont.)

LO 8.6

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Factor rating

General approach to evaluating locations that includes quantitative and qualitative inputs

Procedure:

Determine which factors are relevant

Assign a weight to each factor that indicates its relative importance compared with all other factors

Weights typically sum to 1.00

Decide on a common scale for all factors, and set a minimum acceptable score if necessary

Score each location alternative

Multiply the factor weight by the score for each factor, and sum the results for each location alternative

Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score

Factor Rating

LO 8.6

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A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?

Example: Factor Rating

		Scores (Out of 100)
Factor	Weight	Alt 1	Alt 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

LO 8.6

8-‹#›

A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better?

Example: Factor Rating (cont.)

		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

LO 8.6

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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

Center of Gravity Method

LO 8.6

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Center of Gravity Method (cont.)

a) Map showing destinations

b) Coordinate system added

c) Center of gravity

Figure 8.1

LO 8.6

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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.

Center of Gravity Method (cont.)

LO 8.6

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Example: Center of Gravity Method

Destination	x	y
D1	2	2
D2	3	5
D3	5	4
D4	8	5
	18	16

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.

LO 8.6

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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.

Center of Gravity Method (cont.)

LO 8.6

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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.

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

LO 8.6

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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 is south of destination D2 (3, 5).

Example: Center of Gravity (cont.)

LO 8.6

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Example: Center of Gravity (cont.)

LO 8.6

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