PRODUCTION AND
OPERATIONS
MANAGEMENT
Ch. 9: Location Strategies
POM - J. Galván
1
Learning Objectives

Where must we locate our facilities so
as to satisfy our corporate strategy?
POM - J. Galván
2
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
POM - J. Galván
© 1995 Corel Corp.
3
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
POM - J. Galván
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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
POM - J. Galván
5
Location Decision Sequence
Region/Community
Country
Site
.
POM - J. Galván
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Factors Affecting Country
¨
¨
¨
¨
Government
Culture & economy
Market location
Labor availability,
attitudes,
productivity, and
cost
¨ Infrastructure
¨ Exchange rate
POM - J. Galván
© 1995 Corel Corp.
7
Labor Productivity
Low wages often
over-emphasized
 Labor productivity
important
 Labor cost per
unit should be
criterion:
Labor cost/day
Units made/day

Hourly Compensation ($)
Manufacturing Workers (1994)
Germany
27.37
Japan
21.38
U.S.
17.10
Hong Kong
4.79
Mexico
2.57
POM - J. Galván
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Region Location Decisions
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Corporate desires
Attractiveness
Labor
Utility costs
Government incentives
Proximity to customers
& suppliers
Land/construction $$$
POM - J. Galván
© 1995 Corel Corp.
9
Factors Affecting Site

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Site size
Site cost
Transportation
in/out
Proximity of
services
Environmental
impact
POM - J. Galván
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© 1995 Corel Corp.
Location Decision Example
In 1992, BMW
decided to build its
first major
manufacturing
plant outside
Germany in
Spartanburg, South
Carolina.
© 1995 Corel Corp.
POM - J. Galván
11
Country Decision Factors

Market location
•
•

U.S. is world’s largest
luxury car market
Growing (baby boomers)
¨ Other
Labor
•
Lower manufacturing
labor costs
 $17/hr.
(U.S.) vs. $27
(Germany)
•
Higher labor productivity
Lower shipping cost
($2,500/car less)
¨ New plant &
equipment would
increase
productivity (lower
cost/car $2,0003000)
¨
 11
holidays (U.S.) vs.
31 (Germany)
POM - J. Galván
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Region/Community Decision
Factors

Labor
•
Lower wages in South Carolina (SC)
 About
•

$17,000/yr (SC) vs. $27,051/yr (US)
Based on 1993 metropolitan averages for
all workers
Government incentives
•
•
$135 million in state & local tax breaks
Free-trade zone from airport to plant
 No
duties on imported components or on
exported cars
POM - J. Galván
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Organizations That Need To Be
Close to Markets

Government agencies
Police & fire departments
• Post Office
•

Retail Sales and Serivce
Fast food restaurants, supermarkets, gas
stations
• Drug stores, shopping malls
• Bakeries
•
POM - J. Galván
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Organizations That Need To Be
Close to Markets - continued

Services
• Doctors,
lawyers, accountants, barbers
• Banks, auto repair, motels

Manufacturers
• Makers
of bulky or heavy products
• Japanese car makers
• German car makers
• Auto parts suppliers
POM - J. Galván
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Location Evaluation Methods
¨ Factor-rating method
¨ Locational break-even
analysis
¨ Center of gravity
method
¨ Transportation model
POM - J. Galván
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Factor-Rating Method



Most widely used location technique
Useful for service & industrial
locations
Rates locations using factors
•
Intangible (qualitative) factors
 Example:
•
Education quality, labor skills
Tangible (quantitative) factors
 Example: Short-run & long-run costs
POM - J. Galván
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Steps in Factor Rating Method
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List relevant factors
Assign importance weight to each factor
Develop scale for each factor (0-1, etc.)
Score each location using factor scale
Multiply scores by weights for each factor
& total
Select location with maximum total score
POM - J. Galván
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Factors Affecting Location Selection

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Labor costs
Labor availability
Proximity to
materials and
suppliers
Proximity to markets
Government fiscal
policies
Environmental
regulations
POM - J. Galván
¨ Environmental
regulations
¨ Utilities
¨ Site costs
¨ Transportation
availability
¨ Quality-of-life
¨ Foreign exchange
¨ Quality of
government
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Locational Break-Even Analysis


Method of cost-volume analysis
used for industrial locations
Steps
Determine fixed & variable costs for
each location
• Plot total cost for each location
• Select location with lowest total cost
for expected production volume
 Must be above break-even
•
POM - J. Galván
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Locational Break-Even Analysis
Example
You’re an analyst for AC Delco. You’re
considering a new manufacturing plant in
Akron, Bowling Green, or Chicago. 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.
POM - J. Galván
21
Locational Break-Even
Crossover Chart
Annual Cost
200000
150000
100000
50000
Akron
lowest cost
Bowling Green
lowest cost
0
0
1000
2000
Chicago
lowest
cost
3000
Volume
POM - J. Galván
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Locational Break-Even
Crossover Chart
Annual Cost
200000
150000
100000
Lowest cost envelop
50000
Akron
lowest cost
Bowling Green
lowest cost
0
0
1000
2000
Chicago
lowest
cost
3000
Volume
POM - J. Galván
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Center of Gravity Method



Finds location of single distribution
center serving several destinations
Used primarily for services
Considers
•
Location of existing destinations
 Example:
•
•
Markets, retailers etc.
Volume to be shipped
Shipping distance (or cost)
 Shipping
cost/unit/mile is constant
POM - J. Galván
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Center of Gravity Method Steps


Place existing locations on a
coordinate grid
•
Grid has arbitrary origin & scale
•
Maintains relative distances
Calculate X & Y coordinates for
‘center of gravity’
•
•
Gives location of distribution center
Minimizes transportation cost
POM - J. Galván
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Center of Gravity Method
Equations
X Coordinate
d W

W
ix
Cx
i
i
i
i
Y Coordinate
Cy 
dix = x coordinate of
location i
 d iy Wi
i
 Wi
Wi = Volume of
goods moved to or
from location i
diy = y coordinate of
location i
i
POM - J. Galván
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Transportation Model



Finds amount to be shipped from
several sources to several destinations
Used primarily for industrial locations
Type of linear programming model
•
Objective: Minimize total production
& shipping costs
• Constraints
 Production capacity at source (factory)
 Demand requirement at destination
POM - J. Galván
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Components of Volume and
Revenue for a Service Firm
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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 competitor’s locations
Physical qualities of facilities and neighboring
businesses
Operating policies of the firm
Quality of management
POM - J. Galván
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Location Strategies – Service
vs. Industrial
Industrial Revenue
Focus
Service/Retail/Professio
nal Revenue Focus

Volume/revenue


Drawing area, purchasing
power
 Competition;
advertising/pricing



Transportation cost of raw
materials
 Shipment cost of finished
goods
 Energy and utility cost; labor;
raw material; taxes, etc.
Physical quality

Tangible costs
Parking/access; security/
lighting; appearance/image

Cost determinants
Intangible and future costs


Rent
 Management caliber
 Operations policies (hours,
wage rates)
POM - J. Galván
Attitude toward union
 Quality of life
 Education expenditures by
state
 Quality of state and local
government
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Location Strategies –
Service vs. Industrial
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Service/Retail/Professional
Techniques
Correlation analysis to determine
importance of factors for a
particular type of operation
Traffic counts
Demographic analysis of drawing
area
Purchasing power analysis of
drawing area
Assumptions
Location is a major determinate
of revenue
Issues manifesting from high
customer contact dominate
Costs are relatively constant for a
given area; therefore, revenue
function is critical








POM - J. Galván
Industrial Techniques
Linear Programming
(Transportation method)
Weighted approach to intangibles
Breakeven analysis
Crossover charts
Assumptions
Location is a major determinate
of cost
Most major costs can be
identified explicitly for each site
Low customer contact allows
focus on costs
Intangible costs can be
objectively evaluated
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Major Methods of Solving Location
Problems

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Weighted methods which:
• Assign weights and points to various factors
• Determine tangible costs
• Investigate intangible costs
Center of Gravity Method
• Find best distribution center location
Location breakeven methods
• Special case of breakeven analysis
Transportation method
• A specialized linear programming method
POM - J. Galván
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Telemarketing and Internet
Industries


Require neither face-to-face contact
with customers (or employees) nor
movement of material
Presents a whole new perspective on
the location problem
POM - J. Galván
32
Geographic Information
Systems


New tool to help in location analysis
Enables combination of many
parameters
POM - J. Galván
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