Module 6
BIS 963 Operations Management
Location Strategies
Prof. Aziz Ezzat ElSayed, Ph.D.
Professor of Industrial Engineering
College of Engineering and Technology
Arab Academy for Science and Technology
Abu-Kir Campus, Alexandria, Egypt
Main Reference: Operations Management: Sustainability and Supply Chain Management, Jay Heizer,
Barry Render, Chuck Munson, Global Edition, 12/E, ©2017 • Pearson
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Agenda (Learning Objectives)
• Central Hub Location –
• Importance of Location Decisions
• Factors Affect Location Decisions
1)
2)
3)
4)
5)
6)
7)
Labor Productivity
Exchange Rates and Currency Risks
Tangible & intangible Costs
Political Risk, Values, and Culture
Proximity to Markets
Proximity to Suppliers
Proximity to Competitors (Clustering)
• Methods to evaluate Location Alternatives

(Factor Rating – Center of Gravity - Location BEA)
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Central Hub Location
672 Planes
80,000 Trucks
The largest Airline in the world
FedEx Super hub in Memphis Tennessee, USA ,100 Aircraft
fly each night with > 5 million packages and documents
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Central Hub Location
preliminary sorting area
Secondary sorting area
Memphis facility covers 140,000 m2 . At a preliminary sorting
area, packages are sorted and sent to a secondary sorting area
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Central Hub Location
Packages are checked by city, country, placed in containers and
then loaded onto aircraft for delivery to 215 countries.
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Central Hub Location
Why was Memphis picked as FedEx’s central location?
(1) It is located in the middle of the U.S.
(2) It has very few hours of bad weather closures.
(3) It provided FedEx with generous tax incentives.
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Central Hub Location
The point-to-point model
enables a greater number of
routes (16) but some routes
may have a low frequency of
service, with high cost.
The hub-and-spoke model
concentrates movements in a
lesser number of routes (8),
but with higher frequency of
service, thus minimizing time
and cost between most
origins and destinations.
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Importance of Location Decisions
• Long-term decisions
• Difficult to reverse
• Affect fixed & variable costs
 Transportation
cost , Other costs: Taxes,
wages, rent etc.
• Objective:
• Maximize benefit of location to the firm.
• Global Location Decision Sequence:
 Country Selection Factors
 Region Selection Factors
 Site Selection Factors
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Factors Affect Location Decisions
1.
2.
3.
4.
5.
6.
7.
Labor Productivity
Exchange Rates and Currency Risks
Costs
Political Risk, Values, and Culture
Proximity to Markets
Proximity to Suppliers
Proximity to Competitors (Clustering)
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1. Labor Productivity
• A country’s low wage rate is not enough to
select a certain location. What an OM is really
interested in is the cost per unit which combines
the production and the wage rate.
Cost per unit 
Labor Cost in $ per day
Productivity in units per day
• Example: Otis Elevator moved its plant from
Mexico to South Carolina - why ?
Location
Wages per day Units Produced per day Unit Cost ($)
South Carolina $70
Mexico
$25
60
20
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$1.17
$1.25
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Hedging = ‫إجراء للتحوط من موقف غير مالئم‬
2. Exchange Rate & Currency Risk
• Exchange rates can have a significant impact on costs.
• Firms can take advantage of a favorable exchange rate by
relocating or exporting to a foreign country.
• As foreign currency continually rise and fall in all countries,
a good location in 2017 could be a disastrous one in 2021.
• Operational hedging is a situation where firms with
excess capacity in multiple countries can shift production
levels from location to location as exchange rates change.
1 US Dollar To Japanese Yen
1 USD = 110.79 JPY
June 27 2021
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Cost of Living is usually measured by Income per Capita
3. Costs related to Location
Tangible Costs
Intangible Costs
• costs that are readily
identifiable and precisely
measured.
• less easy to quantify but are
real and could be crucial to a
business's success or failure
• Utilities
• Quality of education
• Labor and Materials
• Public transportation
• Transportation of raw
materials and products
• community attitudes toward
the industry and company
• Depreciation and taxes
• Quality and attitude of
employees.
• Cost of Living
• Quality-of-life
• Site construction
• Climate
• Government incentives
• Customer loyalty
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4. Political Risk, Workers Values & Culture
Local Government
Workers Values
Global Culture
• Attitude toward
• Worker talents
• Punctuality
private investment
attitudes
• Incentives
• Attitudes towards • Type of Legal
turnover
system
• Zoning restrictions • Role of unions
• Ethical issues
• Pollution
• Absenteeism as a • Level of
Corruption &
prevention codes
phenomena
Bribery
• Spoken
• Political Stability
• Employment
Languages
stability
• Religions
• Intellectual
(being able to keep the
same job for a long time)
property rights
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5. Proximity to Markets
• Very important to services.
•
: Sometimes in Industry - Why JIT
systems was developed in Japan? – Why
Overseas plants ? high transportation costs
may make it important to manufacturers.
• Market oriented facilities:


Space required for output >> Space
required for inputs
Examples:
 Car Manufacturing.
 Appliances.
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Perishable = fresh , delicate
6 Proximity to Suppliers
• Perishable goods and bulky raw materials
with high transportation costs
• Raw material oriented facilities ;
weight of inputs >>> weight of output
• Tends to be closer to the raw material
resources.
• Example: Aluminum industry, the most
important is electricity, it dominates all other
raw material

Inputs
Alumina
Coal
Electricity
Aluminum
Smelting
Plant
Output
Aluminum
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7- Proximity to Competitors
• Clustering often
driven by resources
such as natural,
information, capital,
and talent.
• Found in both
manufacturing and
service industries
• Examples?
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7- Proximity to Competitors
Clustering of Companies
Reason for
clustering
Locations
Software firms
Silicon Valley,
Boston, Bangalore
(India)
Talent resources of
bright graduates in
scientific/technical
areas, venture
capitalists nearby
Race car builders
Huntington/North
Hampton region
(UK)
Critical mass of talent
and information
Theme parks (Disney
World, Universal Studios)
Orlando, Florida
Entertainment spot,
warm weather,
tourists, and
inexpensive labor
Fast food chains (Wendy’s, Sites within 1 mile of Stimulate food sales,
McDonald’s, Burger King,
each other (usually high traffic flows
and Pizza Hut)
on highways)
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Methods to evaluate Location
Alternatives
1. The Factor-Rating Method
2. Center-of-Gravity Method
3. Location Break-Even Analysis
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1- Factor Rating Method
1.
2.
3.
4.
5.
6.
List relevant factors for location selection
Assign importance weight to each factor (0-1.0)
Develop scale for each factor (100 maximum)
Score each location using factor scale
Multiply scores by weights for each factor & total
Select location with maximum total score
1
2
5
3
4
= Select France
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2- Center of Gravity Method
• Finds location of single distribution center or a
warehouse serving several destinations
• Used primarily for services (Bank locations,
retail stores, etc.)
• Input Data:

Location of existing destinations is known
in the form of the (X-Y) coordinate of each.


Examples: Markets, cities, retailers etc.
Volume (quantity) to be shipped to of from
each point destination.
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2- Center of Gravity Method
• 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
Center of Gravity Method Equations

X W

W
i
Center of Gravity
X-Coordinate
COG X
i
i
i
i
Center of Gravity
Y-Coordinate
YW

W
i
COG Y
i
i
Xi = x coordinate of location i
Wi = Volume of goods moved
to or from location i
Yi = y coordinate of location i
i
i
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Applying Center of Gravity
• Consider the case of Target outlet stores (a chain discount store). The
firm’s store locations under consideration are in Chicago, Pittsburgh, NY
and Atlanta. They are currently supplied out of an old and inadequate
ware house in Pittsburgh, the site of the chain’s first store. Data on
demand rates at each location and Its current store locations (taking an
arbitrary origin) are as follows: :
Location
Demand (Containers/month)
X (km)
Y (Km)
Chicago
2,000
30
120
Pittsburgh
1,000
90
110
New York
1,000
130
130
Atlanta
2,000
60
40
• Target’s OM has decided to find some central location in which to build
a new warehouse.
• Find the location of the new warehouse using the COG method.
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Center of Gravity: Solution
1000
New York (130,130)
Y
1000
Pittsburg (90,120)
2000
Chicago (30,120)
150
120
X W

W
YW

W
i
COG X
i
i
i
90
i
COG (66.7,93.3)
i
60
New location is
Near central Ohio
2000
Atlanta (60,40)
30
30
COG Y
i
i
i
i
60
90
120
150
X
COGX = [(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)] / (2000+1000+1000+2000) = 66.7
COGY= [(120)(2000) +(120)(1000) +(130)(1000) +(40)(2000)] / (2000+1000+1000+2000) = 93.3
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Excel Add-in
Center of Gravity
X
Y
66.666667
93.33333
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3- Location Break-Even Chart
• Example : Consider 3 locations with the
following data:
City
Akron
Bowling Green
Chicago
=30000+(75*2000)
Fixed Cost
$30,000
$60,000
$110,000
Total cost
$180,000
Variable Cost
$75
$45
$25
$150,000
$160,000
• Assume a Daily volume of 2000 units
• Calculate the total cost
Total Cost = Fixed Cost + (Variable Cost x Volume)
• Thus @ 2000 units, Bowling Green is the best alternative
• But what if the daily output changes ?
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Location Total cost
Location Break-Even Chart
Daily cost
@ Daily Volume = 2000 units
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
|
–
0
Akron
$180,000
B. Green
$150,000
Chicago
$160,000
Chicago FC
Bowling FC
Akron
lowest
cost
|
500
Chicago
lowest
cost
Bowling Green
lowest cost
|
|
1,000
1,500
|
2,000
|
2,500
Akron FC
|
3,000
Volume (units)
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Location Break-Even Chart Calculations
@ Volume Q1: Akron Cost = Bowling Green Cost
$30,000 + $75 Q1 = $60,000 + $45 Q1
$75 Q1 - $45 Q1 = $60,000 - $30,000
$30 Q1 = $30,000
Q1 = 1,000
@ Volume Q2: Bowling Green = Chicago Cost
$60,000 + $45 Q2 = $110,000 + $25 Q2
$45 Q2 - $25 Q2 = $110,000 - $60,000
$20 Q2 = $50,000
Q2 = 2,500
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