BUSI4494 Design of Operations Facilities and Systems Lecture 2 Location Lin Wu 8 Feb 2022 Recap • Getting to know each other • Introduction to module • Introduction to Facilities Planning Recap Facilities Planning (Tompkins et al.) Structure of today’s session 1. Factors in location selection 2. Location selection methodology Facility location • The facility location decision is a strategic decision concerning the geographical positioning of a production or service location (Chen et al., 2014). • When is a facility location decision required? ✓ New businesses ✓ Existing business relocation ✓ Existing business expansion Plant location and design • All businesses are faced with the problem of where to locate their premises, and how to layout all the facilities necessary to production within those premises. • The decisions which are made regarding location and layout will affect the efficiency with which a business can operate and influence operating costs. Location strategy One of the most important decisions a firm makes Increasingly global in nature (???) Long term impact and decisions are difficult to change The objective is to maximize the benefit of location to the firm https://mdxipe.wordpress.com/2018/12/14/are-we-approaching-a-wave-of-deglobalisation/ Factors in location selection BUSI4494 DOFS Location Strategy Location decisions principles (Ketokivi et al., 2018): 1. Decisions about the geography of economic activity are guided by locational factors, such as proximity to markets, access to knowledge, and the relative cost of production inputs. 2. Decisions about the geography of economic activity are guided by organizational factors, such as plant roles in the firm’s network and inter-functional interdependencies. 3. Decisions about the geography of economic activity are guided by temporal considerations. In groups • Factors that may affect location decisions • Categories of factors Location Decisions Country Decision Critical Success Factors 1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labour availability, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks Factors affecting location • The following slides list, very briefly, some of the factors which must be taken into account when choosing a location. • Their relative importance will depend upon the particular enterprise and its current operating situation, the company’s products/services, and the business and operating strategy. Market • It may be advisable to locate plant close to markets. • When? Raw materials • Close to raw materials • When? Raw materials (cont.) • Sustainable production Availability of labour • Cost of labour = wage? • Other factors? Labour productivity Labor productivity ➢ Wage rates are not the only cost ➢ Lower productivity may increase total cost Labor cost per day = cost per unit Productivity (units per day) Example: labour cost per day is $70 in the US and $25 in Mexico. 60 units can be produced in the US per day, and 20 units in Mexico per day. Which country has a lower cost per unit? Labour productivity USA $70 = $1.17 per unit 60 units Mexico $25 = $1.25 per unit 20 units Transportation • Is the available transportation adequate? • Is it the most appropriate: • water (slow but economical) • railways (suitable for large bulk) • roads (very flexible) • airlines (fast but expensive) • pipe lines (high capital cost, low unit transport cost - but inflexible). • Is it integrated? • Logistics providers Services (utilities) • Are the available utilities adequate, and at what cost: • Electricity • Gas • Water • Waste disposal Land requirements • Availability • for present needs • for future expansion • Cost • acquisition • site development • annual costs • Appreciation/depreciation in value https://www.mmtimes.com/special-features/150-investment-myanmar/2822-land-prices-hold-back-property-investment.html Sub-contractors • Availability of sub-contract services and manufacturers. • Quality, reliability and cost of subcontractors. Climate • Are any climatic factors important to production? • How does climate affect costs associated with location decisions? • How does climate affect efficiency associated with location decisions? Government restrictions and incentives • All governments rely upon successful business enterprises to underpin their economy, and depending upon their current economic strength, may offer Vietnam substantial inducements to attract businesses. Cayman Islands • A business will have to consider whether such inducements will overcome any longer term disadvantages of locating in that country. https://www.scotsman.com/news/uk-news/tesco-uses-offshorehavens-avoid-ps1-billion-tax-2512505 Government restrictions and incentives (cont.) • Will location in a particular country give preferential access to particular markets (e.g. access to government contracts, or avoidance of import restrictions/tariffs)? • Some governments will put up barriers and restrictions against particular industries which do not fit in with government policy. Local authority incentives and restrictions • Just as with governments, local authorities may offer inducements to businesses to locate in their area, to improve the wealth of their local community. • Local authorities vary in their restrictions on noise, smells, fire risks, traffic restrictions, etc. which may affect planning permissions. Community services • Education, training facilities • Social amenities • Availability of housing • Policing https://resources.finalsite.net/images/v1608006444/shrewsburyacth/j4gyrijvosxmjlwxj4lu/20201 215DirectorofBusinessServicesV1.pdf Defense and internal security • Not all regions/countries of the world enjoy stability. • The decision whether to locate in a particular country may be influenced by: • the international situation affecting the country • the internal stability of the country • current international relations between the country and your own country Tradition Proximity to competitors • Called clustering • Often driven by resources such as natural, information, capital, talent • Found in both manufacturing and service industries Clustering of Companies Industry Locations Reason for clustering Wine makers Napa Valley (US) Bordeaux region (France) Natural resources of land and climate Software firms Silicon Valley (US), Zhongguancun (China), Bangalore (India) Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby Partner Selection & Location • Competencies, skills, reliability, costs, political and strategic alliances, etc. • Advantages/constraints of location Choosing between alternatives • There are invariably alternative solutions to any location problems. In making a choice it is necessary to consider all the relative revenues and costs, over a projected time-scale. • In addition, there are likely to be a large number of intangible factors which may not be amenable to economic analysis, but which are nevertheless essential to operating efficiency. Choosing between alternatives (cont.) • Thus, although a comparative cost analysis of various alternative solutions may point towards the selection of a particular one, an appraisal of intangible factors may be the basis of a decision to select another. Multi-plant strategies Where a company operates a number of manufacturing plants or service operations, its location decisions may be influenced by specific strategic considerations, e.g. • product plant strategy • market area plant strategy • product-market plant strategy • process plant strategy • general purpose plant strategy (The following slides refer to manufacturing plants but the same considerations can apply to services) Product plant strategy • Each plant manufactures distinct products or product lines, serving the entire (or a significant section of) domestic or international market. • Has the advantage of allowing specialisation in manufacturing processes, design and management expertise, organisation, etc. appropriate to the particular products. Product plant strategy https://www.entrepreneur.com/article/228315#:~:text=T he%20company%20signs%20all%20its,%2C%20China%2 C%20Korea%20and%20Taiwan. Market area plant strategy • Plants manufacture all (or most) of a company’s products, and serve a particular market area • Allows close contact with markets • May be important where transportation costs are high https://www.cocacolacompany.com/company/cocacola-system Product-market plant strategy • Specialization of product plant + close proximity to market https://www.pg.co.uk/structure-and-governance/corporate-structure/ Process plant strategy • Where a process is particularly complex or specialized, often involving high capital investment, a company may set up a dedicated plant. • This may produce a range of products all requiring the particular process. General purpose plant strategy • Some companies do not have their own product range, but exist to provide make-to-order services within a particular broad set of technologies. • Flexibility!! Location strategies – service VS. manufacturing Service/Retail/Professional Location Goods-Producing Location maximize the profit Revenue Focus Cost Focus minimize the cost Volume/revenue • Catchment; purchasing power • Competition; advertising/pricing Physical quality • Parking/access; security/lighting; appearance/image Cost determinants • Rent • Management caliber • Operations 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 • Quality of local government Fast food restaurant Electronics manufacturer Revenue Revenue Costs Costs Location A Location B Location of operation (a) Location A Location of operation (b) (a) Location concerned with profit maximisation (b) Location concerned with cost minimisation Resources and markets Required service level Resource costs Land and facilities investment Suitability of site OPERATIONS RESOURCES Resource availability Location of sites MARKET REQUIREMENTS Image of location Community factors Telemarketing/Internet industries o Require neither face-to-face contact nor movement of materials o Have very broad location options o Traditional variables are no longer relevant o Cost and availability of labor may drive location decisions Location selection methodology BUSI4494 DOFS Location Selection Methods of evaluating location alternatives: • The Factor-Rating Method • Locational Break-Even Analysis • Center-of-Gravity Method Factor-Rating Method Popular because a wide variety of factors can be included in the analysis Six steps in the method 1. 2. 3. 4. 5. 6. Develop a list of relevant factors called critical 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 for each location Recommend the location with the highest point score Factor-rating method New Tech Ltd is an organization that specializes in simulation modelling consultancy. It has identified three sites on the west coast of the USA that have approximately equal initial and operating costs. The sites have been evaluated on a score of 1 to 10 (10 being best) against the following criteria and weighting assigned by management. Rank the three cities in order of their total weighted points score. City Weight LA Portland Seattle Pool of skilled system modellers .5 6 4 5 University research in modelling .3 3 5 3 Recreational and cultural activities .2 5 3 4 Factor-rating method Solution • LA = (6*.5) + (3*.3) + (5*.2) = 4.9 • Seattle = (5*.5) + (3*.3) + (4*.2) = 4.2 • Portland = (4*.5) + (5*.3) + (3*.2) = 4.1 Factor-rating example 1 The following table lists the weightings representing the relative importance of factors for the location of the third overseas campus of our university. Four potential sites have been given a score out of 10 for each factor. Identify the most suitable location for the University based on the results of weighted scoring. A.Tokyo B.Chongqing C.Toulouse D.Mexico City Factor-rating example 1 Factor Weight Site Tokyo Chongqing Toulouse Mexico City Number of potential students 40% 6 6 5 4 Attractiveness to top scholars 25% 7 5 8 6 Operating cost 20% 4 6 5 7 Openness 15% 7 7 6 6 Factor-rating example 2 A British company is opening a new branch in Europe and the following table lists the weightings representing the relative importance of factors for the location of this company. Four potential sites have been given a score out of 10 for each factor. Identify the most suitable location for the branch based on the results of weighted scoring. A.France B.Italy C.Netherlands D.Spain Factor-rating example 2 Factor WEIGHT France Italy Netherlands Spain Labour availability 0.25 6 7 5 8 Labour relations 0.21 6 5 8 7 Purchasing power 0.35 7 6 8 5 Growth potential 0.19 6 5 7 8 Locational break-even analysis Locational cost-volume analysis Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost at the expected production volume level Locational break-even analysis example Three locations: Fixed Variable Total City Cost Cost Cost Akron $30,000 $75 $180,000 Bowling Green $60,000 $45 $150,000 Chicago $110,000 $25 $160,000 Expected volume = ?? units Total Cost = Fixed Cost + Variable Cost x Volume 180,000 = 30,000 + 75 x Volume Volume = 2,000 Locational break-even analysis example $180,000 $160,000 $150,000 Annual cost $130,000 $110,000 $80,000 $60,000 $30,000 $10,000 – – – – – – – – – – – – – – – – – – – – Akron lowest cost Chicago lowest cost Bowling Green lowest cost | | | | | | | 0 500 1,000 1,500 2,000 2,500 3,000 Volume Locational break-even analysis example Location A B C D Fixed cost/year 250,000 100,000 150,000 200,000 Variable cost/year/unit 11 30 20 35 What is the location with the lowest total cost when expected volume is 4,000, 12,000 and 20,000 respectively? Locational break-even analysis example 4,000 12,000 20,000 A B C D 294,000 382,000 470,000 220,000 460,000 700,000 230,000 390,000 550,000 340,000 620,000 900,000 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) Center-of-Gravity Method ➢ Place existing locations on a coordinate grid ➢ Grid origin and scale is arbitrary ➢ Calculate X and Y coordinates for ‘center of gravity’ ➢ Assumes cost is directly proportional to distance and volume shipped Center-of-Gravity Method X coordinate of center of gravity = Y coordinate of center of gravity = where ∑dixQi ∑Qi ∑diyQi ∑Qi dix = x-coordinate of location i diy = y-coordinate of location i Qi = Quantity of goods to be moved to location i Center-of-Gravity method example North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) 90 – 60 – 30 – | – Atlanta (60, 40) | 30 Arbitrary origin | | | | 60 90 120 150 East-West Center-of-Gravity method example Number of Containers Store Location Shipped per Month Chicago (30, 120) 2,000 Pittsburgh (90, 110) 1,000 New York (130, 130) 1,000 Atlanta (60, 40) 2,000 Center-of-Gravity method example (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) x-coordinate = 2000 + 1000 + 1000 + 2000 = 66.7 (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 1000 + 2000 = 93.3 Center-of-Gravity Method North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) + 90 – Center of gravity (66.7, 93.3) 60 – 30 – | – Atlanta (60, 40) | 30 Arbitrar y origin | | | | 60 90 120 150 East-West Shortcomings • Only considers the distances traveled. It does not consider other factors such as the availability of roads on the selected location. • Assumes distribution costs change in a linear fashion with the distance and the quantity transported. • Also assumes quantity transported is fixed for the duration of the journey. Geographic Information Systems (GIS) New tool to help in location analysis Enables more complex demographic analysis Connects data with geography Learning outcomes • Factors to consider when locating a facility • Different methodologies that may be used to gain insights into facility location selection Thank you!
