PRODUCTIONS/OPERATIONS MANAGEMENT

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Chapter88
Location Planning
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Need for Location Decisions

Marketing Strategy

Cost of Doing Business

Growth

Depletion of Resources
Location Decisions

The importance of location
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Competition
Cost
Hidden effect

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Opportunity costs
Market Related Factors

Locations of demand or competition
Location Factors (General)
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Tangible Cost Factors

Availability of Multiple Modes of Transportation
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Labor availability and costs
Utilities
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Material oriented location
Market oriented location
Energy availability and costs
Water availability and costs
Site and construction costs
Taxes
Location Factors
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Intangible Factors
Zoning and legal regulations

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Community Attitudes

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Public opinion (noise, smoke, odor)
Expansion potential

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Pollution control
Access roads and transportation facilities
Living conditions

Costs of living, housing, etc
Nature of Location Decisions
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Strategic Importance
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Objectives
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Long term commitment/costs
Impact on investments, revenues, and operations
Supply chains
Profit potential
No single location may be better than others
Identify several locations from which to choose
Options

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Expand existing facilities
Add new facilities
Move
Making Location Decisions
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Decide on the criteria
Identify the important factors
Develop location alternatives
Evaluate the alternatives
Make selection
Location Decision Factors
Regional Factors
Community
Considerations
Multiple Plant
Strategies
Site-related
Factors
Regional Factors

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Location of raw materials
Location of markets
Labor factors
Climate and taxes
Community Considerations
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Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Developer support
Site Related Factors
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Land
Transportation
Environmental
Legal
Multiple Plant Strategies

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Product plant strategy
Market area plant strategy
Process plant strategy
Comparison of Service and
Manufacturing Considerations
Manufacturing/Distributi
on
Service/Retail
Cost Focus
Revenue focus
Transportation modes/costs
Demographics: age,income,etc
Energy availability, costs
Population/drawing area
Labor cost/availability/skills
Competition
Building/leasing costs
Traffic volume/patterns
Customer access/parking
Trends in Locations
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Foreign producers locating in U.S.
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“Made in USA”
Currency fluctuations
Just-in-time manufacturing techniques
Microfactories
Information Technology
Retail Facility Location

The major criterion
used in locating a
retail facility is the
volume of demand.
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Population in a given
area
Median Age
Median Income
Traffic counts at the
potential site
Public Service Facility Location

Difficulty of
measuring “socialcosts” or “social
benefits”

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Average distance or
time traveled by the
users of the facility
Maximum distance or
travel time between
the facility and its
intended population
Emergency Facility Location
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The objective is to
locate the facility so
that the maximum
response time to
any point of demand
is minimized.
Evaluating Locations

Transportation Model
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Factor Rating
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Decision based on movement costs of raw
materials or finished goods
Decision based on quantitative and
qualitative inputs
Center of Gravity Method

Decision based on minimum distribution
costs
Center of Gravity
Evaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs
Location Cost-Volume Analysis

Assumptions
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Fixed costs are constant
Variable costs are linear
Output can be closely estimated
Only one product involved
Location Decisions
Example 1: Cost-Volume Analysis
Fixed and variable costs for
four potential locations
L o c a tio n
A
B
C
D
F ix e d
C ost
$ 2 5 0 ,0 0
1 0 0 ,0 0
1 5 0 ,0 0
2 0 0 ,0 0
0
0
0
0
V a r ia b le
C ost
$11
30
20
35
Example 1: Solution
Fixed
Costs
A
B
C
D
$250,000
100,000
150,000
200,000
Variable
Costs
$11(10,000)
30(10,000)
20(10,000)
35(10,000)
Total
Costs
$360,000
400,000
350,000
550,000
Example 1: Solution
$(000)
800
700
600
500
400
300
200
100
0
0
D
B
C
A
A Superior
C Superior
B Superior
2
4
6
8
10
Annual Output (000)
12
14
16
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