Location Strategies
Hassan Abualola
Charles Angotto
Shaun Jameson
John Reardon
Joel Vastl
Agenda
• The Strategic Importance of Location
• Factors that Affect Location Decisions
• Methods of Evaluation Location Alternatives
• Service Location Strategy
The Strategic Importance of Location
• Location Strategy
• Location and Costs
• Location and Innovation
Location Strategy
• It is one of the most important strategic decisions made by many
companies (FedEx, Mercedes-Benz, and Hard Rock)
• Has a significant impact on both fixed costs and variable costs
• Companies make location decisions relatively infrequently
• 3 Location options
• Decision making often depends on the type of business
• “The objective of location strategy is to maximize the benefit of
location to the firm”
Location and Costs
• Location decisions often has the power to make or break a
company’s business strategy because it is such a significant
cost and revenue driver.
• Once management has committed to a specific location, many
costs are firmly in place and difficult to reduce
• Hard work to determine an optimal facility location is a good
investment
Location and Innovation
• Cost is not always the most important aspect of a strategic decision
• Four attributes that seem to affect overall competitiveness as well as
innovation
1.
Presence of high quality and specialized inputs
2.
An environment that encourages investment and intense local
rivalry
3.
Pressure and insight gained from a sophisticated local market
4.
Local presence of related and supporting industries
Factors That Affect Location Decisions
• The Basics:
1. Country Decision
2. Region/ Community Decision
3. Site Decision
• Labor Productivity
• Exchange Rates and Currency Risks
• Costs
• Political Risk, Values and Culture
• Proximity
Country Decision
1.
2.
3.
4.
5.
6.
Key Success Factors
Political risks,
government rules,
attitudes, incentives
Cultural and economic
issues
Location of markets
Labor talent, attitudes,
productivity, costs
Availability of supplies,
communications, energy
Exchange rates and
currency risks
Region/Community Decision
1.
2.
3.
MN
4.
WI
MI
IL
IN
5.
OH
6.
7.
8.
Key Success Factors
Corporate desires
Attractiveness of region
Labor availability and
costs
Costs and availability of
utilities
Environmental
regulations
Government incentives
and fiscal policies
Proximity to raw
materials and customers
Land/construction costs
Site Decision
Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of
services/ supplies
needed
5. Environmental
impact issues
Labor Productivity
• Area’s wage rate
• Companies do not want to go to low
• ↓Wage Rate = ↓Knowledge
• ↑Wage Rate = ↑Knowledge
Labor cost per day
Productivity (units per day)
= Cost per unit
Exchange Rates and Currency
Risk
• With the low wage rate that particular country must have
GOOD exchange rates
Costs
• Tangible Costs- easily measured costs such as utilities,
labor, materials, taxes
• Intangible costs- less easy to quantify and include
education, public transportation, community, quality-of-life
Political Risk, Values and Culture
• National, State, Local governments’ attitudes towards
private company
• National, State, Local property, zoning and pollution laws
• Workers values differ with culture
• Do not want to insult a different countries beliefs,
morals, and or culture
Proximity
• → Markets
Near customers
• → Suppliers
Near raw material
• → Competitors
clustering
Methods of Evaluating Location Alternatives
•
•
•
•
•
•
•
•
•
•
4 Types of Methods
The Factor-Rating Method
Example
Locational Break-Even Analysis
Example
Example
Center-of-Gravity Method
Example
Example
Transportation Model
Four Types of Methods
• The Factor-Rating Method: A location method that instills objectivity
into the process of identifying hard to evaluate costs.
• Locational Break-Even Analysis: The use of cost-volume analysis to
make an economic comparison of location alternatives.
• Center-of-Gravity Method: A mathematical technique used for
finding the location of a distribution center that will minimize
distribution costs.
• Transportation Model: The objective of the transportation model is
to determine the best pattern of shipments from several points of
supply to several points of demand.
The Factor-Rating Method
• Popular method because a wide variety of factors can be
included in the analysis.
• Qualitative and Quantitative
• Six Steps
•
•
•
•
•
•
Develop a list of relevant factors called key 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
Example
Locational Break-Even Analysis
• Used to determine which location provides the lowest
cost
• Can be done mathematically or graphically
• Three Steps
• Determine the fixed and variable cost for each location
• Plot the cost for each location
• Select location with the lowest total cost for expected
production volume.
Example
• Three locations:
Selling price = $120
Expected volume = 2,000 units
City
Fixed
Cost
Akron
Bowling Green
Chicago
$30,000
$60,000
$110,000
Total Cost = Fixed Cost + (Variable Cost x
Volume)
Variable
Cost
$75
$45
$25
Total
Cost
$180,000
$150,000
$160,000
Annual cost
Example
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
|
–
0
|
|
|
|
|
|
500
1,000
1,500
2,000
2,500
3,000
Volume
Center-of-Gravity Method
• Finds location of distribution center that minimizes
distribution costs
• This method takes into account the…
• Location of markets
• Volume of goods shipped to those markets
• Shipping Costs for distribution center
• Steps
• Place existing locations on a coordinate grid
• Calculate X and Y coordinates for ‘center of gravity’
Example
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
+
90 –
Center of gravity (66.7, 93.3)
60 –
30 –
–
|
Arbitrary
origin
Atlanta (60, 40)
|
|
|
|
|
30
60
90
120
150
East-West
Example
Store Location
Chicago (30, 120)
Pittsburgh (90, 110)
New York (130, 130)
Atlanta (60, 40)
Number of Containers
Shipped per Month
2,000
1,000
1,000
2,000
(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
Transportation Model
• Finds an initial feasible solution and then
makes step-by-step improvements until an
optimal solution is reached.
• Solutions will minimize total production
and shipping costs
Service Location Strategy
• Service Location Strategy
• Service/Retail Location Strategy
• Goods Producing Location
• Service/Retail Techniques
• Goods Production Techniques
• Service/Retail Assumptions
• Goods Producing Assumptions
• Hotel Location Selection
• Call Center Industry
• Geographical Info Systems
Service Location Strategy
• Purchasing power of customer-drawing area
• Service and image compatibility with demographics of
the customer-drawing area
• Competition/Quality of the competition
• Uniqueness of the firm’s and competitors’ locations
• Physical qualities of facilities and neighboring businesses
• Operating policies of the firm
• Quality of management
Service/Retail Location Strategy
• Revenue focus
• Volume/revenue
•
•
Drawing area; purchasing power
Competition; advertising/pricing
• Physical quality
•
Parking/access; security/lighting; appearance/image
• Cost determinants
•
•
•
Rent
Management caliber
Operations policies (hours, wage rates)
Goods Producing Location
• Cost Focus
• Tangible costs
•
•
Transportation cost of raw material/ finished goods
Energy and utility cost; labor; raw material; taxes,
• Intangible and future costs
•
•
•
•
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local government
Service/Retail Techniques
• Regression models to determine importance of various
factors
• Factor-rating method
• Traffic counts
• Demographic analysis of drawing area
• Purchasing power analysis of area
• Center-of-gravity method
• Geographic information systems
Goods Production Techniques
• Transportation method
• Factor-rating method
• Locational break-even analysis
• Crossover charts
Service/Retail Assumptions
• Location is a major determinant of revenue
• High customer-contact issues are critical
• Costs are relatively constant for a given area; therefore,
the revenue function is critical
Goods Producing Assumptions
• Location is a major determinant of cost
• Most major costs can be identified explicitly for each site
• Low customer contact allows focus on the identifiable
costs
• Intangible costs can be evaluated
Hotel Location Selection
• Strategically Most Important Decision
• La Quinta used 35 variables
• Refined to 4 variables:
• Price of the hotel
• Median income levels
• State population for hotel
• Nearby colleges
Call Center Industry
• No face to face or movement of materials
• Very broad location options
• Traditional variables are not relevant
• Cost and availability of labor may drive location decisions
Geographical Info Systems
• Important tool to help in location analysis
• Enables more complex demographic analysis
• Available data bases include
• Detailed census data
• Detailed maps
• Utilities
• Geographic features
• Locations of major services