OPM 5334-1

Operations Operations ManagementManagement

Location StrategiesLocation StrategiesChapter 4Chapter 4

2

DefinitionDefinition

Facility or Plant location is a place where a factory, warehouse, office or any business enterprise is built

Selection of a location depends on the type of business.

The objective of selection of a location is to obtain the maximum efficiency and effectiveness by minimizing operating cost and achieve maximum revenues.

OPM 5334-3

Industrial Location DecisionsIndustrial 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

© 1995 Corel Corp.

OPM 5334-4

Service Location DecisionsService 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

OPM 5334-5

In General - Location DecisionsIn General - Location Decisions

Long-term decisions Difficult to reverse Affect fixed & variable costs

Objective: Maximize benefit of location to firm

6

Reasons for Plant/Facility Location Reasons for Plant/Facility Location DecisionsDecisions

1. Starting new business

2. Introduction of new product or service

3. Insufficient capacity

4. Changes in technology

5. Mergers

6. Changes in input resources

7. Shifts in geographical demand may occur

OPM 5334-7

Location Decision SequenceLocation Decision Sequence

Country

© 1995 Corel Corp.

Region/Community

© 1995 Corel Corp.

Site

© 1995 Corel Corp.

OPM 5334-8

Factors That Affect Location DecisionsFactors That Affect Location Decisions

OPM 5334-9

Factors Affecting CountryFactors Affecting Country

Government rules, attitudes, political risk, incentives

Culture & economy Market location Labor availability, attitudes,

productivity, and cost Availability of supplies,

communications, energy Exchange rates and currency

risks

© 1995 Corel Corp.

OPM 5334-10

Region Location DecisionsRegion Location Decisions Corporate desires Attractiveness of region (culture,

taxes, climate, etc.) Labor, availability, costs, attitudes

towards unions Costs and availability of utilities Environmental regulations of state

and town Government incentives Proximity to raw materials &

customers Land/construction costs

© 1995 Corel Corp.

OPM 5334-11

Factors Affecting SiteFactors Affecting Site

Site size and cost Air, rail, highway, and

waterway systems Zoning restrictions Nearness of

services/supplies needed

Environmental impact issues

© 1995 Corel Corp.

OPM 5334-12

Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets

Government agencies Police & fire departments Post Office

Retail Sales and Service Fast food restaurants, supermarkets, gas stations Drug stores, shopping malls Bakeries

Services Doctors, lawyers, accountants, barbers Banks, auto repair, motels

OPM 5334-13

Location Evaluation MethodsLocation Evaluation Methods

Factor-rating method Locational break-even

analysis Center of gravity method Transportation model

© 1995 Corel Corp.

OPM 5334-14

Factor-Rating MethodFactor-Rating Method

Most widely used location technique Useful for service & industrial locations Rates locations using factors

Tangible (quantitative) factors Example: Short-run & long-run costs

Intangible (qualitative) factors Example: Education quality, labor skills

OPM 5334-15

Steps in Factor Rating MethodSteps in Factor Rating Method List relevant factors called critical success

factors. Assign importance weight to each factor Develop scale for each factor (such as 1 – 5) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score

CSF in Location AnalysisCSF in Location Analysis

Score(out of 5)

Score(out of 5)

Weighted score

Weighted score

CSF Weight A/Setar Sg.Petani A/Setar Sg.Petani

Labor Availability

5 4 5 5x4=20 5x5=25

Transportation Service

2 4 3 2x4=8 2x3=6

Proximity to market

4 5 4 4x5=20 4x4=16

Proximity to suppliers

3 3 4 3x3=9 3x4=12

Quality of Life 1 5 4 1x5=5 1x4=4

Total Score

62 63

Rank 2 1

Best location

Sg.Petani

OPM 533

4-16

OPM 5334-17

Method of cost-volume analysis used for industrial locations

Steps Determine fixed & variable costs for each location Plot total cost for each location (Cost on vertical axis,

Annual Volume on horizontal axis) Select location with lowest total cost for expected

production volume.

Locational Break-Even AnalysisLocational Break-Even Analysis

OPM 5334-18

BEP = Fixed Cost (FC) Selling Price per unit (SP) – Variable Cost per unit(VC).

Total Revenue (TR) = SP(Q) Total Cost (TC) = FC+TVC Profit = TR-TC

Locational Break-Even AnalysisLocational Break-Even Analysis

OPM 5334-19

Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample

You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Asahan, Baling, or Chini. Fixed costs per year are RM30k, RM60k, & RM110k respectively. Variable costs per case are RM75, RM45, & RM25 respectively. The price per case is RM120. What is the best location for an expected volume of 2,000 cases per year?

© 1995 Corel Corp.

Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample

Answer:

TC = FC + TVCTC (Asahan) = RM30,000 + RM75(2,000) = RM180,000

TC (Baling) = RM60,000 + RM45(2,000) = RM150,000

TC (Chini) = RM110,000 + RM25(2,000) = RM160,000

Baling is the best location because of the lowest cost.

OPM 5334-20

Locational Break-Even Analysis – Select Locational Break-Even Analysis – Select location based on economic basislocation based on economic basis

The crossover point for Asahan and Baling

TC (Asahan) = TC (Baling)

30,000 + 75Q = 60,000 + 45Q

30Q = 30,000

Q = 1,000

The crossover point for Baling and Chini

TC (Baling) = TC (Chini)

60,000 + 45Q = 110,000 + 25Q

20Q = 50,000

Q = 2,500

OPM 5334-21

OPM 5334-22

Locational Break-Even Crossover Locational Break-Even Crossover ChartChart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

Ann

ual C

ost

Asahan

Chini

Baling

Balinglowest cost

Chini lowest cost

Asahan lowest cost

OPM 5334-23

Center of Gravity MethodCenter of Gravity Method

Finds location of single distribution center serving several destinations that can minimize distribution center

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

OPM 5334-24

Center of Gravity Method StepsCenter 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

OPM 5334-25

Center of Gravity Method EquationsCenter of Gravity Method Equations

dix = x coordinate of location i

Wi = Volume of goods moved to or from location i

diy = y coordinate of location i

X Coordinate

Y Coordinate

ii

iiix

x W

WdC

ii

iiiy

y W

WdC

Center-of-Gravity Method ExampleCenter-of-Gravity Method Example

Number of ContainersNumber of Containers Store Location Coordinate Shipped per MonthStore Location Coordinate Shipped per Month

Chicago (30, 120)Chicago (30, 120) 2,000 2,000Pittsburgh (90, 110)Pittsburgh (90, 110) 1,000 1,000New York (130, 130)New York (130, 130) 1,000 1,000Atlanta (60, 40)Atlanta (60, 40) 2,000 2,000

Quain’s Discount Department Store has four stores located in Chicago, Pittsburg, New York and Atlanta. They are currently being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the chain first store. The firm has decided to find some “central” location in which to build a new warehouse. Data on demand rates and the current location of each store are as above.

Center-of-Gravity Method - ExampleCenter-of-Gravity Method - Example

North-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago (30, 120)Chicago (30, 120)New York (130, 130)New York (130, 130)

Pittsburgh (90, 110)Pittsburgh (90, 110)

Atlanta (60, 40)Atlanta (60, 40)

Center-of-Gravity Method ExampleCenter-of-Gravity Method Example

Number of ContainersNumber of Containers Store Location Coordinate Shipped per MonthStore Location Coordinate Shipped per Month

Chicago (30, 120)Chicago (30, 120) 2,000 2,000Pittsburgh (90, 110)Pittsburgh (90, 110) 1,000 1,000New York (130, 130)New York (130, 130) 1,000 1,000Atlanta (60, 40)Atlanta (60, 40) 2,000 2,000

x-coordinate =x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 66.7= 66.7

y-coordinate =y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 93.3= 93.3

OPM 5334-29

Coordinate Locations of Four Coordinate Locations of Four Quain’s Department Stores and Quain’s Department Stores and

the Center of Gravitythe Center of Gravity

OPM 5334-30

Transportation ModelTransportation Model The objective of the transportation model is to determine the best

pattern of shipments from several point of supply (sources) to several point of demands destinations so as to minimize total production and transportation costs.

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

OPM 5334-31

Service Location StrategyService Location Strategy• The focus in the service sector is on maximizing revenue. • The eight (8) major components of volume and revenue for the

service firm are: 1. Purchasing power of customer drawing area2. Service and image compatibility with demographics of the customer

drawing area3. Competition in the area4. Quality of the competition5. Uniqueness of the firm’s and competitor’s locations6. Physical qualities of facilities and neighboring businesses7. Operating policies of the firm8. Quality of management

OPM 5334-32

Location Strategies – Service vs. Location Strategies – Service vs. IndustrialIndustrial

Service/Retail/Professional 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 LocationCost Focus

Tangible costs Transportation cost of raw materials Shipment cost of finished goods Energy and utility cost; labor; raw

material; taxes, etc. Intangible and future costs

Attitude toward union Quality of life Education expenditures by state Quality of state and local government

OPM 5334-33

Location Strategies –Location Strategies –Service vs. IndustrialService vs. Industrial

Service/Retail/Professional Techniques

Regression models to determine importance of various factors

Factor-rating method Traffic counts Demographic analysis of drawing

area Purchasing power analysis of

drawing area Center of gravity method Geographic information systems

Goods Producing LocationTechniques

Linear Programming (Transportation method)

Factor-rating method Locational breakeven

analysis Crossover charts

OPM 5334-34

Location Strategies –Location Strategies –Service vs. IndustrialService vs. Industrial

Service/Retail/Professional Assumptions

Location is a major determinate of revenue

High customer-contact issues are critical

Costs are relatively constant for a given area; therefore, the revenue function is critical

Goods-Producing LocationAssumptions

Location is a major determinate of cost

Most major costs can be identified explicitly for each site

Low customer contact allows focus on identifiable costs

Intangible costs can be evaluated

OPM 5334-35

Final ThoughtFinal Thought

The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.

© 1995 Corel Corp.