Location Planing

8-1 Location Planning and Analysis
Chapter: 1 Location Planning and Analysis

Need for Location Decisions
Nature of location decisions
Importance of Location Decision
Objectives of Locating Decisions
Location Options
General Procedure For Making Location Decisions
Factors That Affect Location Decisions
Tangible and Intangible Factors
Regional Factors
Location of Raw Materials
Location of Markets
Labor Factors
Other Factors
Community Considerations
Site-Related Factors
Multiple Plant Manufacturing Strategies
Product Plant Strategy
Market Area Plant Strategy
Process Plant Strategy
Service and Retail Locations
Global Locations
Chapter:2 Transportation Modeling

Introduction
Obtaining an Initial Solution
The Intuitive Lowest-Cost Approach
Obtaining an Initial Solution
Evaluating Empty Cells: The stepping-Stone Method
Evaluating Empty Cells: The MODI Method
Obtaining an Improved Solution
Special Problems
Unequal Supply and Demand
Degeneracy
Other Applications
Chapter: 3 Interest and type of interest

Chapter: 4 Depreciation and type of depreciation
Chapter: 5 Project Evaluation
Chapter: 6 Cost Indexing
1.Pay back period and discounted pay back period.
2.Accounting rate of return (ARR).
3.Net present value (NRV).
4.Internal rate of return (IRR).
5.Profitability index.
6.Modified internal rate of return (MIRR).
Chapter: 7 Matainance Books:
(i) Production Operation Management
by William J. Stevenson (sixth edition)
(ii) Plant Design and Economics for Chemical Engineers
by
Peters and Timerhaus
(iii) Engineering Economy
by Leland Blank and Anthony Tarquin, Fifth Edition
(iv) Engineering Economics by R. Panneerselvam ,
CHAPTER
8
Location Planning
and Analysis
Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
When a well-know real estate broken was asked
what the three most important determinants of
the value of a property are, he said, Thats easy,
Location, location, and location.

In residential real estate market, location is an important
factor. Although the style of house, number of bedrooms
and bathrooms, level of maintenance, and how modern
the kitchen is undoubtedly enter into the picture, some
locations are just more desirable than others.
In many respects, the choice of location for a business
organization is every bit as important as it is for a house,
although for different reasons.
Location decisions represent an integral part of the
strategic planning process of virtually every
organization. Although it might appear that location
decision are one time problems pertaining to new
organizations, existing organizations often have a bigger
stake in these kinds of decisions than new
organizations.
We will talk about location analysis
We will first examine
The reason why firms must make location
decisions.
The nature of these decisions & then
general procedure for developing and
evaluation location alternatives.

In Importance of Location Decision
Long term commitment, which makes mistakes difficult to
overcome.
Location decisions have impact on:
Investment requirements
Operating costs and revenues and operations
A poor choice of location might result in
Excessive transportation cost
Shortage of qualified labor
Loss of competitive advantage
Inadequate supplies of raw materials
FOR SERVICES:
oA poor location could result in lack of customers and/or High
operating cost.
oSo far both manufacturing and services, location decision can
have a significant impact on competitive advantage
Objective of Location Decisions

As a general rule,
Profit-oriented organization base their decisions on PROFIT POTENTIAL
Whereas
Non-profit organizations strive to achieve a balance b/w cost and the
LEVEL OF CUSTOMER SERVICE they provide.
LOCATION OPTIONS
Managers generally consider FOUR options in location planning:
o Expand
o Move to a new location
o Keeping the old location and add to a new location while retaining
the existing ones
o Doing nothing maintaining the status quo
Need for Location Decisions
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources
NATURE OF LOCATION DECISIONS

Strategic Importance
Long term commitment/costs
Impact on investments, revenues, and operations
Supply chains
Objectives
Profit potential
No single location may be better than others
Identify several locations from which to choose
Options
Expand existing facilities
Add new facilities
Move
MAKING LOCATION DECISIONS

Decide on the criteria
Identify the important factors
Develop location alternatives
Evaluate the alternatives
Make selection
Many factors influence location decision. However, it happens that one
or a few factors are so impt. That they dominate the decision. e,g;
in manufacturing, the potentially dominating factors usually
include availability of an abundant energy and water supply and
proximity to raw material. Thus nucl. reactors require large amount
of water for cooling, heavy industries such as steel and Al
production need large amounts of electricity, and so on.
Transportation costs can be major factor. In service orgs., possible
LOCATION DECISION FACTORS
dominating factors are market related & include

tariff patterns, convenience, and competitors
locations, as well as proximity to the market.
e.g., car rental agencies locate near airports and
midcity, where their customers are. Following
four major factors are impt. and their
subdivisions are described next:
Location Decision Factors

Community
Regional Factors Considerations
Multiple Plant Site-related

Strategies Factors
Regional Factors
Location of raw materials

Location of markets
Labor factors
Climate and taxes

TANGIBLE COST FACTORS

Many items necessary to the operation are costly. Location
decisions should take such items into consideration. Long-range
forecasts of costs should be used, since facilities may last forty or
fifty years or more.
1. Transportation
Availability of multiple modes of transportation can provide
flexibility and minimum cost means of transporting various
materials.
2. Labor Availability and Costs
Labor intensive companies may place more emphasis on the cost
of processing materials than on the cost of transporting them.
Companies that employ a large labor force may relocate to places
with lower wage rates.
TANGIBLE COST FACTORS

3. Energy Availability and Costs
Many manufacturing plants use large amounts of energy sources,
such as electricity or natural gas, to operate production processes.
4. Water Availability and Cost
Processes that require large amounts of water are restricted to
locations where abundant water resources are available. Water
shortages occur in some locations and will probably become more
common.
5. Site and Construction Costs
One cost directly related to facility location is the cost of purchasing
the site and building the facility. The cost per acre of land varies
widely from site to site within a region and from region to region.
INTANGIBLE FACTORS
Not all measures of a locations desirability can be expressed in
dollars and cents. People must be induced to come to work there, so
the appeal of a locality as a place to live and rear a family is
important. The local environment may also have important effects on
a company.
1. Zoning and Legal Regulations
Local, state, and federal pollution control regulations may limit the
locations available to some companies. Zoning regulations control the
types of businesses that may operate in certain areas.
2. Community Attitudes
Community relations should be an integral part of location decisions.
Public opinion in some areas may be unfavorable to particular types
of businesses, even though there is no formal legislation against it.
INTANGIBLE FACTORS
3. Expansion Potential
A site for a manufacturing or nonmanufacturing facility should
offer some flexibility and room for expansion. The size and
contour of the plot of land should allow for expansion of the
facility without a sacrifice of efficiency.
4. Living Conditions
Often a company's top-echelon personnel are obtained from other
branches or other companies. Today some people decline
promotions with their own or offers from other companies
because they do not want to move to the job location.
CLIMATE AND TAXES

Climate & taxes sometimes play a role in location
decision. e.g., severe winter season can seriously
restrict the efficiency of certain operation and result
in delayed deliveries and disruption caused by
inability of employees to get to work.
Similarly, the business & personal income taxes in
some states reduce their attractiveness to companies
seeking new locations.
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Developer support
Site Related Factors
Land
Transportation
Environmental
Legal
Multiple Plant Strategies
Product plant strategy

Market area plant strategy
Process plant strategy

Product plant strategy

With this strategy, entire products or product lines are
produced in separate plants, and each plant usually
supplies the entire domestic market.
This is essentially a decentralized approach, with
each plant focusing on a narrow set of requirements.
This results in economies of scale and, compared
with multipurpose plants, lower operating costs.
Plant location may be widely scattered or clustered
relatively close to one an other.
Market Area plant strategy

Plants are designed to serve a particular geographical segment
of a market e.g., (West coast, Northeast) Individual plants
produce most if not all of a companys products and supply a
limited geographical area. Although operating cost may tend to
be higher than those of product plants, significant savings on
shipping costs for comparable products can be made.
This arrangement is particularly desirable when shipping costs
are high due to volume, weight, or other factors.
Benefits of such arrangements are rapid delivery and response
to local needs. This approach requires centralized coordination
of decision to add or delete plants, or to expand or downsize
current plants due to changing market conditions.
Process plant strategy

In here different plants concentrate on different aspects of a process.
Automobile manufacturers often use this approach, with different
plants for engines, transmissions, body stamping, & even radiators.
This approach is best suited to product that have numerous
components; Separating the production of components results in less
confusion then if all production was carried out at the same location.
But this kind of arrangement requires coordination of production
throughout the system and requires highly informed, centralized
administration to achieve effective operation. Key Adv. Individual
plants are highly specialized and generate volume that yield economies
of scale. MULTIPLE PLANTS have additional benefit: the increase in
learning opportunities that occurs when similar operations are being
done in different plants. Another advantage is that same problems tend
to arise, and solutions to those problems as well as improvements in
general in product & processes can be made at one plant and can be
shared with other plants.
Comparison of Service and
Manufacturing Considerations
Table 8.2
Manufacturing/Distribution 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
Comparison of Service and
Manufacturing Considerations
Medical services are often located near hospital for
convenience of patients. Doctors offices may be
located near hospitals, or grouped in other areas
where other doctors offices may also be located.
TRENDS IN LOCATIONS
(Globalization)
Foreign producers locating in U.S.
Made in USA
Currency fluctuations
Just-in-time manufacturing techniques which encourage supplier to

locate near their clients to reduce supplier lead time.
Microfactories
Information Technology
Table 8.3
Foreign a. Policies on foreign ownership of production facilities

Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions
Customer Possible buy locally sentiment

Preferences
Labor Level of training and education of workers

Work practices
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation
Evaluating Locations
Cost-Profit-Volume Analysis
Factor Rating Method
Centre of Gravity Method
Transportaion Cost Method
Location Cost-Volume Analysis

STEPS OF COST VOLUME ANALYSIS
Determine fixed and variable costs
Plot total costs
Determine lowest total costs
Assumptions
Fixed costs are constant
Variable costs are linear
Output can be closely estimated
Only one product involved

Example 1: Cost-Volume Analysis
Fixed and variable costs for

four potential locations
L o c a tio n F ix e d V a r ia b le
C o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5
Example 1: Solution
F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts
A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0
Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16
Annual Output (000)

Factor Rating Method
The
8-40 Location Planning Center
and Analysis of Gravity Method
GLOBAL LOCATIONS
Recent trends in locating facilities, particularly manufacturing
facilities, reflect a combination of competitive and technological
factors. One trend has been that of foreign producers, especially
automotive firms, to locate plants in the United States. The United
States represents a tremendous market for cars, trucks, and
recreational vehicles. By locating in the United States, these firms
can shorten delivery time and reduce delivery costs. Furthermore,
they can avoid any future tariffs or quotas that might be applied to
imports.
A development that affects location decisions was the passage of
GATT in 1994. One of its provisions was the reduction and
elimination of various tariffs. Consequently, location within the
borders of a country to escape tariffs is now much less of an issue.
GLOBAL LOCATIONS
An ethical issue has been the use of "sweatshops," which employ
workers at low wages in poor working conditions. Consumer protests
have caused a number of companies to cease this practice.
Another trend is just-in-time manufacturing techniques, which
encourage suppliers to locate near their customers to reduce supplier
lead times. For this reason, some U.S. firms are reconsidering decisions
to locate offshore. Moreover, in light manufacturing (e.g., electronics),
low-cost labor is becoming less important than nearness to markets;
users of electronics components want suppliers that are close to their
manufacturing facilities. One offshoot of this is the possibility that the
future will see a trend toward smaller factories located close to markets.
In some industries, small, automated microfactories with narrow product
focuses will be located near major markets to reduce response time.
GLOBAL LOCATIONS
It is likely that advances in information technology will enhance the
ability of manufacturing firms to gather, track, and distribute
information that links purchasing, marketing, and distribution with
design, engineering, and manufacturing. This will reduce the need for
these functions to be located close together, thereby permitting a
strategy of locating production facilities near major markets.
Two other factors are causing companies to locate manufacturing
facilities in countries that contain their markets (e.g., Japanese auto
companies establishing factories in the United States). One is to
counter negative sentiments such as "not made in this country." Thus,
Japanese factories in the United States produce cars made by U.S.
workers. The second factor relates to currency fluctuations and
devaluations. These changes can have a significant impact on demand
and. hence, on profits. Changes in currency value alter the price of
foreign goods, but not the price of goods produced within a country.
GLOBAL LOCATIONS
For instance, if the value of a country's currency falls relative to that of
other countries, prices within the country don't change, but foreign-
produced goods become more expensive. If demand is elastic, then demand
for those foreign goods will fall. Furthermore, currency changes may result
in increased costs of parts supplied by foreign producers. By locating and
selling within a country, and buying from suppliers in that country,
manufacturers can avoid the impact of currency changes.
The trend toward globalization for some organizations has meant having
facilities, personnel, and operations around the world. This has created new
challenges for managing scattered and distant operations. Added to that are
the ongoing social unrest, political instability, and terrorist acts that have
caused many organizations to be very cautious about locating in, or even
traveling to, certain counties or regions.
Nonetheless, the benefits of globalization, coupled with advanced
communications capabilities and other technologies, make globalization
worth considering.
GLOBAL LOCATIONS
The growth in multinational operations over the past several decades
is evidence of the importance of foreign locations. Some firms are
attracted to foreign locations because of nearby deposits of
aluminum, copper, timber, oil, or other natural resources. Other firms
view foreign locations as a way to expand their markets, and still
others are attracted by ample supplies of labor. Some countries may
offer financial incentives to companies to create jobs for their people.
Developing countries may establish tariffs to protect their young
industries from outside competition, which may also reduce the
amount of "foreign'" competition a firm must face if it locates in such
a country. Until the North American Free Trade Agreement
eliminated restrictions, the Fisher-Price Toy Company factory in
Matamoros. Mexico, was not allowed to sell in Mexico the Muppet
toys it makes. U.S. companies with factories in Mexico could import
raw materials duty-free, but they were required to export all of their
output.
GLOBAL LOCATIONS
Many developing countries offer an abundant supply of cheap labor. For
example, a considerable amount of the clothes sold in the United States bear
labels indicating they were made in Korea. China, or Taiwan. In some instances,
it is less expensive to ship raw materials or semi finished goods to foreign
countries for fabrication and assembly, and then ship them to their final
destinations, than it is to produce them in the United States. However, the final
cost per unit is the most important factor. In some cases, the low cost of labor in
a foreign country can be negated by low productivity and shipping costs.
High production costs in Germany have contributed to a number of German
companies locating some of their production facilities in lower-cost countries.
Among them are industrial products giant Siemens, A.G. (a semiconductor plant
in Britain), drug makers Bayer, A.G. (a plant in Texas) and Hoechst, A.G. (a
plant in China), and automakers Mercedes (plants in Spain, France, and
Alabama) and BMW (a plant in Spartansburg, South Carolina).
GLOBAL LOCATIONS
A firm contemplating a foreign location must carefully weigh the
potential benefits against the potential problems. A major factor is the
stability of a country's government and its attitude toward American
firms. Import restrictions can pose problems with bringing in
equipment and spare parts.
Some of the problems of a foreign location can be caused by language
and cultural differences between the United States and the host
country. U.S. firms often find it necessary to use U.S. technical
personnel but find it difficult to convince workers to move to a
foreign country; workers may have to leave their families behind or
else subject them to sub-standard housing or educational systems.
Companies are now exerting additional efforts to reduce these
obstacles. Some provide housing allowances and have schools for
U.S. children. They are also improving their efforts to see that the
employees they send abroad are familiar with local customs and have
a reasonable facility with the language of the host country.
GLOBAL LOCATIONS
One factor that has negatively impacted the bottom line of some
U.S. firms operating plants in foreign countries is the level of
corruption present, erasing some of the envisioned benefits of lower
labor or transportation costs.

Location Planing

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8-1 Location Planning and Analysis

Chapter: 1 Location Planning and Analysis

Chapter:2 Transportation Modeling

Chapter: 3 Interest and type of interest

Operations Management, Eighth Edition, by William J. Stevenson

When a well-know real estate broken was asked

what the three most important determinants of

the value of a property are, he said, Thats easy,

Location, location, and location.

The reason why firms must make location

The nature of these decisions & then

general procedure for developing and

evaluation location alternatives.

Objective of Location Decisions

Need for Location Decisions

NATURE OF LOCATION DECISIONS

MAKING LOCATION DECISIONS

LOCATION DECISION FACTORS

dominating factors are market related & include

Location Decision Factors

Multiple Plant Site-related

Location of raw materials

Climate and taxes

TANGIBLE COST FACTORS

TANGIBLE COST FACTORS

CLIMATE AND TAXES

Site Related Factors

Multiple Plant Strategies

Product plant strategy

Process plant strategy

Product plant strategy

Market Area plant strategy

Process plant strategy

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Just-in-time manufacturing techniques which encourage supplier to

Foreign a. Policies on foreign ownership of production facilities

Customer Possible buy locally sentiment

Labor Level of training and education of workers

Location Cost-Volume Analysis

Variable costs are linear

Output can be closely estimated

Only one product involved

Example 1: Cost-Volume Analysis

Fixed and variable costs for

Annual Output (000)

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