Location Decisions

8
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Principles of Operations Management, Global Edition, Ninth Edition

PowerPoint slides by Jeff Heyl

© 2014 Pearson Education 8-1

 Outline
Major factors that affect location
decisions
Methods of Evaluating Location
Alternatives
- Factor-rating method
- Locational break-even analysis
- Center-of-gravity method
Differences between service and
industrial-sector location analysis
8-2
 Location Strategy
• One of the most important
strategic decisions made by
companies.
• Because it affects both fixed and
variable costs (as much as 50%
of total operating expenses—
energy cost, labor cost, and etc.)
The objective of location strategy is
to maximize the benefit of location
to the firm
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-3
 Location Strategy
 One of the most important Long-term
decision. Once committed to a
location, many resource and cost
issues are difficult to change
 Increasingly global in nature (FedEx- a
hub in China, Hard Rock Cafe –
Moscow)
 Trade Agreements such as NAFTA,
(North American Free Trade
Agreement), EU (European Union) are
facilitating to locate globally
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-4
 Globalization and Facility Location
Glabalization has taken place because of the
development of:
1. Market economics
2. Better international communications
3. Faster, reliable travel and shipping
4. Ease of capital flow between
countries
5. High differences in labor costs

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-5

 Location Strategy and Innovation
 Cost is not always the most important
aspect of a strategic decision. For some
companies the focus on cost may change
to the focus on innovation, creativity and
research.
 For instance Intel prefered to open its
newest plant in Arizona where education
levels are high and skilled workforce is
abundant.
 Warehouse location strategy may be driven
by both cost and also the speed of the
delivery.
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-6
 Location Decisions
Country Decision Key Success Factors
1. Political risks,
government rules,
incentives
2. Exchange rates and
currency risks

Figure 8.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-7
 Location Decisions
Region/ Key Success Factors
Community
Decision 1. Labor availability and costs
2. Availability of utilities and
MN costs
WI
3. Environmental regulations
MI
4. Proximity to raw materials
IL IN
OH and customers
5. Land/construction costs

Figure 8.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-8
 Location Decisions
Site Decision Key Success Factors

1. Air, rail, highway,

and waterway
systems
2. Facilities for
education,
shopping and
recreation
3. Environmental
Figure 8.1 regulations
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-9
 Global Competitiveness Index
Country/Economy 2010 - 2011 2011 – 2012 2014-2015
Switzerland 1 1 1
Sweden 2 3 10
Singapore 3 2 2
United States 4 5 3
Germany 5 6 5
Japan 6 9 6
Finland 7 4 4
Denmark 9 8 12
Canada 10 12 15
United Kingdom 12 10 9
France 15 18 23
China 27 26 28
Spain 42 36 35
Portugal 46 45 36
Turkey 61 59 45

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 10

 Global Competitiveness
Index 2014-2015

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 11

 Factors Affecting
Location Decisions
1. Labor productivity
2. Exchange rates and currency risks
3. Costs –Tangible, Intangible (education,
public transportation)
4. Political risk, values, and culture
(punctuality, corruption)
5. Proximity to markets (customers)
6. Proximity to suppliers (perishable goods,
high transportation costs)
7. Proximity to competitors (clustering)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 12
 Factors That Affect
Location Decisions
► 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)

South Carolina Mexico

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units

8 - 13
 Ranking Corruption
Rank Country 2014 CPI Score (out of 100)
1 Denmark, Finland, New Zealand 92 Least
4 Sweden 88 Corrupt
5 Norway 87
6 Switzerland 86
7 Singapore 84
8 Netherlands 83
12 Germany 79
16 Japan 77
17 Hong Kong 74
19 USA 73
35 Taiwan 61
39 Israel 60
64 Turkey 45 Most
100 China 36 Corrupt
136 Russia 27
174 Somalia 8
8 - 14
 Clustering of Companies
Industry Locations Reason for clustering
Wine making Napa Valley (US) Natural resources of
Bordeaux region land and climate
(France)
Software firms Silicon Valley, Talent resources of
Boston, Bangalore bright graduates in
(India) scientific/technical
areas, venture
capitalists nearby
Race car Huntington/North Critical mass of talent
builders Hampton region and information
(England)

© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 8 - 15

 Clustering of Companies
Industry Locations Reason for clustering
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal weather, tourists
Studios)

Computer Singapore, Taiwan Skilled/educated

hardware workforce with large
manufacturers pool of engineers

© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 8 - 16

 Clustering of Companies
Industry Locations Reason for clustering
Fast food Sites within 1 mile Stimulate food sales,
chains of each other high traffic flows
(Wendy’s,
McDonald’s,
Burger King,
and Pizza Hut)

General aviation Wichita, Kansas Mass of aviation skills

aircraft
(Cessna,
Learjet, Boeing)

© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 8 - 17

 Mathematical Methods to
Evaluate Location Alternatives
Factor rating
Locational cost-volume-
profit analysis
Transportation model
Center of gravity method

LO
8.6 8 - 18
 Factor-Rating Method
 Popular because a wide variety of factors
including both qualitative and
quantitative can be included in the
analysis. Six steps in the method are:
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 19
 Example 1: Factor Rating
 A photo-processing company intends to open a new branch store.
The following table contains information on two potential locations.
Which is better?

Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to
existing source
.10 100 60
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00
8 - 20
 Example 1: Factor Rating
 A photo-processing company intends to open a new branch store.
The following table contains information on two potential locations.
Which is better?

Scores
(Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2
Proximity to
.10 100 60 .10(100) = 10.0 .10(60) = 6.0
existing source
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00 70.6 82.7

8 - 21
 Example 2:Factor-Rating
TABLE 8.4 Weights, Scores, and Solution

SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK

Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude

People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3

Education and
.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
health
Totals 1.00 70.4 68.0

8 - 22
 Locational
Break-Even Analysis
 Method of cost-volume analysis is used
for industrial locations
 Three steps in the method
1. Determine fixed and variable costs for
each location
2. Plot the cost for each location
3. Select the location with the lowest total
cost for the expected production volume

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 23

 Locational Cost-Profit-Volume
Analysis
 For a cost analysis, compute the total
cost for each alternative location:
Total Cost  FC  v  Q
where
FC  Fixed cost
v  Variable cost per unit
Q  Quantity or volume of output

8 - 24
 Example 1: Locational
Break-Even Analysis
Three locations:
Selling price = $120
Expected volume = 2,000 units
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

Total Cost = Fixed Cost + (Variable Cost x Volume)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 25

 Example 1:Locational
Break-Even Analysis
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
Annual cost

–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
Akron Chicago
$30,000 – lowest
Bowling Green
lowest
– cost
lowest cost
cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Figure 8.2
Volume
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 Example 2:
Cost-Profit-Volume Analysis
 Fixed and variable costs for four potential
plant locations are shown below:
Fixed Cost Variable Cost
Location per Year per Unit
A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35

8-27
8 - 27
Example 2: Cost-Profit-
Volume Analysis
Plot of Location Total Costs

8-28
8 - 28
Example: Cost-Profit-Volume Analysis

Total Cost of C  Total Cost of B

 Range approximations
150,000  20Q  100,000  30Q
 B Superior (up to 4,999 units)
50,000  10Q
Q  5,000

Total Cost of A  Total Cost of C

 C Superior (>5,000 to 11,111 units)250,000  11Q  150,000  20Q
100,000  9Q
Q  11,111.11

 A superior (11,112 units and up)

8 - 29
 Center-of-Gravity Method
 Finds location of a distribution
center that minimizes distribution
costs
 Considers
 Location of markets
 Volume of goods shipped to those
markets
 Shipping cost (or distance)

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Center of Gravity Method
 Method for locating a distribution center
that minimizes distribution costs
 Treats distribution costs as a linear
function of the distance and the
quantity shipped
 The quantity to be shipped to each
destination is assumed to be fixed
 Uses a map that shows the locations of
destinations
 A coordinate system is overlaid on the
map to determine the relative locations

8 - 31
 Center of Gravity Method

a) Map showing destinations b) Coordinate system added c) Center of gravity

8-32
8 - 32
 Center of Gravity Method
 If quantities to be shipped to every location are equal, you
can obtain the coordinates of the center of gravity by finding
the average of the x-coordinates and the average of the y-
coordinates

x
 x i

y
 y i

n
where
xi  x coordinate of destinatio n i
yi  y coordinate of destinatio n i
n  Number of destinatio ns

8 - 33
Example: Center of Gravity Method
Suppose you are attempting to find
the center of gravity for this problem.

Destination
D1
x
2
y
2 x
 x i 18
  4.5
n 4
D2 3 5
D3 5 4
D4 8 5
y
 y i

16
4
18 16 n 4

8-34
8 - 34
 Center of Gravity Method
 When the quantities to be shipped to
every location are unequal, the
coordinates of the center of gravity are
found as follows:
x
 xQ i i

Q i

y
 yQ i i

Q i

where
Qi  Quantity t o be shipped to destinatio n i
xi  x coordinate of destinatio n i
yi  y coordinate of destinatio n i
8 - 35
 Example 1: Center of
Gravity
 Suppose the shipments for the problem given
earlier are not all equal. Determine the center of
gravity based on the following information.
Weekly
Destination x y Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 2,000

8-36
8 - 36
 Example 1: Center of
Gravity
x
 xQ i i

2(800)  3(900)  5(200)  8(100) 6,100
  3.05
Q i 2,000 2,000

y
 yQ
i
i 2(800)  5(900)  4(200)  5(100) 7,400
i
  3.7
Q i 2,000 2,000

 The coordinates for the center of gravity are (3.05, 3.7). You
may round the x-coordinate down to 3.0, so the coordinates for
the center of gravity are (3.0, 3.7). This is south of destination
D2 (3, 5).

8 - 37
Example 1: Center of
Gravity

8-38
8 - 38
Example 2:Center-of-Gravity
Method

TABLE 8.5 Demand for Quain’s Discount Department Stores

NUMBER OF CONTAINERS
STORE LOCATION SHIPPED PER MONTH
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000

8 - 39
 Center-of-Gravity Method
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

(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
© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 40
 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)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Figure 8.3
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 Transportation Model

 Finds amount to be shipped from

several points of supply to several
points of demand
 Solution will minimize total
production and shipping costs
 A special class of linear
programming problems

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 42

Service and Retail Locations:
focus is on maximizing revenue.
 Considerations:
 Nearness to raw materials is not usually a
consideration
 Customer access is a
 Prime consideration for some: restaurants, hotels, etc.
 Not an important consideration for others: service call
centers, etc.
 Tend to be profit or revenue driven, and so are
 Concerned with demographics, competition, traffic
volume patterns, and convenience
 Clustering
 Similar types of businesses locate near one another
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
Geographic Information System
(GIS)
 A computer-based tool for collecting, storing,
retrieving, and displaying demographic data on
maps
 Aids decision makers in targeting market
segments
 Besides demographic data, GIS include data about
 Detailed maps

 Utilities

 Geographic features

 Locations of major services

 Geographic Information
Systems (GIS)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 47

 The Call Center Industry
 Requires neither face-to-face
contact nor movement of materials
 Traditional variables are no longer
relevant
 Low-wage countries like India with
highly educated, English-speaking
work force have been attractive
places for big U.S. Companies to
hire call center staff.

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 48