8 - 1 Location Decisions 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 8 © 2014 Pearson Education

8 - 2 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 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall Location Strategy One of the most important strategic decisions made by companies.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.)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

8 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

8 - 5 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 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall 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.

8 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall Location Decisions Country Decision Key Success Factors 1.Political risks, government rules, incentives 2.Exchange rates and currency risks Figure 8.1

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

8 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall Location Decisions Site Decision Key Success Factors 1.Air, rail, highway, and waterway systems 2.Facilities for education, shopping and recreation 3.Environmental regulations Figure 8.1

8 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall Global Competitiveness Index Country/Economy – Switzerland Sweden Singapore United States Germany Japan Finland Denmark Canada United Kingdom France China Spain Portugal Turkey

Global Competitiveness Index © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

Factors That Affect Location Decisions ► Labor productivity ► Wage rates are not the only cost ► Lower productivity may increase total cost Labor cost per day Productivity (units per day) = Cost per unit South Carolina = $1.17 per unit $70 60 units Mexico = $1.25 per unit $25 20 units

Ranking Corruption Rank Country 2014 CPI Score (out of 100) 1Denmark, Finland, New Zealand 92 4Sweden88 5Norway87 6Switzerland 86 7Singapore84 8Netherlands83 12Germany79 16Japan77 17Hong Kong74 19USA73 35Taiwan61 39Israel60 64Turkey45 100China36 136Russia27 174Somalia8 Least Corrupt Most Corrupt

8 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall Clustering of Companies IndustryLocationsReason for clustering Wine makingNapa Valley (US) Bordeaux region (France) Natural resources of land and climate Software firmsSilicon Valley, Boston, Bangalore (India) Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby Race car builders Huntington/North Hampton region (England) Critical mass of talent and information Table 8.3

8 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall Clustering of Companies IndustryLocationsReason for clustering Theme parks (Disney World, Universal Studios) Orlando, FloridaA hot spot for entertainment, warm weather, tourists Computer hardware manufacturers Singapore, TaiwanSkilled/educated workforce with large pool of engineers Table 8.3

8 - 17© 2011 Pearson Education, Inc. publishing as Prentice Hall Clustering of Companies IndustryLocationsReason for clustering Fast food chains (Wendy’s, McDonald’s, Burger King, and Pizza Hut) Sites within 1 mile of each other Stimulate food sales, high traffic flows General aviation aircraft (Cessna, Learjet, Boeing) Wichita, KansasMass of aviation skills Table 8.3

 Factor rating  Locational cost-volume- profit analysis  Transportation model  Center of gravity method Mathematical Methods to Evaluate Location Alternatives LO 8.6

8 - 19© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

 A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Example 1: Factor Rating Scores (Out of 100) FactorWeightAlt 1Alt 2 Proximity to existing source Traffic volume.0580 Rental costs Size Layout Operating Cost

 A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Example 1: Factor Rating Scores (Out of 100)Weighted Scores FactorWeightAlt 1Alt 2Alt 1Alt 2 Proximity to existing source (100) = (60) = 6.0 Traffic volume (80) = 4.0 Rental costs (70) = (90) = 36.0 Size (86) = (92) = 9.2 Layout (40) = (70) = 14.0 Operating Cost (80) = (90) =

Example 2:Factor-Rating TABLE 8.4 Weights, Scores, and Solution SCORES (OUT OF 100)WEIGHTED SCORES KSFWEIGHTFRANCEDENMARKFRANCEDENMARK Labor availability and attitude (.25)(70) = 17.5(.25)(60) = 15.0 People-to-car ratio (.05)(50) = 2.5(.05)(60) = 3.0 Per capita income (.10)(85) = 8.5(.10)(80) = 8.0 Tax structure (.39)(75) = 29.3(.39)(70) = 27.3 Education and health (.21)(60) = 12.6(.21)(70) = 14.7 Totals

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

 For a cost analysis, compute the total cost for each alternative location: Locational Cost-Profit-Volume Analysis

8 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall Example 1: Locational Break-Even Analysis Three locations: Akron$30,000$75$180,000 Bowling Green$60,000$45$150,000 Chicago$110,000$25$160,000 FixedVariableTotal CityCostCostCost Total Cost = Fixed Cost + (Variable Cost x Volume) Selling price = $120 Expected volume = 2,000 units

8 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Example 1:Locational Break-Even Analysis – $180,000 – – $160,000 – $150,000 – – $130,000 – – $110,000 – – $80,000 – – $60,000 – – $30,000 – – $10,000 – – Annual cost ||||||| 05001,0001,5002,0002,5003,000 Volume Akron lowest cost Bowling Green lowest cost Chicago lowest cost Chicago cost curve Akron cost curve Bowling Green cost curve Figure 8.2

Example 2: Cost-Profit-Volume Analysis  Fixed and variable costs for four potential plant locations are shown below: Location Fixed Cost per Year Variable Cost per Unit A$250,000$11 B$100,000$30 C$150,000$20 D$200,000$35

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

 Range approximations  B Superior (up to 4,999 units)  C Superior (>5,000 to 11,111 units)  A superior (11,112 units and up) Example: Cost-Profit-Volume Analysis

8 - 30© 2011 Pearson Education, Inc. publishing as Prentice Hall 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)

 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 Center of Gravity Method

Center of Gravity Method a) Map showing destinationsb) Coordinate system addedc) Center of gravity

 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 Center of Gravity Method

Example: Center of Gravity Method Destinationxy D122 D235 D354 D Suppose you are attempting to find the center of gravity for this problem.

 When the quantities to be shipped to every location are unequal, the coordinates of the center of gravity are found as follows: Center of Gravity Method

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. Destinationxy Weekly Quantity D D D D ,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). Example 1: Center of Gravity

Example 1: Center of Gravity

Example 2:Center-of-Gravity Method TABLE 8.5Demand for Quain’s Discount Department Stores STORE LOCATION NUMBER OF CONTAINERS SHIPPED PER MONTH Chicago2,000 Pittsburgh1,000 New York1,000 Atlanta2,000

8 - 40© 2011 Pearson Education, Inc. publishing as Prentice Hall Center-of-Gravity Method Number of Containers Store LocationShipped per Month Chicago (30, 120)2,000 Pittsburgh (90, 110)1,000 New York (130, 130)1,000 Atlanta (60, 40)2,000 x-coordinate = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) = 66.7 y-coordinate = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) = 93.3

8 - 41© 2011 Pearson Education, Inc. publishing as Prentice Hall Center-of-Gravity Method North-South East-West 120 – 90 – 60 – 30 – – |||||| Arbitrary origin Chicago (30, 120) New York (130, 130) Pittsburgh (90, 110) Atlanta (60, 40) Center of gravity (66.7, 93.3) + Figure 8.3

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

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 Service and Retail Locations: focus is on maximizing revenue.

8-45 Comparison of Service and Manufacturing Considerations Manufacturing/DistributionService/Retail Cost FocusRevenue focus Transportation modes/costsDemographics: age,income,etc Energy availability, costsPopulation/drawing area Labor cost/availability/skillsCompetition Building/leasing costsTraffic volume/patterns Customer access/parking Table 8.2

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 System (GIS)

8 - 47© 2011 Pearson Education, Inc. publishing as Prentice Hall Geographic Information Systems (GIS)

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