Chapter 8 Location Planning and Analysis Saba Bahouth – UCO

Location Decisions Long-term decisions Difficult to reverse - Expensive Affect fixed & variable costs Transportation cost: As much as 25% of product price Other costs: Taxes, wages, rent etc. Objective: Maximize benefit of location to the firm Saba Bahouth – UCO

Manufacturing vs Service Location Industrial Location Decision 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 Service Location Decisions Revenue focus Location is a major revenue factor Affects amount of customer contact Affects volume of business Non-Profit Organizations It is helpful to begin this discussion by asking students how and under what conditions location impacts costs and revenues. Once they have begun to consider these issues, then the decision for industrial or service organizations can be explored. Saba Bahouth – UCO

Manufacturing and Service Considerations Manufacturing / Distribution Cost Focus Service / Retail Revenue focus Transportation modes/costs Demographics: age,income,etc Energy availability/costs Population/drawing area Labor cost/availability/skills Competition Building costs/leasing costs Traffic volume/patterns Customer access/parking

Factors that Affect Location Decisions McDonald’s United Airlines – Lufthansa Micron Hitachi Saba Bahouth – UCO

Example – BMW in South Carolina BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. © 1995 Corel Corp. Country Factors Market location U.S. is world’s largest luxury car market Growing (baby boomers) Labor Lower manufacturing labor costs $17/hr. (U.S.) vs. $27 (Germany) Higher labor productivity 11 holidays (U.S.) vs. 31 (Germany) Other Lower shipping cost ($2,500/car less) New plant & equipment would increase productivity-lower cost/car $2,000-3000 VW in Puebla Region Factors Labor Lower wages in South Carolina Government incentives $135 million in tax breaks Free-trade zone - airport to plant No duties on imported components or on exported cars BMW’s decisions Saba Bahouth – UCO

Globalization Benefits Disadvantages Facilitating Factors Risks Markets Transportation cost Cost savings Legal and regulatory Financial Disadvantages Criticisms Security / Instability Unskilled labor Import restrictions Facilitating Factors Trade agreements Technology Banking systems Risks Legal Currency rate Cultural Political Terrorism Saba Bahouth – UCO

Global Factors to Consider

Trends in Locations Just-in-time manufacturing techniques Microfactories Information Technology Saba Bahouth – UCO

Location Evaluation Methods Some decision tools: 1. Factor-rating method 2. Location break-even analysis (Cost-Profit-Volume) 3. Center of gravity method 4. Transportation model This slide can be used to frame a discussion of methods to evaluate location decisions. Saba Bahouth – UCO

1. Factor-Rating Method It is the most widely used location technique It is used for service & industrial locations It rates locations using two categories of factors: Tangible (quantitative) factors, like cost Intangible (qualitative) factors, like labor skill and schools Steps of the Factor-Rating Method: List relevant factors Assign importance weight to each factor (such as 0 – 1) Develop a score-scale for the factors (such as 1 – 100) Score each location using factor scale Multiply scores by weights for each factor, then total Select location with maximum total score This technique might be viewed as an extension of the Critical Success Factors methodology where the factors are weighted and rated. Solve problem 8.10 part b Saba Bahouth – UCO

2. Location Break-Even Analysis Method of cost-volume analysis used for industrial locations Steps for Break-Even Analysis Determine fixed & variable costs for each location Plot total cost for each location Select location with lowest total cost for expected production volume Exercise: You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year? Basically breakeven where costs depend upon location. Saba Bahouth – UCO

3. Center of Gravity Method It finds the location of a single distribution center serving several destinations. It is used primarily for services and distribution centers. It considers: Location of existing destinations: Markets, retailers etc. Volume to be shipped. Shipping distance (or cost). Assumes shipping cost/unit/mile is constant . Steps for the Center of Gravity Method: 1. Place existing locations on a coordinate grid Grid can have an arbitrary origin & scale (maintain relative distances) 2. Calculate X & Y coordinates for ‘center of gravity’ using the given formulas They give the X & Y location of distribution center This location minimizes the transportation cost This is a good point at which to raise the issue of choosing a decision methodology. Point out to students that the Center of Gravity method is helpful in a limited number of situations (where geography and transportation costs are important?)- where the critical factor methodology is more general. (but the critical factor method is more qualitative) Saba Bahouth – UCO

3. Center of Gravity Method Equations X Coordinate: Solve this problem Y Coordinate: xi = x coordinate of location i yi = y coordinate of location i Qi = Volume of goods moved to or from location i Saba Bahouth – UCO

4. Transportation Model Finds amount to be shipped from several sources to several destinations. Used primarily for industrial locations. The solution uses linear programming Objective: Minimize total shipping costs Constraints Production capacity at source (factory) Demand requirement at destination Again, this method, while quantitative, is unable to handle many of the important factors. Saba Bahouth – UCO