© 1997 Prentice-Hall, Inc Principles of Operations Management Selecting the Location Chapter 6

© 1997 Prentice-Hall, Inc Learning Objectives n Explain location decisions n Describe the factors affecting location decisions n Explain the methods of evaluating location alternatives l Factor rating method l Center of gravity method

© 1997 Prentice-Hall, Inc Thinking Challenge Where do you want to live after graduation? Why? © 1995 Corel Corp. AloneGroupClass

© 1997 Prentice-Hall, Inc n Cost focus l Revenue varies little between locations n Location is a major cost factor l Affects shipping & production costs (e.g., labor) l Costs vary greatly between locations Industrial Location Strategies © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Service Location Strategies n Revenue focus l Costs vary little between market areas n Location is a major revenue factor l Affects amount of customer contact l Affects volume of business © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Location Decisions n Long-term decisions n Difficult to reverse n Affect fixed & variable costs l Transportation cost s As much as 25% of product price l Other costs: Taxes, wages, rent etc. n Objective: Maximize benefit of location to firm

© 1997 Prentice-Hall, Inc Factors Affecting Country n Government n Culture & economy n Market location n Labor l Productivity l Cost n Infrastructure n Exchange rate © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Labor Productivity n Low wages often over-emphasized n Labor productivity important n Labor cost per unit should be criterion: Labor cost/day Units made/day Hourly Compensation ($) Mfg. Workers (1994)

© 1997 Prentice-Hall, Inc Factors Affecting Region/Community n Corporate desires n Attractiveness n Labor n Utility costs n Gov’t incentives n Proximity to customers & suppliers n Land/construction $$$ © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Factors Affecting Site n Site size n Site cost n Transportation in/out n Proximity of services n Environmental impact © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Location Methods n Factor weighting method n Locational break- even analysis n Center of gravity method n Transportation model © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Factor Rating Method n Most widely used location technique n Useful for service & industrial locations n Rates locations using factors l Intangible (qualitative) factors s Example: Education quality, labor skills l Tangible (quantitative) factors s Example: Short-run & long-run costs

© 1997 Prentice-Hall, Inc Factor Rating Method Steps n List relevant factors n Assign importance weight to each factor n Develop scale for each factor (0-1, etc.) n Score each location using factor scale n Multiply scores by weights for each factor & total n Select location with maximum total score

© 1997 Prentice-Hall, Inc Factor Rating Method Example You’re an analyst for John Deere. You’re considering locating a new mfg. plant in Omaha (NE) or Denver (CO). Factor Wgt NE CO Mfg. costs.7$60k$62k Cost of living Labor avail Factor Wgt NE CO Mfg. costs.7$60k$62k Cost of living Labor avail Where should you locate? © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Factor Rating Method Solution OmahaDenver FactorWgt EconScore (0-1) Wgt Score EconScore (0-1) Wgt Score TOTAL

© 1997 Prentice-Hall, Inc Factor Rating Method Thinking Challenge You’re owner of a hot tub store. You’re considering relocating to Phoenix (AZ) or Santa Fe (NM). Factor Wgt AZ NM Population.4984k56k Competition Life style Factor Wgt AZ NM Population.4984k56k Competition Life style Where should you locate? © 1995 Corel Corp. AloneGroupClass

© 1997 Prentice-Hall, Inc Thinking Challenge Solution* PhoenixSanta Fe FactorWgt EconScore (0-1) Wgt Score EconScore (0-1) Wgt Score TOTAL

© 1997 Prentice-Hall, Inc Center of Gravity Method n Finds location of single distribution center serving several destinations n Used primarily for services n Considers l Location of existing destinations s Example: Markets, retailers etc. l Volume to be shipped l Shipping distance (or cost) s Shipping cost/unit/mile is constant

© 1997 Prentice-Hall, Inc Center of Gravity Method Steps n Place existing locations on a coordinate grid l Grid has arbitrary origin & scale l Maintains relative distances n Calculate X & Y coordinates for ‘center of gravity’ l Gives location of distribution center l Minimizes transportation cost

© 1997 Prentice-Hall, Inc Center of Gravity Method Equations d ix = x coordinate of location i W i =Volume of goods moved to or from location i d iy = y coordinate of location i X Coordinate Y Coordinate

© 1997 Prentice-Hall, Inc Center of Gravity Method Example You’re an analyst for Home Depot. You want to find the best location of a warehouse serving retail stores in Lincoln (coord. 90, 60), Columbia (coord. 150, 30), & Austin (coord. 90, 10). Monthly demand is 2k, 3k, 5k units respectively. Columbia, SC Austin, TX Lincoln, NE Warehouse Warehouse? © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Center of Gravity Method Solution Lincoln Store (90,60) 2k demand Austin Store (90,10) 5k demand Columbia Store (150,30) 3k demand © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Thinking Challenge You’re a planner for Sears. You want to find the best location of a warehouse serving retail stores in Seattle (50, 60), Aberdeen (20, 35), & Spokane (160, 50). Monthly demand is 494k, 18k, 171k units respectively. AloneGroupClass © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc Center of Gravity Method Grid Seattle (50,60) 494k units Aberdeen (20,35) 18k units Spokane (160,50) 171k units © 1995 Corel Corp.

© 1997 Prentice-Hall, Inc ConclusionConclusion n Explained location decisions n Described the factors affecting location decisions n Explained the methods of evaluating location alternatives l Factor rating method l Center of gravity method