1. SECTION 2 STRATEGIC DESIGN
Operations Management I
Dirección de Operaciones I- English teaching
Departamento de Organización de Empresas y Marketing
Área de Organización de Empresas
SECTION 2 STRATEGIC DESIGN
3º GADI- 5º DG-ADI-DER
Slide presentation Chapter 7

2. 7.1. The Strategic Importance of Location
CHAPTER 7
FACILITY LOCATION
7.1. The Strategic Importance of Location
7.2. Factors that Affect Location Decisions
Methods of Evaluating Location Alternatives
Service Location Strategy

3. 7.1 The Strategic Importance of Location
One of the most important decisions a firm makes
Increasingly global in nature
Long term impact and decisions are difficult to change
The objective is to maximize the benefit of location to the firm
Cost is not always the most important aspect of a strategic decision

4. 7.1 The Strategic Importance of Location
Four key attributes when strategy is based on innovation
High-quality and specialized inputs
An environment that encourages investment and local rivalry
A sophisticated local market
Local presence of related and supporting industries

5. 7.2 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
Spain
= 1.17€ per unit
70€
60 units
Taiwan
= 1.25€ per unit
25€
20 units

6. 7.2 Factors that Affect Location Decisions
Exchange rates and currency risks
Can have a significant impact on cost structure
Rates change over time
Costs
Tangible - easily measured costs such as utilities, labor, materials, taxes
Intangible - less easy to quantify and include education, public transportation, community, quality-of-life

7. 7.2 Factors that Affect Location Decisions
Attitudes
National, state, local governments toward private and intellectual property, zoning, pollution, employment stability
Worker attitudes towards turnover, unions, absenteeism
Globally cultures have different attitudes towards punctuality, legal, and ethical issues

8. 7.2 Factors that Affect Location Decisions
Proximity to markets
Very important to services
JIT systems or high transportation costs may make it important to manufacturers
Proximity to suppliers
Perishable goods, high transportation costs, bulky products

9. 7.2 Factors that Affect Location Decisions
Proximity to competitors
Called clustering
Often driven by resources such as natural, information, capital, talent
Found in both manufacturing and service industries

10. Global Competitiveness Index of Countries (Source: World Economic Forum, www.weforum.org)
Country 2010 Rank 2007 Rank
USA 4 1
Switzerland 1 4
Denmark 9 3
Sweden 2 9
Germany 5 7
Finland 7 6
Taiwan, China 13 13
France 15 15
Chile 30 27
Spain 42 29
Venezuela

11. 7.2 Factors that Affect Location Decisions
Country Decision
Critical Success Factors
Political risks, government rules, attitudes, incentives
Cultural and economic issues
Location of markets
Labor availability, attitudes, productivity, costs
Availability of supplies, communications, energy
Exchange rates and currency risks

12. 7.2 Factors that Affect Location Decisions
Region/ Community Decision
Critical Success Factors
Corporate desires
Attractiveness of region
Labor availability, costs, attitudes towards unions
Costs and availability of utilities
Environmental regulations
Government incentives and fiscal policies
Proximity to raw materials and customers
Land/construction costs

13. 7.2 Factors that Affect Location Decisions
Site Decision
Critical Success Factors
Site size and cost
Air, rail, highway, and waterway systems
Zoning restrictions
Nearness of services/ supplies needed
Environmental impact issues

14. 7.3 Methods of Evaluating Location Alternatives
The Factor-Rating Method
Locational Break-Even Analysis
Center-of-Gravity Method

15. The Factor-Rating Method
Popular because a wide variety of factors can be included in the analysis
Six steps in the method
Develop a list of relevant factors called critical success factors
Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
Multiply score by weights for each factor for each location
Recommend the location with the highest point score

16. The Factor-Rating Method: Example
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
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

17. Locational Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Taking into account revenues, fixed costs and variable costs
Three steps in the method
Determine fixed and variable costs for each location
Plot the cost for each location
Select location with lowest total cost for expected production volume

18. Locational Break-Even Analysis: Example
EXAMPLE 1: Case of revenues depending on the location.
Revenues
Production

19. Locational Break-Even Analysis: Example
A company is studying two different location alternatives: A and B. Available data:
FCA<FCB but VCA>VCB.
The Revenue function is the same for both alternatives.
VA>VB.
Difference of revenues DI=IA-IB.
Difference of costs DCT=CTA-CTB.
Since DI>DCT, then, Alternative A is preferred because it leads to the maximum benefit.

20. Locational Break-Even Analysis: Example
EXAMPLE 2: Case of revenues independent on the location.
Possible locations
Cost Types
Rent Taxes Production Other
Fixed
Total
Materials Labor Transportation Other
Variable
Total

21. Locational Break-Even Analysis: Example
Costs
Production

22. Locational Break-Even Analysis: Example
A company is studying four different location alternatives: A, B, C and D.
There is one alternative that is preferred for each demand level:
Alternative A for volumes up to 100 un.
Alternative B for volumes between 100 and 150 un.
Alternative C for volumes greater than 150 un.
Alternative D is always discarded since is always improved by some other alternative.

23. Center-of-Gravity Method
It only takes into account the total transportation cost (CTT).
x,y
x1,y1
To measure the distances:
1) Rectangular distance:
2) Euclidean distance:
1/2

24. Center-of-Gravity Method
Initial Solution: We calculate the center-of-gravity of the area included within the different locations
We study the surroundings of the initial point, if the cost is lower, the optimum is moved from the initial point.
This process is repeated as many times as necessary.

25. Center-of-Gravity Method
If we want to use the rectangular distance, we find the optimal solution using the simple median method:
1) We calculate the medium weight.
2) We order the location points by its ordinate and its abscissa, in increasing order.
3) The ordinate and abscissa in which the medium weight is included is the optimal solution.

26. Center-of-Gravity Method
If we want to use the euclidean distance, the optimal solution is found in the coordinates: c × v × y c × v × x å( ) å( ) i i i i i i d d y* = x* = i i × å( c × v ) å( c v ) i i i i d d i i
di euclidean distances
We start with the center-of-gravity and repeat this process as many times as needed. This method is known as the generalized Weber method

27. EXAMPLE 1: We are searching for a new plant location so that transportation costs are minimized for raw materials from the source (Fi) to the new plant, and for finished products from the new plant to the destination points (Mj). In the following table we show the coordinates for each of the points, the unit transportation costs (ci) and the average quantity transported by month (vi).
Points
Coordinates

28. EXAMPLE 1 (Cont.): 1) Calculate the coordinates of the new plant location, if it is located in the center-of-gravity. 2) Calculate the rectangular distance from the center-of-gravity to the destination point M1. 3) Calculate the euclidean distance from the center-of-gravity to the destination point M3. 4) Determine the optimal location using the center-of-gravity method with euclidean distances or generalized Weber method (k=1). 5) Calculate the total transportation cost (CTT) with the optimal solution obtained with the first iteration and with the second iteration of the generalized Weber method. 6) Determine the optimal location using the simple median method. 7) Calculate the total transportation cost (CTT) for the optimal solution obtained using the simple median method.

29. Determine the following: Calculate the coordinates of the new plant location, if it is located in the center-of-gravity.
Points
Coordinates
Calculate the rectangular distance from the center-of-gravity to the destination point M1: Calculate the euclidean distance from the center-of-gravity to the destination point M3:

30. Determine the optimal location using the center-of-gravity method with euclidean distances or generalized Weber method
Points
Coordinates
Euclidean distance to CG
The first approximation to the optimal solution with this method is (35, 37)

31. Euclidean distance to 1st approx. to optimum
Second Iteration
Points
Coordinates
Euclidean distance to 1st approx. to optimum
First approximation to the optimum (35,37)
The second approximation to the optimal solution with this method is (36, 34)

32. Euclidean distance to 1st approx. to optimum
Calculate the total transportation cost (CTT) with the optimal solution obtained with the first iteration
In order to calculate the total transportation cost, we need to calculate the euclidean distances from the first approximation (35,37) to the rest of the considered points.
Points
Euclidean distance to 1st approx. to optimum

33. Euclidean distance to 1st approx. to optimum
Total transportation cost (CTT) with the optimal solution obtained with the second iteration
Points
Euclidean distance to 1st approx. to optimum
Note: Repeating this same process we obtain the optimal solution (40,30) in the iteration 54th, and the total transportation cost is u.m.

34. Determine the optimal location following the simple median method.
Medium weight
We order all the points by the abscissa in increasing order and accumulating the associated weights (civi). The optimal abscissa is 15, corresponding to the point at which the accumulated weight is the first including the medium weight.
Points
Accumulated civi

35. Therefore, the optimal location with this method is (15,30)
We order all the points by the ordinate, in increasing order and accumulating the associated weights (civi). The optimal ordinate is 30, corresponding to the point at which the accumulated weight is the first that is higher than the medium weight.
Points
Accumulated civi
Therefore, the optimal location with this method is (15,30)

36. Rectangular dist. to optimum
Calculate the total transportation cost (CTT) for the optimal solution obtained.
In order to calculate the total transportation cost, we need to calculate the rectangular distances from all the different points to the optimum.
Points
Rectangular dist. to optimum

37. 7.4 Service Location Strategy
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management