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PRODUCTION AND OPERATIONS MANAGEMENT
Ch. 9: Location Strategies POM - J. Galván
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Learning Objectives Where must we locate our facilities so as to satisfy our corporate strategy? POM - J. Galván 4
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Industrial Location Decisions
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 © 1995 Corel Corp. POM - J. Galván 6
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Service Location Decisions
Revenue focus Costs vary little between market areas Location is a major revenue factor Affects amount of customer contact Affects volume of business POM - J. Galván 7
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In General - Location Decisions
Long-term decisions Difficult to reverse 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 firm POM - J. Galván 8
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Location Decision Sequence
Region/Community . Country Site POM - J. Galván 9
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Factors Affecting Country
Government Culture & economy Market location Labor availability, attitudes, productivity, and cost Infrastructure Exchange rate © 1995 Corel Corp. POM - J. Galván 10
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Hourly Compensation ($) Manufacturing Workers (1994)
Labor Productivity Low wages often over-emphasized Labor productivity important Labor cost per unit should be criterion: Labor cost/day Units made/day Hourly Compensation ($) Manufacturing Workers (1994) Germany 27.37 Japan 21.38 U.S. 17.10 Hong Kong 4.79 Mexico 2.57 POM - J. Galván 11
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Region Location Decisions
Corporate desires Attractiveness Labor Utility costs Government incentives Proximity to customers & suppliers Land/construction $$$ © 1995 Corel Corp. POM - J. Galván 12
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Factors Affecting Site
Site size Site cost Transportation in/out Proximity of services Environmental impact POM - J. Galván © 1995 Corel Corp. 13
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Location Decision Example
© 1995 Corel Corp. In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. POM - J. Galván 14
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Country Decision 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, ) POM - J. Galván 15
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Region/Community Decision Factors
Labor Lower wages in South Carolina (SC) About $17,000/yr (SC) vs. $27,051/yr (US) Based on 1993 metropolitan averages for all workers Government incentives $135 million in state & local tax breaks Free-trade zone from airport to plant No duties on imported components or on exported cars POM - J. Galván 16
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Organizations That Need To Be Close to Markets
Government agencies Police & fire departments Post Office Retail Sales and Serivce Fast food restaurants, supermarkets, gas stations Drug stores, shopping malls Bakeries POM - J. Galván 17
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Organizations That Need To Be Close to Markets - continued
Services Doctors, lawyers, accountants, barbers Banks, auto repair, motels Manufacturers Makers of bulky or heavy products Japanese car makers German car makers Auto parts suppliers POM - J. Galván 18
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Location Evaluation Methods
Factor-rating method Locational break-even analysis Center of gravity method Transportation model POM - J. Galván 19
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Factor-Rating Method Most widely used location technique
Useful for service & industrial locations Rates locations using factors Intangible (qualitative) factors Example: Education quality, labor skills Tangible (quantitative) factors Example: Short-run & long-run costs POM - J. Galván 20
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Steps in Factor Rating Method
List relevant factors Assign importance weight to each factor Develop scale for each factor (0-1, etc.) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score POM - J. Galván 21
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Factors Affecting Location Selection
Environmental regulations Utilities Site costs Transportation availability Quality-of-life Foreign exchange Quality of government Labor costs Labor availability Proximity to materials and suppliers Proximity to markets Government fiscal policies Environmental regulations POM - J. Galván 22
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Locational Break-Even Analysis
Method of cost-volume analysis used for industrial locations Steps Determine fixed & variable costs for each location Plot total cost for each location Select location with lowest total cost for expected production volume Must be above break-even POM - J. Galván 23
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Locational Break-Even Analysis Example
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? © 1995 Corel Corp. POM - J. Galván 24
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Locational Break-Even Crossover Chart
Akron Chicago Bowling Green Akron lowest cost Bowling Green lowest cost Chicago lowest cost POM - J. Galván 25
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Locational Break-Even Crossover Chart
Akron Chicago Bowling Green Akron lowest cost Bowling Green lowest cost Chicago lowest cost Lowest cost envelop POM - J. Galván 26
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Center of Gravity Method
Finds location of single distribution center serving several destinations Used primarily for services Considers Location of existing destinations Example: Markets, retailers etc. Volume to be shipped Shipping distance (or cost) Shipping cost/unit/mile is constant POM - J. Galván 27
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Center of Gravity Method Steps
Place existing locations on a coordinate grid Grid has arbitrary origin & scale Maintains relative distances Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Minimizes transportation cost POM - J. Galván 28
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Center of Gravity Method Equations
X Coordinate dix = x coordinate of location i Wi = Volume of goods moved to or from location i diy = y coordinate of location i Y Coordinate POM - J. Galván 29
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Transportation Model Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Type of linear programming model Objective: Minimize total production & shipping costs Constraints Production capacity at source (factory) Demand requirement at destination POM - J. Galván 30
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Components of Volume and Revenue for a Service Firm
Purchasing power of customer drawing area Service and image compatibility with demographics of the customer drawing area Competition in the area Quality of the competition Uniqueness of the firm’s and competitor’s locations Physical qualities of facilities and neighboring businesses Operating policies of the firm Quality of management POM - J. Galván 31
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Location Strategies – Service vs. Industrial
Industrial Revenue Focus Tangible costs Transportation cost of raw materials Shipment cost of finished goods Energy and utility cost; labor; raw material; taxes, etc. Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government Service/Retail/Professional Revenue Focus Volume/revenue Drawing area, purchasing power Competition; advertising/pricing Physical quality Parking/access; security/ lighting; appearance/image Cost determinants Rent Management caliber Operations policies (hours, wage rates) POM - J. Galván 32
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Location Strategies – Service vs. Industrial
Service/Retail/Professional Techniques Correlation analysis to determine importance of factors for a particular type of operation Traffic counts Demographic analysis of drawing area Purchasing power analysis of drawing area Assumptions Location is a major determinate of revenue Issues manifesting from high customer contact dominate Costs are relatively constant for a given area; therefore, revenue function is critical Industrial Techniques Linear Programming (Transportation method) Weighted approach to intangibles Breakeven analysis Crossover charts Assumptions Location is a major determinate of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on costs Intangible costs can be objectively evaluated POM - J. Galván 33
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Major Methods of Solving Location Problems
Weighted methods which: Assign weights and points to various factors Determine tangible costs Investigate intangible costs Center of Gravity Method Find best distribution center location Location breakeven methods Special case of breakeven analysis Transportation method A specialized linear programming method POM - J. Galván 34
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Telemarketing and Internet Industries
Require neither face-to-face contact with customers (or employees) nor movement of material Presents a whole new perspective on the location problem POM - J. Galván 35
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Geographic Information Systems
New tool to help in location analysis Enables combination of many parameters POM - J. Galván 36
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