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DOM 511: OPERATIONS MANAGEMENT PRACTICE Magutu Obara Peterson /S.O Nyamwange University of Nairobi School of Business Département of Management Science Jan April 2013 1 magutumop2011
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FACILITIES LOCATION
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32 Facilities Location Top question on the strategic agendas of contemporary manufacturing & services firms in this age of global markets & global production Question of location linked to 2 competitive imperatives; – 1. need to produce closer to customers due to time based competition, trade agreements & shipping costs – 2. Need to locate near appropriate labor pool to take advantage of low wage costs or high technical skills
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32 Facilities Location Location Decision Process Typically conducted hierarchically & involves 4 basic decisions where appropriate; 1.Global (nation) location 2.Regional location 3.District or community location 4.Local site selection
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32 Macro FACTORS for Location Decision 1.Proximity to customers – buyers want their goods delivered yesterday & their needs incorporated in products being developed & built 2. Business climate – presence of similar-sized businesses, companies in same industry, other foreign companies, probusiness govt legislation, subsidies, tax incentives etc 3. Total costs – inbound/outbound distribution cost, land, construction, labor, taxes, energy costs make up regional costs 4. Infrastructure – adequate road, rail, air, & sea transport, energy & telecommunications 5. Quality of labor – educational & skills levels of labor pool must match coy needs 6. Suppliers – a high-quality and competitive supplier base. Also supports lean production
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32 MACRO FACTORS 7. Raw materials – necessity, perishability 8. Free trade zones 9. Political risk 10. Government, cultural barriers 11. Environmenal regualtion barriers
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32 MiCRO FACTORS Land Transportation Services Restrictions Community receptivity to business barriers
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Manufacturing Vs SERVICES 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
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32 Steps in Making Location Decision Determine the criteria that will be used to evaluate alternatives Identify the factors that are important eg location to markets, raw materials Develop location alternatives – Identify the general region for a location – Identify a small number of community- site alternatives Evaluate the alternatives & make a selection
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32 Evaluation of Location Alternatives Issue is to find locations that will minimize on costs & maximize on revenues Service industries tend to consider the revenue generating potential – production & consumption closely linked to market Goods producing industries concentrate on cost minimization – costs are accumulated in the product which can be shipped to various markets
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32 Evaluation of Location Alternatives We make use of economic analysis methods – Location Break even analysis – Factor rating Method – Transportation method – Centroid Method or center of gravity method
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32 Location Break – Even Analysis Concerned with the impact that operating variables ( costs, selling price, volume ) have on operating income If revenue per unit is independent of location then only costs need to be considered
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Cost-Profit-Volume Analysis – Determine fixed and variable costs – Plot total costs – Determine lowest total costs
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Example 1: Cost-Volume Analysis Fixed and variable costs for three potential locations in thousands ABC FIXED500020003000 VARIABLE220600400
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Factor-Rating Method Popular because a wide variety of factors can be included in the analysis – Considers quantitative & Qualitative factors – Six steps in the method
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Factor-Rating 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 (composite) score
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Location Factor Rating Identify important factors Weight factors (0.00 - 1.00) Subjectively score each factor (0 - 100) Sum weighted scores
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Location Factor Rating: Example Labor pool and climate Proximity to suppliers Wage rates Community environment Proximity to customers Shipping modes Air service LOCATION FACTOR.30.20.15.15.10.05.05 WEIGHT 801006075658550 Site 1 65919580909265 Site 2 90757280956590 Site 3 SCORES (0 TO 100) Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24
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Location Factor Rating: Example (cont.) 24.00 20.00 9.00 11.25 6.50 4.25 2.50 77.50 Site 1 19.50 18.20 14.25 12.00 9.00 4.60 3.25 80.80 Site 2 27.00 15.00 10.80 12.00 9.50 3.25 4.50 82.05 Site 3 WEIGHTED SCORES Site 3 has the highest factor rating
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CENTER OF GRAVITY METHOD Determines the X & Y coordinates(location) of a single facility Method does not explicitly address customer service objectives Assists managers in balancing cost & service objectives Distance is a major criterion though demand (volume, transactions etc ) is also considered COG is defined as the location that minimizes the weighted distance between the facility & its supply & demand points
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CENTER OF GRAVITY METHOD Procedure Place the locations of existing supply & demand points on a coordinate system Origin & scale are arbitrary as long as the relative distances are correctly represented. COG is determined by; C x = ∑X i W i /∑W i C y = ∑Y i W i /∑W i
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Grid-Map Coordinates where, x, y =coordinates of new facility at center of gravity x i, y i =coordinates of existing facility i W i =annual weight shipped from facility i n WiWiWiWi i = 1 xiWixiWixiWixiWi n x = n WiWiWiWi i = 1 yiWiyiWiyiWiyiWi n y = x1x1x1x1 x2x2x2x2 x3x3x3x3x y2y2y2y2y y1y1y1y1 y3y3y3y3 1 (x 1, y 1 ), W 1 2 (x 2, y 2 ), W 2 3 (x 3, y 3 ), W 3
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Center-of-Gravity Technique: Example ABCD x200100250500 y200500600300 Wt7510513560 y700 500 600 400 300 200 100 0 x 700500600400300200100 A B C D (135) (105) (75) (60) Miles Miles
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Center-of-Gravity Technique: Example (cont.) x = = = 238 n WiWi i = 1 xiWixiWi n n WiWi yiWiyiWi n y = = = 444 (200)(75) + (500)(105) + (600)(135) + (300)(60) 75 + 105 + 135 + 60 (200)(75) + (100)(105) + (250)(135) + (500)(60) 75 + 105 + 135 + 60
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CENTER OF GRAVITY METHOD Two factories distribute output to 4 towns as shown. Board has authorized construction of a warehouse to serve the four markets. Identify the warehouse location using COG method
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