1. OPSM 301 Operations Management
Koç University
OPSM 301 Operations Management
Class 18:
Location
(Chapter 8)
Zeynep Aksin

2. Drivers of Supply Chain Performance
Efficiency
Responsiveness
Inventory
Transportation
Facilities
Information
Supply chain structure
Drivers

3. The Logistics Network The Logistics Network consists of:
Facilities: Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers
Raw materials and finished products that flow between the facilities.

4. Customers,
demand
centers
sinks
Field
Warehouses:
stocking
points
Sources:
plants
vendors
ports
Regional
Warehouses:
stocking
points
Supply
Inventory &
warehousing
costs
Production/
purchase
costs
Transportation
costs
Transportation
costs
Inventory &
warehousing
costs

5. Decision Classifications
Strategic Planning: Decisions that typically involve major capital investments and have a long term effect
1. Determination of the number, location and size of new plants, distribution centers and warehouses
2. Acquisition of new production equipment and the design of working centers within each plant
3. Design of transportation facilities, communications equipment, data processing means, etc.

6. Decision Classifications
Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months
1. Work-force size
2. Inventory policies
3. Definition of the distribution channels
4. Selection of transportation and trans-shipment alternatives

7. Decision Classifications
Operational Control: Includes day-to-day operational decisions
1. The assignment of customer orders to individual machines
2. Dispatching, expediting and processing orders
3. Vehicle scheduling

8. Competitive Imperatives Impacting Location
The need to produce close to the customer due to time-based competition, trade agreements, and shipping costs
The need to locate near the appropriate labor pool to take advantage of low wage costs and/or high technical skills
Article from Financial Times 3

9. Site selection and Location
Short-term focus
Accessibility of consumers and workers
“Cost” driven decision
Location
stability
Long-term market position
Strategies for back-office operations

10. Facility Location
Location decisions are made for facilities that produce and deliver both products and services
Both quantitative and qualitative factors can be important to location decisions
Several levels of quantitative analysis are possible
Cost comparisons
Break-even analysis
Linear programming

11. Locational Factors Proximity to Customers Business Climate Total Costs
Infrastructure
Quality of Labor
Suppliers
Other Facilities
Free Trade Zones
Political Risk
Government Barriers
Trading Blocs
Environmental Regulation
Host Community

12. Characteristics of a Good Location
Proximity to target market
Residences, hospitals, schools, offices, airports, military bases
Proximity to destination points
Malls tourist attractions, anchor stores
Ease of access
Proximity to competition
Proximity to other units of the same type
Problem: accurate identification and trade-offs

13. Demand Sensitive Services
Solution Techniques:
Informal judgment
Factor Rating
Regression
Case:
La Quinta Hotels - Regression based site selection

14. Location Evaluation Methods
Factor-rating method
Locational break-even analysis
Center of gravity method
Transportation model

15. Factor-Rating Method Most widely used location technique
Useful for service & industrial locations
Rates locations using factors
Tangible (quantitative) factors
Example: Short-run & long-run costs
Intangible (qualitative) factors
Example: Education quality, labor skills

16. Steps in Factor Rating Method
List relevant factors
Assign importance weight to each factor (such as 0 – 1)
Develop scale for each factor (such as 1 – 100)
Score each location using factor scale
Multiply scores by weights for each factor & total
Select location with maximum total score

17. Demand Sensitive Service Facility Location
Factor Rating example
Item Scale Multiplier
Income of neighborhood
Proximity to shopping centers
Accessibility
Visibility
Traffic

18. Demand Sensitive Service Facility Location
Factor Rating Example
Buyukdere
Etiler
Bostanci
Beyoglu
Income 4 8 10 6
Shopping 2 7
Access 1 9
Visibility
Traffic 3 5
Buyukdere
3.15
Etiler
8.00
Bostanci
9.20
Beyoglu
5.10
Score

19. Cost-Volume Analysis
Fixed and variable costs for four potential locations:
Location
Fixed
Cost
Variable A B C D
$250,000
100,000
150,000
200,000
$11 30 20 35

20. Cost-Volume Analysis $(000) 800 700 600 500 400 300 200 100 D B C A 2D B C A
A Superior
C Superior
B Superior 2 4 6 8 10 12 14 16
Annual Output (000)

21. 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

22. 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

23. 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

24. Example: retail stores
Store Location No of containers shipped/month
Location A
Location B
Location C
Location D
Location E
Location F

26. Remarks Geographic center is not equal to the cost center
Define distance concept carefully

27. Hotelling’s

28. Hotelling’s: round 1 A B

29. Hotelling’s: round 2 A B

30. Hotelling’s: round 3 B A

31. Hotelling’s: final configurationB

32. Conclusion
Why is McDonalds always next to Burger King? Gloria Jeans next to Starbucks?
Remember that others can move when you are planning locations
In general: dynamics of competitive location matter