1. Location Strategies Hassan Abualola Charles Angotto Shaun Jameson
John Reardon
Joel Vastl

2. Agenda The Strategic Importance of Location
Factors that Affect Location Decisions
Methods of Evaluation Location Alternatives
Service Location Strategy

3. The Strategic Importance of Location
Location Strategy
Location and Costs
Location and Innovation

4. Location Strategy
It is one of the most important strategic decisions made by many companies (FedEx, Mercedes-Benz, and Hard Rock)
Has a significant impact on both fixed costs and variable costs
Companies make location decisions relatively infrequently
3 Location options
Decision making often depends on the type of business
“The objective of location strategy is to maximize the benefit of location to the firm”

5. Location and Costs
Location decisions often has the power to make or break a company’s business strategy because it is such a significant cost and revenue driver.
Once management has committed to a specific location, many costs are firmly in place and difficult to reduce
Hard work to determine an optimal facility location is a good investment

6. Location and Innovation
Cost is not always the most important aspect of a strategic decision
Four attributes that seem to affect overall competitiveness as well as innovation
Presence of high quality and specialized inputs
An environment that encourages investment and intense local rivalry
Pressure and insight gained from a sophisticated local market
Local presence of related and supporting industries

7. Factors That Affect Location Decisions
The Basics:
1. Country Decision
2. Region/ Community Decision
3. Site Decision
Labor Productivity
Exchange Rates and Currency Risks
Costs
Political Risk, Values and Culture
Proximity

8. Country Decision Key Success Factors
Political risks, government rules, attitudes, incentives
Cultural and economic issues
Location of markets
Labor talent, attitudes, productivity, costs
Availability of supplies, communications, energy
Exchange rates and currency risks

9. Region/Community Decision
Key Success Factors
Corporate desires
Attractiveness of region
Labor availability and costs
Costs and availability of utilities
Environmental regulations
Government incentives and fiscal policies
Proximity to raw materials and customers
Land/construction costs MN WI MI IL IN OH

10. Site Decision Key Success Factors Site size and cost
Air, rail, highway, and waterway systems
Zoning restrictions
Proximity of services/ supplies needed
Environmental impact issues

11. Productivity (units per day)
Labor Productivity
Area’s wage rate
Companies do not want to go to low
↓Wage Rate = ↓Knowledge
↑Wage Rate = ↑Knowledge
Labor cost per day
Productivity (units per day)
= Cost per unit

12. Exchange Rates and Currency Risk
With the low wage rate that particular country must have GOOD exchange rates

13. Costs
Tangible Costs- easily measured costs such as utilities, labor, materials, taxes
Intangible costs- less easy to quantify and include education, public transportation, community, quality-of-life

14. Political Risk, Values and Culture
National, State, Local governments’ attitudes towards private company
National, State, Local property, zoning and pollution laws
Workers values differ with culture
Do not want to insult a different countries beliefs, morals, and or culture

15. Proximity → Markets → Suppliers → Competitors Near customers
Near raw material
→ Competitors
clustering

16. Methods of Evaluating Location Alternatives
4 Types of Methods
The Factor-Rating Method
Example
Locational Break-Even Analysis
Center-of-Gravity Method
Transportation Model

17. Four Types of Methods
The Factor-Rating Method: A location method that instills objectivity into the process of identifying hard to evaluate costs.
Locational Break-Even Analysis: The use of cost-volume analysis to make an economic comparison of location alternatives.
Center-of-Gravity Method: A mathematical technique used for finding the location of a distribution center that will minimize distribution costs.
Transportation Model: The objective of the transportation model is to determine the best pattern of shipments from several points of supply to several points of demand.

18. The Factor-Rating Method
Popular method because a wide variety of factors can be included in the analysis.
Qualitative and Quantitative
Six Steps
Develop a list of relevant factors called key 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

19. Example

20. Locational Break-Even Analysis
Used to determine which location provides the lowest cost
Can be done mathematically or graphically
Three Steps
Determine the fixed and variable cost for each location
Plot the cost for each location
Select location with the lowest total cost for expected production volume.

21. Example Three locations: Selling price = $120
Expected volume = 2,000 units
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Fixed Variable Total
City Cost Cost Cost
Total Cost = Fixed Cost + (Variable Cost x Volume)

22. Bowling Green cost curve
Example –
$180,000 –
$160,000 –
$150,000 –
$130,000 –
$110,000 –
$80,000 –
$60,000 –
$30,000 –
$10,000 –
Annual cost
| | | | | | |
,000 1,500 2,000 2,500 3,000
Volume
Bowling Green cost curve
Akron cost curve
Chicago cost curve

23. Center-of-Gravity Method
Finds location of distribution center that minimizes distribution costs
This method takes into account the…
Location of markets
Volume of goods shipped to those markets
Shipping Costs for distribution center
Steps
Place existing locations on a coordinate grid
Calculate X and Y coordinates for ‘center of gravity’

24. Example + New York (130, 130) Chicago (30, 120) Pittsburgh (90, 110)
North-South
East-West
120 –
90 –
60 –
30 – –
| | | | | |
Arbitrary origin
Chicago (30, 120)
New York (130, 130)
Pittsburgh (90, 110)
Atlanta (60, 40)
Center of gravity (66.7, 93.3) +

25. Example (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
Number of Containers
Store Location Shipped per Month
Chicago (30, 120) 2,000
Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000
x-coordinate =
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
= 66.7
y-coordinate =
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
= 93.3

26. Transportation Model
Finds an initial feasible solution and then makes step-by-step improvements until an optimal solution is reached.
Solutions will minimize total production and shipping costs

27. Service Location Strategy
Service/Retail Location Strategy
Goods Producing Location
Service/Retail Techniques
Goods Production Techniques
Service/Retail Assumptions
Goods Producing Assumptions
Hotel Location Selection
Call Center Industry
Geographical Info Systems

28. Service Location Strategy
Purchasing power of customer-drawing area
Service and image compatibility with demographics of the customer-drawing area
Competition/Quality of the competition
Uniqueness of the firm’s and competitors’ locations
Physical qualities of facilities and neighboring businesses
Operating policies of the firm
Quality of management

29. Service/Retail Location Strategy
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)

30. Goods Producing Location
Cost Focus
Tangible costs
Transportation cost of raw material/ finished goods
Energy and utility cost; labor; raw material; taxes,
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local government

31. Service/Retail Techniques
Regression models to determine importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems

32. Goods Production Techniques
Transportation method
Factor-rating method
Locational break-even analysis
Crossover charts

33. Service/Retail Assumptions
Location is a major determinant of revenue
High customer-contact issues are critical
Costs are relatively constant for a given area; therefore, the revenue function is critical

34. Goods Producing Assumptions
Location is a major determinant of cost
Most major costs can be identified explicitly for each site
Low customer contact allows focus on the identifiable costs
Intangible costs can be evaluated

35. Hotel Location Selection
Strategically Most Important Decision
La Quinta used 35 variables
Refined to 4 variables:
Price of the hotel
Median income levels
State population for hotel
Nearby colleges

36. Call Center Industry No face to face or movement of materials
Very broad location options
Traditional variables are not relevant
Cost and availability of labor may drive location decisions

37. Geographical Info Systems
Important tool to help in location analysis
Enables more complex demographic analysis
Available data bases include
Detailed census data
Detailed maps
Utilities
Geographic features
Locations of major services