heizer om10 ch08-location

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88 Location StrategiesLocation Strategies

8 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e

PowerPoint slides by Jeff Heyl

OutlineOutline

Global Company Profile: FedExThe Strategic Importance of


The Strategic Importance of Location

Outline Outline –– ContinuedContinuedFactors That Affect Location Decisions

Labor ProductivityExchange Rates and Currency Risks


CostsPolitical Risk, Values, and CultureProximity to MarketsProximity to SuppliersProximity to Competitors (Clustering)

Outline Outline –– ContinuedContinued

Methods of Evaluating Location Alternatives

The Factor-Rating Method


gLocational Break-Even AnalysisCenter-of-Gravity MethodTransportation Model

Outline Outline –– ContinuedContinued

Service Location StrategyHow Hotel Chains Select SitesThe Call Center Industry


The Call Center IndustryGeographic Information Systems

Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:1. Identify and explain seven major factors

that effect location decisions


2. Compute labor productivity3. Apply the factor-rating method4. Complete a locational break-even

analysis graphically and mathematically

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Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:5. Use the center-of-gravity method6 Understand the differences between


6. Understand the differences between service and industrial-sector location strategies

Federal ExpressFederal Express

Central hub conceptEnables service to more locations with fewer aircraft


Enables matching of aircraft flights with package loadsReduces mishandling and delay in transit because there is total control of packages from pickup to delivery

Location StrategyLocation Strategy

The objective of location strategy is The objective of location strategy is to maximize the benefit of location to maximize the benefit of location

to the firmto the firm


to the firmto the firm

Location StrategyLocation Strategy

One of the most important decisions a firm makesIncreasingly global in nature


Significant impact on fixed and variable costsDecisions made relatively infrequentlyThe objective is to maximize the benefit of location to the firm

Location and CostsLocation and Costs

Location decisions based on low cost require careful considerationOnce in place, location-related costs are fixed in place and


costs are fixed in place and difficult to reduceDetermining optimal facility location is a good investment

Location and InnovationLocation and InnovationCost is not always the most important aspect of a strategic decisionFour key attributes when strategy is based on innovation


High-quality and specialized inputsAn environment that encourages investment and local rivalryA sophisticated local marketLocal presence of related and supporting industries

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Location DecisionsLocation Decisions

Long-term decisions Decisions made infrequentlyDecision greatly affects both fixed


Decision greatly affects both fixed and variable costs Once committed to a location, many resource and cost issues are difficult to change

Location DecisionsLocation DecisionsCountry DecisionCountry Decision Key Success FactorsKey Success Factors

1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues


3. Location of markets4. Labor talent, attitudes,

productivity, costs5. Availability of supplies,

communications, energy6. Exchange rates and

currency risksFigure 8.1

Location DecisionsLocation DecisionsRegion/ Region/

Community Community DecisionDecision

Key Success FactorsKey Success Factors1. Corporate desires2. Attractiveness of region 3. Labor availability and costsMN


4. Costs and availability of utilities5. Environmental regulations6. Government incentives and

fiscal policies7. Proximity to raw materials and

customers8. Land/construction costs

WI

MI

IL IN OH

Figure 8.1

Location DecisionsLocation DecisionsSite DecisionSite Decision Key Success FactorsKey Success Factors

1. Site size and cost2. Air, rail, highway, and

waterway systems


3. Zoning restrictions4. Proximity of services/

supplies needed5. Environmental impact

issues

Figure 8.1

Global Competitiveness Global Competitiveness Index of CountriesIndex of Countries

Country 2009 Rank 2005 RankSwitzerland 1 4USA 2 1Japan 8 10C d 9 13


Canada 9 13UK 13 9Israel 27 23China 29 48Italy 48 38India 49 22Mexico 60 59Russia 63 53 Table 8.1

Factors That Affect Factors That Affect Location DecisionsLocation Decisions

Labor productivityWage rates are not the only costLower productivity may increase total cost


Labor cost per dayProductivity (units per day) = Cost per unit

ConnecticutConnecticut

= $1.17 per unit$70

60 units

JuarezJuarez

= $1.25 per unit$25

20 units

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Exchange rates and currency risksCan have a significant impact on costsRates change over time


CostsTangible - easily measured costs such as utilities, labor, materials, taxesIntangible - less easy to quantify and include education, public transportation, community, quality-of-life


Exchange rates and currency risksCan have a significant impact on cost structureRates change over time

Location decisions based


Rates change over timeCosts

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

decisions based on costs alone

can create difficult ethical

situations


Political risk, values, and cultureNational, state, local governments attitudes toward private and intellectual property, zoning, pollution, employment


property, zoning, pollution, employment stability may be in fluxWorker attitudes towards turnover, unions, absenteeismGlobally cultures have different attitudes towards punctuality, legal, and ethical issues

Ranking CorruptionRanking CorruptionRank Country 2009 CPI Score (out of 10)1 New Zealand 9.42 Demark 9.33 Singapore, Sweden 9.25 Switzerland 9.08 Australia, Canada, Iceland 8.712 Hong Kong 8.2

Least Corrupt


12 Hong Kong 8.214 Germany 8.017 Japan, UK 7.719 USA 7.537 Taiwan 5.639 South Korea 5.556 Malaysia 4.579 China 3.689 Mexico 3.3146 Russia 2.2

Most Corrupt


Proximity to marketsVery important to servicesJIT systems or high transportation costs

k i i f


may make it important to manufacturersProximity to suppliers

Perishable goods, high transportation costs, bulky products


Proximity to competitorsCalled clusteringOften driven by resources such as natural,


y ,information, capital, talentFound in both manufacturing and service industries

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Clustering of CompaniesClustering of CompaniesIndustry Locations Reason for clustering

Wine making Napa Valley (US) Bordeaux region (France)

Natural resources of land and climate

Software firms Silicon Valley, Talent resources of


So t a e s S co a ey,Boston, Bangalore (India)

a e t esou ces obright graduates in scientific/technical areas, venture capitalists nearby

Race car builders

Huntington/North Hampton region (England)

Critical mass of talent and information

Table 8.3


Theme parks (Disney World, Universal Studios)

Orlando, Florida A hot spot for entertainment, warm weather, tourists, and inexpensive labor


Electronics firms

Northern Mexico NAFTA, duty free export to US

Computer hardware manufacturers

Singapore, Taiwan High technological penetration rate and per capita GDP, skilled/educated workforce with large pool of engineers

Table 8.3


Fast food chains (Wendy’s, McDonald’s, Burger King

Sites within 1 mile of each other

Stimulate food sales, high traffic flows


Burger King, and Pizza Hut)

General aviation aircraft (Cessna, Learjet, Boeing)

Wichita, Kansas Mass of aviation skills

Orthopedic device manufacturing

Warsaw, Indiana Ready supply of skilled workers, strong U.S. market

Table 8.3

FactorFactor--Rating MethodRating MethodPopular because a wide variety of factors can be included in the analysisSix steps in the method

1. Develop a list of relevant factors called key success factors


2. Assign a weight to each factor3. Develop a scale for each factor4. Score each location for each factor5. Multiply score by weights for each factor for

each location6. Recommend the location with the highest

point score

FactorFactor--Rating ExampleRating ExampleKey Scores

Success (out of 100) Weighted ScoresFactor Weight France Denmark France Denmark

Labor availabilityand attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0


People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capitaincome .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3Education

and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7Totals 1.00 70.4 68.0

Table 8.4

Locational Locational BreakBreak--Even AnalysisEven Analysis

Method of cost-volume analysis used for industrial locationsThree steps in the method


p1. Determine fixed and variable costs for

each location2. Plot the cost for each location 3. Select location with lowest total cost for

expected production volume

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Locational BreakLocational Break--Even Even Analysis ExampleAnalysis Example

Three locations:

Selling price = $120Expected volume = 2,000 units


Akron $30,000 $75 $180,000Bowling Green $60,000 $45 $150,000Chicago $110,000 $25 $160,000

Fixed Variable TotalCity Cost Cost Cost

Total Cost = Fixed Cost + (Variable Cost x Volume)

Locational BreakLocational Break--Even Even Analysis ExampleAnalysis Example

–$180,000 –

–$160,000 –$150,000 –

–$130,000 –t


,–

$110,000 –––

$80,000 ––

$60,000 –––

$30,000 ––

$10,000 ––

Annu

al c

ost

| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000Volume

Akron lowest cost

Bowling Green lowest cost

Chicago lowest cost

Figure 8.2

CenterCenter--ofof--Gravity MethodGravity Method

Finds location of distribution center that minimizes distribution costsC id


ConsidersLocation of marketsVolume of goods shipped to those marketsShipping cost (or distance)

CenterCenter--ofof--Gravity MethodGravity MethodPlace existing locations on a coordinate grid

Grid origin and scale is arbitrary M i t i l ti di t


Maintain relative distances

Calculate X and Y coordinates for ‘center of gravity’

Assumes cost is directly proportional to distance and volume shipped

CenterCenter--ofof--Gravity MethodGravity Method

x - coordinate =∑dixQi

∑Qi

i

i

∑diyQi


∑diyQi

∑Qi

i

i

y - coordinate =

where dix = x-coordinate of location idiy = y-coordinate of location iQi = Quantity of goods moved to

or from location i

CenterCenter--ofof--Gravity MethodGravity MethodNorth-South

120 –

90 –

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)


East-West

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Atlanta (60, 40)

Figure 8.3

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CenterCenter--ofof--Gravity MethodGravity MethodNumber of Containers

Store Location Shipped per MonthChicago (30, 120) 2,000Pittsburgh (90, 110) 1,000New York (130, 130) 1,000


Atlanta (60, 40) 2,000

x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000= 66.7

y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000= 93.3

CenterCenter--ofof--Gravity MethodGravity MethodNorth-South

120 –

90 –

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)

C f ( )+


East-West

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Atlanta (60, 40)

Center of gravity (66.7, 93.3)

Figure 8.3

Transportation ModelTransportation Model

Finds amount to be shipped from several points of supply to several points of demand


Solution will minimize total production and shipping costsA special class of linear programming problems

Worldwide Distribution of Worldwide Distribution of Volkswagens and PartsVolkswagens and Parts


Figure 8.4

Service Location StrategyService Location Strategy1. Purchasing power of customer-drawing area2. Service and image compatibility with

demographics of the customer-drawing area3. Competition in the area4 Quality of the competition


4. Quality of the competition5. Uniqueness of the firm’s and competitors’

locations6. Physical qualities of facilities and neighboring

businesses7. Operating policies of the firm8. Quality of management

Location StrategiesLocation StrategiesService/Retail/Professional Location Goods-Producing Location

Revenue Focus Cost Focus

Volume/revenueDrawing area; purchasing powerCompetition; advertising/pricing

Physical quality

Tangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; raw

material; taxes and so on


Table 8.6

Physical qualityParking/access; security/lighting;

appearance/image

Cost determinantsRentManagement caliberOperations policies (hours, wage

rates)

material; taxes, and so on

Intangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and local

government

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Location StrategiesLocation Strategies

Service/Retail/Professional Location Goods-Producing LocationTechniques Techniques

Regression models to determine importance of various factors

Factor-rating method

Transportation methodFactor-rating methodLocational break even analysis


Table 8.6

Factor rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systems

Locational break-even analysisCrossover charts

Location StrategiesLocation Strategies

Service/Retail/Professional Location Goods-Producing LocationAssumptions Assumptions

Location is a major determinant of revenue

High customer-contact issues are

Location is a major determinant of cost

Most major costs can be identified


Table 8.6

High customer contact issues are critical

Costs are relatively constant for a given area; therefore, the revenue function is critical

Most major costs can be identified explicitly for each site

Low customer contact allows focus on the identifiable costs

Intangible costs can be evaluated

How Hotel Chains Select SitesHow Hotel Chains Select SitesLocation is a strategically important decision in the hospitality industryLa Quinta started with 35 independent variables and worked to refine a regression model to predict profitability


regression model to predict profitabilityThe final model had only four variables

Price of the innMedian income levelsState population per innLocation of nearby colleges

r2 = .5151% of the

profitability is predicted by

just these four variables!

The Call Center IndustryThe Call Center Industry

Requires neither face-to-face contact nor movement of materialsHas very broad location options


Has very broad location optionsTraditional variables are no longer relevantCost and availability of labor may drive location decisions

Geographic Information Geographic Information Systems (GIS)Systems (GIS)

Important tool to help in location analysisEnables more complex demographic analysis


Available data bases includeDetailed census dataDetailed mapsUtilitiesGeographic featuresLocations of major services

Geographic Information Geographic Information Systems (GIS)Systems (GIS)


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