Operations Management: Location Strategy

OPERATIONS
MANAGEMENT
LOCATION
STRATEGY
SOURCE: OPERATIONS MANAGEMENT
10th GLOBAL EDITION – HEIZER & RENDER
OBJECTIVE
MAXIMIZE THE BENEFIT OF A LOCATION TO THE FIRM
OUTLINE
STRATEGIC IMPORTANCE OF LOCATION
7 FACTORS THAT AFFECT LOCATION DECISIONS
5 METHODS FOR EVALUATING LOCATION

ALTERNATIVES
SERVICE LOCATION STRATEGY

STRATEGIC IMPORTANCE
• Major impact on overall risk and profit of the company
• Increasingly global in nature
• Long term decision
• Greatly affects fixed costs and variable costs
• Decision made infrequently (rarely) – cannot be reversed easily
Decision is made due to demand which has outgrown the plant's

capacity, changes in labor productivity, exchange rates, costs, or local
attitudes
LOCATION OPTIONS
• expanding an existing facility instead of moving
• maintaining current sites while adding another facility elsewhere
• closing the existing facility and moving to another location
(companies may also relocate their manufacturing or service facilities
because of shifts in demographics and customer demand given that
they have the capital to do so)
LOCATION DECISION DEPENDS ON THE TYPE OF BUSINESS

INDUSTRIAL LOCATION DECISION
• cost focus -> low fixed cost focus
- minimizing costs
- revenue varies little between locations
• location as a major cost factor

- affects shipping & production costs (e.g., labor)
- costs vary greatly between locations
• innovation and creativity will also be critical

RETAIL AND PROFESSIONAL SERVICE
LOCATION DECISION
• focus on maximizing revenue -> higher variable cost
- costs vary little between market areas
• location as a major revenue factor

- affects amount of customer interaction
- affects volume of business
LOCATION AND COSTS
• Location decisions based on low cost require careful consideration
- high fixed costs
- labor is ill-trained or has poor work ethic (low cost), highly trained
(expensive), adequately trained (ideal)
• Once location is decided, costs ( fixed costs) are firmly placed in the area
and are difficult to reduce
- utility costs, cost of raw materials, etc..
• Determining optimal location is a good investment

LOCATION AND INNOVATION
• Cost is not always the most important aspect in a strategic decision
• 4 Key attributes when strategy is based on innovation
 High-quality and specialized inputs
 environment that encourages investment and local rivalry
 sophisticated local market
 local presence of related and supporting industries
FACTORS THAT AFFECT LOCATION DECISIONS
• Labor Productivity/ Workforce Productivity
 Wage rates are not the only cost
 Lower production may increase total cost
Labor cost per day

______________________ = Cost per unit
Production (units per day)
• Exchange rates and currency risks
 Can have a significant impact on cost structure
 Rates change over time
• Costs
 Tangible costs – easily measured costs such as fixed costs
 Intangible costs – costs that are no easy to quantify which includes transportation,
education, community, quality of life
Location decisions based on costs alone can create difficult ethical

situations
• Political Risks, Values, and Culture
National, State, Local government’s attitudes towards private and intellectual
property, Zoning, Pollution, Employment Stability may be in flux
Worker attitudes towards turnover, unions, absenteeism
Cultures have different attitudes towards punctuality, legal, and ethical issues
• Proximity to Markets
Very important to services
JIT systems or high transportation costs may make it important to
manufacturers
• Proximity to Suppliers
Perishable goods, high transportation costs, bulky products
• Proximity to Competitors
Clustering
Often driven by resources such as natural, information, capital, talent
Found in both manufacturing and service industries
LOCATION DECISION
COUNTRY DECISION
• Political risk, Government rules,
attitudes, incentives
• Culture & economy
• Market location
• Labor availability, attitudes,
productivity, and cost
• Availability of supplies,
communications, energy
• Exchange rates and currency risks
LOCATION DECISION
REGION DECISION
• Corporate desires
• Attractiveness of region(culture, taxes,
climate, etc..)
• Labor, availability, costs, attitudes
towards unions
• Costs and availability of utilities
• Environmental regulations of state and
town
• Government incentives
• Proximity to raw materials & customers
• Land/ Construction costs
LOCATION DECISION
SITE DECISION
• Site size and cost
• Air, rail, highway, and waterway
systems
• Zoning restrictions
• Nearness of services/supplies
needed
• Environmental impact issues
METHODS FOR EVALUATING LOCATION
ALTERNATIVES
• FACTOR RATING METHOD
most used method since a wide variety of factors can be included in
the analysis
6 steps in the method:

o create a list of relevant factors called critical success factors
o assign a weight to each factor
o assign a scale for each factor
o score each location for each factor
o multiply score by weights for each factor of each location
o recommend location with the highest points/score
ALTERNATIVES
• LOCATIONAL BREAK-EVEN ANALYSIS
method of cost-volume analysis used for industrial locations
done mathematically or graphically
3 steps in the method:

o determine fixed and variable costs for each location
o plot the cost for each location
o select location with lowest total cost for expected production volume
LOCATIONAL BREAK-EVEN ANALYSIS
3 locations:
Selling price = $120
Expected Volume = 2,000 units
CITY FIXED COST VARIABLE COST TOTAL COST
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Total Cost = Fixed Cost + (Variable Cost x Volume)

LOCATIONAL BREAK-EVEN ANALYSIS
• With an expected volume of 2,000 units per year, Bowling Green
provides the lowest cost location. The expected profit is:
Profit = Total revenue – Total cost

? = 120 (2000) – 150,000
? = 240,000 – 150,000
Profit = 90,000 -> highest among the three locations
locationstrategy-100117065049-phpapp01.pdf --- page 30

ALTERNATIVES
• CENTER-OF-GRAVITY METHOD
- compute geographic coordinates for a potential single new facility
that will minimize costs
- finds location of distribution center that minimizes distribution
cost
• Considers
- location of markets
- volume of goods shipped to those markets
- shipping cost (or distance)
ALTERNATIVES
o Place existing locations on a coordinate grid
- grid origin and scale is arbitrary
- maintain relative distances
o Calculate X and Y coordinates for “center of gravity”
- assumes cost is directly proportional to distance and volume
shipped
CENTER-OF-GRAVITY METHOD
Equation:
• X coordinate = ∑ dix Qi/ ∑ Qi

• Y coordinate = ∑ diy Qi/ ∑ Qi
Where:
dix – x coordinate of location i
diy – y coordinate of location I
Qi – quantity of goods
locationstrategy-100117065049-phpapp01.pdf --- page 34

ALTERNATIVES
• TRANSPORTATION MODEL
- finds amount to be shipped from several points of supply (source) to
several points of demand (destination)
- used primarily for industrial locations
- solution will minimize total production and shipping costs
- a special class of linear programming problems (simple to complex)
Constraints
- production capacity of source (factory)
- demand requirement of destination
locationstrategy-100117065049-phpapp01.pdf ---- page 38
ALTERNATIVES
• Geographic Information Systems (GIS)
- 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
SUMMARY
Service/Retail/Professional Goods-Producing Location
Location Strategy Strategy
Revenue Focus Cost Focus

Volume/Revenue Tangible Costs
Drawing area; Purchasing power Transportation cost of raw material
Competition; Advertising/Pricing Shipment cost of finished goods
Energy and utility costs; labor; raw material; taxes,etc..
(fixed cost and overhead cost)
Physical Quality Intangible and Future Costs
Parking/Access; Security/Lighting Attitude towards Union
Appearance/Image Quality of Life
Education expenditures by state
Quality of state and local government
Cost Determinants
Rent
Management Caliber
Operations Policies (hours, wage rates)
Service/Retail/Professional Location Strategy Goods-Producing Location Strategy
TECHNIQUES
Regression models to determine importance of Transportation method/model
various factors
Factor-rating method Factor-rating method
Traffic counts Location break-even analysis
Demographic analysis of drawing area Crossover charts
Purchasing power analysis of area
Center-of-gravity method
Geographic Information Systems

Service/Retail/Professional Goods-Producing Location
Location Strategy Strategy
ASSUMPTIONS
Location is a major determinant of revenue Location is a major determinant of cost
High customer-contact issues are critical Most major costs can be identified explicitly for each
site
Costs are relatively constant for a given area; Low customer contact allows focus on the identifiable
therefore, the revenue function is critical costs
Intangible costs can be evaluated

SERVICE LOCATION STRATEGY
• Location focus should be more on determining the volume of business and revenue
8 Major Determinants for volume and revenue for the service firm:
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of the
customer drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitor’s locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management
Central Hub Concept
• Global Company – Federal Express (FedEx)
- world renowned delivery service
- various hubs strategically located around the world
Memphis, Tennessee (superhub/ central hub)
Paris – European hub
Guangzhou – Asian hub
Miami – Latin American hub
Toronto – Canadian hub
• Faster response, less Transportation costs

• Enables service to more locations with fewer use of transportation

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OPERATIONS

7 FACTORS THAT AFFECT LOCATION DECISIONS

5 METHODS FOR EVALUATING LOCATION

SERVICE LOCATION STRATEGY

Decision is made due to demand which has outgrown the plant's

LOCATION DECISION DEPENDS ON THE TYPE OF BUSINESS

• location as a major cost factor

• innovation and creativity will also be critical

• location as a major revenue factor

• Determining optimal location is a good investment

Labor cost per day

Location decisions based on costs alone can create difficult ethical

6 steps in the method:

3 steps in the method:

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

Profit = Total revenue – Total cost

locationstrategy-100117065049-phpapp01.pdf --- page 30

• X coordinate = ∑ dix Qi/ ∑ Qi

locationstrategy-100117065049-phpapp01.pdf --- page 34

Revenue Focus Cost Focus

Traffic counts Location break-even analysis

Demographic analysis of drawing area Crossover charts

Purchasing power analysis of area

Geographic Information Systems

Intangible costs can be evaluated

• Faster response, less Transportation costs

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