Location Decisions 8 Power Point presentation to accompany

Location Decisions 8 Power. Point presentation to accompany Heizer and Render Operations Management, Global Edition, Eleventh Edition Principles of Operations Management, Global Edition, Ninth Edition Power. Point slides by Jeff Heyl © 2014 Pearson Education 8 -1

Outline Major factors that affect location decisions Methods of Evaluating Location Alternatives - Factor-rating method - Locational break-even analysis - Center-of-gravity method Differences between service and industrial-sector location analysis 8 -2

Location Strategy • One of the most important strategic decisions made by companies. • Because it affects both fixed and variable costs (as much as 50% of total operating expenses— energy cost, labor cost, and etc. ) The objective of location strategy is to maximize the benefit of location to the firm © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 -3

Location Strategy u One of the most important Long-term decision. Once committed to a location, many resource and cost issues are difficult to change u Increasingly global in nature (Fed. Ex- a hub in China, Hard Rock Cafe – Moscow) u Trade Agreements such as NAFTA, (North American Free Trade Agreement), EU (European Union) are facilitating to locate globally © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 -4

Globalization and Facility Location Glabalization has taken place because of the development of: 1. Market economics 2. Better international communications 3. Faster, reliable travel and shipping 4. Ease of capital flow between countries 5. High differences in labor costs © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 -5

Location Strategy and Innovation u Cost is not always the most important aspect of a strategic decision. For some companies the focus on cost may change to the focus on innovation, creativity and research. u For instance Intel prefered to open its newest plant in Arizona where education levels are high and skilled workforce is abundant. u Warehouse location strategy may be driven by both cost and also the speed of the delivery. © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 -6

Location Decisions Country Decision Key Success Factors 1. Political risks, government rules, incentives 2. Exchange rates and currency risks Figure 8. 1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 -7

Location Decisions Region/ Community Decision Key Success Factors 1. Labor availability and costs 2. Availability of utilities and costs MN 3. Environmental regulations WI MI IL IN OH 4. Proximity to raw materials and customers 5. Land/construction costs Figure 8. 1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 -8

Location Decisions Site Decision Key Success Factors 1. Air, rail, highway, and waterway systems 2. Facilities for education, shopping and recreation Figure 8. 1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 3. Environmental regulations 8 -9

Global Competitiveness Index Country/Economy Switzerland Sweden Singapore United States Germany Japan Finland Denmark Canada United Kingdom France China Spain Portugal Turkey 2010 - 2011 1 2 3 4 5 6 7 9 10 12 15 27 42 46 61 © 2011 Pearson Education, Inc. publishing as Prentice Hall 2011 – 2012 1 3 2 5 6 9 4 8 12 10 18 26 36 45 59 2014 -2015 1 10 2 3 5 6 4 12 15 9 23 28 35 36 45 8 - 10

Global Competitiveness Index 2014 -2015 © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 11

Factors Affecting Location Decisions 1. Labor productivity 2. Exchange rates and currency risks 3. Costs –Tangible, Intangible (education, public transportation) 4. Political risk, values, and culture (punctuality, corruption) 5. Proximity to markets (customers) 6. Proximity to suppliers (perishable goods, high transportation costs) 7. Proximity to competitors (clustering) © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 12

Factors That Affect Location Decisions ► Labor productivity ► Wage rates are not the only cost ► Lower productivity may increase total cost Labor cost per day = Cost per unit Productivity (units per day) South Carolina $70 = $1. 17 per unit 60 units Mexico $25 = $1. 25 per unit 20 units 8 - 13

Ranking Corruption Rank 1 4 5 6 7 8 12 16 17 19 35 39 64 100 136 174 Country 2014 CPI Score (out of 100) Denmark, Finland, New Zealand Least 92 Corrupt Sweden 88 Norway 87 Switzerland 86 Singapore 84 Netherlands 83 Germany 79 Japan 77 Hong Kong 74 USA 73 Taiwan 61 Israel 60 Most Turkey 45 Corrupt China 36 Russia 27 Somalia 8 8 - 14

Clustering of Companies Industry Locations Reason for clustering Wine making Napa Valley (US) Bordeaux region (France) Natural resources of land climate Software firms Silicon Valley, Boston, Bangalore (India) Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby Race car builders Huntington/North Hampton region (England) Critical mass of talent and information © 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8. 3 8 - 15

Clustering of Companies Industry Locations Reason for clustering Theme parks (Disney World, Universal Studios) Orlando, Florida A hot spot for entertainment, warm weather, tourists Computer hardware manufacturers Singapore, Taiwan Skilled/educated workforce with large pool of engineers © 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8. 3 8 - 16

Clustering of Companies Industry Fast food chains (Wendy’s, Mc. Donald’s, Burger King, and Pizza Hut) Locations Sites within 1 mile of each other General aviation Wichita, Kansas aircraft (Cessna, Learjet, Boeing) © 2011 Pearson Education, Inc. publishing as Prentice Hall Reason for clustering Stimulate food sales, high traffic flows Mass of aviation skills Table 8. 3 8 - 17

Mathematical Methods to Evaluate Location Alternatives u. Factor rating u. Locational cost-volumeprofit analysis u. Transportation model u. Center of gravity method LO 8. 6 8 - 18

Factor-Rating Method u Popular because a wide variety of factors including both qualitative and quantitative can be included in the analysis. Six steps in the method are: 1. Develop a list of relevant factors called key success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 19

Example 1: Factor Rating u A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Factor Weight Alt 1 Alt 2 Proximity to existing source . 10 100 60 Traffic volume . 05 80 80 Rental costs . 40 70 90 Size . 10 86 92 Layout . 20 40 70 Operating Cost . 15 80 90 1. 00 8 - 20

Example 1: Factor Rating u A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Factor Weighted Scores Weight Alt 1 Alt 2 Alt 1 Proximity to existing source . 10 100 60 . 10(100) = 10. 0 . 10(60) = 6. 0 Traffic volume . 05 80 80 . 05(80) = 4. 0 Rental costs . 40 70 90 . 40(70) = 28. 0 . 40(90) = 36. 0 Size . 10 86 92 . 10(86) = 8. 6 . 10(92) = 9. 2 Layout . 20 40 70 . 20(40) = 8. 0 . 20(70) = 14. 0 Operating Cost . 15 80 90 . 15(80) = 12. 0 . 15(90) = 13. 5 70. 6 82. 7 1. 00 Alt 2 8 - 21

Example 2: Factor-Rating TABLE 8. 4 Weights, Scores, and Solution SCORES (OUT OF 100) KSF WEIGHT FRANCE DENMARK WEIGHTED SCORES FRANCE DENMARK Labor availability and 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 capita income . 10 85 80 (. 10)(85) = 8. 5 (. 10)(80) = 8. 0 Tax structure . 39 75 70 (. 39)(75) = 29. 3 (. 39)(70) = 27. 3 Education and health . 21 60 70 (. 21)(60) = 12. 6 (. 21)(70) = 14. 7 70. 4 68. 0 Totals 1. 00 8 - 22

Locational Break-Even Analysis u Method of cost-volume analysis is used for industrial locations u Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select the location with the lowest total cost for the expected production volume © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 23

Locational Cost-Profit-Volume Analysis u For a cost analysis, compute the total cost for each alternative location: 8 - 24

Example 1: Locational Break -Even Analysis Three locations: Selling price = $120 Expected volume = 2, 000 units Fixed Variable Total City 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) © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 25

Annual cost Example 1: Locational Break -Even Analysis Figure 8. 2 – $180, 000 – – $160, 000 – $150, 000 – urve – st c o co $130, 000 – icag – Ch $110, 000 – n ree – g G ve lin cur – w t o $80, 000 – B cos t s – co $60, 000 – on ve r – Ak cur – Akron Bowling Green $30, 000 – lowest cost – cost $10, 000 – | | | – 0 500 1, 000 1, 500 2, 000 © 2011 Pearson Education, Inc. publishing as Prentice Hall Chicago lowest cost | | 2, 500 3, 000 Volume 8 - 26

Example 2: Cost-Profit-Volume Analysis u Fixed and variable costs for four potential plant locations are shown below: Location Fixed Cost Variable Cost per Year per Unit A $250, 000 $11 B $100, 000 $30 C $150, 000 $20 D $200, 000 $35 8 -27 8 - 27

Example 2: Cost-Profit. Volume Analysis Plot of Location Total Costs 8 -28 8 - 28

Example: Cost-Profit-Volume Analysis u Range approximations u B Superior (up to 4, 999 units) u C Superior (>5, 000 to 11, 111 units) u A superior (11, 112 units and up) 8 - 29

Center-of-Gravity Method u Finds location of a distribution center that minimizes distribution costs u Considers u Location of markets u Volume of goods shipped to those markets u Shipping cost (or distance) © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 30

Center of Gravity Method u Method for locating a distribution center that minimizes distribution costs u Treats distribution costs as a linear function of the distance and the quantity shipped u The quantity to be shipped to each destination is assumed to be fixed u Uses a map that shows the locations of destinations u A coordinate system is overlaid on the map to determine the relative locations 8 - 31

Center of Gravity Method a) Map showing destinations b) Coordinate system added c) Center of gravity 8 -32 8 - 32

Center of Gravity Method u If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the ycoordinates 8 - 33

Example: Center of Gravity Method Suppose you are attempting to find the center of gravity for this problem. Destination x y D 1 2 2 D 2 3 5 D 3 5 4 D 4 8 5 18 16 8 -34 8 - 34

Center of Gravity Method u When the quantities to be shipped to every location are unequal, the coordinates of the center of gravity are found as follows: 8 - 35

Example 1: Center of Gravity u Suppose the shipments for the problem given earlier are not all equal. Determine the center of gravity based on the following information. Destination x y Weekly Quantity D 1 2 2 800 D 2 3 5 900 D 3 5 4 200 D 4 8 5 100 18 16 2, 000 8 -36 8 - 36

Example 1: Center of Gravity u The coordinates for the center of gravity are (3. 05, 3. 7). You may round the x-coordinate down to 3. 0, so the coordinates for the center of gravity are (3. 0, 3. 7). This is south of destination D 2 (3, 5). 8 - 37

Example 1: Center of Gravity 8 -38 8 - 38

Example 2: Center-of-Gravity Method TABLE 8. 5 Demand for Quain’s Discount Department Stores STORE LOCATION NUMBER OF CONTAINERS SHIPPED PER MONTH Chicago 2, 000 Pittsburgh 1, 000 New York 1, 000 Atlanta 2, 000 8 - 39

Center-of-Gravity Method 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 (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) 2000 + 1000 + 2000 = 66. 7 x-coordinate = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 2000 = 93. 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 40

Center-of-Gravity Method North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) + 90 – Center of gravity (66. 7, 93. 3) 60 – 30 – | – Atlanta (60, 40) | 30 Arbitrary origin | | 60 90 120 150 © 2011 Pearson Education, Inc. publishing as Prentice Hall East-West Figure 8. 3 8 - 41

Transportation Model u Finds amount to be shipped from several points of supply to several points of demand u Solution will minimize total production and shipping costs u A special class of linear programming problems © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 42

Service and Retail Locations: focus is on maximizing revenue. n Considerations: n n Nearness to raw materials is not usually a consideration Customer access is a n n n Tend to be profit or revenue driven, and so are n n Prime consideration for some: restaurants, hotels, etc. Not an important consideration for others: service call centers, etc. Concerned with demographics, competition, traffic volume patterns, and convenience Clustering n Similar types of businesses locate near one another

Comparison of Service and Manufacturing Considerations Table 8. 2 Manufacturing/Distribution Service/Retail Cost Focus Revenue focus Transportation modes/costs Demographics: age, income, etc Energy availability, costs Population/drawing area Labor cost/availability/skills Competition Building/leasing costs Traffic volume/patterns Customer access/parking

Geographic Information System (GIS) n n n A computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps Aids decision makers in targeting market segments Besides demographic data, GIS include data about ü Detailed maps ü Utilities ü Geographic features ü Locations of major services

Geographic Information Systems (GIS) © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 47

The Call Center Industry u Requires neither face-to-face contact nor movement of materials u Traditional variables are no longer relevant u Low-wage countries like India with highly educated, English-speaking work force have been attractive places for big U. S. Companies to hire call center staff. © 2011 Pearson Education, Inc. publishing as Prentice Hall 8 - 48