8-10. location strategies

7/30/2019 8-10. Location Strategies

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OperationsManagement

Chapter 8Location Strategies


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Outline

Global Company Profile:FedEx

The Strategic Importance ofLocation


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Outline Continued

Factors That Affect LocationDecisions

Labor Productivity

Exchange Rates and Currency Risks

Costs

Political Risk, Values, and Culture

Proximity to Markets

Proximity to Suppliers

Proximity to Competitors (Clustering)


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Outline Continued

Methods of Evaluating LocationAlternatives

The Factor-Rating Method Locational Break-Even Analysis

Center-of-Gravity Method

Transportation Model


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Outline Continued

Service Location Strategy

How Hotel Chains Select Sites

The Call Center Industry

Geographic Information Systems


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Learning Objectives

When you complete this chapter youshould be able to:

1. Identify and explain seven major factors

that effect location decisions

2. Compute labor productivity

3. Apply the factor-rating method

4. Complete a locational break-evenanalysis graphically and mathematically

5. Use the center-of-gravity method


7/41 2008 Prentice Hall, Inc. 8 7

Federal Express

Central hub concept

Enables service to more locations withfewer aircraft

Enables matching of aircraft flights withpackage loads

Reduces mishandling and delay in transit

because there is total control ofpackages from pickup to delivery


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Location Strategy

One of the most important decisions afirm makes

Increasingly global in nature Significant impact on fixed and

variable costs

Decisions made relatively infrequentlyThe objective is to maximize the

benefit of location to the firm


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Location and Costs

Location decisions based on lowcost require careful consideration

Once in place, location-relatedcosts are fixed in place anddifficult to reduce

Determining optimal facilitylocation is a good investment


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Location and Innovation

Cost is not always the most importantaspect of a strategic decision

Four key attributes when strategy is

based on innovationHigh-quality and specialized inputs

An environment that encourages

investment and local rivalryA sophisticated local market

Local presence of related and

supporting industries


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Location Decisions

Long-term decisions

Decisions made infrequently

Decision greatly affects both fixedand variable costs

Once committed to a location,many resource and cost issues aredifficult to change


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Location Decisions

Country Decision Critical Success Factors

1. Political risks, governmentrules, attitudes, incentives

2. Cultural and economicissues

3. Location of markets

4. Labor talent, attitudes,

productivity, costs5. Availability of supplies,communications, energy

6. Exchange rates andcurrency risksFigure 8.1


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Location DecisionsRegion/

CommunityDecision

Critical Success Factors

1. Corporate desires

2. Attractiveness of region

3. Labor availability, costs,attitudes towards unions

4. Costs and availability of utilities

5. Environmental regulations

6. Government incentives andfiscal policies

7. Proximity to raw materials andcustomers

8. Land/construction costs

MN

WI

MI

IL IN OH

Figure 8.1


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Location Decisions

Site Decision Critical Success Factors

1. Site size and cost

2. Air, rail, highway, and

waterway systems3. Zoning restrictions

4. Proximity of services/supplies needed

5. Environmental impactissues

Figure 8.1


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Growth CompetitivenessIndex of Countries

Country 2006-2007 Rank 2005 Rank

Switzerland 1 4USA 6 1

J apan 7 10Germany 8 6UK 10 9Israel 15 23Canada 16 13New Zealand 23 22Italy 42 38China 54 48Mexico 58 59

Russia 62 53

Table 8.1


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Factors That AffectLocation Decisions

Labor productivity

Wage rates are not the only cost

Lower production may increase total cost

Labor cost per day

Production (units per day)= Cost per unit

Connecticut

= $1.17 per unit$70

60 units

J uarez

= $1.25 per unit$25

20 units


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Exchange rates and currency risks

Can have a significant impact on coststructure

Rates change over time

Costs

Tangible - easily measured costs such as

utilities, labor, materials, taxes Intangible - less easy to quantify and

include education, public transportation,community, quality-of-life


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Exchange rates and currency risks

Can have a significant impact on coststructure

Rates change over time

Costs

Tangible - easily measured costs such as

utilities, labor, materials, taxes Intangible - less easy to quantify and

include education, public transportation,community, quality-of-life

Location

decisions basedon costs alone

can create

difficult ethicalsituations


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Political risk, values, and culture

National, state, local governmentsattitudes toward private and intellectualproperty, zoning, pollution, employmentstability may be in flux

Worker attitudes towards turnover, unions,absenteeism

Globally cultures have different attitudestowards punctuality, legal, and ethicalissues


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Ranking Corruption

Rank Country 2006 CPI Score (out of 10)1 Finland 9.61 Iceland 9.61 New Zealand 9.65 Singapore 9.4

7 Switzerland 9.111 UK 8.614 Canada 8.515 Hong Kong 8.316 Germany 8.0

17 J apan 7.620 USA, Belgium 7.334 Israel, Taiwan 5.970 Brazil, China, Mexico 3.3121 Russia 2.5

LeastCorrupt

MostCorrupt

Table 8.2


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Proximity to markets

Very important to services

J IT systems or high transportation costsmay make it important to manufacturers

Proximity to suppliers

Perishable goods, high transportation

costs, bulky products


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Proximity to competitors

Called clustering

Often driven by resources such as natural,information, capital, talent

Found in both manufacturing and serviceindustries


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Locational

Break-Even Analysis Method of cost-volume analysis used for

industrial locations

Three steps in the method1. Determine fixed and variable costs for

each location

2. Plot the cost for each location

3. Select location with lowest total cost forexpected production volume


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Locational Break-EvenAnalysis Example

Three locations:

Akron $30,000 $75 $180,000

Bowling Green $60,000 $45 $150,000

Chicago $110,000 $25 $160,000

Fixed Variable TotalCity Cost Cost Cost

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

Selling price = $120

Expected volume = 2,000 units


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Locational Break-EvenAnalysis Example

$180,000

$160,000 $150,000

$130,000

$110,000

$80,000

$60,000

$30,000

$10,000

Annualcost

| | | | | | |

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

Volume

Akronlowestcost

Bowling Greenlowest cost

Chicagolowestcost

Figure 8.2


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Finds location of distributioncenter that minimizes distributioncosts

Considers

Location of markets

Volume of goods shipped to thosemarkets

Shipping cost (or distance)


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Place existing locations on acoordinate grid

Grid origin and scale is arbitrary

Maintain relative distances

Calculate X and Y coordinates for

center of gravityAssumes cost is directly

proportional to distance andvolume shipped


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x - coordinate =

dixQi

Qii

i

diyQi

Qii

i

y - coordinate =

where dix = x-coordinate of location i

diy = y-coordinate of location i

Qi = Quantity of goods moved to

or from location i


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North-South

East-West

120

90

60

30

| | | | | |30 60 90 120 150

Arbitraryorigin

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

Pittsburgh (90, 110)

Atlanta (60, 40)

Figure 8.3


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Number of ContainersStore Location Shipped per Month

Chicago (30, 120) 2,000Pittsburgh (90, 110) 1,000

New York (130, 130) 1,000Atlanta (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


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North-South

East-West

120

90

60

30

| | | | | |30 60 90 120 150

Arbitraryorigin

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

Pittsburgh (90, 110)

Atlanta (60, 40)

Center of gravity (66.7, 93.3)+

Figure 8.3


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Transportation Model

Finds amount to be shipped fromseveral points of supply to several

points of demand Solution will minimize total

production and shipping costs

A special class of linearprogramming problems


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Worldwide Distribution of

Volkswagens and Parts

Figure 8.4


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Service Location Strategy

1. Purchasing power of customer-drawing area

2. Service and image compatibility with demographicsof the customer-drawing area

3. Competition in the area4. Quality of the competition

5. Uniqueness of the firms and competitors locations

6. Physical qualities of facilities and neighboring

businesses7. Operating policies of the firm

8. Quality of management


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Location Strategies

Service/Retail/Professional Location Goods-Producing LocationRevenue Focus Cost 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, wagerates)

Tangible costs

Transportation cost of raw material

Shipment cost of finished goods

Energy and utility cost; labor; rawmaterial; taxes, and so on

Intangible and future costs

Attitude toward union

Quality of life

Education expenditures by state

Quality of state and localgovernment

Table 8.6


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Location Strategies

Service/Retail/Professional Location Goods-Producing Location

Techniques Techniques

Regression models to determineimportance 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

Transportation method

Factor-rating methodLocational break-even analysis

Crossover charts

Table 8.6


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Location Strategies

Service/Retail/Professional Location Goods-Producing Location

Assumptions Assumptions

Location is a major determinant ofrevenue

High customer-contact issues arecritical

Costs are relatively constant for agiven area; therefore, the revenuefunction is critical

Location is a major determinant ofcost

Most major costs can be identifiedexplicitly for each site

Low customer contact allows focuson the identifiable costs

Intangible costs can be evaluated

Table 8.6


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How Hotel Chains Select Sites

Location is a strategically importantdecision in the hospitality industry

La Quinta started with 35 independent

variables and worked to refine aregression model to predict profitability

The final model had only four variables

Price of the inn

Median income levels

State population per inn

Location of nearby colleges

r2= .51

51% of theprofitability ispredicted by

just these fourvariables!


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The Call Center Industry

Requires neither face-to-facecontact nor movement of materials

Has very broad location options

Traditional variables are no longer

relevant Cost and availability of labor may

drive location decisions


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Geographic InformationSystems (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


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Geographic InformationSystems (GIS)

8-10. location strategies

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