loc plan ch08

8-1 Location Planning and Analysis

CHAPTER8

Location Planning and Analysis

McGraw-Hill/IrwinOperations Management, Eighth Edition, by William J. StevensonCopyright © 2005 by The McGraw-Hill Companies, Inc. All rights

reserved.


Need for Location DecisionsNeed for Location Decisions

Marketing Strategy

Cost of Doing Business

Growth

Depletion of Resources


NATURE OF LOCATION DECISIONSNATURE OF LOCATION DECISIONS

Strategic Importance Long term commitment/costs Impact on investments, revenues, and operations Supply chains

Objectives Profit potential No single location may be better than others Identify several locations from which to choose

Options Expand existing facilities Add new facilities Move


MAKING LOCATION DECISIONSMAKING LOCATION DECISIONS Decide on the criteria Identify the important factors Develop location alternatives Evaluate the alternatives Make selectionMany factors influence location decision. However, it happens that

one or a few factors are so impt. That they dominate the decision. e,g; in manufacturing, the potentially dominating factors usually include availability of an abundant energy and water supply and proximity to raw material. Thus nucl. reactors require large amount of water for cooling, heavy industries such as steel and Al production need large amounts of electricity, and so on. Transportation costs can be major factor. In service orgs., possible


LOCATION DECISION FACTORSLOCATION DECISION FACTORS

dominating factors are market related & include tariff patterns, convenience, and competitor’s locations, as well as proximity to the market. e.g., car rental agencies locate near airports and midcity, where their customers are. Following four major factors are impt. and their subdivisions are described next:


Location Decision FactorsLocation Decision Factors

Regional Factors

Site-related Factors

Multiple Plant Strategies

Community Considerations


Location of raw materials Location of markets Labor factors Climate and taxes

Regional FactorsRegional Factors


TANGIBLE COST FACTORSTANGIBLE COST FACTORSMany items necessary to the operation are costly. Location decisions should take such items into consideration. Long-range forecasts of costs should be used, since facilities may last forty or fifty years or more.

1. Transportation

Availability of multiple modes of transportation can provide flexibility and minimum cost means of transporting various materials.

2. Labor Availability and Costs

Labor intensive companies may place more emphasis on the cost of processing materials than on the cost of transporting them. Companies that employ a large labor force may relocate to places with lower wage rates.


TANGIBLE COST FACTORSTANGIBLE COST FACTORS3. Energy Availability and Costs

Many manufacturing plants use large amounts of energy sources, such as electricity or natural gas, to operate production processes.

4. Water Availability and Cost

Processes that require large amounts of water are restricted to locations where abundant water resources are available. Water shortages occur in some locations and will probably become more common.

5. Site and Construction Costs

One cost directly related to facility location is the cost of purchasing the site and building the facility. The cost per acre of land varies widely from site to site within a region and from region to region.


INTANGIBLE FACTORSINTANGIBLE FACTORSNot all measures of a location’s desirability can be expressed in dollars and cents. People must be induced to come to work there, so the appeal of a locality as a place to live and rear a family is important. The local environment may also have important effects on a company.

1. Zoning and Legal Regulations

Local, state, and federal pollution control regulations may limit the locations available to some companies. Zoning regulations control the types of businesses that may operate in certain areas.

2. Community Attitudes

Community relations should be an integral part of location decisions. Public opinion in some areas may be unfavorable to particular types of businesses, even though there is no formal legislation against it.


INTANGIBLE FACTORSINTANGIBLE FACTORS3. Expansion Potential

A site for a manufacturing or nonmanufacturing facility should offer some flexibility and room for expansion. The size and contour of the plot of land should allow for expansion of the facility without a sacrifice of efficiency.

4. Living Conditions

Often a company's top-echelon personnel are obtained from other branches or other companies. Today some people decline promotions with their own or offers from other companies because they do not want to move to the job location.


CLIMATE AND TAXESCLIMATE AND TAXES

Climate & taxes sometimes play a role in location decision. e.g., severe winter season can seriously restrict the efficiency of certain operation and result in delayed deliveries and disruption caused by inability of employees to get to work.Similarly, the business & personal income taxes in some states reduce their attractiveness to companies seeking new locations.


Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support

Community ConsiderationsCommunity Considerations


Land Transportation Environmental Legal

Site Related FactorsSite Related Factors


Product plant strategy Market area plant strategy Process plant strategy

Multiple Plant StrategiesMultiple Plant Strategies


Product plant strategyProduct plant strategyWith this strategy, entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market. This is essentially a decentralized approach, with each plant focusing on a narrow set of requirements.This results in economies of scale and, compared with multipurpose plants, lower operating costs.Plant location may be widely scattered or clustered relatively close to one an other.


Market Area plant strategyMarket Area plant strategyPlants are designed to serve a particular geographical segment of a market e.g., (West coast, Northeast) Individual plants produce most if not all of a company’s products and supply a limited geographical area. Although operating cost may tend to be higher than those of product plants, significant savings on shipping costs for comparable products can be made.This arrangement is particularly desirable when shipping costs are high due to volume, weight, or other factors.Benefits of such arrangements are rapid delivery and response to local needs. This approach requires centralized coordination of decision to add or delete plants, or to expand or downsize current plants due to changing market conditions.


Process plant strategyProcess plant strategy In here different plants concentrate on different aspects of a process.

Automobile manufacturers often use this approach, with different plants for engines, transmissions, body stamping, & even radiators. This approach is best suited to product that have numerous components; Separating the production of components results in less confusion then if all production was carried out at the same location. But this kind of arrangement requires coordination of production throughout the system and requires highly informed, centralized administration to achieve effective operation. Key Adv. Individual plants are highly specialized and generate volume that yield economies of scale. MULTIPLE PLANTS have additional benefit: the increase in learning opportunities that occurs when similar operations are being done in different plants. Another advantage is that same problems tend to arise, and solutions to those problems as well as improvements in general in product & processes can be made at one plant and can be shared with other plants.


Comparison of Service and Comparison of Service and Manufacturing ConsiderationsManufacturing Considerations

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/patternsCustomer access/parking

Table 8.2

8-20 Location Planning and AnalysisComparison of Service and Comparison of Service and

Manufacturing ConsiderationsManufacturing Considerations Medical services are often located near hospital for

convenience of patients. Doctor’s offices may be located near hospitals, or grouped in other areas where other doctors offices may also be located.

8-21 Location Planning and AnalysisTRENDS IN LOCATIONS TRENDS IN LOCATIONS (Globalization)(Globalization)

Foreign producers locating in U.S.“Made in USA”Currency fluctuationsJust-in-time manufacturing techniques which encourage supplier to locate near their clients to reduce supplier lead time. Microfactories Information Technology


ForeignGovernment

a. Policies on foreign ownership of production facilitiesLocal ContentImport restrictionsCurrency restrictionsEnvironmental regulationsLocal product standards

b. Stability issuesCulturalDifferences

Living circumstances for foreign workers / dependentsReligious holidays/traditions

CustomerPreferences

Possible buy locally sentiment

Labor Level of training and education of workersWork practicesPossible regulations limiting number of foreign employeesLanguage differences

Resources Availability and quality of raw materials, energy,transportation

Table 8.3


Evaluating LocationsEvaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs


Location Cost-Volume AnalysisLocation Cost-Volume Analysis

Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved


Example 1: Cost-Volume AnalysisExample 1: Cost-Volume Analysis

Fixed and variable costs for four potential locations

L o c a t i o n F i x e dC o s t

V a r i a b l eC o s t

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 13 02 03 5


Example 1: SolutionExample 1: Solution

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0


Example 1: SolutionExample 1: Solution

800700600500400300200100

0

Annual Output (000)

$(000)

8 10 12 14 166420

A

BC

B SuperiorC Superior

A Superior

D


Evaluating LocationsEvaluating Locations

Transportation Model Decision based on movement costs of raw

materials or finished goods Factor Rating

Decision based on quantitative and qualitative inputs

Center of Gravity Method Decision based on minimum distribution costs


GLOBAL LOCATIONSGLOBAL LOCATIONS

Recent trends in locating facilities, particularly manufacturing facilities, reflect a combination of competitive and technological factors. One trend has been that of foreign producers, especially automotive firms, to locate plants in the United States. The United States represents a tremendous market for cars, trucks, and recreational vehicles. By locating in the United States, these firms can shorten delivery time and reduce delivery costs. Furthermore, they can avoid any future tariffs or quotas that might be applied to imports.

A development that affects location decisions was the passage of GATT in 1994. One of its provisions was the reduction and elimination of various tariffs. Consequently, location within the borders of a country to escape tariffs is now much less of an issue.


GLOBAL LOCATIONSGLOBAL LOCATIONS An ethical issue has been the use of "sweatshops," which employ

workers at low wages in poor working conditions. Consumer protests have caused a number of companies to cease this practice.

Another trend is just-in-time manufacturing techniques, which encourage suppliers to locate near their customers to reduce supplier lead times. For this reason, some U.S. firms are reconsidering decisions to locate offshore. Moreover, in light manufacturing (e.g., electronics), low-cost labor is becoming less important than nearness to markets; users of electronics components want suppliers that are close to their manufacturing facilities. One offshoot of this is the possibility that the future will see a trend toward smaller factories located close to markets. In some industries, small, automated microfactories with narrow product focuses will be located near major markets to reduce response time.


GLOBAL LOCATIONSGLOBAL LOCATIONS• It is likely that advances in information technology will enhance the

ability of manufactur ing firms to gather, track, and distribute information that links purchasing, marketing, and dis tribution with design, engineering, and manufacturing. This will reduce the need for these functions to be located close together, thereby permitting a strategy of locating production fa cilities near major markets.

• Two other factors are causing companies to locate manufacturing facilities in countries that contain their markets (e.g., Japanese auto companies establishing factories in the United States). One is to counter negative sentiments such as "not made in this country." Thus, Japa nese factories in the United States produce cars made by U.S. workers. The second factor re lates to currency fluctuations and devaluations. These changes can have a significant impact on demand and. hence, on profits. Changes in currency value alter the price of foreign goods, but not the price of goods produced within a country.


GLOBAL LOCATIONSGLOBAL LOCATIONS

• For instance, if the value of a country's currency falls relative to that of other countries, prices within the country don't change, but foreign-produced goods become more expensive. If demand is elastic, then demand for those foreign goods will fall. Furthermore, currency changes may result in increased costs of parts supplied by foreign producers. By locating and selling within a country, and buying from suppliers in that country, manufacturers can avoid the impact of currency changes.

• The trend toward globalization for some organizations has meant having facilities, personnel, and operations around the world. This has created new challenges for managing scattered and distant operations. Added to that are the ongoing social unrest, political instability, and terrorist acts that have caused many organizations to be very cautious about locating in, or even traveling to, certain counties or regions.

• Nonetheless, the benefits of globalization, coupled with advanced communications capabilities and other technologies, make globalization worth considering.


GLOBAL LOCATIONSGLOBAL LOCATIONS• The growth in multinational operations over the past several decades

is evidence of the importance of foreign locations. Some firms are attracted to foreign locations because of nearby deposits of aluminum, copper, timber, oil, or other natural resources. Other firms view foreign locations as a way to expand their markets, and still others are attracted by ample supplies of labor. Some countries may offer financial incentives to companies to create jobs for their people. Developing countries may establish tariffs to protect their young industries from outside competition, which may also reduce the amount of "foreign'" competition a firm must face if it locates in such a country. Until the North American Free Trade Agreement eliminated restrictions, the Fisher-Price Toy Company factory in Matamoros. Mexico, was not allowed to sell in Mexico the Muppet toys it makes. U.S. companies with factories in Mexico could import raw materials duty-free, but they were required to export all of their output.


GLOBAL LOCATIONSGLOBAL LOCATIONS Many developing countries offer an abundant supply of cheap labor. For

example, a considerable amount of the clothes sold in the United States bear labels indicating they were made in Korea. China, or Taiwan. In some instances, it is less expensive to ship raw materials or semi finished goods to foreign countries for fabrication and assembly, and then ship them to their final destinations, than it is to produce them in the United States. However, the final cost per unit is the most important factor. In some cases, the low cost of labor in a foreign country can be negated by low productivity and shipping costs.

High production costs in Germany have contributed to a number of German companies locating some of their production facilities in lower-cost countries. Among them are industrial products giant Siemens, A.G. (a semiconductor plant in Britain), drug makers Bayer, A.G. (a plant in Texas) and Hoechst, A.G. (a plant in China), and automakers Mercedes (plants in Spain, France, and Alabama) and BMW (a plant in Spartansburg, South Carolina).


GLOBAL LOCATIONSGLOBAL LOCATIONS• A firm contemplating a foreign location must carefully weigh the

potential benefits against the potential problems. A major factor is the stability of a country's government and its attitude toward American firms. Import restrictions can pose problems with bringing in equipment and spare parts.

• Some of the problems of a foreign location can be caused by language and cultural differences between the United States and the host country. U.S. firms often find it necessary to use U.S. technical personnel but find it difficult to convince workers to move to a foreign country; workers may have to leave their families behind or else subject them to sub-standard housing or educational systems. Companies are now exerting additional efforts to reduce these obstacles. Some provide housing allowances and have schools for U.S. children. They are also improving their efforts to see that the employees they send abroad are familiar with local customs and have a reasonable facility with the language of the host country.


GLOBAL LOCATIONSGLOBAL LOCATIONS One factor that has negatively impacted the bottom line of some

U.S. firms operating plants in foreign countries is the level of corruption present, erasing some of the envisioned benefits of lower labor or transportation costs.

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