om location layout

Operations Management

Location and Layout Strategies

OM - location and layout strategy

Objective of Location Strategy

Maximize the benefit of location to the firm


Industrial Location Decisions

Cost focus Revenue varies little

between locations

Location is a major cost factor Affects shipping &

production costs (e.g., labor)

Costs vary greatly between locations


Service Location DecisionsRevenue focus

Costs vary little between market areas

Location is a major revenue factor Affects amount of

customer contact Affects volume of

business


In General - Location Decisions

Long-term decisions

Difficult to reverse

Affect fixed & variable costs Transportation cost

As much as 25% of product price

Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location

to firmOM - location and layout strategy

Location Decision Sequence

Country

© 1995 Corel Corp.

Region/Community

© 1995 Corel Corp.

Site

© 1995 Corel Corp.


Factors That Affect Location Decisions


Location Decision Example

BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

© 1995 Corel Corp.


Country Decision Factors

Market location U.S. is world’s largest

luxury car market Growing

Labor Lower manufacturing

labor costs$17/hr. (U.S.) vs. $27

(Germany) Higher labor productivity

11 holidays (U.S.) vs. 31 (Germany)

Other Lower shipping

cost ($2,500/car less)

New plant & equipment would increase productivity (lower cost/car $2,000-3000)


Region/Community Decision Factors

Labor Lower wages in South Carolina (SC)

Government incentives $135 million in state & local tax breaks Free-trade zone from airport to plant

No duties on imported components or on exported cars


Location Evaluation Methods

Factor-rating

method

Locational break-

even analysis

Center of gravity

method

Transportation

modelOM - location and layout strategy

Factor-Rating Method

Most widely used location technique

Useful for service & industrial locations

Rates locations using factors

Tangible (quantitative) factors

Example: Short-run & long-run costs

Intangible (qualitative) factors

Example: Education quality, labor skills


Steps in Factor Rating Method

List relevant factors Assign importance weight to each

factor (such as 0 – 1) Develop scale for each factor (such as

1 – 100) Score each location using factor scale Multiply scores by weights for each

factor & total for each location Select location with maximum total

score


Method of cost-volume analysis used for industrial locations

Steps Determine fixed & variable costs for

each location Plot total cost for each location (Cost

on vertical axis, Annual Volume on horizontal axis)

Select location with lowest total cost for expected production volume

Must be above break-even

Locational Break-Even Analysis


Three locations:Three locations:

AkronAkron $30,000$30,000 $75$75 $180,000$180,000

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

ChicagoChicago $110,000$110,000 $25$25 $160,000$160,000

FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost

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

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

Location break Even Analysis example

–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

An

nu

al c

ost

An

nu

al c

ost

| | | | | | |

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000

VolumeVolume

Akron Akron lowest lowest costcost

Bowling Green Bowling Green lowest costlowest cost

Chicago Chicago lowest costlowest cost

Chicago cost curve

Chicago cost curve

Akron

cost

Akron

cost

curv

ecu

rve

Bowling Green

Bowling Green

cost curve

cost curve

Locational Break-Even Locational Break-Even Analysis ExampleAnalysis Example

Place existing locations on a Place existing locations on a coordinate gridcoordinate grid Grid origin and scale is arbitrary Grid origin and scale is arbitrary

Maintain relative distancesMaintain relative distances

Calculate X and Y coordinates for Calculate X and Y coordinates for ‘center of gravity’‘center of gravity’ Assumes cost is directly proportional Assumes cost is directly proportional

to distance and volume shippedto distance and volume shipped

Center-of-Gravity MethodCenter-of-Gravity Method

North-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120

150150Arbitrary Arbitrary originorigin

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

Pittsburgh (90, 110)Pittsburgh (90, 110)

Atlanta (60, 40)Atlanta (60, 40)

Figure 8.3Figure 8.3


Number of ContainersNumber of ContainersStore LocationStore Location Shipped per MonthShipped per Month

Chicago (30, 120)Chicago (30, 120) 2,0002,000Pittsburgh (90, 110)Pittsburgh (90, 110) 1,0001,000New York (130, 130)New York (130, 130) 1,0001,000Atlanta (60, 40)Atlanta (60, 40) 2,0002,000

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

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 66.7= 66.7

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

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 93.3= 93.3


North-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120

150150Arbitrary Arbitrary originorigin

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

Pittsburgh (90, 110)Pittsburgh (90, 110)

Atlanta (60, 40)Atlanta (60, 40)

Center of gravity (66.7, 93.3)Center of gravity (66.7, 93.3)+

Figure 8.3Figure 8.3


What is Facility Layout

Location or arrangement of everything

within & around buildings

Determines long-run efficiency of

operations

Helps achieve a strategy that supports

differentiation, low cost or quick

response


Strategic Importance of Layout

Proper layout enables:

Higher utilization of space, equipment,and

people

Improved flow of information, materials, or

people

Improved employee morale and safer working

conditions

Improved customer/client interaction

Flexibility to change – cross train; use small,

movable or modular equipment; etc


Office Layout

Design positions people, equipment, & offices for maximum information flow, comfort and safety

Arranged by process or product Example: Payroll dept. is by process

Relationship chart used Examples

Banks (process) Software company (Pdt)


Office Layout Floor Plan

AccountingAccounting

ManagerManager Brand XBrand X

FinanceFinanceFin. Acct.


Retail/Service Layout

Design maximizes product exposure to customers

Decision variables Store flow pattern Allocation of (shelf) space to products

Video


Retail Layouts - Some Rules of Thumb

Locate high-draw items around the periphery of the store

Use prominent locations such as the first or last aisle for high-impulse and high margin items

Distribute “power items” (items that may dominate a shopping trip) to both sides of an aisle, and disperse them to increase the viewing of other items

Use end aisle locations because they have a very high exposure rate

Convey mission of store by positioning of primary items up front


Environmental Dimensions of Servicescapes

Ambient Conditions: background characteristics such as noise level, music, lighting, temperature, and scent.

Spatial Layout and Functionality: arrangement of furnishings and equipment creating a visual and functional landscape

Signs, Symbols, and Artifacts: selection, orientation, location, and size of objects; serve as explicit or implicit signals


Warehouse Layout

Design balances space (cube) utilization & handling cost

Similar to process layout Items moved between dock & various

storage areas

Optimum layout depends onVariety of items storedNumber of items picked


Warehouse Layout Floor Plan

ZonesZones

ConveyorConveyorTruckTruck

Order PickerOrder Picker


Cross Docking

Transferring goods from incoming

trucks at receiving docks

to outgoing trucks at shipping docks

Avoids placing goods into storage

Requires suppliers provide effective addressing (bar codes) and packaging that provides for rapid transhipment

In-In-comingcoming

OutgoingOutgoing

© 1984-1994 T/Maker Co.© 1995 Corel Corp.


Random Stocking Includes tasks like

Maintain a list of “open” locations Maintain accurate records of existing inventory

and its locations Sequence items on orders to minimize travel

time required to pick orders Combine orders to reduce picking time Assign certain items or classes of items, such

as high usage items, to particular warehouse areas so that distance traveled is minimized


Fixed-Position Layout

Design is for stationary project

Workers and equipment come to site

Complicating factors

Limited space at site

Changing material needs

Volume of materials needed is dynamic


Process-Oriented Layout

Design places departments with large

flows of material or people together

Department areas having similar

processes located in close proximity e.g., All x-ray machines in same area

Supports process-focused strategy i.e.

product differentiation stategy


Emergency Room LayoutSurg

ery

RadiologyE.R. beds Pharmacy Billing/exit

E.R.Triage room

E.R. AdmissionsPatient B - erratic pacemaker

Patient A - broken leg

Labs


Product-Oriented Layout

Facility organized around product Design minimizes line imbalance

Delay between work stations Types: Fabrication line; assembly

line


om location layout

Documents

layout strategyom location

layout strategiesom

location cost

benefit of location

firmom location

location techniqueuseful

locationselect location

locationsom location