1997 Prentice-Hall, Inc.

Principles of Operations Management

Selecting the Location Chapter 6

6-1

Learning Objectives
1997 Prentice-Hall, Inc.

Explain location decisions

Describe the factors affecting location decisions

Explain the methods of evaluating location alternatives

Factor rating method Center of gravity method

6-2

Thinking Challenge
1997 Prentice-Hall, Inc.

Where do you want to live after graduation? Why?

1995 Corel Corp.

6-3

Alone

Group Class

 1997 Prentice-Hall, Inc.

Industrial Location Strategies

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

1995 Corel Corp.

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 1997 Prentice-Hall, Inc.

Service Location Strategies

Revenue focus

Costs vary little between market areas

Location is a major revenue factor

Affects amount of customer contact Affects volume of business

1995 Corel Corp.

6-5

Location Decisions
1997 Prentice-Hall, Inc.

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 firm

6-6

Factors Affecting Country

1997 Prentice-Hall, Inc.

Government
Culture & economy Market location Labor Productivity Cost Infrastructure
1995 Corel Corp.

Exchange rate
6-7

Labor Productivity
1997 Prentice-Hall, Inc.

Low wages often over-emphasized

Labor productivity important Labor cost per unit should be criterion: Labor cost/day Units made/day
6-8

Hourly Compensation ($) Mfg. Workers (1994)

Germany Japan U.S. Hong Kong Mexico 27.37 21.38 17.10 4.79 2.57

 1997 Prentice-Hall, Inc.

Factors Affecting Region/Community

Corporate desires
Attractiveness Labor Utility costs Govt incentives Proximity to customers & suppliers Land/construction $$$
6-9
1995 Corel Corp.

 1997 Prentice-Hall, Inc.

Factors Affecting Site

Site size
Site cost Transportation in/out Proximity of services Environmental impact
1995 Corel Corp.

6 - 10

Location Methods
1997 Prentice-Hall, Inc.

Factor weighting method

Locational breakeven analysis Center of gravity method

Transportation model
1995 Corel Corp.

6 - 11

Factor Rating Method

1997 Prentice-Hall, Inc.

Most widely used location technique

Useful for service & industrial locations Rates locations using factors

Intangible (qualitative) factors Example: Education quality, labor skills Tangible (quantitative) factors Example: Short-run & long-run costs

6 - 12

 1997 Prentice-Hall, Inc.

Factor Rating Method Steps

List relevant factors

Assign importance weight to each factor

Develop scale for each factor (0-1, etc.)

Score each location using factor scale

Multiply scores by weights for each factor & total Select location with maximum total score
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 1997 Prentice-Hall, Inc.

Factor Rating Method Example

1995 Corel Corp.

Youre an analyst for John Deere. Youre considering locating a new mfg. plant in Omaha (NE) or Denver (CO). Factor Wgt NE CO Mfg. costs .7 $60k $62k Cost of living .1 .7 .6 Labor avail. .2 1 .8
Where should you locate?
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 1997 Prentice-Hall, Inc.

Factor Rating Method Solution

Omaha Denver
Wgt Econ Score Wgt Score (0-1) Score
(0-1)

Factor Wgt Econ Score

TOTAL
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 1997 Prentice-Hall, Inc.

Factor Rating Method Thinking Challenge

Youre owner of a hot tub store. Youre considering relocating to Phoenix (AZ) or Santa Fe (NM). Factor Wgt AZ NM Population .4 984k 56k Competition .1 .3 .8 Life style .5 .2 .9
Where should you locate?
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Alone Group Class
1995 Corel Corp.

 1997 Prentice-Hall, Inc.

Thinking Challenge Solution*

Phoenix Santa Fe
(0-1)

Factor Wgt Econ Score

Wgt Econ Score Wgt Score (0-1) Score

TOTAL
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Center of Gravity Method

1997 Prentice-Hall, Inc.

Finds location of single distribution center serving several destinations Used primarily for services Considers

Location of existing destinations Example: Markets, retailers etc. Volume to be shipped Shipping distance (or cost) Shipping cost/unit/mile is constant

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 1997 Prentice-Hall, Inc.

Center of Gravity Method Steps

Place existing locations on a coordinate grid

Grid has arbitrary origin & scale Maintains relative distances

Calculate X & Y coordinates for center of gravity

Gives location of distribution center Minimizes transportation cost

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 1997 Prentice-Hall, Inc.

Center of Gravity Method Equations

X Coordinate

dix Wi Cx i Wi
i

dix = x coordinate of location i Wi = Volume of goods moved to or from location i

Y Coordinate

diy Wi Cy i Wi
i

diy = y coordinate of location i

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 1997 Prentice-Hall, Inc.

Center of Gravity Method Example

Columbia, SC Austin, TX

Youre an analyst for Home Depot. You want to find the best location of a warehouse serving retail stores in Lincoln (coord. 90, 60), Columbia (coord. 150, 30), & Austin (coord. 90, 10). Monthly demand is 2k, 3k, 5k units respectively.
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1995 Corel Corp.

Warehouse?

Lincoln, NE

 1997 Prentice-Hall, Inc.

Center of Gravity Method Solution

Lincoln Store (90,60) 2k demand Austin Store (90,10) 5k demand Columbia Store (150,30) 3k demand
120 150
1995 Corel Corp.

90

60

30

0 0
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30

60

90

Thinking Challenge
1997 Prentice-Hall, Inc.

Youre a planner for Sears. You want to find the best location of a warehouse serving retail stores in Seattle (50, 60), Aberdeen (20, 35), & Spokane (160, 50). Monthly demand is 494k, 18k, 171k units respectively.
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Alone Group Class

1995 Corel Corp.

Conclusion
1997 Prentice-Hall, Inc.

Explained location decisions

Described the factors affecting location decisions

Explained the methods of evaluating location alternatives

Factor rating method Center of gravity method

6 - 25