Location and Layout

Strategies
Steven Co Jr., CIE, AAE
Location Strategies
 The Strategic Importance of Location

• One of the most important decisions a firm makes

• Increasingly global in nature
• Significant impact on fixed and variable costs
• Decisions made relatively infrequently
• Long term decisions
• Once committed to a location, many resource and cost issues are difficult to change
 The Strategic Importance of Location

• The objective of location strategy is to maximize the benefit of location to

the firm.
• Options include
• Expanding existing facilities
• Maintain existing and add sites
• Closing existing and relocating
 Location and Costs

• Location decisions require careful consideration

• Once in place, location related costs are fixed in place and difficult to reduce
• Effort spent determining optimal facility location is a good investment
 Factors That Affect Location Decisions

• Globalization adds to complexity

• Drivers of globalization
• Market economics
• Communication
• Rapid, reliable transportation
• Ease of capital flow
• Differing labor costs
• Identify key success factors (K S F s)
 Location Decisions

• Key Success Factors (Country Decision)

• Political risks, government rules, attitudes, incentives
• Cultural and economic issues
• Location of markets
• Labor talent, attitudes, productivity, costs
• Availability of supplies, communications, energy
• Exchange rates and currency risks
 Location Decisions

• Key Success Factors (Region/Community Decision)

• Corporate desires
• Attractiveness of region
• Labor availability and costs
• Costs and availability of utilities
• Environmental regulations
• Government incentives and fiscal policies
• Proximity to raw materials and customers
• Land/construction costs
 Location Decisions

• Key Success Factors (Site Decision)

• Site size and cost
• Air, rail, highway, and waterway systems
• Zoning restrictions
• Proximity of services/supplies needed
• Environmental impact issues
• Customer density and demographics
 Factors That Affect Location Decisions

• Labor productivity
• Wage rates are not the only cost
• Lower productivity may increase total cost
• Exchange rates and currency risks
• Can have a significant impact on costs
• Rates change over time
• Costs
• Tangible – easily measured costs such as utilities, labor, materials, taxes
• Intangible – not as easy to quantify and include education, public transportation, community, quality-
of-life
• Location decisions based on costs alone can create difficult ethical situations
 Factors That Affect Location Decisions

• Political risk, values, and culture

• National, state, local governments’ attitudes toward private and intellectual property,
zoning, pollution, employment stability may be in flux
• Worker attitudes toward turnover, unions, absenteeism
• Globally cultures have different attitudes toward punctuality, legal, and ethical issues
• Proximity to markets
• Very important to services
• JIT systems or high transportation costs may make it important to manufacturers
• Proximity to suppliers
• Perishable goods, high transportation costs, bulky products
 Factors That Affect Location Decisions

• Proximity to competitors (clustering)

• Often driven by resources such as natural, information, capital, talent
• Found in both manufacturing and service industries
 Factor Rating Method

• Popular because a wide variety of factors can be included in the analysis

• Six steps in the method
• Develop a list of relevant factors called key success factors
• Assign a weight to each factor
• Develop a scale for each factor
• Score each location for each factor
• Multiply score by weights for each factor and total the score for each location
• Make a recommendation based on the highest point score
 Factor Rating Method

• Example:
Five Flags over Florida, a U S chain of 10 family oriented theme parks, has
decided to expand overseas by opening its first park in Europe. It wishes to
select between France and Denmark. The ratings sheet lists key success
factors that management has decided are important; their weightings and
their rating for two possible sites: Dijon, France, and Copenhagen, Denmark
are shown.
Factor Rating Method
 Locational Cost-Volume Analysis

• An economic comparison of location alternatives

• Three steps in the method
• Determine fixed and variable costs for each location
• Plot the cost for each location
• Select location with lowest total cost for expected production volume
 Locational Cost-Volume Analysis

• Example:
Esmail Mohebbi, owner of European Ignitions Manufacturing, needs to expand his
capacity. He is considering three locations—Athens, Brussels, and Lisbon—for a new
plant. The company wishes to find the most economical location for an expected
volume of 2,000 units per year. Mohebbi conducts locational cost–volume analysis. To
do so, he determines that fixed costs per year at the sites are $30,000, $60,000, and
$110,000, respectively; and variable costs are $75 per unit, $45 per unit, and $25 per
unit, respectively. The expected selling price of each ignition system produced is $120.
Locational Cost-Volume Analysis
Locational Cost-Volume Analysis
 Center-of-Gravity Method

• Finds location of distribution center that minimizes distribution costs

• Considers
• Location of markets
• Volume of goods shipped to those markets
• Shipping cost (or distance)
 Center-of-Gravity Method

• Place existing locations on a coordinate grid

• Grid origin and scale are arbitrary
• Maintain relative distances
• Calculate x and y coordinates for ‘center of gravity’
• Assumes cost is directly proportional to distance and volume shipped
 Center-of-Gravity Method

σ 𝑋𝑖 𝑄𝑖
X-coordinate of the center of gravity = σ
𝑄𝑖
σ 𝑌𝑖 𝑄 𝑖
Y-coordinate of the center of gravity = σ 𝑄𝑖

Where:
𝑋𝑖 = x-coordinate of location i
𝑌𝑖 = y−coordinate of location i
𝑄𝑖 = quantity of goods moved to or from location i
 Center-of-Gravity Method

• Example Store location Number of

containers
Quain’s Discount Department Stores, a chain of four shipped per
large Target-type outlets, has store locations in Chicago, month
Pittsburgh, New York, and Atlanta; they are currently
being supplied out of an old and inadequate warehouse Chicago 2,000
in Pittsburgh, the site of the chain’s first store. The firm Pittsburgh 1,000
wants to find some “central” location in which to build a New York 1,000
new warehouse. Quain’s will apply the center-of-gravity
method. It gathers data on demand rates at each outlet. Atlanta 2,000
 Center-of-Gravity Method
• Coordinate Locations
of Four Quain’s
Department Stores
and Center of Gravity
Center-of-Gravity Method
 Transportation Model

• Finds amount to be shipped from several points of supply to several points

of demand
• Solution will minimize total production and shipping costs
• A special class of linear programming problems
 Service Location Strategy

• Purchasing power of customer-drawing area

• Service and image compatibility with demographics of the customer-drawing area
• Competition in the area
• Quality of the competition
• Uniqueness of the firm’s and competitors’ locations
• Physical qualities of facilities and neighboring businesses
• Operating policies of the firm
• Quality of management
 Location Strategies
Service/Retail/ Professional Goods-producing
Revenue Focus Cost Focus
Volume/revenue Tangible costs
• Drawing area; purchasing power • Transportation cost of raw material
• Competition; advertising/pricing • Shipment cost of finished goods
• Energy and utility cost; labor; raw
Physical quality material; taxes, and so on
• Parking/access; security/lighting;
appearance/ image Intangible and future costs
• Attitude toward union
Cost determinants • Quality of life
• Rent • Education expenditures by state
• Management caliber • Quality of state and local government
• Operation policies (hours, wage rates)
 Location Strategies
Service/Retail/ Professional
Techniques
• Regression models to determine
importance 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
Assumptions
• Location is a major determinant of
revenue
• High customer-contact issues are
critical
• Costs are relatively constant for a
given area; therefore, the revenue
function is critical
Goods-producing
Techniques
• Transportation method
• Factor-rating method
• Locational cost–volume analysis
• Crossover charts
Assumptions
• Location is a major determinant of
cost
• Most major costs can be identified
explicitly for each site
• Low customer contact allows focus on
the identifiable costs
• Intangible costs can be evaluated
 Geographic Information Systems (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
Layout Strategies
 Strategic Importance of Layout Decisions

• The objective of layout strategy is to develop an effective and efficient

layout that will meet the firm’s competitive requirements.
 Layout Design Considerations

• 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
 Types of Layout

• Office layout
• Retail layout
• Warehouse layout
• Fixed position layout
• Process oriented layout
• Work cell layout
• Product oriented layout
 Types of Layout

• Office layout : Positions workers, their equipment, and spaces/offices to provide for
movement of information
• Retail layout : Allocates display space and responds to customer behavior
• Warehouse layout : Addresses trade offs between space and material handling
• Fixed position layout : Addresses the layout requirements of large, bulky projects such as
ships and buildings
• Process oriented layout : Deals with low volume, high variety production (also called job
shop or intermittent production)
• Work cell layout : Arranges machinery and equipment to focus on production of a single
product or group of related products
• Product oriented layout : Seeks the best personnel and machine utilizations in repetitive
or continuous production
 Good Layouts Consider

• Material handling equipment

• Capacity and space requirements
• Environment and aesthetics
• Flows of information
• Cost of moving between various work areas
 Good Layouts Consider

• Material handling equipment

• Capacity and space requirements
• Environment and aesthetics
• Flows of information
• Cost of moving between various work areas
 Office Layout
• Grouping of workers, their equipment, and spaces to provide comfort, safety, and
movement of information
• Movement of information is main distinction
• Typically in state of flux due to frequent technological changes
• Three physical and social aspects
• Proximity
• Privacy
• Permission
• Two major trends
• Information technology
• Dynamic needs for space and services
Office Relationship Chart
 Retail Layout

• Objective is to maximize profitability per square foot of floor space

• Sales and profitability vary directly with customer exposure
• Five Helpful Ideas for Supermarket Layout
• Locate high draw items around the periphery of the store
• Use prominent locations for high impulse and high margin items
• Distribute power items to both sides of an aisle and disperse them to increase viewing of
other items
• Use end aisle locations
• Convey mission of store through careful positioning of lead off department
Store Layout
 Store Layout

• Slotting
• Manufacturers pay slotting fees to retailers to get the retailers to display (slot) their
product
• Contributing factors
• Limited shelf space
• An increasing number of new products
• Better information about sales through P O S data collection
• Closer control of inventory
 Store Layout

• Servicescapes
• Ambient conditions background characteristics such as lighting, sound, smell, and
temperature
• Spatial layout and functionality which involve customer circulation path planning, aisle
characteristics, and product grouping
• Signs, symbols, and artifacts characteristics of building design that carry social
significance
 Warehouse and Storage Layouts

• Objective is to find the optimum trade offs between handling costs and
costs associated with warehouse space
• Maximize the total cube of the warehouse utilize its full volume while
maintaining low material handling costs
 Warehouse and Storage Layouts

• Material Handling Costs

• All costs associated with the transaction
• Incoming transport
• Storage
• Finding and moving material
• Outgoing transport
• Equipment, people, material, supervision, insurance, depreciation
• Minimize damage and spoilage
 Warehouse and Storage Layouts

• Warehouse density tends to vary inversely with the number of different

items stored
• Automated Storage and Retrieval Systems (A S R S s) can significantly
improve warehouse productivity
• Dock location is a key design element
 Warehouse and Storage Layouts

• Cross-Docking
• Materials are moved directly
from receiving to shipping and
are not placed in storage in the
warehouse
• Requires tight scheduling and
accurate shipments, bar code
or RFID identification used for
advanced shipment
notification as materials are
unloaded
 Warehouse and Storage Layouts
• Random Stocking
• Typically requires automatic identification systems (A I Ss) and effective information
systems
• Allows more efficient use of space
• Key tasks
• Maintain list of “open” locations
• Maintain accurate records
• Sequence items to minimize travel, “pick” time
• Combine picking orders
• Assign classes of items to particular areas
 Warehouse and Storage Layouts

• Customizing
• Value added activities performed at the warehouse
• Enable low cost and rapid response strategies
• Assembly of components
• Loading software
• Repairs
• Customized labeling and packaging
 Fixed-Position Layout

• Product remains in one place

• Workers and equipment come to site
• Complicating factors
• Limited space at site
• Different materials required at different stages of the project
• Volume of materials needed is dynamic
 Fixed-Position Layout

• Alternative Strategy
• As much of the project as possible is completed off-site in a product-oriented facility
• This can significantly improve efficiency but is only possible when multiple similar units
need to be created
 Process-Oriented Layout

• Like machines and equipment are grouped together

• Flexible and capable of handling a wide variety of products or services
• Scheduling can be difficult and setup, material handling, and labor costs can be
high
• Arrange work centers so as to minimize the costs of material handling
• Basic cost elements are
• Number of loads (or people) moving between centers
• Distance loads (or people) move between centers
Process-Oriented Layout
 Process-Oriented Layout

Minimize cost=σ𝑛𝑖=1 σ𝑛𝑗=1 𝑋𝑖𝑗 𝐶𝑖𝑗

Where:
n = total number of work centers or departments
i, j = individual departments
𝑋𝑖𝑗 = number of loads moved from department i to department j
𝐶𝑖𝑗 = cost to moved from department i to department j
 Process-Oriented Layout

• Example:
Walters Company management wants to arrange the six departments of its
factory in a way that will minimize interdepartmental material handling costs
They make an initial assumption (to simplify the problem) that each
department is 2020×20 feet and that the building is 60 feet long and 40 feet
wide
 Process-Oriented Layout

• The process layout procedure that they follow involves six steps:
• Construct a from to matrix
• Determine the space requirements
• Develop an initial schematic diagram
• Determine the cost of this layout
• Try to improve the layout
• Prepare a detailed plan
 Process-Oriented Layout
Step 1: Construct a “from-to matrix”
 Process-Oriented Layout
Step 2: Determine the space requirements
 Process-Oriented Layout
Step 3: Develop an initial schematic diagram
 Process-Oriented Layout
Step 4: Determine the cost of this layout
 Process-Oriented Layout
Step 5: Try to improve the layout
 Process-Oriented Layout
Step 6: Prepare a detailed plan
 Process-Oriented Layout
• Computer Software
• Graphical approach only works for small problems
• Computer programs are available to solve bigger problems
• Craft
• Aldep
• Corelap
• Factory Flow
• Proplanner
• Three dimensional visualization software allows managers to view possible layouts and
assess process, material handling, efficiency, and safety issues
 Process-Oriented Layout

• Proplanner flow path calculator

• Generate material flow diagrams
• Calculate material handling distances,
times, costs
• Color-coded flow lines
• Helps identify excessive material
handling
 Work Cells

• Reorganizes people and machines into groups to focus on single products or

product groups
• Group technology identifies products that have similar characteristics for
particular cells
• Volume must justify cells
• Cells can be reconfigured as designs or volume changes
 Work Cells

• Advantages of Work Cells

• Reduced work-in-process inventory
• Less floor space required
• Reduced raw material and finished goods inventories
• Reduced direct labor cost
• Heightened sense of employee participation
• Increased equipment and machinery utilization
• Reduced investment in machinery and equipment
 Work Cells

• Requirements of Work Cells

• Identification of families of products
• A high level of training, flexibility and empowerment of employees
• Being self-contained, with its own equipment and resources
• Test (poka-yoke) at each station in the cell
 Work Cells
• Improving Layouts by Moving to the Work Cell Concept
 Work Cells
• U-shaped line may reduce employee movement and space requirements while enhancing
communication, reducing the number of workers, and facilitating inspection
 Work Cells

• Staffing and Balancing Work Cells

• Determine the takt time:
𝑇𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘 𝑡𝑖𝑚𝑒 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒
Takt time =
𝑈𝑛𝑖𝑡𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑡𝑜 𝑠𝑎𝑡𝑖𝑠𝑓𝑦 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑑𝑒𝑚𝑎𝑛𝑑

• Determine the number of operators required

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑
Workers required =
𝑇𝑎𝑘𝑡 𝑡𝑖𝑚𝑒
 Work Cells

• Example
Stephen Hall’s company in Dayton makes auto mirrors. The major customer is
the Honda plant nearby. Honda expects 600 mirrors delivered daily, and the
work cell producing the mirrors is scheduled for 8 hours. Hall wants to
determine the takt time and the number of workers required.
 Work Cells

• 600 mirrors per day required

• Mirror production scheduled for 8
hours per day
• From a work balance chart total
operation time = 140 seconds
 Work Cells
To produce one unit every
Takt time =
(8 ℎ𝑟𝑠 ∗60 𝑚𝑖𝑛𝑠) 48 seconds will require 2.92
600 𝑢𝑛𝑖𝑡𝑠 people. With three operators
= 0.8 min = 48 seconds this work cell will be
producing one unit each
46.67 seconds (140
140 𝑠𝑒𝑐𝑠
Workers required = seconds/3 employees =
48 𝑠𝑒𝑐𝑠
46.67) and 617 units per day
= 2.92 people (480 minutes available × 60
seconds =46.67 seconds for
each unit = 617).
 Work Cells

• Work Balance Charts

• Used for evaluating operation times in work cells
• Can help identify bottleneck operations
• Flexible, cross-trained employees can help address labor bottlenecks
• Machine bottlenecks may require other approaches
 Work Cells

• Focused Work Center and Focused Factory

• Focused Work Center
• Identify a large family of similar products that have a large and stable demand
• Moves production from a general-purpose, process-oriented facility to a large work cell
• Focused Factory
• A focused work cell in a separate facility
• May be focused by product line, layout, quality, new product introduction, flexibility, or
other requirements
 Repetitive and Product-Oriented Layout

• Organized around products or families of similar high-volume, low-variety

products
• Volume is adequate for high equipment utilization
• Product demand is stable enough to justify high investment in specialized equipment
• Product is standardized or approaching a phase of life cycle that justifies investment
• Supplies of raw materials and components are adequate and of uniform quality
 Repetitive and Product-Oriented Layout

• Fabrication line
• Builds components on a series of machines
• Machine paced
• Require mechanical or engineering changes to balance
• Assembly line
• Puts fabricated parts together at a series of workstations
• Paced by work tasks
• Balanced by moving tasks
• Both types of lines must be balanced so that the time to perform the work at each station is
the same
 Repetitive and Product-Oriented Layout

• Advantages
• Low variable cost per unit
• Low material handling costs
• Reduced work in process inventories
• Easier training and supervision
• Rapid throughput
• Disadvantages
• High volume is required
• Work stoppage at any point ties up the whole operation
• Lack of flexibility in product or production rates
 Repetitive and Product-Oriented Layout

• Assembly Line Balancing

• Objective is to minimize the imbalance between machines or personnel while meeting
required output
• Starts with the precedence relationships
• Determine cycle time
• Calculate theoretical minimum number of workstations
• Balance the line by assigning specific tasks to workstations
Repetitive and Product-Oriented Layout
 Repetitive and Product-Oriented Layout

• Example
Boeing wants to develop a precedence diagram for an electrostatic wing
component that requires a total assembly time of 65 minutes. Staff gather
tasks, assembly times, and sequence requirements for the component.
Repetitive and Product-Oriented Layout
Repetitive and Product-Oriented Layout
 Repetitive and Product-Oriented Layout
• Layout Heuristics that may be used to assign tasks to workstations in
assembly-line balancing
1. Longest task time From the available tasks, choose the task
with the largest (longest) task time
2. Most following tasks From the available tasks, choose the task
with the largest number of following
tasks
3. Ranked positional weight From the available tasks, choose the task
for which the sum of following task times
is the longest
4. Shortest task time From the available tasks, choose the task
with the shortest task time
5. Least number of From the available tasks, choose the task
following tasks with the least number of subsequent
tasks
Thank you!