PRODUCTION AND

OPERATIONS
MANAGEMENT
Ch. 9: Location Strategies

POM - J. Galvn

Learning Objectives

Where must we locate our facilities so

as to satisfy our corporate strategy?

POM - J. Galvn

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

POM - J. Galvn

1995 Corel Corp.

Service Location Decisions

Revenue focus

Costs vary little between market areas

Location is a major
revenue factor
Affects amount of
customer contact
Affects volume of
business

POM - J. Galvn

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 firm
POM - J. Galvn

Location Decision Sequence

Region/Community

Country

Site
.

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Factors Affecting Country

Government
Culture & economy
Market location
Labor availability,
attitudes,
productivity, and cost
Infrastructure
Exchange rate
POM - J. Galvn

1995 Corel Corp.

Labor Productivity
Low wages often
over-emphasized
Labor productivity
important
Labor cost per
unit should be
criterion:
Labor cost/day
Units made/day

Hourly Compensation ($)

Manufacturing Workers (1994)

Germany

27.37

Japan

21.38

U.S.

17.10

Hong Kong

4.79

Mexico

2.57

POM - J. Galvn

Region Location Decisions

Corporate desires
Attractiveness
Labor
Utility costs
Government incentives
Proximity to customers
& suppliers
Land/construction $$$
POM - J. Galvn

1995 Corel Corp.

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Factors Affecting Site

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

Location Decision Example

In 1992, BMW
decided to build its
first major
manufacturing
plant outside
Germany in
Spartanburg, South
Carolina.
1995 Corel Corp.
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Country Decision Factors

Market location

U.S. is worlds largest luxury

car market
Growing (baby boomers)

Other

Labor

Lower manufacturing labor

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

Higher labor productivity

11 holidays (U.S.) vs.

31 (Germany)

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Lower shipping cost

($2,500/car less)
New plant &
equipment would
increase
productivity (lower
cost/car $2,0003000)
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Region/Community Decision
Factors

Labor

Lower wages in South Carolina (SC)

About

$17,000/yr (SC) vs. $27,051/yr (US)

Based on 1993 metropolitan averages for

all workers

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

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Organizations That Need To Be

Close to Markets

Government agencies
Police

& fire departments

Post Office

Retail Sales and Serivce

Fast

food restaurants, supermarkets, gas

stations
Drug stores, shopping malls
Bakeries
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Organizations That Need To Be

Close to Markets - continued

Services
Doctors,

lawyers, accountants, barbers

Banks, auto repair, motels

Manufacturers
Makers

of bulky or heavy products

Japanese car makers
German car makers
Auto parts suppliers
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Location Evaluation Methods

Factor-rating method
Locational break-even
analysis
Center of gravity
method
Transportation model

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Factor-Rating Method

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
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Steps in Factor Rating Method

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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Factors Affecting Location Selection

Labor costs
Labor availability
Proximity to materials
and suppliers
Proximity to markets
Government fiscal
policies
Environmental
regulations
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Environmental
regulations
Utilities
Site costs
Transportation
availability
Quality-of-life
Foreign exchange
Quality of
government
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Locational Break-Even Analysis

Method of cost-volume analysis used

for industrial locations
Steps

Determine fixed & variable costs for each

location
Plot total cost for each location
Select location with lowest total cost for
expected production volume
Must be above break-even
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Locational Break-Even Analysis

Example
Youre an analyst for AC Delco. Youre
considering a new manufacturing plant in
Akron, Bowling Green, or Chicago. Fixed
costs per year are $30k, $60k, & $110k
respectively. Variable costs per case are
$75, $45, & $25 respectively. The price
per case is $120. What is the best location
for an expected volume of 2,000 cases per
year?
1995 Corel Corp.
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Locational Break-Even
Crossover Chart
ron
k
A
Chicag

l
Bo w

ing

en
e
r
G

Akron
lowest cost

Bowling Green
lowest cost

POM - J. Galvn

Chicago
lowest
cost

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Locational Break-Even
Crossover Chart
ron
k
A
Chicag

ing
ow l

en
e
r
G

Lowest cost envelop

Akron
lowest cost

Bowling Green
lowest cost

POM - J. Galvn

Chicago
lowest
cost

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Center of Gravity Method

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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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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Center of Gravity Method

Equations
X Coordinate
d W

W
ix

Cx

Y Coordinate
Cy

d iy Wi
i

Wi
i

dix = x coordinate of
location i
Wi = Volume of
goods moved to or
from location i
diy = y coordinate of
location i
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Transportation Model

Finds amount to be shipped from several

sources to several destinations
Used primarily for industrial locations
Type of linear programming model

Objective: Minimize total production

& shipping costs
Constraints
Production capacity at source (factory)
Demand requirement at destination
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Components of Volume and

Revenue for a Service Firm

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 firms and competitors locations
Physical qualities of facilities and neighboring
businesses
Operating policies of the firm
Quality of management
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Location Strategies Service

vs. Industrial
Service/Retail/Profession
al Revenue Focus

Tangible costs

Drawing area, purchasing

power
Competition;
advertising/pricing

Physical quality

Volume/revenue

Industrial Revenue Focus

Parking/access; security/
lighting; appearance/image

Intangible and future costs

Cost determinants

Transportation cost of raw

materials
Shipment cost of finished
goods
Energy and utility cost; labor;
raw material; taxes, etc.

Rent
Management caliber
Operations policies (hours,
wage rates)
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Attitude toward union

Quality of life
Education expenditures by
state
Quality of state and local
government

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Location Strategies
Service vs. Industrial
Service/Retail/Professional Techniques

Correlation analysis to determine

importance of factors for a
particular type of operation

Traffic counts

Demographic analysis of drawing

area

Purchasing power analysis of

drawing area
Assumptions

Location is a major determinate of

revenue

Issues manifesting from high

customer contact dominate

Costs are relatively constant for a

given area; therefore, revenue
function is critical

POM - J. Galvn

Industrial Techniques
Linear Programming
(Transportation method)
Weighted approach to intangibles
Breakeven analysis
Crossover charts
Assumptions
Location is a major determinate
of cost
Most major costs can be
identified explicitly for each site
Low customer contact allows
focus on costs
Intangible costs can be
objectively evaluated

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Major Methods of Solving Location

Problems

Weighted methods which:

Assign weights and points to various factors
Determine tangible costs
Investigate intangible costs
Center of Gravity Method
Find best distribution center location
Location breakeven methods
Special case of breakeven analysis
Transportation method
A specialized linear programming method

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Telemarketing and Internet

Industries

Require neither face-to-face contact

with customers (or employees) nor
movement of material
Presents a whole new perspective on
the location problem

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Geographic Information
Systems

New tool to help in location analysis

Enables combination of many
parameters

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