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8 Location Strategies

PowerPoint presentation to accompany


Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e

PowerPoint slides by Jeff Heyl

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-1


Location Strategy

The objective of location strategy is


to maximize the benefit of location
to the firm

© 2011 Pearson Education, Inc. publishing as Prentice Hall 8-2


Location Strategy
 One of the most important Long-term
decision a firm makes. Once committed to a
location, many resource and cost issues are
difficult to change
 Decisions made relatively infrequently
 Increasingly global in nature (FedEx- a hub
in China, Hard Rock Cafe – Moscow)
 Significant impact on fixed and variable
costs (may include as much as 50% of total
cost)
 The objective is to maximize the benefit of
location to the firm
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Location and Costs
 Location decisions supporting a low
cost competitive strategy require
careful consideration
 Because once in place, location-related
costs are fixed in place and difficult to
reduce
 Regions with high energy cost,
expensive, ill-trained human resource
with poor work ethics will make a
location decision supporting a low cost
competitive strategy UNSUCCESFUL.

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Location and Innovation
 Cost is not always the most important
aspect of a strategic decision. For
some companies the focus on cost
may change to the focus on
innovation, creativity and research.
 For instance Intel prefered to open its
newest plant in Arizona where
education levels are high and skilled
labor is abundant. Moreover, this
strategy gave them the advantage of
protection of intellectual property in
the U.S.
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Location Decisions
Country Decision Key Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
Figure 8.1 currency risks
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Location Decisions
Region/ Key Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
MN 3. Labor availability and costs
WI 4. Costs and availability of utilities
MI 5. Environmental regulations
IL IN
OH 6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
Figure 8.1 8. Land/construction costs
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Location Decisions
Site Decision Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

Figure 8.1
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Global Competitiveness Index 2010–2011-2012.
Country/Economy 2010 - 2011 2011 - 2012
Switzerland 1 1
Sweden 2 3
Singapore 3 2
United States 4 5
Germany 5 6
Japan 6 9
Finland 7 7
Denmark 9 8
Canada 10 12
United Kingdom 12 10
France 15 18
China 27 26
Spain 42 36
Portugal 46 45
Turkey 61 59
Bulgaria 71 74

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Labor Productivity Affects Total
Cost
 Labor productivity
 Wage rates are not the only cost
 Lower productivity may increase total cost

Labor cost per day


= Cost per unit
Productivity (units per day)

Connecticut Juarez, Mexico

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units

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Ethical Issues
 Location decisions based on costs alone
can create difficult ethical situations.
Some News from International Media:
 At least eleven 15-year-old children were
discovered to be working last year in
three factories which supply Apple.
 Computer giant Apple admitted that child
labor was used in three supplier factories
in 2009 to build iPhones, iPods and
Macintosh computers.
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Seven Factors That Affect
Location Decisions
1. Labor productivity
2. Exchange rates and currency risks
3. Costs (Tangible such as utilities, labor,
materials, taxes and Intangible quality-
of-life, education level)
4. Political risk, values, and culture,
ethics
5. Proximity to markets
6. Proximity to suppliers
7. Proximity to competitors (Clustering)
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Ranking Corruption
Rank Country 2011 CPI Score (out of 10)
1 New Zealand 9.5 Least
2 Denmark, Finland 9.4 Corrupt
3 Sweden 9.3
4 Singapore 9.2
6 Norway 9.0
12 Hong Kong 8.4
14 Germany, Japan 8.0
17 UK 7.8
24 USA 7.1
41 Poland 5.5
43 South Korea 5.4
57 Saudi Arabia 4.7
61 Turkey 4.2 Most
143 Russia 2.4 Corrupt
182 Somalia 1.0
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Clustering of Companies
Industry Locations Reason for clustering
Wine making Napa Valley (US) Natural resources of
Bordeaux region land and climate
(France)
Software firms Silicon Valley, Talent resources of
Boston, Bangalore bright graduates in
(India) scientific/technical
areas, venture
capitalists nearby
Race car Huntington/North Critical mass of talent
builders Hampton region and information
(England)

© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 8 - 14


Clustering of Companies
Industry Locations Reason for clustering
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal weather, tourists, and
Studios) inexpensive labor
Electronics Northern Mexico NAFTA, duty free
firms export to US

Computer Singapore, Taiwan High technological


hardware penetration rate and
manufacturers per capita GDP,
skilled/educated
workforce with large
pool of engineers

© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 8 - 15


Clustering of Companies
Industry Locations Reason for clustering
Fast food Sites within 1 mile Stimulate food sales,
chains of each other high traffic flows
(Wendy’s,
McDonald’s,
Burger King,
and Pizza Hut)
General aviation Wichita, Kansas Mass of aviation skills
aircraft
(Cessna,
Learjet, Boeing)
Orthopedic Warsaw, Indiana Ready supply of skilled
device workers, strong U.S.
manufacturing market

© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 8 - 16


Factor-Rating Method
 Popular because a wide variety of factors
including both qualitative and
quantitative can be included in the
analysis. Six steps in the method are:
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score
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Factor-Rating Example
Key Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to-
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0

Table 8.4
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Locational
Break-Even Analysis
 Method of cost-volume analysis used for
industrial locations
 Three steps in the method
1. Determine fixed and variable costs for
each location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume

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Locational Break-Even
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000

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

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Locational Break-Even
Analysis Example

$180,000 –

$160,000 –
$150,000 –

$130,000 –
Annual cost


$110,000 –


$80,000 –

$60,000 –


Akron Chicago
$30,000 – lowest
Bowling Green
lowest
– cost
lowest cost
cost
$10,000 –
| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000
Figure 8.2
Volume
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Center-of-Gravity Method
 Finds location of a distribution
center that minimizes distribution
costs
 Considers
 Location of markets
 Volume of goods shipped to those
markets
 Shipping cost (or distance)

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Center-of-Gravity Method
 Place existing locations on a
coordinate grid
 Grid origin and scale is arbitrary
 Maintain relative distances
 Calculate X and Y coordinates for
‘center of gravity’
 Assumes cost is directly
proportional to distance and
volume shipped
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Center-of-Gravity Method
∑dixQi
i
x - coordinate =
∑Qi
i

∑diyQi
i
y - coordinate =
∑Qi
i

where dix = x-coordinate of location i


diy = y-coordinate of location i
Qi = Quantity of goods moved to
or from location i
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Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –

60 –

30 –
Atlanta (60, 40)


| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Figure 8.3
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Center-of-Gravity Method
Number of Containers
Store Location Shipped per Month
Chicago (30, 120) 2,000
Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000
Atlanta (60, 40) 2,000

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)


x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
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Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Atlanta (60, 40)


| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Figure 8.3
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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

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Service Location Strategy
Service sector focuses on maximizing
revenue.
The most important factors affecting
location decisions in service industry are:
1. Purchasing power of customer-drawing
area
2. Demographics of the customer-drawing
area
3. Competition in the area
4. Physical qualities of facilities and
neighboring businesses
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Location Strategies
Service/Retail/Professional Location Goods-Producing Location
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
Operations policies (hours, wage Quality of state and local
rates) government

Table 8.6
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Location Strategies

Service/Retail/Professional Location Goods-Producing Location


Techniques Techniques
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Locational break-even analysis
Traffic counts Crossover charts
Demographic analysis of drawing
area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems

Table 8.6
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Location Strategies

Service/Retail/Professional Location Goods-Producing Location


Assumptions Assumptions
Location is a major Location is a major
determinant of revenue determinant of cost
High customer-contact issues Most major costs can be
are critical identified explicitly for each
Costs are relatively constant site
for a given area; therefore, Low customer contact allows
the revenue function is focus on the identifiable
critical costs
Intangible costs can be
evaluated

Table 8.6
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How Hotel Chains Select Sites
 Location is a strategically important
decision in the hospitality industry
 La Quinta started with 35 independent
variables and worked to refine a
regression model to predict profitability
 The final model had only four variables
 Price of the inn r2 = .51
 Median income levels 51% of the
profitability is
 State population per inn predicted by
 Location of nearby colleges just these four
variables!
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The Call Center Industry
 Requires neither face-to-face contact
nor movement of materials
 Has very broad location options
 Traditional variables are no longer
relevant
 Cost and availability of labor may drive
location decisions
 Low-wage countries like India with
highly educated, English-speaking work
force have been attractive places for big
U.S. Companies to hire call center staff.
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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
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Geographic Information
Systems (GIS)

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