Chapter: 1 Location Planning and Analysis: Need For Location Decisions Nature of Location Decisions

8-1 Location Planning and Analysis
Chapter: 1 Location Planning and Analysis

Need for Location Decisions
Nature of location decisions
Importance of Location Decision
Objectives of Locating Decisions
Location Options
General Procedure For Making Location Decisions
Factors That Affect Location Decisions
Tangible and Intangible Factors
Regional Factors
Location of Raw Materials
Location of Markets
Labor Factors
Other Factors
Community Considerations
Site-Related Factors
Multiple Plant Manufacturing Strategies
Product Plant Strategy
Market Area Plant Strategy
Process Plant Strategy
Service and Retail Locations
Global Locations
Chapter:2 Transportation Modeling

Introduction
Obtaining an Initial Solution
The Intuitive Lowest-Cost Approach
Obtaining an Initial Solution
Evaluating Empty Cells: The stepping-Stone Method
Evaluating Empty Cells: The MODI Method
Obtaining an Improved Solution
Special Problems
Unequal Supply and Demand
Degeneracy
Other Applications
Chapter: 3 Interest and type of interest

Chapter: 4 Depreciation and type of depreciation
Chapter: 5 Project Evaluation
Chapter: 6 Cost Indexing
1.Pay back period and discounted pay back period.
2.Accounting rate of return (ARR).
3.Net present value (NRV).
4.Internal rate of return (IRR).
5.Profitability index.
6.Modified internal rate of return (MIRR).
Chapter: 7 Matainance Books:
(i) Production Operation Management
by William J. Stevenson (sixth edition)
(ii) Plant Design and Economics for Chemical Engineers by
Peters and Timerhaus
(iii) Engineering Economy
by Leland Blank and Anthony Tarquin, Fifth Edition
(iv) Engineering Economics by R. Panneerselvam , Eastern
Economy Edition
CHAPTER
8
Location Planning
and Analysis
Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
When a well-know real estate broken was asked
what the three most important determinants of
the value of a property are, he said, “That’s easy,
Location, location, and location.”

In residential real estate market, location is an important
factor. Although the style of house, number of bedrooms
and bathrooms, level of maintenance, and how modern
the kitchen is undoubtedly enter into the picture, some
locations are just more desirable than others.
In many respects, the choice of location for a business
organization is every bit as important as it is for a house,
although for different reasons.
Location decisions represent an integral part of the
strategic planning process of virtually every
organization. Although it might appear that location
decision are one time problems pertaining to new
organizations, existing organizations often have a bigger
stake in these kinds of decisions than new
organizations.
We will talk about location analysis
The reason why firms must make location
decisions.
The nature of these decisions & then
general procedure for developing and
evaluation location alternatives.

In Importance of Location Decision
Long term commitment, which makes mistakes difficult to
overcome.
Location decisions have impact on:
Investment requirements
Operating costs and revenues and operations
A poor choice of location might result in
Excessive transportation cost
Shortage of qualified labor
Loss of competitive advantage
Inadequate supplies of raw materials
FOR SERVICES:
oA poor location could result in lack of customers and/or High
operating cost.
oSo far both manufacturing and services, location decision can
have a significant impact on competitive advantage
Objective of Location Decisions

As a general rule,
Profit-oriented organization base their decisions on PROFIT POTENTIAL
Whereas
Non-profit organizations strive to achieve a balance b/w cost and the
LEVEL OF CUSTOMER SERVICE they provide.
LOCATION OPTIONS
Managers generally consider FOUR options in location planning:
o Expand
o Move to a new location
o Keeping the old location and add to a new location while retaining
the existing ones
o Doing nothing maintaining the “status quo”
Need for Location Decisions
 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources
NATURE OF LOCATION DECISIONS

 Strategic Importance
 Long term commitment/costs
 Impact on investments, revenues, and operations
 Supply chains
 Objectives
 Profit potential
 No single location may be better than others
 Identify several locations from which to choose
 Options
 Expand existing facilities
 Add new facilities
 Move
MAKING LOCATION DECISIONS

 Decide on the criteria
 Identify the important factors
 Develop location alternatives
 Evaluate the alternatives
 Make selection
Many factors influence location decision. However, it happens that
one or a few factors are so impt. That they dominate the decision.
e,g; in manufacturing, the potentially dominating factors usually
include availability of an abundant energy and water supply and
proximity to raw material. Thus nucl. reactors require large
amount of water for cooling, heavy industries such as steel and Al
production need large amounts of electricity, and so on.
Transportation costs can be major factor. In service orgs., possible
LOCATION DECISION FACTORS
dominating factors are market related & include

tariff patterns, convenience, and competitor’s
locations, as well as proximity to the market.
e.g., car rental agencies locate near airports and
midcity, where their customers are. Following
four major factors are impt. and their
subdivisions are described next:
Location Decision Factors

Community
Regional Factors Considerations
Multiple Plant Site-related

Strategies Factors
Regional Factors
 Location of raw materials

 Location of markets
 Labor factors
 Climate and taxes

TANGIBLE COST FACTORS

Many items necessary to the operation are costly. Location
decisions should take such items into consideration. Long-range
forecasts of costs should be used, since facilities may last forty or
fifty years or more.
1. Transportation
Availability of multiple modes of transportation can provide
flexibility and minimum cost means of transporting various
materials.
2. Labor Availability and Costs
Labor intensive companies may place more emphasis on the cost of
processing materials than on the cost of transporting them.
Companies that employ a large labor force may relocate to places
with lower wage rates.
TANGIBLE COST FACTORS

3. Energy Availability and Costs
Many manufacturing plants use large amounts of energy sources,
such as electricity or natural gas, to operate production processes.
4. Water Availability and Cost
Processes that require large amounts of water are restricted to
locations where abundant water resources are available. Water
shortages occur in some locations and will probably become
more common.
5. Site and Construction Costs
One cost directly related to facility location is the cost of purchasing
the site and building the facility. The cost per acre of land varies
widely from site to site within a region and from region to region.
INTANGIBLE FACTORS
Not all measures of a location’s desirability can be expressed in
dollars and cents. People must be induced to come to work there, so
the appeal of a locality as a place to live and rear a family is
important. The local environment may also have important effects on
a company.
1. Zoning and Legal Regulations
Local, state, and federal pollution control regulations may limit the
locations available to some companies. Zoning regulations control
the types of businesses that may operate in certain areas.
2. Community Attitudes
Community relations should be an integral part of location decisions.
Public opinion in some areas may be unfavorable to particular types
of businesses, even though there is no formal legislation against it.
INTANGIBLE FACTORS
3. Expansion Potential
A site for a manufacturing or nonmanufacturing facility should
offer some flexibility and room for expansion. The size and
contour of the plot of land should allow for expansion of the
facility without a sacrifice of efficiency.
4. Living Conditions
Often a company's top-echelon personnel are obtained from other
branches or other companies. Today some people decline
promotions with their own or offers from other companies
because they do not want to move to the job location.
CLIMATE AND TAXES

Climate & taxes sometimes play a role in location
decision. e.g., severe winter season can seriously
restrict the efficiency of certain operation and result
in delayed deliveries and disruption caused by
inability of employees to get to work.
Similarly, the business & personal income taxes in
some states reduce their attractiveness to companies
seeking new locations.
 Quality of life
 Services
 Attitudes
 Taxes
 Environmental regulations
 Utilities
 Developer support
Site Related Factors
 Land
 Transportation
 Environmental
 Legal
Multiple Plant Strategies
 Product plant strategy

 Market area plant strategy
 Process plant strategy

Product plant strategy

With this strategy, entire products or product lines are
produced in separate plants, and each plant usually
supplies the entire domestic market.
This is essentially a decentralized approach, with
each plant focusing on a narrow set of requirements.
This results in economies of scale and, compared
with multipurpose plants, lower operating costs.
Plant location may be widely scattered or clustered
relatively close to one an other.
Market Area plant strategy

Plants are designed to serve a particular geographical segment
of a market e.g., (West coast, Northeast) Individual plants
produce most if not all of a company’s products and supply a
limited geographical area. Although operating cost may tend to
be higher than those of product plants, significant savings on
shipping costs for comparable products can be made.
This arrangement is particularly desirable when shipping costs
are high due to volume, weight, or other factors.
Benefits of such arrangements are rapid delivery and response
to local needs. This approach requires centralized coordination
of decision to add or delete plants, or to expand or downsize
current plants due to changing market conditions.
Process plant strategy

 In here different plants concentrate on different aspects of a process.
Automobile manufacturers often use this approach, with different
plants for engines, transmissions, body stamping, & even radiators.
This approach is best suited to product that have numerous
components; Separating the production of components results in less
confusion then if all production was carried out at the same location.
But this kind of arrangement requires coordination of production
throughout the system and requires highly informed, centralized
administration to achieve effective operation. Key Adv. Individual
plants are highly specialized and generate volume that yield economies
of scale. MULTIPLE PLANTS have additional benefit: the increase in
learning opportunities that occurs when similar operations are being
done in different plants. Another advantage is that same problems tend
to arise, and solutions to those problems as well as improvements in
general in product & processes can be made at one plant and can be
shared with other plants.
Comparison of Service and
Manufacturing Considerations
Table 8.2
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns

Customer access/parking
Comparison of Service and
Manufacturing Considerations
 Medical services are often located near hospital for
convenience of patients. Doctor’s offices may be
located near hospitals, or grouped in other areas
where other doctors offices may also be located.
TRENDS IN LOCATIONS (Globalization)

Foreign producers locating in U.S.
“Made in USA”
Currency fluctuations
Just-in-time manufacturing techniques which encourage supplier

to locate near their clients to reduce supplier lead time.
 Microfactories
 Information Technology
Table 8.3
Foreign a. Policies on foreign ownership of production facilities

Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions
Customer Possible buy locally sentiment

Preferences
Labor Level of training and education of workers

Work practices
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation
Evaluating Locations
 Cost-Profit-Volume Analysis
 Factor Rating Method
 Centre of Gravity Method
 Transportaion Cost Method
Location Cost-Volume Analysis

STEPS OF COST VOLUME ANALYSIS
 Determine fixed and variable costs
 Plot total costs
 Determine lowest total costs
 Assumptions
 Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated
 Only one product involved

Example 1: Cost-Volume Analysis
Fixed and variable costs for

four potential locations
L o c a tio n F ix e d V a r ia b le
C o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5
Example 1: Solution
F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts
A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0
Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16
Annual Output (000)

Factor Rating Method
8-40 Location Planning andThe Center
Analysis of Gravity Method
GLOBAL LOCATIONS
 Recent trends in locating facilities, particularly manufacturing
facilities, reflect a combination of competitive and technological
factors. One trend has been that of foreign producers, especially
automotive firms, to locate plants in the United States. The United
States represents a tremendous market for cars, trucks, and
recreational vehicles. By locating in the United States, these firms
can shorten delivery time and reduce delivery costs. Furthermore,
they can avoid any future tariffs or quotas that might be applied to
imports.
 A development that affects location decisions was the passage of
GATT in 1994. One of its provisions was the reduction and
elimination of various tariffs. Consequently, location within the
borders of a country to escape tariffs is now much less of an issue.
GLOBAL LOCATIONS
 An ethical issue has been the use of "sweatshops," which employ
workers at low wages in poor working conditions. Consumer protests
have caused a number of companies to cease this practice.
 Another trend is just-in-time manufacturing techniques, which
encourage suppliers to locate near their customers to reduce supplier
lead times. For this reason, some U.S. firms are reconsidering decisions
to locate offshore. Moreover, in light manufacturing (e.g., electronics),
low-cost labor is becoming less important than nearness to markets;
users of electronics components want suppliers that are close to their
manufacturing facilities. One offshoot of this is the possibility that the
future will see a trend toward smaller factories located close to markets.
In some industries, small, automated microfactories with narrow product
focuses will be located near major markets to reduce response time.
GLOBAL LOCATIONS
• It is likely that advances in information technology will enhance the
ability of manufacturing firms to gather, track, and distribute
information that links purchasing, marketing, and distribution with
design, engineering, and manufacturing. This will reduce the need for
these functions to be located close together, thereby permitting a
strategy of locating production facilities near major markets.
• Two other factors are causing companies to locate manufacturing
facilities in countries that contain their markets (e.g., Japanese auto
companies establishing factories in the United States). One is to
counter negative sentiments such as "not made in this country." Thus,
Japanese factories in the United States produce cars made by U.S.
workers. The second factor relates to currency fluctuations and
devaluations. These changes can have a significant impact on demand
and. hence, on profits. Changes in currency value alter the price of
foreign goods, but not the price of goods produced within a country.
GLOBAL LOCATIONS
• For instance, if the value of a country's currency falls relative to that of
other countries, prices within the country don't change, but foreign-
produced goods become more expensive. If demand is elastic, then
demand for those foreign goods will fall. Furthermore, currency changes
may result in increased costs of parts supplied by foreign producers. By
locating and selling within a country, and buying from suppliers in that
country, manufacturers can avoid the impact of currency changes.
• The trend toward globalization for some organizations has meant having
facilities, personnel, and operations around the world. This has created
new challenges for managing scattered and distant operations. Added to
that are the ongoing social unrest, political instability, and terrorist acts
that have caused many organizations to be very cautious about locating in,
or even traveling to, certain counties or regions.
• Nonetheless, the benefits of globalization, coupled with advanced
communications capabilities and other technologies, make globalization
worth considering.
GLOBAL LOCATIONS
• The growth in multinational operations over the past several decades
is evidence of the importance of foreign locations. Some firms are
attracted to foreign locations because of nearby deposits of
aluminum, copper, timber, oil, or other natural resources. Other firms
view foreign locations as a way to expand their markets, and still
others are attracted by ample supplies of labor. Some countries may
offer financial incentives to companies to create jobs for their people.
Developing countries may establish tariffs to protect their young
industries from outside competition, which may also reduce the
amount of "foreign'" competition a firm must face if it locates in such
a country. Until the North American Free Trade Agreement
eliminated restrictions, the Fisher-Price Toy Company factory in
Matamoros. Mexico, was not allowed to sell in Mexico the Muppet
toys it makes. U.S. companies with factories in Mexico could import
raw materials duty-free, but they were required to export all of their
output.
GLOBAL LOCATIONS
 Many developing countries offer an abundant supply of cheap labor. For
example, a considerable amount of the clothes sold in the United States bear
labels indicating they were made in Korea. China, or Taiwan. In some
instances, it is less expensive to ship raw materials or semi finished goods to
foreign countries for fabrication and assembly, and then ship them to their final
destinations, than it is to produce them in the United States. However, the final
cost per unit is the most important factor. In some cases, the low cost of labor
in a foreign country can be negated by low productivity and shipping costs.
 High production costs in Germany have contributed to a number of German
companies locating some of their production facilities in lower-cost countries.
Among them are industrial products giant Siemens, A.G. (a semiconductor
plant in Britain), drug makers Bayer, A.G. (a plant in Texas) and Hoechst,
A.G. (a plant in China), and automakers Mercedes (plants in Spain, France,
and Alabama) and BMW (a plant in Spartansburg, South Carolina).
GLOBAL LOCATIONS
• A firm contemplating a foreign location must carefully weigh the
potential benefits against the potential problems. A major factor is the
stability of a country's government and its attitude toward American
firms. Import restrictions can pose problems with bringing in
equipment and spare parts.
• Some of the problems of a foreign location can be caused by language
and cultural differences between the United States and the host
country. U.S. firms often find it necessary to use U.S. technical
personnel but find it difficult to convince workers to move to a
foreign country; workers may have to leave their families behind or
else subject them to sub-standard housing or educational systems.
Companies are now exerting additional efforts to reduce these
obstacles. Some provide housing allowances and have schools for
U.S. children. They are also improving their efforts to see that the
employees they send abroad are familiar with local customs and have
a reasonable facility with the language of the host country.
GLOBAL LOCATIONS
 One factor that has negatively impacted the bottom line of some
U.S. firms operating plants in foreign countries is the level of
corruption present, erasing some of the envisioned benefits of lower
labor or transportation costs.

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8-1 Location Planning and Analysis

Chapter: 1 Location Planning and Analysis

Chapter:2 Transportation Modeling

Chapter: 3 Interest and type of interest

Operations Management, Eighth Edition, by William J. Stevenson

When a well-know real estate broken was asked

what the three most important determinants of

the value of a property are, he said, “That’s easy,

Location, location, and location.”

The reason why firms must make location

The nature of these decisions & then

general procedure for developing and

evaluation location alternatives.

Objective of Location Decisions

Need for Location Decisions

NATURE OF LOCATION DECISIONS

MAKING LOCATION DECISIONS

LOCATION DECISION FACTORS

dominating factors are market related & include

Location Decision Factors

Multiple Plant Site-related

 Location of raw materials

 Climate and taxes

TANGIBLE COST FACTORS

TANGIBLE COST FACTORS

CLIMATE AND TAXES

Site Related Factors

Multiple Plant Strategies

 Product plant strategy

 Process plant strategy

Product plant strategy

Market Area plant strategy

Process plant strategy

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

TRENDS IN LOCATIONS (Globalization)

Just-in-time manufacturing techniques which encourage supplier

Foreign a. Policies on foreign ownership of production facilities

Customer Possible buy locally sentiment

Labor Level of training and education of workers

Location Cost-Volume Analysis

 Variable costs are linear

 Output can be closely estimated

 Only one product involved

Example 1: Cost-Volume Analysis

Fixed and variable costs for

Annual Output (000)

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