Operations

Management
Location Strategies
 Learning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:
– Objective of location strategy
– International location issues
– Clustering
– Geographic Information Systems
Describe or explain:
– Three methods of solving the location problem
• Factor-rating method
• Locational breakeven analysis
• Center -of-gravity method
– Describe the factors affecting location decisions
 Federal Express
• Stresses “hub” concept
• Advantages:
– enables service to more locations with fewer
aircraft
– enables matching of aircraft flights with package
loads
– reduces mishandling and delay in transit because
there is total control of packages from pickup to
delivery
Objective of Location Strategy

Maximize the benefit of location

to the firm
 Industrial Location Decisions
• Cost focus
– Revenue varies little
between locations
• Location is a major
cost factor
– Affects shipping &
production costs (e.g., labor) © 1995 Corel Corp.

– Costs vary greatly between

locations
 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
 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 =
Cost or Revenue = $’s! for either Manufacturing
or service.
Location Decision Sequence
Country Region/Community

Site
© 1995
Corel Corp. © 1995 Corel Corp.

© 1995
Corel Corp.
Factors That Affect Location Decisions
 Factors Affecting Country
• Government rules, attitudes,
political risk, incentives
• Culture & economy
• Market location
• Labor availability, attitudes,
productivity, and cost
• Availability of supplies,
communications, energy
• Exchange rates and currency
risks
 Region Location Decisions
• Corporate desires
• Attractiveness of region (culture,
taxes, climate, etc.)
• Labor, availability, costs, attitudes
towards unions
• Costs and availability of utilities
• Environmental regulations of state
and town
• Government incentives
• Proximity to raw materials &
customers
• Land/construction costs
© 1995 Corel Corp.
 Factors Affecting Site
• Site size and cost
• Air, rail, highway,
and waterway
systems
• Zoning restrictions
• Nearness of
services/supplies
needed
• Environmental
impact issues
© 1995 Corel Corp.
 Location Decision Example
BMW decided to
build its first major
manufacturing plant
outside Germany in
Spartanburg, South
Carolina.

© 1995 Corel Corp.

 Country Decision Factors
• Market location • Other
– U.S. is world’s largest luxury
car market – Lower shipping cost
– Growing (baby boomers) ($2,500/car less)
• Labor – New plant &
– Lower manufacturing labor
costs equipment would
• $17/hr. (U.S.) vs. $27 increase productivity
(Germany)
– Higher labor productivity
(lower cost/car
• 11 holidays (U.S.) vs. $2,000-3000)
31 (Germany) – Laws of U.S.A.
 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
 Components of Volume and Revenue for
a Service Firm
1. Purchasing power of customer drawing area
2. Service and image compatibility with demographics of
the customer drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitor’s locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management
 Location Strategies – Service vs.
Industrial
Service/Retail/Professional Revenue Goods-Producing Location
Focus Cost Focus
 Volume/revenue  Tangible costs
 Drawing area, purchasing power  Transportation cost of raw
 Competition; advertising/pricing materials
 Physical quality  Shipment cost of finished goods
 Parking/access; security/ lighting;  Energy and utility cost; labor;
appearance/image raw material; taxes, etc.
 Cost determinants  Intangible and future costs
 Rent  Attitude toward union
 Management caliber  Quality of life
 Operations policies (hours, wage  Education expenditures by state
rates)  Quality of state and local
government
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
 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
Geographic Information Systems
• New tool to help in location analysis
• Enables combination of many parameters
 Final Thought
The ideal location for many
companies in the future will
be a floating factory ship
that will go from port to
port, from country to
country – wherever cost
per unit is lowest.
Operations
Management
Layout Strategy
 Learning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:
– Fixed-position layout
– Process-oriented layout
– Work cells
– Focused work center
– Office layout
– Retail layout
– Warehouse layout
– Product-oriented layout
– Assembly-line factory
 Learning Objectives
When you complete this chapter, you
should be able to :
Describe or explain:
– How to achieve a good layout for the process
facility
– How to balance production flow in a
repetitive or product-oriented facility
McDonald’s - New Kitchen Layout
– No food prepared ahead except patty
– Elimination of some steps, shortening of others
– New bun toasting machine (11 seconds vs 30 seconds)
– Repositioning condiment containers (one motion,
not two)
– Sandwiches assembled in order
– Production levels controlled by computer
– Discard only meat when sandwiches do not sell fast
enough
– Savings of $100,000,000 per year in food costs
 Innovation at McDonald’s
• Indoor seating (1950’s)
• Drive-through window (1970s)
• Adding breakfast to the menu (1980s)
• Adding play areas (1990s)

(three out of the four are layout decisions)

Objectives of the Layout Strategy
• Develop an economical layout which will
meet the requirements of:
– product design and volume (product strategy)
– process equipment and capacity (process strategy)
– quality of work life (human resource strategy)
– building and site constraints (location strategy)
 Types of Layouts
• Fixed-position layout – Product does not move
• Process-oriented layout – Product low volume
specialized
• Office layout –People Information Layout
• Retail layout – Customer preference and access
Layout
• Warehouse layout – Material handling & space
• Product-oriented layout – Product Layout is for
max efficiency high volume
 What is Facility Layout ?
• Location or arrangement of everything
within & around buildings
• Objectives are to maximize
– Customer satisfaction
– Utilization of space, equipment, & people
– Efficient flow of information, material, & people
– Employee morale & safety
 Strategic Importance of Layout

Proper layout enables:

• 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
 Layout Strategies
Project Job Shop Office Retail Warehouse Repetitive
(fixed-position) (Process- (storage) /Continuous
oriented) (product-
oriented)
Examples
Ingal Ship Shouldice Allstate Kroger’s Federal-Mogul’s Sony’s TV
Building Corp. Hospital Insurance Supermarket Warehouse Assembly Line

Trump Plaza Olive Microsoft Walgreens The Gap’s Dodge

Garden distribution center Caravans
Pittsburgh Bloomingdales
Minivans
Airport
Related Issues to solve
Move material Manage varied Locate workers Expose Balance low- Equalize the
to the limited material flow for requiring frequent customer to cost storage task time at
storage areas each product contact close to high-margin with low-cost each
around the site each other items material workstation
handling
Requirements of a Good Layout
an understanding of capacity and space
requirements
selection of appropriate material handling
equipment
decisions regarding environment and aesthetics
identification and understanding of the
requirements for information flow
identification of the cost of moving between the
various work areas
Constraints on Layout Objectives
• Product design & volume
• Process equipment & capacity
• Quality of work life
• Building and site
Areas of Concern in Layout
Strategy
Communication

Service Material
Areas Attributes
Layout
Work
Warehousing Strategy
Cell

Material
Safety
Flow