Production and Operations

Management
Unit 5
 Unit 5-Location Strategies
• Introduction, Location Planning Process
Concept of facility location
Facility location may be defined as a place where the facility will be set up
for producing goods or services. The need for location selection may arise
under any of the following conditions:
 When a business is newly started.
 When the existing business unit has outgrown its original facilities and
expansion is not possible; hence a new location has to be found.
 When the volume of business or the extent of market necessitates
 Establishment of branches.
 When the lease expires and the landlord does not renew the lease.
 Other social or economic reasons.
Need for Facility Location Planning
• Facility location planning is also required for providing a cost benefit to
the organization.
• The location planning should help in reducing the transportation cost
for the organization. This ultimately helps in decreasing the cost of
production and generating cost advantage for the organization.
• It is also needed to identify proximity to the sources of raw materials
and transportation facilities.
• A facility should ideally be located at a place where raw materials are
available.
• This is necessary for maintaining continuity in the production process.
Procedures and Techniques for Selecting
Facility Location
• An organization follows certain steps to make a correct location
choice. These steps are:

Decide on the criteria for evaluating location alternatives

Identify important factors

Develop location alternatives

Evaluate the alternatives

Make a decision and select the location

Location Strategy
 One of the most important decisions a firm makes
 Increasingly global in nature
 Significant impact on fixed and variable costs
 Decisions made relatively infrequently
 The objective is to maximize the benefit of location to the firm
 Location decisions based on low cost require careful consideration
 Once in place, location-related costs are fixed in place and difficult to
reduce
 Determining optimal facility location is a good investment
Location Strategy
• Cost is not always the most important aspect of a strategic decision
• Four key attributes when strategy is based on innovation
• High-quality and specialized inputs
• An environment that encourages investment and local rivalry
• A sophisticated local market
• Local presence of related and supporting industries
Location Strategy
• Long-term decisions
• Decisions made infrequently
• Decision greatly affects both fixed and variable costs
• Once committed to a location, many resource and cost issues are
difficult to change
What determines a country to locate your
business
• 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
Considerations for which region to locate
your business
• Corporate desires
• Attractiveness of region
• Labor availability, costs, attitudes towards unions
• Costs and availability of utilities
• Environmental regulations
• Government incentives and fiscal policies
• Proximity to raw materials and customers
• Land/construction costs
Considerations for site decisions
• Site size and cost
• Air, rail, highway, and waterway systems
• Zoning restrictions
• Proximity of services/ supplies needed
• Environmental impact issues
Factors That Affect Location Decisions
• Labor productivity
• Exchange rates and currency risks
Can have a significant impact on cost structure
Rates change over time
• Costs
Tangible - easily measured costs such as utilities, labor, materials,
taxes
Intangible - less easy to quantify and include education, public
transportation, community, quality-of-life
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 towards turnover, unions, absenteeism
Globally cultures have different attitudes towards punctuality, legal,
and ethical issues
Factors That Affect Location Decisions
• 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
Called clustering
Often driven by resources such as natural, information, capital, talent
Found in both manufacturing and service industries
Service Location strategies
• Purchasing power of the customers in the area.
• Service and image compatibility with the demographics
• Competition in the area
• Quality of the competition
• Uniqueness of the firm’s and competitor’s locations
Cont’d
• Bank
• Hospital
• Hotels
• Telemarketing industry
• School