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Chapter 8

Location Planning and Analysis

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

The Need for Location Decisions
‡ Location decisions arise for a variety of reasons:
± Addition of new facilities
‡ ‡ ‡ ‡ ‡ As part of a marketing strategy to expand markets Growth in demand Depletion of basic inputs requires relocation Shift in markets Cost of doing business at a particular location

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Location Decisions: Strategically Important
‡ Location decisions:
± Are closely tied to an organization¶s strategies ‡ Low-cost ‡ Convenience to attract market share ± Effect capacity and flexibility ± Represent a long-term commitment of resources ± Effect investment requirements, operating costs, revenues, and operations ± Impact competitive advantage ± Importance to supply chains

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4. Expand an existing facility Add new locations while retaining existing facilities Shut down one location and move to another Do nothing 8-4 . 2.Location: Options ‡ Existing companies generally have four options available in location planning: 1. 3.

Identify the country or countries for location b. Develop location alternatives a. such as location of markets or raw materials 3. Identify the general region for location c.Location Decision: General Procedure ‡ Steps: 1. Evaluate the alternatives and make a decision 8-5 . Identify a small number of community alternatives d. Decide on the criteria to use for evaluating location alternatives 2. Identify the site alternatives among the community alternatives 4. Identify important factors.

S.Global Location: Facilitating Factors ‡ Two key factors have contributed to the attractiveness of globalization: ± Trade Agreements such as ‡ North American Free Trade Agreement (NAFTA) ‡ General Agreement on Tarriffs and Trade (GATT) ‡ U.-China Trade Relations Act ‡ EU and WTO efforts to facilitate trade ± Technology ‡ Advances in communication and information technology 8-6 .

Global Location: Benefits ‡ A wide range of benefits have accrued to organizations that have globalized operations: ± Markets ± Cost savings ± Legal and regulatory ± Financial ± Other 8-7 .

Global Location: Disadvantages ‡ There are a number of disadvantages that may arise when locating globally: ± Transportation costs ± Security costs ± Unskilled labor ± Import restrictions ± Criticism for locating out-of-country 8-8 .

Global Location: Risks ‡ Organizations locating globally should be aware of potential risk factors related to: ± Political instability and unrest ± Terrorism ± Economic instability ± Legal regulation ± Ethical considerations ± Cultural differences 8-9 .

Managing Global Operations ‡ Managerial implications for global operations: ± Language and cultural differences ‡ Risk of miscommunication ‡ Development of trust ‡ Different management styles ‡ Corruption and bribery ± Level of technology and resistance to technological change 8-10 .

Location: Identifying a Region ‡ Primary regional factors: ± Locating near the raw materials ± Locating near markets 8-11 .

Location: Identifying a Region (contd.) ± Labor factors ± Other factors ‡ Climate and taxes may play an important role in location decisions 8-12 .

retrieving. storing.Geographic Information System (GIS) ‡ GIS ± A computer-based tool for collecting. and displaying demographic data on maps ± Aids decision makers in ‡ Targeting market segments ‡ Identifying locations relative to their market potential ‡ Planning distribution networks ± Portraying relevant information on a map makes it easier for decision makers to understand 8-13 .

Location: Identifying a Community ‡ Businesses also actively seek attractive communities based on such factors such as: ± ± ± ± ± ± ± Quality of life Services Attitudes Taxes Environmental regulations Utilities Development support 8-14 .

Location: Identifying a Site ‡ Primary site location considerations are ± Land ± Transportation ± Zoning ± Other restrictions 8-15 .

Multiple Plant Manufacturing Strategies ‡ Organizing operations ± Product plant strategy ± Market area plant strategy ± Process plant strategy ± General-purpose plant strategy 8-16 .

traffic/volume patterns. etc. hotels. ‡ Not an important consideration for others: service call centers.Service and Retail Locations ‡ Considerations: ± Nearness to raw materials is not usually a consideration ± Customer access is a ‡ Prime consideration for some: restaurants. etc. and convenience 8-17 . ± Tend to be profit or revenue driven. and so are ‡ Concerned with demographics. competition.

Evaluating Location Alternatives ‡ Common techniques: ± Locational cost-volume-profit analysis ± Factor rating ± Center of gravity method ± Transportation model 8-18 .

Locational Cost-Profit-Volume Analysis ‡ Locational Cost-Profit-Volume Analysis ± Technique for evaluating location choices in economic terms ± Steps: 1. Plot the total-cost lines for all alternatives on the same graph 3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output 8-19 . Determine the fixed and variable costs for each alternative 2.

Locational Cost-Profit-Volume Analysis ‡ Assumptions 1. The required level of output can be closely estimated 4. Only one product is involved 8-20 . Fixed costs are constant for the range of probable output 2. Variable costs are linear for the range of probably output 3.

Locational Cost-Profit-Volume Analysis ‡ For a cost analysis. compute the total cost for each alternative location: Total Cost ! FC  v v Q where FC ! Fixed cost v ! Variable cost per unit Q ! Quantity or volume of output 8-21 .

000 $150.000 $100.Example: Cost-Profit-Volume Analysis ‡ Fixed and variable costs for four potential plant locations are shown below: Location A B C D Fixed Cost per Year $250.000 $200.000 Variable Cost per Unit $11 $30 $20 $35 8-22 .

Example: Cost-Profit-Volume Analysis B Superior C Superior A Superior 8-23 .

999 units) Total Cost of C ! Total Cost of B 150.000 Total Cost of A ! Total Cost of C 250.Example: Cost-Profit-Volume Analysis ‡ Range approximations ± B Superior (up to 4.000  11Q ! 150.000  20Q 100.111.111 units) ± A superior (11.000 ! 9Q Q ! 11.000  30Q 50.000 to 11.000 ! 10Q Q ! 5.11 ± C Superior (>5.112 units and up) 8-24 .000  20Q ! 100.

‡ Determine which factors are relevant Assign a weight to each factor that indicates its relative importance compared with all other factors. Decide on a common scale for all factors.Factor Rating ‡ Procedure: 1. unless it fails to meet the minimum acceptable score 8-25 . and sum the results for each location alternative Choose the alternative that has the highest composite score.00 3. 5. and set a minimum acceptable score if necessary Score each location alternative Multiply the factor weight by the score for each factor. 2. 4. Weights typically sum to 1. 6.

5 82.6 Alt 2 .20 . The following table contains information on two potential locations.40 .6 .0 .10(60) = 6.0 .00 Alt 1 100 80 70 86 40 80 Alt 2 60 80 90 92 70 90 Weighted Scores Alt 1 .10 .0 .0 .10(100) = 10.05(80) = 4.20(70) = 14.10(92) = 9.15 1.2 .0 .40(90) = 36.05 .7 8-26 .20(40) = 8.10 .0 .0 .Example: Factor Rating ‡ A photo-processing company intends to open a new branch store.15(80) = 12.05(80) = 4.0 70.15(90) = 13.40(70) = 28. Which is better? Scores (Out of 100) Factor Proximity to existing source Traffic volume Rental costs Size Layout Operating Cost Weight .10(86) = 8.0 .

Center of Gravity Method ‡ Center of Gravity Method ± Method for locating a distribution center that minimizes distribution costs ‡ Treats distribution costs as a linear function of the distance and the quantity shipped ‡ The quantity to be shipped to each destination is assumed to be fixed ‡ The method includes the use of a map that shows the locations of destinations ± The map must be accurate and drawn to scale ‡ A coordinate system is overlaid on the map to determine relative locations 8-27 .

Center of Gravity Method 8-28 .

Center of Gravity Method ‡ When the quantities to be shipped to every location are unequal. you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the ycoordinates §xQ x! §Q §yQ y! §Q i i i i i i where Qi ! Quantity to be shipped to destination i xi ! x coordinates of destination i yi ! y coordinates of destination i 8-29 .

Example: Center of Gravity ‡ Suppose the shipments for the problem depicted in Figure 8.000 8-30 .1a are not all equal. Destination D1 D2 D3 D4 x 2 3 5 8 18 y 2 5 4 5 16 Weekly Quantity 800 900 200 100 1. Determine the center of gravity based on the following information.

000 2.0. You may round the x-coordinate down to 3. 3.000 2.05. 5).7 y! 2. so the coordinates for the center of gravity are (3.7).000 § y Q i ! 2(800)  5(900)  4(200)  5(100) ! 7. 3.400 ! 3.0.05 2.000 §Q i i ‡ The coordinates for the center of gravity are (3.100 ! ! ! 3.Example: Center of Gravity §xQ x! §Q i i i i 2(800)  3(900)  5( 200)  8(100) 6. This south of destination D2 (3.7). 8-31 .