8-10. location strategies
TRANSCRIPT
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OperationsManagement
Chapter 8Location Strategies
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Outline
Global Company Profile:FedEx
The Strategic Importance ofLocation
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Outline Continued
Factors That Affect LocationDecisions
Labor Productivity
Exchange Rates and Currency Risks
Costs
Political Risk, Values, and Culture
Proximity to Markets
Proximity to Suppliers
Proximity to Competitors (Clustering)
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Outline Continued
Methods of Evaluating LocationAlternatives
The Factor-Rating Method Locational Break-Even Analysis
Center-of-Gravity Method
Transportation Model
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Outline Continued
Service Location Strategy
How Hotel Chains Select Sites
The Call Center Industry
Geographic Information Systems
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Learning Objectives
When you complete this chapter youshould be able to:
1. Identify and explain seven major factors
that effect location decisions
2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-evenanalysis graphically and mathematically
5. Use the center-of-gravity method
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Federal Express
Central hub concept
Enables service to more locations withfewer aircraft
Enables matching of aircraft flights withpackage loads
Reduces mishandling and delay in transit
because there is total control ofpackages from pickup to delivery
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Location Strategy
One of the most important decisions afirm makes
Increasingly global in nature Significant impact on fixed and
variable costs
Decisions made relatively infrequentlyThe objective is to maximize the
benefit of location to the firm
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Location and Costs
Location decisions based on lowcost require careful consideration
Once in place, location-relatedcosts are fixed in place anddifficult to reduce
Determining optimal facilitylocation is a good investment
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Location and Innovation
Cost is not always the most importantaspect of a strategic decision
Four key attributes when strategy is
based on innovationHigh-quality and specialized inputs
An environment that encourages
investment and local rivalryA sophisticated local market
Local presence of related and
supporting industries
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Location Decisions
Long-term decisions
Decisions made infrequently
Decision greatly affects both fixedand variable costs
Once committed to a location,many resource and cost issues aredifficult to change
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Location Decisions
Country Decision Critical Success Factors
1. Political risks, governmentrules, attitudes, incentives
2. Cultural and economicissues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs5. Availability of supplies,communications, energy
6. Exchange rates andcurrency risksFigure 8.1
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Location DecisionsRegion/
CommunityDecision
Critical Success Factors
1. Corporate desires
2. Attractiveness of region
3. Labor availability, costs,attitudes towards unions
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives andfiscal policies
7. Proximity to raw materials andcustomers
8. Land/construction costs
MN
WI
MI
IL IN OH
Figure 8.1
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Location Decisions
Site Decision Critical Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems3. Zoning restrictions
4. Proximity of services/supplies needed
5. Environmental impactissues
Figure 8.1
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Growth CompetitivenessIndex of Countries
Country 2006-2007 Rank 2005 Rank
Switzerland 1 4USA 6 1
J apan 7 10Germany 8 6UK 10 9Israel 15 23Canada 16 13New Zealand 23 22Italy 42 38China 54 48Mexico 58 59
Russia 62 53
Table 8.1
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Factors That AffectLocation Decisions
Labor productivity
Wage rates are not the only cost
Lower production may increase total cost
Labor cost per day
Production (units per day)= Cost per unit
Connecticut
= $1.17 per unit$70
60 units
J uarez
= $1.25 per unit$25
20 units
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Factors That AffectLocation Decisions
Exchange rates and currency risks
Can have a significant impact on coststructure
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
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Factors That AffectLocation Decisions
Exchange rates and currency risks
Can have a significant impact on coststructure
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
Location
decisions basedon costs alone
can create
difficult ethicalsituations
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Factors That AffectLocation Decisions
Political risk, values, and culture
National, state, local governmentsattitudes toward private and intellectualproperty, zoning, pollution, employmentstability may be in flux
Worker attitudes towards turnover, unions,absenteeism
Globally cultures have different attitudestowards punctuality, legal, and ethicalissues
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Ranking Corruption
Rank Country 2006 CPI Score (out of 10)1 Finland 9.61 Iceland 9.61 New Zealand 9.65 Singapore 9.4
7 Switzerland 9.111 UK 8.614 Canada 8.515 Hong Kong 8.316 Germany 8.0
17 J apan 7.620 USA, Belgium 7.334 Israel, Taiwan 5.970 Brazil, China, Mexico 3.3121 Russia 2.5
LeastCorrupt
MostCorrupt
Table 8.2
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Factors That AffectLocation Decisions
Proximity to markets
Very important to services
J IT systems or high transportation costsmay make it important to manufacturers
Proximity to suppliers
Perishable goods, high transportation
costs, bulky products
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Factors That AffectLocation Decisions
Proximity to competitors
Called clustering
Often driven by resources such as natural,information, capital, talent
Found in both manufacturing and serviceindustries
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Locational
Break-Even Analysis Method of cost-volume analysis used for
industrial locations
Three steps in the method1. Determine fixed and variable costs for
each location
2. Plot the cost for each location
3. Select location with lowest total cost forexpected production volume
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Locational Break-EvenAnalysis Example
Three locations:
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Fixed Variable TotalCity Cost Cost Cost
Total Cost = Fixed Cost + (Variable Cost x Volume)
Selling price = $120
Expected volume = 2,000 units
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Locational Break-EvenAnalysis Example
$180,000
$160,000 $150,000
$130,000
$110,000
$80,000
$60,000
$30,000
$10,000
Annualcost
| | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
Akronlowestcost
Bowling Greenlowest cost
Chicagolowestcost
Figure 8.2
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Center-of-Gravity Method
Finds location of distributioncenter that minimizes distributioncosts
Considers
Location of markets
Volume of goods shipped to thosemarkets
Shipping cost (or distance)
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Center-of-Gravity Method
Place existing locations on acoordinate grid
Grid origin and scale is arbitrary
Maintain relative distances
Calculate X and Y coordinates for
center of gravityAssumes cost is directly
proportional to distance andvolume shipped
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Center-of-Gravity Method
x - coordinate =
dixQi
Qii
i
diyQi
Qii
i
y - coordinate =
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
East-West
120
90
60
30
| | | | | |30 60 90 120 150
Arbitraryorigin
Chicago (30, 120)New York (130, 130)
Pittsburgh (90, 110)
Atlanta (60, 40)
Figure 8.3
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Center-of-Gravity Method
Number of ContainersStore Location Shipped per Month
Chicago (30, 120) 2,000Pittsburgh (90, 110) 1,000
New York (130, 130) 1,000Atlanta (60, 40) 2,000
x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 2000=66.7
y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 2000
=93.3
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Center-of-Gravity Method
North-South
East-West
120
90
60
30
| | | | | |30 60 90 120 150
Arbitraryorigin
Chicago (30, 120)New York (130, 130)
Pittsburgh (90, 110)
Atlanta (60, 40)
Center of gravity (66.7, 93.3)+
Figure 8.3
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Transportation Model
Finds amount to be shipped fromseveral points of supply to several
points of demand Solution will minimize total
production and shipping costs
A special class of linearprogramming problems
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Worldwide Distribution of
Volkswagens and Parts
Figure 8.4
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Service Location Strategy
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographicsof the customer-drawing area
3. Competition in the area4. Quality of the competition
5. Uniqueness of the firms and competitors locations
6. Physical qualities of facilities and neighboring
businesses7. Operating policies of the firm
8. Quality of management
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Location Strategies
Service/Retail/Professional Location Goods-Producing LocationRevenue Focus Cost Focus
Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/lighting;appearance/image
Cost determinants
Rent
Management caliber
Operations policies (hours, wagerates)
Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor; rawmaterial; taxes, and so on
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and localgovernment
Table 8.6
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Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques
Regression models to determineimportance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
Transportation method
Factor-rating methodLocational break-even analysis
Crossover charts
Table 8.6
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Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Assumptions Assumptions
Location is a major determinant ofrevenue
High customer-contact issues arecritical
Costs are relatively constant for agiven area; therefore, the revenuefunction is critical
Location is a major determinant ofcost
Most major costs can be identifiedexplicitly for each site
Low customer contact allows focuson the identifiable costs
Intangible costs can be evaluated
Table 8.6
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How Hotel Chains Select Sites
Location is a strategically importantdecision in the hospitality industry
La Quinta started with 35 independent
variables and worked to refine aregression model to predict profitability
The final model had only four variables
Price of the inn
Median income levels
State population per inn
Location of nearby colleges
r2= .51
51% of theprofitability ispredicted by
just these fourvariables!
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The Call Center Industry
Requires neither face-to-facecontact nor movement of materials
Has very broad location options
Traditional variables are no longer
relevant Cost and availability of labor may
drive location decisions
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Geographic InformationSystems (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 InformationSystems (GIS)