chapter 8 location planning and analysis. management 3620chapter 8 location planning and analysis8-2...

Chapter 8

Location Planning and Analysis

Management 3620 Chapter 8 Location Planning and Analysis 8-2

Need for Location Decisions

• Marketing Strategy

• Growth

• Depletion of Resources

• Cost of Doing Business

Management 3620 Chapter 8 Location Planning and Analysis 8-3

Nature of Location Decisions (1 of 2)

• Importance– long term commitment

– impact on investment requirements, operating costs and revenues

• Objectives– profit potential

– acceptable alternatives

Management 3620 Chapter 8 Location Planning and Analysis 8-4

Nature of Location Decisions (2 of 2)

• Options– expand existing facilities

– add new facilities

– shut down and move

– do nothing

Management 3620 Chapter 8 Location Planning and Analysis 8-5

General Procedures forMaking Location Decisions

• Decide on the criteria• Identify important factors• Develop location alternatives

– identify general region– identify a small number of community

alternatives– identify site alternatives

• Evaluate alternatives and make a selection

Management 3620 Chapter 8 Location Planning and Analysis 8-6

Location Decision Factors

Regional Factors

Site-related

FactorsMultiple Plant Strategies

Community

Considerations

Management 3620 Chapter 8 Location Planning and Analysis 8-7

Regional Factors• Location of resources• Location of markets• Labor factors• Other factors

– climate– taxes– utilities cost and availability– input cost and availability– culture

Management 3620 Chapter 8 Location Planning and Analysis 8-8

Community Considerations• Facilities for education, shopping,

recreation, transportation, religious worship, and entertainment

• Quality of police, fire , and medical services

• Local attitudes toward the company• Size of the community• Cost and availability of utilities,

environmental regulations, taxes, and incentives

Management 3620 Chapter 8 Location Planning and Analysis 8-9

Site-Related Factors

• Land

• Transportation

• Zoning or other restrictions

Management 3620 Chapter 8 Location Planning and Analysis 8-10

Multiple Plant Manufacturing Strategies (1 of 2)

• Product plant strategy– entire product lines are produced in separate

plants– decentralized approach– specialization of resources

• Market area strategy– plants designed to serve a particular

geographic area– operating cost high; transportation cost low– rapid delivery and response to customer needs

Management 3620 Chapter 8 Location Planning and Analysis 8-11

Multiple Plant Manufacturing Strategies (2 of 2)

• Process plant strategy– plants concentrate on different aspects of a

process– coordination is a major issue– plants highly specialized; economies of

scale

Management 3620 Chapter 8 Location Planning and Analysis 8-12

Service and Retail Locations

• Traffic volume and convenience important

• Location of other retailers or similar service providers

• Demographic analysis of drawing area

• Transportation and/or parking facilities

• Customer safety and security

• Competitors’ locations

Management 3620 Chapter 8 Location Planning and Analysis 8-13

Trends in Location Decisions• Foreign producers locating in U.S.

– “Made in USA”– currency fluctuations

• Just-in-time manufacturing techniques

• Microfactories– narrow product focus– located near major markets

• Information highway

Management 3620 Chapter 8 Location Planning and Analysis 8-14

Comparison of Service and Manufacturing Considerations

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

Management 3620 Chapter 8 Location Planning and Analysis 8-15

Foreign Government

a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards

b. Stability issues Cultural Differences

Living circumstances for foreign workers / dependents Religious holidays/traditions

Customer Preferences

Possible buy locally sentiment

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

Table 8-2Global Locations

Management 3620 Chapter 8 Location Planning and Analysis 8-16

Methods of Evaluating Location Alternatives

• Locational Cost-Profit-Volume Analysis

• The Transportation Model

• The Factor Rating Method

• The Center of Gravity Method

Management 3620 Chapter 8 Location Planning and Analysis 8-17

Locational Cost-Profit-Volume Analysis

• Uses cost-volume analysis to make economic comparison of location alternatives

• The three steps in locational break-even analysis– Determine the fixed and variable costs for each

location– Plot the costs for each location, with costs on the

vertical axis of the graph and annual volume on the horizontal axis

– Select the location that has the lowest total cost for the expected production volume

Management 3620 Chapter 8 Location Planning and Analysis 8-18

Example 1Cost-Volume Analysis

• Fixed and variable costs for four potential locations

Location Fixed Cost

Variable Cost

A B C D

$250,000 100,000 150,000 200,000

$11 30 20 35

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Example 1Solution

F i x e dC o s t s

V a r i a b l eC o s t s

T o t a lC o s t s

ABCD

$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0

$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )

$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0

Management 3620 Chapter 8 Location Planning and Analysis 8-20

Example 1Solution

800700600500400300200100

0

Annual Output (000)

8 10 12 14 166420

$(000)

A

BC

B SuperiorC Superior

A Superior

D

XBC XCA

Management 3620 Chapter 8 Location Planning and Analysis 8-21

Example 1Crossover Volume

$20-$30

$100,000-$150,000

VC -VC

FC-FC X

CB

BCBC

units 5,000 $10

$50,000 XBC

$11-$20

$150,000-$250,000

VC -VC

FC-FC X

AC

CACA

units 11,111 $9

$100,000 XCA

Management 3620 Chapter 8 Location Planning and Analysis 8-22

The Transportation Model

• Objective is to determine the best pattern of shipments to minimize production and transportation costs

• A special case of the linear programming problem

• Special-purpose algorithms have been developed to solve this type of problem

Management 3620 Chapter 8 Location Planning and Analysis 8-23

The Factor-Rating Method (1 of 2)

• Allows consideration of both quantitative and qualitative factors

• Different factors can be assigned different weights

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Factor-Rating (2 of 2)The six steps in the factor-rating method

– Develop a list of relevant location factors– Assign a weight to each factor to reflect its

relative importance to the company’s objectives– Develop a scoring scale for each factor– Have management score each alternative for

each factor, using the scale developed in the previous step

– For each alternative, multiply each factor’s score times its weight; then total the score

– Make a recommendation based on the maximum point score, considering the results of quantitative approaches as well

Management 3620 Chapter 8 Location Planning and Analysis 8-25

The Center-of-Gravity Method (1 of 2)

• Mathematical technique to minimize distribution costs

• Takes into account– location of markets– the volume of goods shipped to those

markets– shipping costs

• Assumes that shipping cost is directly proportional to both distance and volume shipped

Management 3620 Chapter 8 Location Planning and Analysis 8-26

Center-of-Gravity (2 of 2)

Find the center of gravity along each axis using

and

i

i

i

ii

Q

Qxx =

i

i

i

ii

Q

Qyy =