c4 location
DESCRIPTION
Operation Management - OPM 530TRANSCRIPT
OPM 5334-1
Operations Operations ManagementManagement
Location StrategiesLocation StrategiesChapter 4Chapter 4
2
DefinitionDefinition
Facility or Plant location is a place where a factory, warehouse, office or any business enterprise is built
Selection of a location depends on the type of business.
The objective of selection of a location is to obtain the maximum efficiency and effectiveness by minimizing operating cost and achieve maximum revenues.
OPM 5334-3
Industrial Location DecisionsIndustrial Location Decisions
Cost focus Revenue varies little
between locations
Location is a major cost factor Affects shipping &
production costs (e.g., labor) Costs vary greatly between
locations
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OPM 5334-4
Service Location DecisionsService 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
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In General - Location DecisionsIn General - Location Decisions
Long-term decisions Difficult to reverse Affect fixed & variable costs
Objective: Maximize benefit of location to firm
6
Reasons for Plant/Facility Location Reasons for Plant/Facility Location DecisionsDecisions
1. Starting new business
2. Introduction of new product or service
3. Insufficient capacity
4. Changes in technology
5. Mergers
6. Changes in input resources
7. Shifts in geographical demand may occur
OPM 5334-7
Location Decision SequenceLocation Decision Sequence
Country
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Region/Community
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Site
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Factors That Affect Location DecisionsFactors That Affect Location Decisions
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Factors Affecting CountryFactors 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
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OPM 5334-10
Region Location DecisionsRegion 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
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OPM 5334-11
Factors Affecting SiteFactors Affecting Site
Site size and cost Air, rail, highway, and
waterway systems Zoning restrictions Nearness of
services/supplies needed
Environmental impact issues
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OPM 5334-12
Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets
Government agencies Police & fire departments Post Office
Retail Sales and Service Fast food restaurants, supermarkets, gas stations Drug stores, shopping malls Bakeries
Services Doctors, lawyers, accountants, barbers Banks, auto repair, motels
OPM 5334-13
Location Evaluation MethodsLocation Evaluation Methods
Factor-rating method Locational break-even
analysis Center of gravity method Transportation model
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OPM 5334-14
Factor-Rating MethodFactor-Rating Method
Most widely used location technique Useful for service & industrial locations Rates locations using factors
Tangible (quantitative) factors Example: Short-run & long-run costs
Intangible (qualitative) factors Example: Education quality, labor skills
OPM 5334-15
Steps in Factor Rating MethodSteps in Factor Rating Method List relevant factors called critical success
factors. Assign importance weight to each factor Develop scale for each factor (such as 1 – 5) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score
CSF in Location AnalysisCSF in Location Analysis
Score(out of 5)
Score(out of 5)
Weighted score
Weighted score
CSF Weight A/Setar Sg.Petani A/Setar Sg.Petani
Labor Availability
5 4 5 5x4=20 5x5=25
Transportation Service
2 4 3 2x4=8 2x3=6
Proximity to market
4 5 4 4x5=20 4x4=16
Proximity to suppliers
3 3 4 3x3=9 3x4=12
Quality of Life 1 5 4 1x5=5 1x4=4
Total Score
62 63
Rank 2 1
Best location
Sg.Petani
OPM 533
4-16
OPM 5334-17
Method of cost-volume analysis used for industrial locations
Steps Determine fixed & variable costs for each location Plot total cost for each location (Cost on vertical axis,
Annual Volume on horizontal axis) Select location with lowest total cost for expected
production volume.
Locational Break-Even AnalysisLocational Break-Even Analysis
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BEP = Fixed Cost (FC) Selling Price per unit (SP) – Variable Cost per unit(VC).
Total Revenue (TR) = SP(Q) Total Cost (TC) = FC+TVC Profit = TR-TC
Locational Break-Even AnalysisLocational Break-Even Analysis
OPM 5334-19
Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample
You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Asahan, Baling, or Chini. Fixed costs per year are RM30k, RM60k, & RM110k respectively. Variable costs per case are RM75, RM45, & RM25 respectively. The price per case is RM120. What is the best location for an expected volume of 2,000 cases per year?
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Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample
Answer:
TC = FC + TVCTC (Asahan) = RM30,000 + RM75(2,000) = RM180,000
TC (Baling) = RM60,000 + RM45(2,000) = RM150,000
TC (Chini) = RM110,000 + RM25(2,000) = RM160,000
Baling is the best location because of the lowest cost.
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Locational Break-Even Analysis – Select Locational Break-Even Analysis – Select location based on economic basislocation based on economic basis
The crossover point for Asahan and Baling
TC (Asahan) = TC (Baling)
30,000 + 75Q = 60,000 + 45Q
30Q = 30,000
Q = 1,000
The crossover point for Baling and Chini
TC (Baling) = TC (Chini)
60,000 + 45Q = 110,000 + 25Q
20Q = 50,000
Q = 2,500
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Locational Break-Even Crossover Locational Break-Even Crossover ChartChart
0
50000
100000
150000
200000
0 500 1000 1500 2000 2500 3000
Volume
Ann
ual C
ost
Asahan
Chini
Baling
Balinglowest cost
Chini lowest cost
Asahan lowest cost
OPM 5334-23
Center of Gravity MethodCenter of Gravity Method
Finds location of single distribution center serving several destinations that can minimize distribution center
Used primarily for services Considers
Location of existing destinations Example: Markets, retailers etc.
Volume to be shipped Shipping distance (or cost)
Shipping cost/unit/mile is constant
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Center of Gravity Method StepsCenter of Gravity Method Steps
Place existing locations on a coordinate grid Grid has arbitrary origin & scale Maintains relative distances
Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Minimizes transportation cost
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Center of Gravity Method EquationsCenter of Gravity Method Equations
dix = x coordinate of location i
Wi = Volume of goods moved to or from location i
diy = y coordinate of location i
X Coordinate
Y Coordinate
ii
iiix
x W
WdC
ii
iiiy
y W
WdC
Center-of-Gravity Method ExampleCenter-of-Gravity Method Example
Number of ContainersNumber of Containers Store Location Coordinate Shipped per MonthStore Location Coordinate Shipped per Month
Chicago (30, 120)Chicago (30, 120) 2,000 2,000Pittsburgh (90, 110)Pittsburgh (90, 110) 1,000 1,000New York (130, 130)New York (130, 130) 1,000 1,000Atlanta (60, 40)Atlanta (60, 40) 2,000 2,000
Quain’s Discount Department Store has four stores located in Chicago, Pittsburg, New York and Atlanta. They are currently being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the chain first store. The firm has decided to find some “central” location in which to build a new warehouse. Data on demand rates and the current location of each store are as above.
Center-of-Gravity Method - ExampleCenter-of-Gravity Method - Example
North-SouthNorth-South
East-WestEast-West
120 120 –
90 90 –
60 60 –
30 30 –
–| | | | | |
3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin
Chicago (30, 120)Chicago (30, 120)New York (130, 130)New York (130, 130)
Pittsburgh (90, 110)Pittsburgh (90, 110)
Atlanta (60, 40)Atlanta (60, 40)
Center-of-Gravity Method ExampleCenter-of-Gravity Method Example
Number of ContainersNumber of Containers Store Location Coordinate Shipped per MonthStore Location Coordinate Shipped per Month
Chicago (30, 120)Chicago (30, 120) 2,000 2,000Pittsburgh (90, 110)Pittsburgh (90, 110) 1,000 1,000New York (130, 130)New York (130, 130) 1,000 1,000Atlanta (60, 40)Atlanta (60, 40) 2,000 2,000
x-coordinate =x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 66.7= 66.7
y-coordinate =y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 93.3= 93.3
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Coordinate Locations of Four Coordinate Locations of Four Quain’s Department Stores and Quain’s Department Stores and
the Center of Gravitythe Center of Gravity
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Transportation ModelTransportation Model The objective of the transportation model is to determine the best
pattern of shipments from several point of supply (sources) to several point of demands destinations so as to minimize total production and transportation costs.
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
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Service Location StrategyService Location Strategy• The focus in the service sector is on maximizing revenue. • The eight (8) major components of volume and revenue for the
service firm are: 1. Purchasing power of customer drawing area2. Service and image compatibility with demographics of the customer
drawing area3. Competition in the area4. Quality of the competition5. Uniqueness of the firm’s and competitor’s locations6. Physical qualities of facilities and neighboring businesses7. Operating policies of the firm8. Quality of management
OPM 5334-32
Location Strategies – Service vs. Location Strategies – Service vs. IndustrialIndustrial
Service/Retail/Professional Revenue 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, wage rates)
Goods-Producing LocationCost Focus
Tangible costs Transportation cost of raw materials Shipment cost of finished goods Energy and utility cost; labor; raw
material; taxes, etc. Intangible and future costs
Attitude toward union Quality of life Education expenditures by state Quality of state and local government
OPM 5334-33
Location Strategies –Location Strategies –Service vs. IndustrialService vs. Industrial
Service/Retail/Professional Techniques
Regression models to determine importance of various factors
Factor-rating method Traffic counts Demographic analysis of drawing
area Purchasing power analysis of
drawing area Center of gravity method Geographic information systems
Goods Producing LocationTechniques
Linear Programming (Transportation method)
Factor-rating method Locational breakeven
analysis Crossover charts
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Location Strategies –Location Strategies –Service vs. IndustrialService vs. Industrial
Service/Retail/Professional Assumptions
Location is a major determinate of revenue
High customer-contact issues are critical
Costs are relatively constant for a given area; therefore, the revenue function is critical
Goods-Producing LocationAssumptions
Location is a major determinate of cost
Most major costs can be identified explicitly for each site
Low customer contact allows focus on identifiable costs
Intangible costs can be evaluated
OPM 5334-35
Final ThoughtFinal 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.
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