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OperationsOperations

ManagementManagement

Location StrategiesLocation Strategies

Chapter 8Chapter 8

Industrial Location DecisionsIndustrial Location Decisions

Costfocus Revenue varies little

between locations

Location is a major

cost factor Affects shipping &

production costs (e.g., labor)

Costs vary greatly between

locations

1995 Corel Corp.

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

Location Decision SequenceLocation Decision Sequence

Country

1995CorelCorp.

Region/Community

1995 Corel Corp.

Site

1995CorelCorp.

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

1995 Corel Corp.

Region Location DecisionsRegion Location Decisions 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

1995 Corel Corp.

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Factors Affecting SiteFactors Affecting Site

Site size and cost

Air, rail, highway, and

waterway systems

Zoning restrictions

Nearness of

services/suppliesneeded

Environmental

impact issues

1995 Corel Corp.

Location Evaluation MethodsLocation Evaluation Methods

Factor-rating method

Locational break-even

analysis

Center of gravity method

Transportation model

1995 Corel Corp.

FactorFactor--Rating MethodRating 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

Steps in Factor Rating MethodSteps in Factor Rating Method

List relevant factors

Assign importance weight to each factor (suchas 0 1)

Develop scale for each factor (such as 1 100)

Score each location using factor scale

Multiply scores by weights for each factor & total

Select location with maximum total score

Problem 8.9Problem 8.90.15*90=13.5

13.5+9.5+24+9+18+7.5=81.5

Method of cost-volume analysis used for industriallocations

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 expectedproduction volume Must be above break-even

Locational BreakLocational Break--Even AnalysisEven Analysis

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Locational BreakLocational Break--Even AnalysisEven AnalysisExampleExample

Youre an analyst for AC Delco. Youreconsidering a new manufacturing plant in Akron,Bowling Green, or Chicago. Fixed costs per yearare $30k, $60k, & $110k respectively. Variablecosts per case are $75, $45, & $25 respectively.

The price per case is $120. What is the bestlocation for an expected volume of 2,000 casesper year?

1995 Corel Corp.

Locational BreakLocational Break--Even CrossoverEven CrossoverChartChart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

AnnualCost

Akron

Chicago

Bowling

Green

Bowling Green

lowest cost

Chicago

lowestcost

Akron

lowest cost

Center of Gravity MethodCenter of Gravity Method

Finds location ofsingle distribution center

serving several destinations

Used primarily for services

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& Ycoordinates for center of gravity

Gives location of distribution center

Minimizes transportation cost

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

xW

Wd

C

=

ii

iiiy

yW

Wd

C

Coordinate Locations of FourCoordinate Locations of Four

QuainQuains Department Stores ands Department Stores andthe Center of Gravitythe Center of GravityContainershipped: 2000

1000

1000

2000

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20001000

1000

2000

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