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OperationsManagementChapter 8 –Location StrategiesPowerPoint presentation to accompanyHeizer/RenderPrinciples of Operations Management, 7eOperations Management, 9e 2008 Prentice Hall, Inc.8–1

Outline; Global Company Profile:FedEx; The Strategic Importance ofLocation 2008 Prentice Hall, Inc.8–2

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) 2008 Prentice Hall, Inc.8–3

Outline – Continued; Methods of Evaluating LocationAlternatives; The Factor-Rating Method; Locational Break-Even Analysis; Center-of-Gravity Method; Transportation Model 2008 Prentice Hall, Inc.8–4

Outline – Continued; Service Location Strategy; How Hotel Chains Select Sites; The Call Center Industry; Geographic Information Systems 2008 Prentice Hall, Inc.8–5

Learning ObjectivesWhen you complete this chapter youshould be able to:1. Identify and explain seven major factorsthat effect location decisions2. Compute labor productivity3. Apply the factor-rating method4. Complete a locational break-evenanalysis graphically and mathematically5. Use the center-of-gravity method 2008 Prentice Hall, Inc.8–6

Federal Express; Central hub concept; Enables service to more locations withfewer aircraft; Enables matching of aircraft flights withpackage loads; Reduces mishandling and delay in transitbecause there is total control ofpackages from pickup to delivery 2008 Prentice Hall, Inc.8–7

Location Strategy; One of the most important decisions afirm makes; Increasingly global in nature; Significant impact on fixed andvariable costs; Decisions made relatively infrequently; The objective is to maximize thebenefit of location to the firm 2008 Prentice Hall, Inc.8–8

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 god investment 2008 Prentice Hall, Inc.8–9

Location and Innovation; Cost is not always the most importantaspect of a strategic decision; Four key attributes when strategy isbased on innovation; High-quality and specialized inputs; An environment that encouragesinvestment and local rivalry; A sophisticated local market; Local presence of related andsupporting industries 2008 Prentice Hall, Inc.8 – 10

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 2008 Prentice Hall, Inc.8 – 11

Location DecisionsCountry DecisionFigure 8.1 2008 Prentice Hall, Inc.Critical Success Factors1. Political risks, governmentrules, attitudes, incentives2. Cultural and economicissues3. Location of markets4. Labor talent, attitudes,productivity, costs5. Availability of supplies,communications, energy6. Exchange rates andcurrency risks8 – 12

Location DecisionsRegion/CommunityDecisionMNWIMIILFigure 8.1 2008 Prentice Hall, Inc.INOHCritical Success Factors1. Corporate desires2. Attractiveness of region3. Labor availability, costs,attitudes towards unions4. Costs and availability of utilities5. Environmental regulations6. Government incentives andfiscal policies7. Proximity to raw materials andcustomers8. Land/construction costs8 – 13

Location DecisionsSite DecisionCritical Success Factors1. Site size and cost2. Air, rail, highway, andwaterway systems3. Zoning restrictions4. Proximity of services/supplies needed5. Environmental impactissuesFigure 8.1 2008 Prentice Hall, Inc.8 – 14

Growth CompetitivenessIndex of CountriesCountry2006-2007 da16New Zealand23Italy42China54Mexico58Russia62 2008 Prentice Hall, Inc.2005 Rank411069231322384859Table 8.1538 – 15

Factors That AffectLocation Decisions; Labor productivity; Wage rates are not the only cost; Lower productivity may increase total costLabor cost per day Cost per unitProductivity (units per day)ConnecticutJuarez 70 1.17 per unit60 units 25 1.25 per unit20 units 2008 Prentice Hall, Inc.8 – 16

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 asutilities, labor, materials, taxes; Intangible - less easy to quantify andinclude education, public transportation,community, quality-of-life 2008 Prentice Hall, Inc.8 – 17

Factors That AffectLocation Decisions; Exchange rates and currency risks; Can have a significant impact on costLocationstructuredecisions; Rates change overtimebasedon costs alone; Costscan create; Tangible - easily measured costs such asdifficult ethicalutilities, labor, materials, taxessituations; Intangible - less easy to quantify and; Intangible - less easy to quantify andinclude education, public transportation,community, quality-of-life 2008 Prentice Hall, Inc.8 – 18

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 2008 Prentice Hall, Inc.8 – 19

Ranking CorruptionRank111571114151617203470121Country2006 CPI Score (out of 10)Finland9.6LeastCorruptIceland9.6New Hong Kong8.3Germany8.0Japan7.6USA, Belgium7.3Israel, Taiwan5.9MostBrazil, China, Mexico3.3CorruptRussia2.5Table 8.2 2008 Prentice Hall, Inc.8 – 20

Factors That AffectLocation Decisions; Proximity to markets; Very important to services; JIT systems or high transportation costsmay make it important to manufacturers; Proximity to suppliers; Perishable goods, high transportationcosts, bulky products 2008 Prentice Hall, Inc.8 – 21

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 2008 Prentice Hall, Inc.8 – 22

Clustering of CompaniesIndustryLocationsReason for clusteringWine makingNapa Valley (US)Bordeaux region(France)Natural resources ofland and climateSoftware firmsSilicon Valley,Boston, Bangalore(India)Talent resources ofbright graduates inscientific/technicalareas, venturecapitalists nearbyRace carbuildersHuntington/NorthHampton region(England)Critical mass of talentand information 2008 Prentice Hall, Inc.Table 8.38 – 23

Clustering of CompaniesIndustryLocationsReason for clusteringTheme parks(Disney World,UniversalStudios)Orlando, FloridaA hot spot forentertainment, warmweather, tourists, andinexpensive laborElectronicsfirmsNorthern MexicoNAFTA, duty freeexport to USComputerhardwaremanufacturersSingapore, TaiwanHigh technologicalpenetration rate andper capita GDP,skilled/educatedworkforce with largepool of engineers 2008 Prentice Hall, Inc.Table 8.38 – 24

Clustering of CompaniesIndustryFast foodchains(Wendy’s,McDonald’s,Burger King,and Pizza Hut)LocationsSites within 1 mileof each otherReason for clusteringStimulate food sales,high traffic flowsGeneral aviation Wichita, Kansasaircraft(Cessna,Learjet, Boeing)Mass of aviation skillsOrthopedicdevicesReady supply of skilledworkers, strong U.S.market 2008 Prentice Hall, Inc.Warsaw, IndianaTable 8.38 – 25

Factor-Rating Method; Popular because a wide variety of factorscan be included in the analysis; Six steps in the method1. Develop a list of relevant factors calledcritical success factors2. Assign a weight to each factor3. Develop a scale for each factor4. Score each location for each factor5. Multiply score by weights for each factor foreach location6. Recommend the location with the highestpoint score 2008 Prentice Hall, Inc.8 – 26

Factor-Rating ExampleCriticalSuccessFactorLaboravailabilityand attitudePeople-tocar ratioPer capitaincomeTax structureEducationand healthTotalsScores(out of 100)Weight France DenmarkWeighted 0)(85) 8.5(.10)(80) 8.0(.39)(75) 29.3 (.39)(70) 27.3.216070(.21)(60) 12.6 (.21)(70) 14.71.00(.25)(70) 17.5 (.25)(60) 15.0(.05)(50) 2.570.4(.05)(60) 3.068.0Table 8.4 2008 Prentice Hall, Inc.8 – 27

LocationalBreak-Even Analysis; Method of cost-volume analysis used forindustrial locations; Three steps in the method1. Determine fixed and variable costs foreach location2. Plot the cost for each location3. Select location with lowest total cost forexpected production volume 2008 Prentice Hall, Inc.8 – 28

Locational Break-EvenAnalysis ExampleThree locations:Selling price 120Expected volume 2,000 unitsFixed VariableCityCostCostAkron 30,000 75Bowling Green 60,000 45Chicago 110,000 25TotalCost 180,000 150,000 160,000Total Cost Fixed Cost (Variable Cost x Volume) 2008 Prentice Hall, Inc.8 – 29

Annual costLocational Break-EvenAnalysis ExampleFigure 8.2– 180,000 –– 160,000 – 150,000 –e–curvtso 130,000 –go caci– Ch 110,000 –neer–g G rveni– wl t cuo 80,000 – B cos ts–con 60,000 –ro rvek– A cu–Akron 30,000 –Bowling Greenlowestlowest cost–cost 10,000 – –05001,0001,5002,000Volume 2008 Prentice Hall, Inc.Chicagolowestcost 2,5003,0008 – 30

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) 2008 Prentice Hall, Inc.8 – 31

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 gravity’; Assumes cost is directlyproportional to distance andvolume shipped 2008 Prentice Hall, Inc.8 – 32

Center-of-Gravity Method dixQix - coordinate i Qii diyQiy - coordinate i Qiiwhere 2008 Prentice Hall, Inc.dix x-coordinate of location idiy y-coordinate of location iQi Quantity of goods moved toor from location i8 – 33

Center-of-Gravity MethodNorth-SouthNew York (130, 130)Chicago (30, 120)120 –Pittsburgh (90, 110)90 –60 –30 – –Atlanta (60, 40) 30Arbitraryorigin 2008 Prentice Hall, Inc. 6090120150East-WestFigure 8.38 – 34

Center-of-Gravity MethodNumber of ContainersStore LocationShipped per MonthChicago (30, 120)2,000Pittsburgh (90, 110)1,000New York (130, 130)1,000Atlanta (60, 40)2,000(30)(2000) (90)(1000) (130)(1000) (60)(2000)x-coordinate 2000 1000 1000 2000 66.7(120)(2000) (110)(1000) (130)(1000) (40)(2000)2000 1000 1000 2000 93.3y-coordinate 2008 Prentice Hall, Inc.8 – 35

Center-of-Gravity MethodNorth-SouthNew York (130, 130)Chicago (30, 120)120 –Pittsburgh (90, 110) 90 –Center of gravity (66.7, 93.3)60 –30 – –Atlanta (60, 40) 30Arbitraryorigin 2008 Prentice Hall, Inc. 6090120150East-WestFigure 8.38 – 36

Transportation Model; Finds amount to be shipped fromseveral points of supply to severalpoints of demand; Solution will minimize totalproduction and shipping costs; A special class of linearprogramming problems 2008 Prentice Hall, Inc.8 – 37

Worldwide Distribution ofVolkswagens and PartsFigure 8.4 2008 Prentice Hall, Inc.8 – 38

Service Location Strategy1. Purchasing power of customer-drawing area2. Service and image compatibility with demographicsof the customer-drawing area3. Competition in the area4. Quality of the competition5. Uniqueness of the firm’s and competitors’ locations6. Physical qualities of facilities and neighboringbusinesses7. Operating policies of the firm8. Quality of management 2008 Prentice Hall, Inc.8 – 39

Location StrategiesService/Retail/Professional LocationRevenue FocusVolume/revenueDrawing area; purchasing powerCompetition; advertising/pricingPhysical qualityParking/access; security/lighting;appearance/imageCost determinantsRentManagement caliberOperations policies (hours, wagerates)Goods-Producing LocationCost FocusTangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; rawmaterial; taxes, and so onIntangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and localgovernmentTable 8.6 2008 Prentice Hall, Inc.8 – 40

Location StrategiesService/Retail/Professional LocationTechniquesRegression models to determineimportance of various factorsFactor-rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systemsGoods-Producing LocationTechniquesTransportation methodFactor-rating methodLocational break-even analysisCrossover chartsTable 8.6 2008 Prentice Hall, Inc.8 – 41

Location StrategiesService/Retail/Professional LocationAssumptionsLocation is a major determinant ofrevenueHigh customer-contact issues arecriticalCosts are relatively constant for agiven area; therefore, the revenuefunction is criticalGoods-Producing LocationAssumptionsLocation is a major determinant ofcostMost major costs can be identifiedexplicitly for each siteLow customer contact allows focuson the identifiable costsIntangible costs can be evaluatedTable 8.6 2008 Prentice Hall, Inc.8 – 42

How Hotel Chains Select Sites; Location is a strategically importantdecision in the hospitality industry; La Quinta started with 35 independentvariables 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 2008 Prentice Hall, Inc.r2 .5151% of theprofitability ispredicted byjust these fourvariables!8 – 43

The Call Center Industry; Requires neither face-to-facecontact nor movement of materials; Has very broad location options; Traditional variables are no longerrelevant; Cost and availability of labor maydrive location decisions 2008 Prentice Hall, Inc.8 – 44

Geographic InformationSystems (GIS); Important tool to help in location analysis; Enables more complex demographicanalysis; Available data bases include; Detailed census data; Detailed maps; Utilities; Geographic features; Locations of major services 2008 Prentice Hall, Inc.8 – 45

Geographic InformationSystems (GIS) 2008 Prentice Hall, Inc.8 – 46

2008 Prentice Hall, Inc. 8 – 1 Operations Management Chapter 8 – Location Strategies PowerPoint presentation to accompany Heizer/Render Principles of .