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8 Location Strategies Outline
Global Company Profile:
FedEx
PowerPoint presentation to accompany The Strategic Importance of
Heizer and Render
Operations Management, 10e
Location
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl
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Outline – Continued Outline – Continued
Factors That Affect Location
Decisions Methods of Evaluating Location
Labor Productivity Alternatives
Exchange Rates and Currency Risks The Factor-Rating Method
g
Costs Locational Break-Even Analysis
Political Risk, Values, and Culture Center-of-Gravity Method
Proximity to Markets Transportation Model
Proximity to Suppliers
Proximity to Competitors (Clustering)
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Outline – Continued Learning Objectives
When you complete this chapter you
Service Location Strategy should be able to:
How Hotel Chains Select Sites 1. Identify and explain seven major factors
The Call Center Industry that effect location decisions
Geographic Information Systems 2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-even
analysis graphically and mathematically
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Learning Objectives Federal Express
When you complete this chapter you
should be able to: Central hub concept
Enables service to more locations with
5. Use the center-of-gravity method fewer aircraft
6.
6 Understand the differences between Enables matching of aircraft flights with
service and industrial-sector location package loads
strategies
Reduces mishandling and delay in
transit because there is total control of
packages from pickup to delivery
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Location Strategy Location Strategy
One of the most important decisions a
The objective of location strategy is firm makes
to maximize the benefit of location Increasingly global in nature
to the firm
Significant impact on fixed and
variable costs
Decisions made relatively infrequently
The objective is to maximize the
benefit of location to the firm
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Location and Costs Location and Innovation
Cost is not always the most important
Location decisions based on low aspect of a strategic decision
cost require careful consideration
Four key attributes when strategy is
Once in place, location-related based on innovation
costs are fixed in place and High-quality and specialized inputs
difficult to reduce
An environment that encourages
Determining optimal facility investment and local rivalry
location is a good investment A sophisticated local market
Local presence of related and
supporting industries
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Location Decisions Location Decisions
Country Decision Key Success Factors
Long-term decisions 1. Political risks, government
rules, attitudes, incentives
Decisions made infrequently 2. Cultural and economic
Decision greatly affects both fixed issues
and variable costs 3. Location of markets
4. Labor talent, attitudes,
Once committed to a location, productivity, costs
many resource and cost issues 5. Availability of supplies,
are difficult to change communications, energy
6. Exchange rates and
Figure 8.1 currency risks
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Location Decisions Location Decisions
Region/ Key Success Factors Site Decision Key Success Factors
Community
Decision 1. Corporate desires 1. Site size and cost
2. Attractiveness of region 2. Air, rail, highway, and
MN
3. Labor availability and costs waterway systems
WI 4. Costs and availability of utilities 3. Zoning restrictions
MI 5. Environmental regulations 4. Proximity of services/
OH 6. Government incentives and supplies needed
IL IN
fiscal policies 5. Environmental impact
7. Proximity to raw materials and issues
customers
Figure 8.1 8. Land/construction costs Figure 8.1
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Global Competitiveness Factors That Affect
Index of Countries Location Decisions
Country 2009 Rank 2005 Rank Labor productivity
Switzerland 1 4
Wage rates are not the only cost
USA 2 1
Japan 8 10 Lower productivity may increase total cost
Canada
C d 9 13
UK 13 9 Labor cost per day
= Cost per unit
Israel 27 23 Productivity (units per day)
China 29 48
Italy 48 38 Connecticut Juarez
India 49 22
$70 $25
Mexico 60 59 = $1.17 per unit = $1.25 per unit
60 units 20 units
Russia 63 53 Table 8.1
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4. 10/16/2010
Factors That Affect Factors That Affect
Location Decisions Location Decisions
Exchange rates and currency risks Exchange rates and currency risks
Can have a significant impact on costs Can have a significant impact on cost
structure Location
Rates change over time
decisions
Rates change over time based
Costs on costs alone
Costs
Tangible - easily measured costs such as can create
utilities, labor, materials, taxes Tangible - easily measured costs such as
difficult ethical
utilities, labor, materials, taxes
Intangible - less easy to quantify and
include education, public transportation, Intangible - less easysituations
to quantify and
community, quality-of-life include education, public transportation,
community, quality-of-life
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Factors That Affect Ranking Corruption
Location Decisions Rank Country 2009 CPI Score (out of 10)
1 New Zealand 9.4 Least
Political risk, values, and culture 2 Demark 9.3 Corrupt
3 Singapore, Sweden 9.2
National, state, local governments 5 Switzerland 9.0
attitudes toward private and intellectual 8 Australia, Canada, Iceland 8.7
property, zoning, pollution, employment 12 Hong Kong 8.2
stability may be in flux 14 Germany 8.0
17 Japan, UK 7.7
Worker attitudes towards turnover, unions, 19 USA 7.5
absenteeism 37 Taiwan 5.6
Globally cultures have different attitudes 39 South Korea 5.5
56 Malaysia 4.5
towards punctuality, legal, and ethical Most
79 China 3.6
issues 89 Mexico 3.3 Corrupt
146 Russia 2.2
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Factors That Affect Factors That Affect
Location Decisions Location Decisions
Proximity to markets Proximity to competitors
Very important to services Called clustering
JIT systems or high transportation costs Often driven by resources such as natural,
y ,
may make i i
k it important to manufacturers
f information, capital, talent
Proximity to suppliers Found in both manufacturing and service
Perishable goods, high transportation industries
costs, bulky products
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Clustering of Companies Clustering of Companies
Industry Locations Reason for clustering Industry Locations Reason for clustering
Wine making Napa Valley (US) Natural resources of Theme parks Orlando, Florida A hot spot for
Bordeaux region land and climate (Disney World, entertainment, warm
(France) Universal weather, tourists, and
Studios) inexpensive labor
So t a e
Software firms
s S co a ey,
Silicon Valley, Talent resources o
a e t esou ces of
Boston, Bangalore bright graduates in Electronics Northern Mexico NAFTA, duty free
(India) scientific/technical firms export to US
areas, venture
capitalists nearby
Computer Singapore, Taiwan High technological
Race car Huntington/North Critical mass of talent hardware penetration rate and
builders Hampton region and information manufacturers per capita GDP,
(England) skilled/educated
workforce with large
pool of engineers
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Clustering of Companies Factor-
Factor-Rating Method
Popular because a wide variety of factors
Industry Locations Reason for clustering can be included in the analysis
Fast food Sites within 1 mile Stimulate food sales, Six steps in the method
chains of each other high traffic flows
(Wendy’s, 1. Develop a list of relevant factors called key
McDonald’s, success factors
Burger King
King,
and Pizza Hut) 2. Assign a weight to each factor
General aviation Wichita, Kansas Mass of aviation skills 3. Develop a scale for each factor
aircraft
(Cessna, 4. Score each location for each factor
Learjet, Boeing) 5. Multiply score by weights for each factor for
Orthopedic Warsaw, Indiana Ready supply of skilled each location
device workers, strong U.S.
manufacturing market 6. Recommend the location with the highest
point score
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Factor-
Factor-Rating Example Locational
Break-
Break-Even Analysis
Key Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark Method of cost-volume analysis used for
Labor industrial locations
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0 Three steps in the method
p
People-to-
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0 1. Determine fixed and variable costs for
Per capita each location
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
2. Plot the cost for each location
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education 3. Select location with lowest total cost for
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7 expected production volume
Totals 1.00 70.4 68.0
Table 8.4
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Locational Break-Even
Break- Locational Break-Even
Break-
Analysis Example Analysis Example
Three locations: –
$180,000 –
–
Selling price = $120 $160,000 –
$150,000 –
Expected volume = 2,000 units –
$130,000 –
,
Annual cost
t
Fixed Variable Total $110,000 –
–
City Cost Cost Cost –
–
Akron $30,000 $75 $180,000 $80,000 –
–
Bowling Green $60,000 $45 $150,000 $60,000 –
–
Chicago $110,000 $25 $160,000 $30,000 –
–
Akron
Bowling Green
Chicago
lowest lowest
– lowest cost
cost cost
$10,000 –
Total Cost = Fixed Cost + (Variable Cost x Volume) |
– | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Figure 8.2
Volume
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Center-of-
Center-of-Gravity Method Center-of-
Center-of-Gravity Method
Finds location of distribution Place existing locations on a
center that minimizes distribution coordinate grid
costs Grid origin and scale is arbitrary
Considers
C id Maintain l ti di t
M i t i relative distances
Location of markets Calculate X and Y coordinates for
Volume of goods shipped to those ‘center of gravity’
markets Assumes cost is directly
Shipping cost (or distance) proportional to distance and
volume shipped
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Center-of-
Center-of-Gravity Method Center-of-
Center-of-Gravity Method
∑dixQi North-South
New York (130, 130)
x - coordinate = i
Chicago (30, 120)
∑Qi 120 –
i Pittsburgh (90, 110)
∑diyQi 90 –
y - coordinate = i
∑Qi 60 –
i
30 –
where dix = x-coordinate of location i Atlanta (60, 40)
diy = y-coordinate of location i –
| | | | | |
East-West
Qi = Quantity of goods moved to 30 60 90 120 150
Arbitrary
or from location i origin
Figure 8.3
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Center-of-
Center-of-Gravity Method Center-of-
Center-of-Gravity Method
Number of Containers North-South
Store Location Shipped per Month New York (130, 130)
Chicago (30, 120)
Chicago (30, 120) 2,000 120 –
Pittsburgh (90, 110) 1,000 Pittsburgh (90, 110)
New York (130, 130) 1,000 90 – + Center of gravity (
C f (66.7, 93.3)
)
Atlanta (60, 40) 2,000
60 –
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
2000 + 1000 + 1000 + 2000 30 –
= 66.7 Atlanta (60, 40)
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) –
| | | | | |
y-coordinate = East-West
2000 + 1000 + 1000 + 2000 30 60 90 120 150
Arbitrary
= 93.3 origin
Figure 8.3
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Transportation Model Worldwide Distribution of
Volkswagens and Parts
Finds amount to be shipped from
several points of supply to several
points of demand
Solution will minimize total
production and shipping costs
A special class of linear
programming problems
Figure 8.4
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Service Location Strategy Location Strategies
1. Purchasing power of customer-drawing area Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus
2. Service and image compatibility with
Volume/revenue Tangible costs
demographics of the customer-drawing area Drawing area; purchasing power Transportation cost of raw material
3. Competition in the area Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw
4.
4 Quality of the competition Physical quality material; taxes, and so on
taxes
Parking/access; security/lighting;
5. Uniqueness of the firm’s and competitors’ appearance/image Intangible and future costs
locations Attitude toward union
Cost determinants Quality of life
6. Physical qualities of facilities and neighboring Rent Education expenditures by state
businesses Management caliber Quality of state and local
Operations policies (hours, wage government
7. Operating policies of the firm rates)
8. Quality of management
Table 8.6
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8. 10/16/2010
Location Strategies Location Strategies
Service/Retail/Professional Location Goods-Producing Location Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques Assumptions Assumptions
Regression models to determine Transportation method Location is a major determinant of Location is a major determinant of
importance of various factors Factor-rating method revenue cost
Factor rating
Factor-rating method Locational break even analysis
break-even High customer contact issues are
customer-contact Most major costs can be identified
Traffic counts Crossover charts critical explicitly for each site
Demographic analysis of drawing area Costs are relatively constant for a Low customer contact allows focus
Purchasing power analysis of area given area; therefore, the revenue on the identifiable costs
function is critical Intangible costs can be evaluated
Center-of-gravity method
Geographic information systems
Table 8.6 Table 8.6
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How Hotel Chains Select Sites
The Call Center Industry
Location is a strategically important
decision in the hospitality industry
Requires neither face-to-face
La Quinta started with 35 independent contact nor movement of materials
variables and worked to refine a
regression model to predict profitability Has very broad location options
The final model had only four variables Traditional variables are no longer
Price of the inn r2 = .51 relevant
Median income levels 51% of the
profitability is Cost and availability of labor may
State population per inn predicted by drive location decisions
Location of nearby colleges just these four
variables!
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Geographic Information Geographic Information
Systems (GIS) Systems (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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