Chapter 8 Location Planning and Analysis Mc GrawHillIrwin

Chapter 8 Location Planning and Analysis Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Chapter 8: Learning Objectives You should be able to: 1. Identify some of the main reasons organizations need to 2. 3. 4. 5. 6. make location decisions Explain why location decisions are important Discuss the options that are available for location decisions Give examples of the major factors that affect location decisions Outline the decision process for making these kinds of decisions Use the techniques presented to solve typical problems Student Slides 8 -2

Location Decision Process Steps: 1. Decide on the criteria to use for evaluating location alternatives 2. Identify important factors, such as location of markets or raw materials 3. Develop location alternatives a. Identify the country or countries for location b. Identify the general region for location c. Identify a small number of community alternatives d. Identify the site alternatives among the community alternatives 4. Evaluate the alternatives and make a decision Student Slides 8 -3

A Sequence of Decisions National Decision Political, social, economic stability; Currency exchange rates; . . . Regional Decision Climate; Customer concentrations; Degree of unionization; . . . Community Decision Transportation system availability; Preference of management; . . . Site Decision Site size/cost; Environmental impact; Zoning restrictions; . . .

Location: Identifying a Country Factors relating to foreign locations Government a. Policies on foreign ownership of production facilities Local content requirements Import restrictions Currency restrictions Environment regulations Local product standards Liability laws a. Stability issues Cultural differences Living circumstances foreign workers and their dependents Ways of doing business Religious holidays/traditions Customer preferences Possible “buy locally” sentiment Labor Level of training and education of workers Work ethic Wage rates Possible regulations limiting the number of foreign employees Language differences Resources Availability and quality of raw materials, energy, transportation infrastructure Financial incentives, tax rates, inflation rates, interest rates Technological Rate of technological change, rate of innovations Market potential, competition Safety Crime, terrorism threat Student Slides 8 -5

Location: Identifying a Region Primary regional factors: Location of raw materials Necessity Perishability Transportation costs Location of markets As part of a profit-oriented company’s competitive strategy So not-for-profits can meet the needs of their service users Distribution costs and perishability Student Slides 8 -6

Location: Identifying a Region (contd. ) Labor factors Cost of labor Availability of suitably skilled workers Wage rates in the area Labor productivity Attitudes toward work Whether unions pose a serious potential problem Other factors Climate and taxes may play an important role in location decisions Student Slides 8 -7

Location: Identifying a Community Many communities actively attempt to attract new businesses they perceive to be a good fit for the community Businesses also actively seek attractive communities based on such factors such as: Quality of life Services Attitudes Taxes Environmental regulations Utilities Development support Student Slides 8 -8

Location: Identifying a Site Primary site location considerations are Land Transportation Zoning Other restrictions Student Slides 8 -9

Service and Retail Locations Considerations: Customer access: Prime consideration for some: restaurants, hotels, etc. Not an important consideration for others: service call centers, etc. Demographics, competition, traffic/volume and convenience Clustering Similar types of businesses locate near one another Student Slides 8 -10

Facility Types and Their Dominant Locational Factors Mining, Quarrying, and Heavy Manufacturing Near their raw material sources Abundant supply of utilities Land construction costs are inexpensive Light Manufacturing Availability and cost of labor Warehousing Proximity to transportation facilities Incoming and outgoing transportation costs . . . more

Facility Types and Their Dominant Locational Factors R&D and High-Tech Manufacturing Ability to recruit/retain scientists, engineers, etc. Near companies with similar technology interests Retailing and For-Profit Services Near concentrations of target customers Government and Health/Emergency Services Near concentrations of constituents

Evaluating Location Alternatives Common techniques: 1. Locational cost-volume-profit analysis 2. Transportation model 3. Factor rating 4. Center of gravity method Student Slides 8 -13

1. Locational Cost-Profit-Volume Analysis Based on fixed cost and variable cost. Steps: 1. Determine the fixed and variable costs for each alternative 2. Plot the total-cost lines for all alternatives on the same graph 3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output Cost model: Total cost = FC + v * Q Example 1 on page 351 Student Slides 8 -14

1. Locational Cost-Profit-Volume Analysis Example 1 on page 351 Location fixe cost/yr. A B C D 250 K 100 K 150 K 200 K variable cost/unit $11 $30 $20 $35 A Annual volume: 8, 000 unit per year =360 K Total cost A B C D 250 K 100 K 150 K 200 K 250 K $11 (8 K) $30(8 K) $20(8 K) $35(8 K) =360 K =400 K =350 K =550 K Decision Alternative C is the best Conduct sensitivity analysis? Student Slides 8 -15

3. Factor Rating General approach to evaluating locations that includes quantitative and qualitative inputs Procedure: 1. 2. Determine which factors are relevant Assign a weight to each factor that indicates its relative importance compared with all other factors. Weights typically sum to 1. 00 3. 4. 5. 6. Decide on a common scale for all factors, and set a minimum acceptable score if necessary Score each location alternative Multiply the factor weight by the score for each factor, and sum the results for each location alternative Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score Student Slides 8 -16

Location Decision Factors Economic factors Site acquisition, preparation and construction costs Labor costs, skills and availability Utilities costs and availability Transportation costs Taxes

Qualitative Location Decision Factors Non-economic factors Labor attitudes and traditions Training and employment services Community’s attitude Schools and churches Recreation and cultural attractions Amount and type of housing available

Qualitative Location Decisions Factors Possibly important qualitative factors: Housing Climate Community activities Education and health services Recreation Churches Union activities Community attitudes

Integrating Qualitative & Quantitative Factors Managers often wrestle with the task of trading off qualitative factors against quantitative ones Methods for systematically displaying the relative advantages and disadvantages, both qualitative and quantitative, of each location alternative have been developed The relative-aggregate-scores approach is one such method

Relative-Aggregate-Scores Approach Quantitative and Qualitative Factors Factor Score Location A Location B Econ. Wgt. Weight Data Score Prod. cost/ton. 45 Transp. cost/ton. 35 Labor Avail. . 15 Union Activity. 05 Total Score $65. 923 $18 1. 000. 700. 450 . 415. 350. 105. 023 $60 1. 000. 450 $21. 857. 300. 500. 075. 750. 038 . 893 . 863

4. Center of Gravity Method for locating a distribution center that minimizes distribution costs Treats distribution costs as a linear function of the distance and the quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method includes the use of a map that shows the locations of destinations The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative locations Student Slides 8 -22

Example: Center of Gravity (p. 356) Student Slides 8 -23