OM Class www suse 1 astate edujseydel Operations

山���大学 – OM Class www. suse 1. astate. edu/~jseydel Operations Management Location Planning for Better Supply Chain Management John Seydel, Ph. D. Arkansas State University (阿肯色州立大学）

Student Objectives Upon successful completion of this material, you should be able to o Identify and explain seven major factors that affect location decisions o Understand the differences between service and goods-producing location strategies o Use various tools for supporting the location decision n Apply the simple multicriteria approach n Complete a locational break-even analysis graphically and mathematically n Use the center-of-gravity method

Location Decisions o The objective of location strategy is to maximize the benefit of location to the firm o The strategic nature n Long-term decisions; made infrequently n Decision greatly affects both fixed and variable costs n Once committed to a location, many resource and cost issues are difficult to change o Determining optimal facility location is a therefore a good investment o Consider also a “practical” perspective

Location and Innovation o Cost is not always the most important aspect of a strategic decision o Four key factors may be addressed when strategy is based on innovation n High-quality and specialized inputs n An environment that encourages investment and local rivalry n A sophisticated local market n Local presence of related and supporting industries

Factors Considered in Selecting a Country o Political risks, government rules, attitudes, incentives o Cultural and economic issues o Location of markets o Labor talent, attitudes, productivity, costs o Availability of supplies, communications, energy o Exchange rates and currency risks

Factors Considered in Selecting a Region within a Country o o o o Corporate desires Attractiveness of region Labor availability and costs Costs and availability of utilities Environmental regulations Government incentives and fiscal policies Proximity to raw materials and customers Land/construction costs

Factors Considered in Selecting a Specific Site within a Region o o o Site size and cost Air, rail, highway, and waterway systems Zoning restrictions Proximity of services/ supplies needed Environmental impact issues

General Factors Affecting Location Decisions (a) o Labor productivity n Wage rates are not the only cost n Lower productivity may increase total cost Location o Exchange rates anddecisions currency risks based n Can have a significant costs onimpact costsonalone n Rates change over time can create o Costs difficult ethical n Tangible - easily measured costs such as situations utilities, labor, materials, taxes n Intangible - less easy to quantify and include education, public transportation, community, quality-of-life

General Factors Affecting Location Decisions (b) n Labor productivity o Wage rates are not the only cost o Lower productivity (and bad quality) may increase total cost n Exchange rates and currency risks o Can have a significant impact on costs o Rates change over time n Costs o Tangible: easily measured costs such as utilities, labor, materials, taxes o Intangible: less easy to quantify and include education, public transportation, community, quality-of-life n Political risk, values, and culture o National, state, local government attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux o Worker attitudes towards turnover, unions, absenteeism o Globally cultures have different attitudes toward punctuality, legal, and ethical issues

General Factors Affecting Location Decisions (c) o Proximity to markets n Very important to services n JIT systems or high transportation costs may make it important to manufacturers o Proximity to suppliers: perishable goods, high transportation costs, bulky products o Proximity to competitors n Called clustering n Often driven by resources such as natural, information, capital, talent n Found in both manufacturing and service industries

Criteria to Be Considered in Locating Service Operations o Purchasing power of customer-drawing area o Service and image compatibility with demographics of the customer-drawing area o Competition in the area o Quality of the competition o Uniqueness of the firm’s and competitors’ locations o Physical qualities of facilities and neighboring businesses o Operating policies of the firm o Quality of management

How Hotel Chains Select Sites o Location is a strategically important decision in the hospitality industry o La Quinta started with 35 independent variables and worked to refine a regression model to predict profitability o The final model had only four variables n n n Price of the inn Median income levels State population per inn Location of nearby colleges R 2 =. 51 51% of the variation in profitability is explained by just these four variables

Call Center Industry o Requires neither face-to-face contact nor movement of materials o Has very broad location options o Traditional variables are no longer relevant o Cost and availability of labor may drive location decisions

Some Modern Technology Support for Location Planning o GIS (geographic information systems): enable more complex demographic analysis o Involve n Hardware: essentially RFID n Software: dedicated applications (GPS) n Databases the most critical component o Available databases include n n n Detailed census data Detailed maps Utilities Geographic features Locations of major services

Some Common Methods for Evaluating Location Alternatives o Factor-rating (multicriteria analysis) o Locational break-even analysis o Center-of-gravity method

Multicriteria Approach to Location Selection o Problem identification n Decision variable: the location for a new facility n Determine the criteria (note, not “criterion”) of importance) n Objective: highest overall score o Considering alternatives n Identify potential locations n Evaluate the locations o o Assign a weight to each criterion (i. e. , factor) Develop a scale for each criterion Score each location for each criterion Multiply score by weights for each factor for each location n Select the location with the highest point score o Note: numerous techniques (AHP, DEA, . . . ) exist

Center of Gravity o Finds location of distribution center that minimizes distribution costs o Considers n Location of markets n Volume of goods shipped to those markets n Shipping cost (or distance) o Procedure: Assumes cost is directly proportional to distance and volume shipped n Place existing locations on a coordinate grid o Grid origin and scale is arbitrary o Maintain relative distances n Calculate X and Y coordinates for center of gravity

Locational Break-Even Analysis: Example $180, 000 Annual cost $160, 000 $150, 000 $130, 000 $110, 000 $80, 000 $60, 000 $30, 000 $10, 000 – – – ve – cur t s o – go c a c i h – C – n ee r – g G rve n i l – w t cu o s – B co t s – co – on rve r – Ak cu – Akron Chicago Bowling Green – lowest cost – | | | | – 0 500 1, 000 1, 500 2, 000 2, 500 3, 000 Volume

Summary of Objectives n Identify and explain seven major factors that affect location decisions n Use various tools for supporting the location decision o Apply the simple multicriteria approach o Complete a locational break-even analysis graphically and mathematically o Use the center-of-gravity method n Understand the differences between service and goods-producing location strategies

Quality, Costs, and Productivity

Deming’s 14 Points 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Create constancy of purpose toward improvement Adopt the new philosophy Cease dependence on inspection to achieve quality End the practice of awarding business on the basis of price tag Improve constantly and forever the system, to improve quality and productivity Institute training on the job Institute leadership; the aim of supervision should be to help people do a better job Drive out fear, so that everyone may work effectively Break down barriers Eliminate slogans etc. for the work force asking for zero defects Eliminate numerical quotas Remove barriers that rob the employee of his right to pride of workmanship Institute a vigorous program of education and self-improvement Put everybody to work to accomplish the transformation

Appendix

A Practical Look at Location Decisions ; -} [Return to Previous]

The Scientific Problem-Solving Framework (SPSF) o Define the problem n Define decision variables n Determine criteria of importance (factors) n Specify whether criteria are associated with goals or with objectives n Identify constraints o Consider alternatives n Identify them n Evaluate them n Select “best” one o Implement solution o Monitor and revise solution; re-solve if appropriate [Return to Previous]

Ranking Corruption Rank Country 2009 CPI Score (out of 10) 1 New Zealand 9. 4 Least Corrupt 2 Demark 9. 3 3 Singapore, Sweden 9. 2 5 Switzerland 9. 0 8 Australia, Canada, Iceland 8. 7 12 Hong Kong 8. 2 14 Germany 8. 0 17 Japan, UK 7. 7 19 USA 7. 5 37 Taiwan 5. 6 39 South Korea 5. 5 56 Malaysia 4. 5 Most 79 China 3. 6 Corrupt 89 Mexico 3. 3 146 Russia 2. 2 © 2011 Pearson Education, Inc. publishing as Prentice [Return to Previous]

MCDM Example Suppose labor cost is twice as important as utility cost, which is in turn twice as important as climate. Lubbock has scores of 8, 5, and 2 in these areas; El Paso has scores of 7, 6, and 5 in these areas; Dallas has scores of 6, 6, and 6 in these areas, and Houston has scores of 3, 7, and 9 in these areas. [Return to Previous]

Co. G Example Suppose Champion Cooling Company is locating a warehouse that will provide service to four store locations: Seattle, with an annual volume of 1, 000 units; Fargo, with an annual volume of 2, 000 units; Miami, with an annual volume of 6, 000 units; and Las Vegas, with an annual volume of 6, 500 units. Las Vegas is located at (1, 1); Miami is located at (10, 1); Seattle is located at (1, 6), and Fargo is located at (5, 6). [Return to Previous]

BEP Example The U. S. Navy is considering four ports for their submarine squid proofing operations: San Diego, Bremerton, Virginia Beach, and Tulsa. The fixed costs at each location are $500, 000, $700, 000, $1, 000, and $250, 000 respectively and the variable costs are $300, 000, $200, 000, $100, 000, and $1, 000. [Return to Previous]