PRODUCTION AND OPERATIONS MANAGEMENT Ch 9 Location Strategies

PRODUCTION AND OPERATIONS MANAGEMENT Ch. 9: Location Strategies POM - J. Galván 1

Learning Objectives n Where must we locate our facilities so as to satisfy our corporate strategy? POM - J. Galván 2

Industrial Location Decisions ¨ Cost focus ¨ Revenue varies little between locations ¨ Location is a major cost factor Affects shipping & production costs (e. g. , labor) ¨ Costs vary greatly between locations ¨ POM - J. Galván © 1995 Corel Corp. 3

Service Location Decisions n Revenue focus • n Costs vary little between market areas Location is a major revenue factor Affects amount of customer contact • Affects volume of business • POM - J. Galván 4

In General - Location Decisions n n n Long-term decisions Difficult to reverse Affect fixed & variable costs Transportation cost n As much as 25% of product price • Other costs: Taxes, wages, rent etc. • n Objective: Maximize benefit of location to firm POM - J. Galván 5

Location Decision Sequence Region/Community Country Site. POM - J. Galván 6

Factors Affecting Country ¨ ¨ Government Culture & economy Market location Labor availability, attitudes, productivity, and cost ¨ Infrastructure ¨ Exchange rate POM - J. Galván © 1995 Corel Corp. 7

Labor Productivity Low wages often over-emphasized n Labor productivity important n Labor cost per unit should be criterion: Labor cost/day Units made/day n Hourly Compensation ($) Manufacturing Workers (1994) Germany 27. 37 Japan 21. 38 U. S. 17. 10 Hong Kong 4. 79 Mexico 2. 57 POM - J. Galván 8

Region Location Decisions n n n n Corporate desires Attractiveness Labor Utility costs Government incentives Proximity to customers & suppliers Land/construction $$$ POM - J. Galván © 1995 Corel Corp. 9

Factors Affecting Site n n n Site size Site cost Transportation in/out Proximity of services Environmental impact POM - J. Galván 10 © 1995 Corel Corp.

Location Decision Example In 1992, BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina. © 1995 Corel Corp. POM - J. Galván 11

Country Decision Factors n Market location U. S. is world’s largest luxury car market • Growing (baby boomers) ¨ Other • n Labor • Lower manufacturing labor costs n $17/hr. (U. S. ) vs. $27 (Germany) • Higher labor productivity Lower shipping cost ($2, 500/car less) ¨ New plant & equipment would increase productivity (lower cost/car $2, 0003000) ¨ n 11 holidays (U. S. ) vs. 31 (Germany) POM - J. Galván 12

Region/Community Decision Factors n Labor • Lower wages in South Carolina (SC) n About • n $17, 000/yr (SC) vs. $27, 051/yr (US) Based on 1993 metropolitan averages for all workers Government incentives • • $135 million in state & local tax breaks Free-trade zone from airport to plant n No duties on imported components or on exported cars POM - J. Galván 13

Organizations That Need To Be Close to Markets n Government agencies • Police & fire departments • Post Office n Retail Sales and Serivce • Fast food restaurants, supermarkets, gas stations • Drug stores, shopping malls • Bakeries POM - J. Galván 14

Organizations That Need To Be Close to Markets - continued n Services • Doctors, lawyers, accountants, barbers • Banks, auto repair, motels n Manufacturers • Makers of bulky or heavy products • Japanese car makers • German car makers • Auto parts suppliers POM - J. Galván 15

Location Evaluation Methods ¨ Factor-rating method ¨ Locational break-even analysis ¨ Center of gravity method ¨ Transportation model POM - J. Galván 16

Factor-Rating Method n n n Most widely used location technique Useful for service & industrial locations Rates locations using factors • Intangible (qualitative) factors n Example: • Education quality, labor skills Tangible (quantitative) factors n Example: Short-run & long-run costs POM - J. Galván 17

Steps in Factor Rating Method n n n List relevant factors Assign importance weight to each factor Develop scale for each factor (0 -1, etc. ) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score POM - J. Galván 18

Factors Affecting Location Selection n n n Labor costs Labor availability Proximity to materials and suppliers Proximity to markets Government fiscal policies Environmental regulations POM - J. Galván ¨ Environmental regulations ¨ Utilities ¨ Site costs ¨ Transportation availability ¨ Quality-of-life ¨ Foreign exchange ¨ Quality of government 19

Locational Break-Even Analysis n n Method of cost-volume analysis used for industrial locations Steps • • • Determine fixed & variable costs for each location Plot total cost for each location Select location with lowest total cost for expected production volume n Must be above break-even POM - J. Galván 20

Locational Break-Even Analysis Example You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30 k, $60 k, & $110 k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2, 000 cases per year? © 1995 Corel Corp. POM - J. Galván 21

Locational Break-Even Crossover Chart n ro k A o Chicag en re ng G li Bow Akron lowest cost Bowling Green lowest cost POM - J. Galván Chicago lowest cost 22

Locational Break-Even Crossover Chart n ro k A o Chicag en re ng G Lowest cost envelop li Bow Akron lowest cost Bowling Green lowest cost POM - J. Galván Chicago lowest cost 23

Center of Gravity Method n n n Finds location of single distribution center serving several destinations Used primarily for services Considers • Location of existing destinations n Example: Markets, retailers etc. Volume to be shipped • Shipping distance (or cost) • n Shipping cost/unit/mile is constant POM - J. Galván 24

Center of Gravity Method Steps n Place existing locations on a coordinate grid Grid has arbitrary origin & scale • Maintains relative distances • n Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center • Minimizes transportation cost • POM - J. Galván 25

Center of Gravity Method Equations X Coordinate Y Coordinate dix = x coordinate of location i Wi = Volume of goods moved to or from location i diy = y coordinate of location i POM - J. Galván 26

Transportation Model n n n Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Type of linear programming model Objective: Minimize total production & shipping costs • Constraints n Production capacity at source (factory) n Demand requirement at destination • POM - J. Galván 27

Components of Volume and Revenue for a Service Firm n n n n Purchasing power of customer drawing area Service and image compatibility with demographics of the customer drawing area Competition in the area Quality of the competition Uniqueness of the firm’s and competitor’s locations Physical qualities of facilities and neighboring businesses Operating policies of the firm Quality of management POM - J. Galván 28

Location Strategies – Service vs. Industrial Revenue Focus Service/Retail/Professio nal Revenue Focus o Volume/revenue o Drawing area, purchasing power o Competition; advertising/pricing o o o Transportation cost of raw materials o Shipment cost of finished goods o Energy and utility cost; labor; raw material; taxes, etc. o Physical quality o Tangible costs Parking/access; security/ lighting; appearance/image Cost determinants o Intangible and future costs Attitude toward union o Quality of life o Education expenditures by state o Quality of state and local government o Rent o Management caliber o Operations policies (hours, wage rates) o POM - J. Galván 29

Location Strategies – Service vs. Industrial o o o o Service/Retail/Professional Techniques Correlation analysis to determine importance of factors for a particular type of operation Traffic counts Demographic analysis of drawing area Purchasing power analysis of drawing area Assumptions Location is a major determinate of revenue Issues manifesting from high customer contact dominate Costs are relatively constant for a given area; therefore, revenue function is critical o o o o POM - J. Galván Industrial Techniques Linear Programming (Transportation method) Weighted approach to intangibles Breakeven analysis Crossover charts Assumptions Location is a major determinate of cost Most major costs can be identified explicitly for each site Low customer contact allows focus on costs Intangible costs can be objectively evaluated 30

Major Methods of Solving Location Problems n n Weighted methods which: • Assign weights and points to various factors • Determine tangible costs • Investigate intangible costs Center of Gravity Method • Find best distribution center location Location breakeven methods • Special case of breakeven analysis Transportation method • A specialized linear programming method POM - J. Galván 31

Telemarketing and Internet Industries Require neither face-to-face contact with customers (or employees) nor movement of material n Presents a whole new perspective on the location problem n POM - J. Galván 32

Geographic Information Systems New tool to help in location analysis n Enables combination of many parameters n POM - J. Galván 33