1

Lecture4

Location Planning and Analysis

Chapter 8

2

Need for Location DecisionsNeed for Location Decisions

Cost of Doing Business

Growth

Depletion of Resources

Marketing Strategy

3

Site Selection at Staples Inc.Site Selection at Staples Inc.http://www.computerworld.com/databasetopics/businessintelligence/story/0,10801,104656,00.htmlhttp://www.computerworld.com/databasetopics/businessintelligence/story/0,10801,104656,00.html

Staples plans to open 95 new stores this year after considering as many as 5,000 sites. Mistakes are costly -- closing a failed store can set the Framingham, Mass.-based company back $500,000 to $1 million.

The office supply retailer uses GIS tools from Tactician Corp. in Andover, Mass., combined with analytic tools from SAS Institute Inc. in Cary, N.C., to help it select store sites. The process all begins with a real estate model that forecasts weekly sales or potential sales by ZIP code. The forecasts drive activities such as site selection, budgeting, labor scheduling and marketing programs such as direct-mail campaigns, says Alan Gordon, director of sales forecasting at Staples, which now has GIS tools in a half-dozen departments.

The model considers some 30 factors that affect site selection, including obvious ones such as the presence of competitors and the demographics of the local population. "And there are things we put into our model that other people haven't learned of yet," Gordon says.

He says Staples hones its site-selection acumen by using SAS routines to correct and enhance the geographic data that it buys from external parties.

"The more we work in this area, the more we find problems and correct them," Gordon says. "We have explicitly tried to make that a competitive advantage."

For example, Gordon says, commercial databases of driving times between locations allow users to vary speeds by road type, but the databases don't take into account actual local traffic densities. Staples has written software that incorporates local conditions, so it knows how long it takes to drive from one ZIP code to another location through intervening ZIP codes of varying traffic density.

GIS and BI tool vendors are collaborating to integrate their products, so users don't have to. But the Tactician and SAS tools aren't yet integrated, and Staples passes files back and forth between the two companies' tools via FTP. But Gordon says Staples is building its own interface to allow both SAS and Tactician to access common DB2 or Oracle tables.

4

Nature of Location DecisionsNature of Location Decisions Strategic Importance

Long term commitment/costs Impact on investments, revenues, and operations Supply chains

Objectives Profit potential Minimize travel distance/cost/time No single location may be better than others Identify several locations from which to choose

Options Expand existing facilities Add new facilities Move

5

Making Location DecisionsMaking Location Decisions

Decide on the objective Identify the important factors Develop location alternatives Evaluate the alternatives Make selection

6

Proximity to raw materials Proximity to customers Location of markets Labor factors - cost, availability, skill, productivity Taxes at the federal, state, county, and local levels Construction costs and land price Government and political stability Regional competition Insurance

Regional FactorsRegional Factors

7

Demographics Services - schools, hospitals, recreation, etc. Environmental regulations Utilities Transportation system

Community Considerations Community Considerations & Site Related Factors& Site Related Factors

Geographic Information System Geographic Information System (GIS) technology(GIS) technology

8

Country DecisionCountry Decision Critical Success FactorsCritical Success Factors

1.1. Political risks, government Political risks, government rules, attitudes, incentivesrules, attitudes, incentives

2.2. Cultural and economic Cultural and economic issuesissues

3.3. Location of marketsLocation of markets

4.4. Labor availability, Labor availability, attitudes, productivity, attitudes, productivity, costscosts

5.5. Availability of supplies, Availability of supplies, communications, energycommunications, energy

6.6. Exchange rates and Exchange rates and currency riskscurrency risks

Global Location DecisionsGlobal Location Decisions

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Comparison of Service and Comparison of Service and Manufacturing ConsiderationsManufacturing Considerations

Manufacturing/Distribution Service/Retail

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,income,etc

Energy availability, costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Customer access/parking

Table 8.2

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Industry Locations Reason for clustering

Wine makers Napa Valley (US) Bordeaux region (France)

Natural resources of land and climate

Software firms Silicon Valley, Boston, Bangalore (India)

Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby

Race car builders Huntington/North Hampton region (England)

Critical mass of talent and information

Locations of IndustryLocations of Industry

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Industry Locations Reason for clustering

Theme parks Orlando A hot spot for entertainment, warm weather, tourists, and inexpensive labor

Electronic firms Northern Mexico NAFTA, duty free export to US

Computer hardware manufacturers

Singapore, Taiwan High technological penetration rate and per capita GDP, skilled/educated workforce with large pool of engineers

Fast food chains Sites within one mile of each other

Stimulate food sales, high traffic flows

General aviation aircraft

Wichita, Kansas Mass of aviation skills

Locations of Industry – Contd.Locations of Industry – Contd.

12

Evaluating LocationsEvaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs

13

Three locations:Three locations:

AkronAkron $30,000$30,000 $75$75 $180,000$180,000

Bowling GreenBowling Green $60,000$60,000 $45$45 $150,000$150,000

ChicagoChicago $110,000$110,000 $25$25 $160,000$160,000

Selling price Selling price = $120= $120

Expected volumeExpected volume = 2,000 = 2,000 unitsunits

FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost

Total Cost = Fixed Cost + Variable Cost x VolumeTotal Cost = Fixed Cost + Variable Cost x Volume

Cost-Volume & Locational Break-Even Cost-Volume & Locational Break-Even AnalysisAnalysis

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–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

An

nu

al c

ost

An

nu

al c

ost

| | | | | | |

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000

VolumeVolume

Akron Akron lowest lowest costcost

Bowling Green Bowling Green lowest costlowest cost

Chicago Chicago lowest lowest costcost

Chicago cost curve

Chicago cost curve

Akron c

ost

Akron c

ost

curv

e

curv

e

Bowling Green

Bowling Green

cost curve

cost curve

Locational Break-Even Analysis Locational Break-Even Analysis Graph of Break-Even PointsGraph of Break-Even Points

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Evaluating LocationsEvaluating Locations

Factor Rating Decision based on quantitative and qualitative

inputs Center of Gravity Method

Decision based on minimum distribution costs Transportation Model

Decision based on movement costs of raw materials or finished goods

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Popular because a wide variety of factors Popular because a wide variety of factors can be included in the analysiscan be included in the analysis

Six steps in the methodSix steps in the method1.1. Develop a list of relevant factors called Develop a list of relevant factors called

critical success factorscritical success factors

2.2. Assign a weight to each factorAssign a weight to each factor

3.3. Develop a scale for each factorDevelop a scale for each factor

4.4. Score each location for each factorScore each location for each factor

5.5. Multiply score by weights for each factor for Multiply score by weights for each factor for each locationeach location

6.6. Recommend the location with the highest Recommend the location with the highest point scorepoint score

Factor-Rating MethodFactor-Rating Method

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CriticalCritical ScoresScoresSuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor WeightWeight FranceFrance DenmarkDenmark FranceFrance DenmarkDenmark

Labor Labor availability availability and attitude and attitude .25.25 7070 6060 (.25)(70) = 17.5(.25)(70) = 17.5 (.25)(60) = 15.0(.25)(60) = 15.0People-toPeople-to car ratiocar ratio .05.05 5050 6060 (.05)(50) = 2.5(.05)(50) = 2.5 (.05)(60) = 3.0(.05)(60) = 3.0Per capitaPer capita incomeincome .10.10 8585 8080 (.10)(85) = 8.5(.10)(85) = 8.5 (.10)(80) = 8.0(.10)(80) = 8.0Tax structureTax structure .39.39 7575 7070 (.39)(75) = 29.3(.39)(75) = 29.3 (.39)(70) = 27.3(.39)(70) = 27.3EducationEducation and healthand health .21.21 6060 7070 (.21)(60) = 12.6(.21)(60) = 12.6 (.21)(70) = 14.7(.21)(70) = 14.7

TotalsTotals 1.001.00 70.470.4 68.068.0

Factor-Rating ExampleFactor-Rating Example

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Determine the center of gravity for the destinations shown on the following map. Monthly shipments will be the quantities listed in the table.

DC # Coordinate Weekly

Shipment Qty

DC1 (2,2) 800

DC2 (3,5) 900

DC3 (5,4) 200

DC4 (8,5) 100

DC1

DC2

DC3

DC4

Center of Gravity: An ExampleCenter of Gravity: An Example

ii

iii

Q

Qxx

ii

iii

Q

Qyy

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Transportation ProblemTransportation ProblemChapter 8SChapter 8S

Objective: determination of a transportation plan of a single commodity from a number of sources to a number of destinations, such that total cost of transportation is minimized

Sources may be plants, destinations may be warehouses Question:

how many units to transport from source i to destination j such that supply and demand constraints are met, and total transportation cost is minimized

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A Transportation TableA Transportation Table

Warehouse

4 7 7 1100

12 3 8 8200

8 10 16 5150

450

45080 90 120 160

1 2 3 4

1

2

3

Factory Factory 1can supply 100units per period

Demand

Table 8S.1

Warehouse B’s demand is 90 units per period Total demand

per period

Total supplycapacity perperiod

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Solution in Management ScientistSolution in Management Scientist

Total transportation cost = 4(80) + 7(0) + 7(10)+ 1(10) + 12(0) + 3(90) + 8(110) + 8(0) + 8(0) +10(0) + 16(0) +5 (150) = $2300

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Transportation Model – Tool for Site Transportation Model – Tool for Site Location: An ExampleLocation: An Example

A large tire manufacturer is contemplating construction of a new manufacturing facility. Two leading candidate location: Cincinnati and Columbus, OH The new facility would have a supply capacity of 160 units a week Transportation costs

Between each candidate location and existing locations (A, B, C), and between pairs of existing locations

Choose the best candidate location.

From Columbus

to

Cost

per

unit

From Cincinnati

to

Cost per unit

A $18 A $7

B 8 B 17

C 13 C 13

A B C Supply per week

1 10 14 10 210

2 12 17 20 140

3 11 11 12 150

Demand per week

220 220 220

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Set up transportation table for Columbus Set up transportation table for Columbus

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Set up transportation table for CincinnatiSet up transportation table for Cincinnati

Choose Columbus

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Project ManagementChapter 17

Lecture4

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Project ManagementProject Management How is it different?

Limited time frame Narrow focus, specific objectives

Why is it used? Special needs Pressures for new or improves products or services

Definition of a project Unique, one-time sequence of activities designed

to accomplish a specific set of objectives in a limited time frame

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Project ManagementProject Management What are the Key Metrics

Time Cost Performance objectives

What are the Key Success Factors? Top-down commitment Having a capable project manager Having time to plan Careful tracking and control Good communications

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Project ManagementProject Management

What are the tools? Work breakdown structure Network diagram Gantt charts

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Project ManagerProject Manager

Responsible for:

Work QualityHuman Resources TimeCommunications Costs

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Deciding which projects to implement

Selecting a project manager

Selecting a project team

Planning and designing the project

Managing and controlling project resources

Deciding if and when a project should be terminated

Key DecisionsKey Decisions

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Temptation to understate costs

Withhold information

Misleading status reports

Falsifying records

Compromising workers’ safety

Approving substandard work

http://www.pmi.org/

Ethical IssuesEthical Issues

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PERT and CPMPERT and CPM

PERT: Program Evaluation and Review TechniqueCPM: Critical Path Method

Graphically displays project activities Estimates how long the project will take Indicates most critical activities Show where delays will not affect project PERT and CPM have been used to plan, schedule, and control

a wide variety of projects: R&D of new products and processes Construction of buildings and highways Maintenance of large and complex equipment Design and installation of new systems

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PERT/CPMPERT/CPM

PERT/CPM used to plan the scheduling of individual

activities that make up a project. Projects may have as many as several

thousand activities. Complicating factor in carrying out the

activities some activities depend on the completion of

other activities before they can be started.

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PERT/CPMPERT/CPM Project managers rely on PERT/CPM to help them

answer questions such as: What is the total time to complete the project? What are the scheduled start and finish dates for each

specific activity? Which activities are critical?

must be completed exactly as scheduled to keep the project on schedule?

How long can non-critical activities be delayed before they cause an increase in the project completion

time?

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Planning and SchedulingPlanning and Scheduling

Locate new facilities

Interview staff

Hire and train staff

Select and order furniture

Remodel and install phones

Furniture setup

Move in/startup

Activity 0 2 4 6 8 10 12 14 16 18 20

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Project NetworkProject Network

Project network constructed to model the precedence of the

activities. Nodes represent activities Arcs represent precedence relationships of the

activities Critical path for the network

a path consisting of activities with zero slack

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Project Network – An ExampleProject Network – An Example

A

B

C

E

F

Locatefacilities

Orderfurniture

Furnituresetup

Interview

RemodelMove in

D

Hire andtrain

GS

8 weeks

6 weeks

3 weeks

4 weeks9 weeks

11 weeks

1 week

38

Management Scientist SolutionManagement Scientist Solution

Path Length (weeks)

Slack

A-B-F-G A-E-G C-D-G

18 20 14

2 0 6

Critical PathCritical Path

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Three-time estimate approach the time to complete an activity assumed to

follow a Beta distribution An activity’s mean completion time is:

t = (a + 4m + b)/6 a = the optimistic completion time estimate b = the pessimistic completion time estimate m = the most likely completion time estimate

An activity’s An activity’s completion time variancecompletion time variance is is 22 = (( = ((bb--aa)/6))/6)22

Uncertain Activity TimesUncertain Activity Times

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Uncertain Activity TimesUncertain Activity Times

In the three-time estimate approach, the critical path is determined as if the mean times for the activities were fixed times.

The overall project completion time is assumed to have a normal distribution with mean equal to the sum of the means along the

critical path, and variance equal to the sum of the variances along the

critical path.

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ActivityImmediate

PredecessorOptimisticTime (a)

Most LikelyTime (m)

PessimisticTime (b)

A -- 4 6 8

B -- 1 4.5 5

C A 3 3 3

D A 4 5 6

E A 0.5 1 1.5

F B,C 3 4 5

G B,C 1 1.5 5

H E,F 5 6 7

I E,F 2 5 8

J D,H 2.5 2.75 4.5

K G,I 3 5 7

ExampleExample

42

Management Scientist SolutionManagement Scientist Solution

43

Network activities ES: early start EF: early finish LS: late start LF: late finish

Used to determine Expected project duration Slack time Critical path

Key TerminologyKey Terminology

44

The Network Diagram (cont’d)The Network Diagram (cont’d) Path

Sequence of activities that leads from the starting node to the finishing node

AON path: S-1-2-6-7 Critical path

The longest path; determines expected project duration Critical activities

Activities on the critical path Slack

Allowable slippage for path; the difference the length of path and the length of critical path

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Advantages of PERTAdvantages of PERT

Forces managers to organize

Provides graphic display of activities

Identifies

Critical activities

Slack activities1

2

3

4

5 6

46

Limitations of PERTLimitations of PERT

Important activities may be omitted

Precedence relationships may not be correct

Estimates may include a fudge factor

May focus solely on critical path