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Location Planning and Analysis

CT - Chapter 8

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Need for Location DecisionsNeed for Location Decisions

Marketing Strategy

Cost of Doing Business

Growth

Depletion of Resources

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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

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Making Location DecisionsMaking Location Decisions

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

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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

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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

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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.

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Evaluating LocationsEvaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs

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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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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 ProblemCT – Chapter 8SCT – Chapter 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