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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