CHAPTER EIGHT LOCATION PLANNING AND ANALYSIS Chapter 8 Location Planning and Analysis

CHAPTER EIGHTLOCATION PLANNING AND ANALYSIS

Chapter 8

Location Planning

and Analysis


MTSU Management 362 8-2

Need for Location Decisions

• Marketing Strategy

• Growth

• Depletion of Resources

• Cost of Doing Business



Nature of Location Decisions (1 of 2)

• Importance– Long term commitment– Impact on investment requirements, operating

costs and revenues

• Objectives– Profit potential– Acceptable alternatives



Nature of Location Decisions (2 of 2)

• Options– Expand existing facilities– Add new facilities– Shut down and move– Do nothing



General Procedures forMaking Location Decisions

• Decide on the criteria

• Identify important factors

• Develop location alternatives– identify general region– identify a small number of community alternatives– identify site alternatives

• Evaluate alternatives and make a selection



Location Decision Factors

Regional Factors

Site-related FactorsMultiple Plant Strategies

Community Considerations



Regional Factors• Location of raw materials• Location of markets• Labor factors• Other factors

– climate– taxes– utilities cost and availability– input cost and availability– culture



Community Considerations

• Facilities for education, shopping, recreation, transportation, religious worship, and entertainment

• Quality of police, fire , and medical services

• Local attitudes toward the company

• Size of the community

• Cost and availability of utilities, environmental regulations, taxes, and incentives



Site-Related Factors

• Land

• Transportation

• Zoning or other restrictions



Multiple Plant Manufacturing Strategies (1 of 2)

• Product plant strategy– entire product lines are produced in separate plants– decentralized approach– specialization of resources

• Market area strategy– plants designed to serve a particular geographic area– operating cost high; transportation cost low– rapid delivery and response to customer needs



Multiple Plant Manufacturing Strategies (2 of 2)

• Process plant strategy– plants concentrate on different aspects of a

process– coordination is a major issue– plants highly specialized; economies of scale



Service and Retail Locations

• Traffic volume and convenience important

• Location of other retailers or similar service providers

• Demographic analysis of drawing area

• Transportation and/or parking facilities

• Customer safety and security

• Competitors’ locations



• Foreign producers locating in U.S.– “Made in USA”

– currency fluctuations

• Just-in-time manufacturing techniques

• Microfactories– narrow product focus

– located near major markets

• Information highway

Trends in Locations



ForeignGovernment

a. Policies on foreign ownership of production facilitiesLocal ContentImport restrictionsCurrency restrictionsEnvironmental regulationsLocal product standards

b. Stability issuesCulturalDifferences

Living circumstances for foreign workers / dependentsReligious holidays/traditions

CustomerPreferences

Possible buy locally sentiment

Labor Level of training and education of workersWork practicesPossible regulations limiting number of foreign employeesLanguage differences

Resources Availability and quality of raw materials, energy,transportation

Table 8-2

Global Locations



Methods of Evaluating Location Alternatives

• Locational Cost-Profit-Volume Analysis

• The Transportation Model

• The Factor Rating Method

• The Center of Gravity Method



Locational Cost-Profit-Volume Analysis

• Uses cost-volume analysis to make economic comparison of location alternatives

• The three steps in locational break-even analysis1 Determine the fixed and variable costs for each

location2 Plot the costs for each location, with costs on the

vertical axis of the graph and annual volume on the horizontal axis

3 Select the location that has the lowest total cost for the expected production volume



Problem 3, page 384

Fixed and variable costs for two potential locations

Location FixedCost

VariableCost

AB

$800,000920,000

$14,00013,000



The Transportation Model

• Objective is to determine the best pattern of shipments to minimize production and transportation costs

• A special case of the linear programming problem

• Special-purpose algorithms have been developed to solve this type of problem



The Factor-Rating Method (1 of 2)

• Allows consideration of both quantitative and qualitative factors

• Different factors can be assigned different weights



Factor-Rating (2 of 2)

• The six steps in the factor-rating method1 Develop a list of relevant factors2 Assign a weight to each factor to reflect its relative

importance to the company’s objectives3 Develop a scale for each factor4 Have management score each location for each factor,

using the scale developed in the previous step5 Multiply the scores times the weights for each factor, and

total the score for each location6 Make a recommendation based on the maximum point

score, considering the results of quantitative approaches as well



The Center-of-Gravity Method (1 of 2)

• Mathematical technique to minimize distribution costs

• Takes into account– location of markets– the volume of goods shipped to those markets– shipping costs

• Assumes that shipping cost is directly proportional to both distance and volume shipped



Center-of-Gravity (2 of 2)

• Find the center of gravity along each axis using

and

i

i

i

ii

Q

Qxx =

i

i

i

ii

Q

Qyy =



Problem 12, page 386

0 1 2 3 4 5 6 7 8 9

0123456789

A

BC

D



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CHAPTER EIGHT LOCATION PLANNING AND ANALYSIS Chapter 8 Location Planning and Analysis