Operations Management

Location Strategies

Objective of Location Strategy

Maximize the benefit of location to the firm

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

Industrial Location Decisions Contd..

Tangible costs such as transportation of raw materials and finished goods, labor, raw materials etc.

Intangible costs such as education expenditures, quality of life etc..

Service Location Decisions

Revenue focus Costs vary little between

market areas

Location is a major revenue factor Affects amount of customer

contact

Affects volume of business

Purchasing power Parking, security,

lighting etc.. Rent

In General - Location Decisions

Long-term decisions

Difficult to reverse

Affect fixed & variable costs Transportation cost

As much as 25% of product price

Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location

to firm

Factors That Affect Location Decisions

Country level: Political risks, govt. rules, attitudes Cultural and economic issues Location of markets Labor talent, productivity Exchange rates and currency risks

Region level: Corporate desires (Reliance refineries in Guj. ) Attractiveness of the region (culture, taxes,

climate etc.) Labor availability Proximity to raw materials and customers Land and construction costs

Factors That Affect Location Decisions Contd:

Site Level Site, Size and Cost Air, rail, highway systems Proximity of services needed Environmental impact issues Proximity to competitors

Location Evaluation Methods

Factor-rating

method

Locational break-

even analysis

Center of gravity

method

© 1995 Corel Corp.

Factor-Rating Method

Most widely used location technique

Useful for service & industrial

locations

Rates locations using factors

Steps in Factor Rating Method

List relevant factors Assign importance weight to each

factor (such as 0 – 1) Develop scale for each factor (such as

1 – 100) Score each location using factor scale Multiply scores by weights for each

factor & total for each location Select location with maximum total

score

Factor rating method contd..

Factors Weight

Scores (100)

Wgtd Scores

A B A B

Labor availability

0.25 70 60 17.5 15.0

Attitude 0.05 50 60 2.5 3.0

Per capita income

0.10 85 80 8.5 8.0

Tax 0.39 75 70 29.3 27.3

Education 0.21 60 70 12.6 14.7

Totals 1.00 70.4 68.0

Method of cost-volume analysis used for industrial locations

Steps Determine fixed & variable costs for

each location Plot total cost for each location (Cost

on vertical axis, Annual Volume on horizontal axis)

Select location with lowest total cost for expected production volume

Must be above break-even

Locational Break-Even Analysis

Locational Break-Even Analysis Example

You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Birgunj, Pokhara or Biratnagar. Fixed costs per year are 30k, 60k, & 110k 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.

Locational Break-Even Crossover Chart

0

50000

100000

150000

200000

0 500 1000 1500 2000 2500 3000

Volume

Ann

ual C

ost

Birgunj

Biratnagar

Pokhara

Pokhara lowest cost

Biratnagar lowest

cost

Birgunj Lowest

cost

Center of Gravity Method

Finds location of single distribution center serving several destinations

Considers Location of existing destinations Volume to be shipped Shipping distance (or cost)

Center of Gravity Method Steps

Place existing locations on a coordinate grid Grid has origin & scale Maintains relative distances

Calculate X & Y coordinates for ‘center of gravity’

Center of Gravity Method Equations

dix = x coordinate of location i

Wi = Volume of goods moved to or from location i

diy = y coordinate of location i

X Coordinate

Y Coordinate

ii

iiix

x W

WdC

ii

iiiy

y W

WdC

CG Method

Locations Number of containers shipped per month

A (30,120) 2000B (90,120) 1000C (130,130) 1000D (60,40) 2000

CG Method Contd..

X-Coordinate of the CG:(30)(2000)+(90)(1000)+(130)(1000)+(60)(2000)

2000+1000+1000+2000=66.7Y-Coordinate of the CG:

(120)(2000)+(110)(1000)+(130)(1000)+(40)(2000)

2000+1000+1000+2000=93.3

Service Location strategies

Purchasing power of the customers in the area.

Service and image compatibility with the demographics

Competition in the areaQuality of the competitionUniqueness of the firm’s and

competitor’s locations

Contd..

BankHospitalHotelsTelemarketing industrySchool