OPM Topic 4 Location

Operations&ProductionManagement
1/31/2015
Operations &
Production Management
(OPM)
Dr. Muhammad Wasif
Visiting Faculty, IBA.
4 Location Strategies
Resource Person : Dr. Muhammad Wasif
Operations & Production Management
ResourcePerson:Dr.MuhammadWasif
1/31/2015
Section 4.1
Introduction to Location Strategies
33
Location Strategy
The objective of location strategy is to maximize
the benefit of location to the firm.
Example : FedEx central hub concept;
Enables service to more locations with fewer aircraft
Enables matching of aircraft flights with package

loads
Reduces mishandling and delay in transit because

there is total control of packages from pickup to
delivery
10
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Location Strategy
One of the most important decisions a firm

makes
Increasingly global in nature
Significant impact on fixed and variable costs
Decisions made relatively infrequently
The objective is to maximize the benefit of

location to the firm
10
Location and Costs

Location
decisions based on low
cost require careful consideration

Once
in place, location-related
costs are fixed in place and

difficult to reduce
Determining
optimal facility
location is a good investment

10
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Location and Innovation
Cost is not always the most important aspect of a

strategic decision
Four key attributes when strategy is based on

innovation
High-quality
An
and specialized inputs
environment that encourages investment and local
rivalry
A
sophisticated local market
Local
presence of related and supporting industries
10
Location Decisions : Country Decision

Key success factors
1.
Political risks, government rules, attitudes,

incentives
2.
Cultural and economic issues
3.
Location of markets
4.
Labor talent, attitudes, productivity, costs
5.
Availability of supplies, communications, energy
6.
Exchange rates and currency risks
10
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Location Decisions : Region/ Community Decision

Key success factors
1.
Corporate desires
2.
Attractiveness of region
3.
Labor availability and costs
4.
Costs and availability of utilities
5.
Environmental regulations
6.
Government incentives and fiscal policies
7.
Proximity to raw materials and customers
8.
Land/construction costs
10
Location Decisions : Site Decision

Key success factors
1.
Site size and cost
2.
Air, rail, highway, and waterway

systems
3.
Zoning restrictions
4.
Proximity of services/ supplies

needed
5.
Environmental impact issues
10
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Section 4.2
Competitiveness of Location
11
33
The 12 pillars of
competitiveness
10
Ref: World economic forum
1/31/2015
The Global Competitiveness

Index framework
10

Index framework

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Section 4.3
Factors Affecting Location Strategies
19
33
Factors That Affect Location Decisions

Labor productivity
Wage rates are not the only cost
Lower productivity may increase total cost
Poor training, poor education or poor work habit may not be a

good buy even at low wages.
Poor transportation to work is another important factor.

Quality coils producing coils in Connecticut, USA and at Juarez, Mexico
Connecticut
Juarez
$70
= $1.17 per unit
60 units
$25
= $1.25 per unit
20 units
10
10
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Exchange rates and currency risks
Can have a significant impact on costs
Rates change over time
Costs
Tangible - easily measured costs such as utilities,

labor, materials, taxes
Intangible - less easy to quantify and include

education, public transportation, community,
quality-of-life
10

Political risk, values, and culture
National, state, local governments attitudes

toward private and intellectual property,
zoning, pollution, employment stability may
be in flux
Worker attitudes towards turnover, unions,

absenteeism
Globally cultures have different attitudes

towards punctuality, legal, and ethical issues
10
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Proximity to markets
Very important to services
JIT systems or high transportation costs may make it important to

manufacturers
Proximity to suppliers
Perishable goods, high transportation costs, bulky products
Proximity to competitors
Called clustering
Often driven by resources such as natural, information, capital, talent
Found in both manufacturing and service industries
10
Clustering of Companies
Industry
Locations
Reason for clustering
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
Computer hardware
manufacturers
Singapore, Taiwan
High technological penetration

rate and per capita GDP,
skilled/educated workforce
with large pool of engineers
10
12
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Clustering of Companies in Pakistan

Industry
Locations
Reason for clustering
Automobile Industry
Toyota-Indus, PakSuzuki, Gandhara-Nissan

and their vendors near
Bin Qasim Industrial Area
Accessibility to port, other

industrial hub, easy
transportation to other part of
country
Textile Industry
Textile, garment and

leather factories in
Faisalabad
Availability of utilities and

transports, skilled labors,
easy to outsource work in
nearby areas.
Surgical and sports

goods
Different surgical and

sports goods in Sialkot.
High talent in metal working

and sport good
manufacturing.
10
Section 4.4
Mathematical Models for

Location Strategies
26
33
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Factor-Rating Method
Popular because a wide variety of factors can be included in

the analysis
Six steps in the method

1.
Develop a list of relevant factors called key success factors
2.
Assign a weight to each factor
3.
Develop a scale for each factor
4.
Score each location for each factor
5.
Multiply score by weights for each factor for each location
6.
Recommend the location with the highest point score
10
Factor-Rating Method
10
14
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Locational Break-Even Analysis
Method of cost-volume analysis

used for industrial locations
Three steps in the method

1.
Determine fixed and variable

costs for each location
2.
Plot the cost for each location
3.
Select location with lowest total

cost for expected production
volume
Total Cost = Fixed Cost + (Variable Cost x Volume)
10
Locational Break-Even Analysis

Three locations
Selling price = $120
Expected volume = 2,000 units
Total Cost = Fixed Cost + (Variable Cost x Volume)

TC1 for Akron = 30,000 + 75x
TC2 for Bow. G. = 60,000 + 45x
TC3 for Chicago = 110,000 + 25x
TC1=TC2 solving for x, we get
x=1,000 units Fig shows that Akron is good if x<1000
since line is under the line of Bowling Green TC.
TC2=TC3 solving for x, we get
x=2,500 units Fig shows that Bowling Green is good if
x<2500 since line is under the line of Chicago TC.
Bowling green is good for 1,000<x<2,500
Answer: for Expected volume=2,000 Bowling Green
10
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Center-of-Gravity Method
Place existing locations on a

coordinate grid
Grid origin and scale is

arbitrary
Maintain relative distances
Calculate X and Y coordinates for

center of gravity
Assumes cost is directly

proportional to distance and
volume shipped
10
North-South
New York (130, 130)
Chicago (30, 120)
120
Pittsburgh (90, 110)

90
60
30
Atlanta (60, 40)

|
30
Arbitrary
origin
60
90
120
150
East-West
10
16
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Number of Containers
Store Location
Shipped per Month
Chicago (30, 120)
2,000
1,000
New York (130, 130)
1,000
Atlanta (60, 40)
2,000
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
10
North-South
New York (130, 130)
Chicago (30, 120)
120
90
Center of gravity (66.7, 93.3)
60
30
Atlanta (60, 40)

|
30
Arbitrary
origin
60
90
120
150
East-West
10
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Transportation Model
Finds amount to be shipped from several

points of supply to several points of
demand
Solution will minimize total production and

shipping costs
A special class of linear programming

problems
10
Service Location Strategy
Purchasing power of customer-drawing area
Service and image compatibility with demographics of the customerdrawing area
Competition in the area
Quality of the competition
Uniqueness of the firms and competitors locations
Physical qualities of facilities and neighboring businesses
Operating policies of the firm
Quality of management
10
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Location Strategy
Service/Retail/Professional Location
Goods-Producing Location
Revenue Focus
Cost Focus
Volume/revenue
Tangible costs
Drawing area; purchasing power

Competition; advertising/pricing
Transportation cost of raw material

Shipment cost of finished goods
Energy and utility cost; labor; raw
material; taxes, and so on
Physical quality
Parking/access; security/lighting;
appearance/image
Intangible and future costs
Cost determinants
Rent
Management caliber
Operations policies (hours, wage
rates)
Attitude toward union

Quality of life
Education expenditures by state
Quality of state and local
government
10
Location Strategy
Service/Retail/Professional Location
Techniques
Goods-Producing Location
Techniques
Regression models to determine

importance of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
Transportation method
Factor-rating method
Locational break-even analysis
Crossover charts
Location is a major determinant of

revenue
High customer-contact issues are
critical
Costs are relatively constant for a
given area; therefore, the revenue
function is critical
Location is a major determinant of

cost
Most major costs can be identified
explicitly for each site
Low customer contact allows focus
on the identifiable costs
Intangible costs can be evaluated
10
19
1/31/2015
Geographic Information Systems (GIS)
Important tool to help in location analysis
Enables more complex demographic analysis
Available data bases include
Detailed census data
Detailed maps
Utilities
Geographic features
Locations of major services
10
References
Operations Management, 10th Ed., by J. Heizer &

B. Render
Operations Management, William J. Stevenson.
Operations Management, 7th Ed., N. Slack, A.B.

Jones, R. Johnston.
Cases in Operations Management, S. Chambers, C.

Harland, A. Harison, N. Slack.
59
20

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Operations&ProductionManagement

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Introduction to Location Strategies

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Enables service to more locations with fewer aircraft

Enables matching of aircraft flights with package

Reduces mishandling and delay in transit because

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

One of the most important decisions a firm

Increasingly global in nature

Significant impact on fixed and variable costs

Decisions made relatively infrequently

The objective is to maximize the benefit of

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Location and Costs

decisions based on low

cost require careful consideration

costs are fixed in place and

location is a good investment

Operations & Production Management

Location and Innovation

Cost is not always the most important aspect of a

Four key attributes when strategy is based on

and specialized inputs

environment that encourages investment and local

sophisticated local market

presence of related and supporting industries

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Location Decisions : Country Decision

Political risks, government rules, attitudes,

Cultural and economic issues

Labor talent, attitudes, productivity, costs

Availability of supplies, communications, energy

Exchange rates and currency risks

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Location Decisions : Region/ Community Decision

Labor availability and costs

Costs and availability of utilities

Government incentives and fiscal policies

Proximity to raw materials and customers

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Location Decisions : Site Decision

Site size and cost

Air, rail, highway, and waterway

Proximity of services/ supplies

Environmental impact issues

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Operations & Production Management

Resource Person : Dr. Muhammad Wasif

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Ref: World economic forum

The Global Competitiveness

Operations & Production Management

Ref: World economic forum