Chapter 10 - Facility Location
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Transcript of Chapter 10 - Facility Location
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Facility Location
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Outline
► The Strategic Importance of Location
► Factors That Affect Location Decisions
► Methods of Evaluating Location Alternatives
► Service Location Strategy
► Geographic Information Systems
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Learning ObjectivesWhen you complete this chapter you should be able to:
1. Identify and explain seven major factors that effect location decisions
2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-even analysis graphically and mathematically
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The Strategic Importance of
Location
► One of the most important decisions a firm makes
► Increasingly global in nature
► Significant impact on fixed and variable costs
► Decisions made relatively infrequently
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The Strategic Importance of
Location
► Long-term decisions
► Once committed to a location, many resource and cost issues are difficult to change
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The Strategic Importance of
Location
The objective of location strategy is to maximize the benefit of location
to the firm
Options include
1. Expanding existing facilities
2. Maintain existing and add sites
3. Closing existing and relocating
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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
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Factors That Affect Location
Decisions
▶ Globalization adds to complexity
▶Market economics
▶Communication
▶Rapid, reliable transportation
▶ Ease of capital flow
▶Differing labor costs
▶ Identify key success factors (KSFs)
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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 risksFigure 9.1
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Location DecisionsRegion/
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 costsFigure 9.1
MN
WI
MI
IL INOH
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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
Figure 9.1
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Global
Competitiveness
Index of
Countries
TABLE 9.1
Competitiveness of 142 Selected
Countries
COUNTRY
2011-2012
RANKING
Switzerland 1
Singapore 2
Sweden 3
Finland 4
USA 5
Japan 9
UK 10
Canada 12
Israel 22
China 26
Mexico 58
Vietnam 65
Russia 66
Haiti 141
Chad 142
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Factors That Affect
Location Decisions
► Labor productivity
► Wage rates are not the only cost
► Lower productivity may increase total cost
Labor cost per day
Productivity (units per day)= Cost per unit
South Carolina
= $1.17 per unit$70
60 units
Mexico
= $1.25 per unit$25
20 units
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Factors That Affect
Location Decisions
► 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
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Factors That Affect
Location Decisions
► 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
Location decisions based on costs
alone can create difficult ethical
situations
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Factors That Affect
Location Decisions
► 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
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Ranking CorruptionRank Country 2012 CPI Score (out of 100)
1 Demark, Finland, New Zealand 90
4 Sweden 88
5 Singapore 87
6 Switzerland 86
7 Australia, Norway 85
9 Canada, Netherlands 84
13 Germany 79
14 Hong Kong 77
17 Japan, UK 74
19 USA 73
37 Taiwan 61
39 Israel 60
45 South Korea 56
80 China 39
123 Vietnam 31
133 Russia 28
Least Corrupt
Most Corrupt
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Factors That Affect
Location Decisions
► 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
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Factors That Affect
Location Decisions
► Proximity to competitors (clustering)
► Often driven by resources such as natural, information, capital, talent
► Found in both manufacturing and service industries
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Clustering of Companies
TABLE 9.3 Clustering of Companies
INDUSTRY LOCATIONS
REASON FOR
CLUSTERING
Wine making 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
Clean energy Colorado Critical mass of talent and
information, with 1,000
companies
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Clustering of Companies
TABLE 9.3 Clustering of Companies
INDUSTRY LOCATIONS
REASON FOR
CLUSTERING
Theme parks
(Disney World,
Universal Studios,
and Sea World)
Orlando, Florida A hot spot for
entertainment, warm
weather, tourists, and
inexpensive labor
Electronics firms Northern Mexico NAFTA, duty free export to
U.S.
Computer hardware
manufacturers
Singapore, Taiwan High technological
penetration rate and per
capita GDP,
skilled/educated workforce
with large pool of engineers
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Clustering of Companies
TABLE 9.3 Clustering of Companies
INDUSTRY LOCATIONS
REASON FOR
CLUSTERING
Fast food chains
(Wendy’s,
McDonald’s, Burger
King, and Pizza
Hut)
Sites within 1 mile of
each other
Stimulate food sales, high
traffic flows
General aviation
aircraft (Cessna,
Learjet, Boeing,
Raytheon)
Wichita, Kansas Mass of aviation skills
Athletic footwear,
outdoor wear
Portland, Oregon 300 companies, many
owned by Nike, deep talent
pool and outdoor culture
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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. Make a recommendation based on the highest point score
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Factor-Rating ExampleTABLE 9.4 Weights, Scores, and Solution
SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK
Labor availability
and attitude.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education and
health.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0
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Weight Location A Location B Location C
Wages 40 30 75 90
Labor Climate 30 40 70 40
Taxes 15 80 40 90
Utilities 15 75 60 10
A small manufacturer is considering several locations for a new
facility. They have identified four factors that they consider to
be important for their location decision. They have decided to
assign scores to the four factors, with a higher score indicating
a more favorable location. Use the information in the following
table to perform a factor rating to select the best location.
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Factor Factor Description Weight Barclay Chester
1 Average community income .40 75 70
2 Community growth potential .25 60 80
3 Availability of public transportation .15 45 90
4 Labor cost .20 80 65
A clothing chain is considering two different locations for a new retail outlet.
The organization has identified the four factors listed in the following table
as the basis for evaluation, and has assigned weights as shown on the
right side of this table. The manager has rated each location on each factor,
on a 100-point basis (higher scores are better), as shown in the right-hand
table.
a) Calculate the composite score for each alternative location.
b) Which site should be chosen?
c) Are you concerned about the sensitivity and subjectivity of this solution?
Comment.
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Locational
Cost-Volume Analysis
► An economic comparison of location alternatives
► 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
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Locational Cost-Volume Analysis Example
Three locations:
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000
Fixed Variable TotalCity Cost Cost Cost
Total Cost = Fixed Cost + (Variable Cost x Volume)
Selling price = $120
Expected volume = 2,000 units
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Locational Cost-Volume Analysis Example
Crossover point – Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000
60,000 + 45(x) = 110,000 + 25(x)
20(x) = 50,000
(x) = 2,500
Crossover point – Brussels/Lisbon
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Locational Cost-Volume Analysis Example
–$180,000 –
–$160,000 –$150,000 –
–$130,000 –
–$110,000 –
––
$80,000 ––
$60,000 –––
$30,000 ––
$10,000 ––
An
nu
al co
st
| | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
Athens lowest cost
Brusselslowest cost
Lisbon lowest cost
Figure 9.2
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Location A would result in annual fixed costs of
$300,000 and variable costs of $55 per unit.
Annual fixed costs at Location B are $600,000
with variable costs of $32 per unit. Sales volume
is estimated to be 30,000 units per year. Which
location has the lower cost at this volume? How
large is its cost advantage? At what volume are
the two facilities equal in cost?
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Center-of-Gravity Method
► Finds location of distribution center that minimizes distribution costs
► Considers
► Location of markets
► Volume of goods shipped to those markets
► Shipping cost (or distance)
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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
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Center-of-Gravity Method
where dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved to or from location i
=
dixQi
i
å
Qi
i
åx-coordinate of the
center of gravity
=
diyQi
i
å
Qi
i
åy-coordinate of the
center of gravity
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Center-of-Gravity Method
TABLE 9.5 Demand for Quain’s Discount Department Stores
STORE LOCATION
NUMBER OF CONTAINERS
SHIPPED PER MONTH
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000
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Center-of-Gravity Method
North-South
East-West
120 –
90 –
60 –
30 –
–| | | | | |
30 60 90 120 150Arbitrary origin
Chicago (30, 120)New York (130, 130)
Pittsburgh (90, 110)
Atlanta (60, 40)
Figure 9.3
d1x = 30
d1y = 120
Q1 = 2,000
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Center-of-Gravity Method
x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 2000
= 66.7
y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 2000
= 93.3
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Center-of-Gravity Method
North-South
East-West
120 –
90 –
60 –
30 –
–| | | | | |
30 60 90 120 150Arbitrary origin
Chicago (30, 120)New York (130, 130)
Pittsburgh (90, 110)
Atlanta (60, 40)
Center of gravity (66.7, 93.3)+
Figure 9.3
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Collection point Load (X,Y) Coordinates
A 9,000 (4,8)
B 4,000 (7,2)
C 2,000 (4,1)
D 5,000 (7,3)
Environmental Glass Products, Inc. wants to build a new
centralized facility to receive household, commercial, and
industrial glass for recycling. This center will be supplied by
trucks coming from four "collection points," where recyclable
glass is dropped off by individuals and businesses. The volume
and the map coordinates for the four collection centers are
shown below. Where should the collection center be located?
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Bases (X,Y) Coordinates Tonnage
Fort Able (40,110) 30,000
Base Baker (70,50) 60,000
Camp Charlie (90,20) 35,000
Camp Delta (70,80) 75,000
A contractor for the military is looking for a new location
for a supply depot. The depot will supply four bases whose
tonnage (demand) and map coordinates are shown below.
If management wants the depot to have a central location,
what should be its map coordinates?
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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
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Worldwide Distribution of
Volkswagens and PartsFigure 8.4
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Service Location Strategy
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management
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Location StrategiesTABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
REVENUE FOCUS COST FOCUS
Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/lighting;
appearance/ image
Cost determinants
Rent
Management caliber
Operation policies (hours, wage
rates)
Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor; raw
material; taxes, and so on
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local
government
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Location StrategiesTABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
TECHNIQUES 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 cost–volume analysis
Crossover charts
ASSUMPTIONS ASSUMPTIONS
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
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How Hotel Chains Select Sites
► Location is a strategically important decision in the hospitality industry
► La Quinta started with 35 independent variables and worked to refine a regression model to predict profitability
► The final model had only four variables
► Price of the inn
► Median income levels
► State population per inn
► Location of nearby colleges
r2 = .51
51% of the profitability is predicted by
just thesefour variables!
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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
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Geographic Information
Systems (GIS)