OPM Topic 4 Location
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Transcript of OPM Topic 4 Location
Operations & Production Management 1/31/2015
Resource Person : Dr. Muhammad Wasif 1
Operations & Production Management
(OPM)Dr. Muhammad Wasif
Visiting Faculty, IBA.
4 – Location Strategies
2
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Operations & Production Management 1/31/2015
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Introduction to Location StrategiesSection 4.1
3
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Location Strategy
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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
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Location Strategy
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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
Location and Costs
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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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Location and Innovation
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Cost is not always the most important aspect of a
strategic decision
Four key attributes when strategy is based on
innovation
High-quality and specialized inputs
An environment that encourages investment and local
rivalry
A sophisticated local market
Local presence of related and supporting industries
Location Decisions : Country Decision
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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
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Location Decisions : Region/ Community Decision
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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
Location Decisions : Site Decision
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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
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Competitiveness of LocationSection 4.2
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Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Ref: World economic forum
The
12
pillar
s of
co
mpe
titi
vene
ss
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Resource Person : Dr. Muhammad Wasif 7
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Ref: World economic forum
The
Glo
bal Com
peti
tive
ness
In
dex
fram
ewor
k
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Ref: World economic forum
The
Glo
bal Com
peti
tive
ness
In
dex
fram
ewor
k
Operations & Production Management 1/31/2015
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Resource Person : Dr. Muhammad Wasif Operations & Production Management10Ref: World economic forum
The Global Competitiveness
Resource Person : Dr. Muhammad Wasif Operations & Production Management10Ref: World economic forum
Operations & Production Management 1/31/2015
Resource Person : Dr. Muhammad Wasif 9
Resource Person : Dr. Muhammad Wasif Operations & Production Management10Ref: World economic forum
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Ref: World economic forum
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Resource Person : Dr. Muhammad Wasif 10
Factors Affecting Location StrategiesSection 4.3
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Factors That Affect Location Decisions
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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.
Connecticut
= $1.17 per unit$70
60 units
Juarez
= $1.25 per unit$25
20 units
Quality coils producing coils in Connecticut, USA and at Juarez, Mexico
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Factors That Affect Location Decisions
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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
Factors That Affect Location Decisions
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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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Factors That Affect Location Decisions
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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
Clustering of Companies
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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
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Clustering of Companies in Pakistan
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Industry Locations Reason for clustering
Automobile Industry Toyota-Indus, Pak-Suzuki, 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.
Mathematical Models for Location Strategies
Section 4.4
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Factor-Rating Method
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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
Factor-Rating Method
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Locational Break-Even Analysis
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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)
Locational Break-Even Analysis
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Three locationsSelling price = $120Expected volume = 2,000 units
Total Cost = Fixed Cost + (Variable Cost x Volume)
TC1 for Akron = 30,000 + 75xTC2 for Bow. G. = 60,000 + 45xTC3 for Chicago = 110,000 + 25x
TC1=TC2 solving for x, we getx=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 getx=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
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Center-of-Gravity Method
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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
Center-of-Gravity Method
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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)
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Center-of-Gravity Method
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Number of ContainersStore Location Shipped per Month
Chicago (30, 120) 2,000Pittsburgh (90, 110) 1,000New York (130, 130) 1,000Atlanta (60, 40) 2,000
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
Center-of-Gravity Method
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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)+
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Transportation Model
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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
Service Location Strategy
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Purchasing power of customer-drawing area
Service and image compatibility with demographics of the customer-drawing area
Competition in the area
Quality of the competition
Uniqueness of the firm’s and competitors’ locations
Physical qualities of facilities and neighboring businesses
Operating policies of the firm
Quality of management
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Location Strategy
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus
Volume/revenueDrawing area; purchasing powerCompetition; advertising/pricing
Physical qualityParking/access; security/lighting;
appearance/image
Cost determinantsRentManagement caliberOperations policies (hours, wage
rates)
Tangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; raw
material; taxes, and so on
Intangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and local
government
Location Strategy
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques
Regression models to determine importance of various factors
Factor-rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systems
Transportation methodFactor-rating methodLocational break-even analysisCrossover 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
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Geographic Information Systems (GIS)
Resource Person : Dr. Muhammad Wasif Operations & Production Management10
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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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.