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Mgt 521 lecture five

Mgt 521 lecture five

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Lecture five
Location planning and analysis
What is location decision
• A decision that involves selecting or choosing
places when a firm should locate based on
organizational strategy. Location decision is a
strategic issue. Hence, it should be dealt with
careful consideration.
Strategic importance of location
decision
As location decision is a strategic issue it is very significant for
organizational strategy achievement. Strategic importance of
location decision are as follows:
1. Location decision is highly related with organization’s
strategy. For example: a strategy of being low cost
producer may try to locate in such places where they can
get raw material or labor supply in a low cost.
2. Location decisions can not be changed easily if once
made. Hence, it has a long term commitment. If once a
new stall is located in a place, the organization cannot
change within short time. It requires huge financial loss
for the organization.
3. 3. A poor selection of location may results in high
transportation cost, labor cost, raw material cost. It may
also increase operating cost for the business.
Available location options for an
organization
There are four location options for an organization. They are:
• Expansion of existing facility: one option for an organization is
expansion of an existing facility. This option can be selected if there
is available space for expansion and it is an attractive idea from cost
considerations.
• Adding a new location: in this option a firm can open new store
along with existing stores. Although it is costly, it may increase
customer base.
• Shut down one location and move to another: in this option firm
may decide to shut down an existing location and open a location in
another suitable place. It occurs when existing location has some
problems I terms of getting inputs or other issues.
• Do nothing: if a detailed analysis of potential locations fails to
identify any benefit for the existing system, firm may decide to do
nothing. This decision is made for a short time period.
The process of making location
decisions
The process used for location decision varies from
organization to organization. Different organizations may
use different processes. Here standardized steps for
location decisions are described:
• Selecting criteria for location decision: before starting
a location decision, managers should determine the
criteria that will be used to evaluate the location
alternatives. It is a managerial issue.
• Identify important factors: from the criteria selected in
above step, managers prioritize important factors to be
used for evaluation.
Continue
• Developing location alternatives: now a set f
alternatives are developed for location. The
alternatives may be based on a region, a number
of communities or site within a community.
• Evaluate the alternatives and make a decision:
now alternatives are evaluated based on selected
and prioritized criteria. And an appropriate
alternative is selected and implemented.

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Mgt 521 lecture five

  • 2. What is location decision • A decision that involves selecting or choosing places when a firm should locate based on organizational strategy. Location decision is a strategic issue. Hence, it should be dealt with careful consideration.
  • 3. Strategic importance of location decision As location decision is a strategic issue it is very significant for organizational strategy achievement. Strategic importance of location decision are as follows: 1. Location decision is highly related with organization’s strategy. For example: a strategy of being low cost producer may try to locate in such places where they can get raw material or labor supply in a low cost. 2. Location decisions can not be changed easily if once made. Hence, it has a long term commitment. If once a new stall is located in a place, the organization cannot change within short time. It requires huge financial loss for the organization. 3. 3. A poor selection of location may results in high transportation cost, labor cost, raw material cost. It may also increase operating cost for the business.
  • 4. Available location options for an organization There are four location options for an organization. They are: • Expansion of existing facility: one option for an organization is expansion of an existing facility. This option can be selected if there is available space for expansion and it is an attractive idea from cost considerations. • Adding a new location: in this option a firm can open new store along with existing stores. Although it is costly, it may increase customer base. • Shut down one location and move to another: in this option firm may decide to shut down an existing location and open a location in another suitable place. It occurs when existing location has some problems I terms of getting inputs or other issues. • Do nothing: if a detailed analysis of potential locations fails to identify any benefit for the existing system, firm may decide to do nothing. This decision is made for a short time period.
  • 5. The process of making location decisions The process used for location decision varies from organization to organization. Different organizations may use different processes. Here standardized steps for location decisions are described: • Selecting criteria for location decision: before starting a location decision, managers should determine the criteria that will be used to evaluate the location alternatives. It is a managerial issue. • Identify important factors: from the criteria selected in above step, managers prioritize important factors to be used for evaluation.
  • 6. Continue • Developing location alternatives: now a set f alternatives are developed for location. The alternatives may be based on a region, a number of communities or site within a community. • Evaluate the alternatives and make a decision: now alternatives are evaluated based on selected and prioritized criteria. And an appropriate alternative is selected and implemented.
  • 7. Factors that affect location decision • Location decision is made based on several factors that may affect company’s strategic choices. These factors are classified into regional, community, site-related factors. Regional factors: Location of raw materials: firms locate near raw materials to reduce cost of operation. Locating near raw material sources reduces the cost of transportation of materials. Besides, perishable products can not be moved long distance. Hence, firms locate near raw materials. Location of markets: retail sales and service organizations should locate near market areas they want to serve to reduce cost and to capture customers. For example: restaurants, bank, dry cleaners.
  • 8. Continue • Climate and tax: firms also consider location decisions due to get tax incentives. Some firms may not grow in cold weather. Hence, they need to establish in areas that provide desired climate. Community related factors • Desirability of communities, availability of education, medical services and transportation services for workers need to be considered in location decision.
  • 9. Continue Site related decision • Land: land is an important factors for location decision. Scope for drainage, electricity, future expansion affect land cost and demand. Manufacturing firms should consider this factor carefully. • Environmental and legal restriction: is there is a restriction from environmental or legal perspective to locate in an area firms should consider that issue before making location decisions.
  • 10. Different plant manufacturing strategies • When companies have multiple manufacturing facilities, they can organize in various ways. These ways are given below: • Product plan strategy: with this strategy, a product is produced in a separate plants. hence, each plant produce different products and serve the local markets for that product. For example: plant A produces computer chip, plant B produces hard disc.
  • 11. Continue • Market area plant strategy: with this strategy plants are designed to serve a particular geographic area of a market. Individual plant produce most of the products for that geographic area. This strategy saves shipping cost but increases operating cost. • Process plant strategy: with this strategy different plants focuses on different parts of the process of a process. Usually automobile companies use this strategy. This strategy is suitable for products that have multiple components. For example: plant A produces door for a car, Plant B produces engine and so on.
  • 12. Evaluating location alternatives There are several methods to evaluate location alternatives. They are: • Locational cost-profit-volume analysis • Transportation model • Factor rating and • Center of gravity method
  • 13. Locational cost-profit-volume analysis Steps for evaluating suitable location alternatives are as follows: 1. Determine the fixed and variable cost for al locations 2. Determine total cost for all locations 3. Select the location that have lowest total cost at an expected level of output or volume.
  • 14. Math problem • Question 1: if expected output is 8000 units per year which location will provide lowest cost or which location will be suitable? Show in graph.
  • 15. Center of gravity math problem Destination X,Y QUANTITY SHIPPED D1 2,2 800 D2 3,5 900 D3 5,4 200 D4 8,5 100 • Question: determine the center of gravity destination using graph.