C4 location


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Operation Management - OPM 530

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C4 location

  1. 1. Operations Management Location Strategies Chapter 4 OPM 533 4-
  2. 2. Definition <ul><li>Facility or Plant location is a place where a factory, warehouse, office or any business enterprise is built </li></ul><ul><li>Selection of a location depends on the type of business. </li></ul><ul><li>The objective of selection of a location is to obtain the maximum efficiency and effectiveness by minimizing operating cost and achieve maximum revenues. </li></ul>
  3. 3. Industrial Location Decisions OPM 533 4- <ul><li>Cost focus </li></ul><ul><ul><li>Revenue varies little between locations </li></ul></ul><ul><li>Location is a major cost factor </li></ul><ul><ul><li>Affects shipping & production costs (e.g., labor) </li></ul></ul><ul><ul><li>Costs vary greatly between locations </li></ul></ul>© 1995 Corel Corp.
  4. 4. Service Location Decisions <ul><li>Revenue focus </li></ul><ul><ul><li>Costs vary little between market areas </li></ul></ul><ul><li>Location is a major revenue factor </li></ul><ul><ul><li>Affects amount of customer contact </li></ul></ul><ul><ul><li>Affects volume of business </li></ul></ul>OPM 533 4-
  5. 5. In General - Location Decisions <ul><li>Long-term decisions </li></ul><ul><li>Difficult to reverse </li></ul><ul><li>Affect fixed & variable costs </li></ul><ul><li>Objective: Maximize benefit of location to firm </li></ul>OPM 533 4-
  6. 6. Reasons for Plant/Facility Location Decisions <ul><li>Starting new business </li></ul><ul><li>Introduction of new product or service </li></ul><ul><li>Insufficient capacity </li></ul><ul><li>Changes in technology </li></ul><ul><li>Mergers </li></ul><ul><li>Changes in input resources </li></ul><ul><li>Shifts in geographical demand may occur </li></ul>
  7. 7. Location Decision Sequence OPM 533 4- Country © 1995 Corel Corp. Region/Community © 1995 Corel Corp. Site © 1995 Corel Corp.
  8. 8. Factors That Affect Location Decisions OPM 533 4-
  9. 9. Factors Affecting Country OPM 533 4- <ul><li>Government rules, attitudes, political risk, incentives </li></ul><ul><li>Culture & economy </li></ul><ul><li>Market location </li></ul><ul><li>Labor availability, attitudes, productivity, and cost </li></ul><ul><li>Availability of supplies, communications, energy </li></ul><ul><li>Exchange rates and currency risks </li></ul>© 1995 Corel Corp.
  10. 10. Region Location Decisions <ul><li>Corporate desires </li></ul><ul><li>Attractiveness of region (culture, taxes, climate, etc.) </li></ul><ul><li>Labor, availability, costs, attitudes towards unions </li></ul><ul><li>Costs and availability of utilities </li></ul><ul><li>Environmental regulations of state and town </li></ul><ul><li>Government incentives </li></ul><ul><li>Proximity to raw materials & customers </li></ul><ul><li>Land/construction costs </li></ul>OPM 533 4- © 1995 Corel Corp.
  11. 11. Factors Affecting Site <ul><li>Site size and cost </li></ul><ul><li>Air, rail, highway, and waterway systems </li></ul><ul><li>Zoning restrictions </li></ul><ul><li>Nearness of services/supplies needed </li></ul><ul><li>Environmental impact issues </li></ul>OPM 533 4- © 1995 Corel Corp.
  12. 12. Organizations That Need To Be Close to Markets <ul><li>Government agencies </li></ul><ul><ul><li>Police & fire departments </li></ul></ul><ul><ul><li>Post Office </li></ul></ul><ul><li>Retail Sales and Service </li></ul><ul><ul><li>Fast food restaurants, supermarkets, gas stations </li></ul></ul><ul><ul><li>Drug stores, shopping malls </li></ul></ul><ul><ul><li>Bakeries </li></ul></ul><ul><li>Services </li></ul><ul><ul><li>Doctors, lawyers, accountants, barbers </li></ul></ul><ul><ul><li>Banks, auto repair, motels </li></ul></ul>OPM 533 4-
  13. 13. Location Evaluation Methods OPM 533 4- <ul><li>Factor-rating method </li></ul><ul><li>Locational break-even analysis </li></ul><ul><li>Center of gravity method </li></ul><ul><li>Transportation model </li></ul>© 1995 Corel Corp.
  14. 14. Factor-Rating Method <ul><li>Most widely used location technique </li></ul><ul><li>Useful for service & industrial locations </li></ul><ul><li>Rates locations using factors </li></ul><ul><ul><li>Tangible (quantitative) factors </li></ul></ul><ul><ul><ul><li>Example: Short-run & long-run costs </li></ul></ul></ul><ul><ul><li>Intangible (qualitative) factors </li></ul></ul><ul><ul><ul><li>Example: Education quality, labor skills </li></ul></ul></ul>OPM 533 4-
  15. 15. Steps in Factor Rating Method <ul><li>List relevant factors called critical success factors. </li></ul><ul><li>Assign importance weight to each factor </li></ul><ul><li>Develop scale for each factor (such as 1 – 5) </li></ul><ul><li>Score each location using factor scale </li></ul><ul><li>Multiply scores by weights for each factor & total </li></ul><ul><li>Select location with maximum total score </li></ul>OPM 533 4-
  16. 16. CSF in Location Analysis OPM 533 4- Score (out of 5) Score (out of 5) Weighted score Weighted score CSF Weight A/Setar Sg.Petani A/Setar Sg.Petani Labor Availability 5 4 5 5x4=20 5x5=25 Transportation Service 2 4 3 2x4=8 2x3=6 Proximity to market 4 5 4 4x5=20 4x4=16 Proximity to suppliers 3 3 4 3x3=9 3x4=12 Quality of Life 1 5 4 1x5=5 1x4=4 Total Score 62 63 Rank 2 1 Best location <ul><li>Sg.Petani </li></ul>
  17. 17. <ul><li>Method of cost-volume analysis used for industrial locations </li></ul><ul><li>Steps </li></ul><ul><ul><li>Determine fixed & variable costs for each location </li></ul></ul><ul><ul><li>Plot total cost for each location (Cost on vertical axis, Annual Volume on horizontal axis) </li></ul></ul><ul><ul><li>Select location with lowest total cost for expected production volume. </li></ul></ul>Locational Break-Even Analysis OPM 533 4-
  18. 18. <ul><ul><ul><li>BEP = Fixed Cost (FC) </li></ul></ul></ul><ul><ul><ul><li> Selling Price per unit (SP) – Variable Cost per unit(VC). </li></ul></ul></ul><ul><ul><ul><li>Total Revenue (TR) = SP(Q) </li></ul></ul></ul><ul><ul><ul><li>Total Cost (TC) = FC+TVC </li></ul></ul></ul><ul><ul><ul><li>Profit = TR-TC </li></ul></ul></ul>Locational Break-Even Analysis OPM 533 4-
  19. 19. Locational Break-Even Analysis Example OPM 533 4- You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Asahan, Baling, or Chini. Fixed costs per year are RM30k, RM60k, & RM110k respectively. Variable costs per case are RM75, RM45, & RM25 respectively. The price per case is RM120. What is the best location for an expected volume of 2,000 cases per year? © 1995 Corel Corp.
  20. 20. Locational Break-Even Analysis Example <ul><li>Answer: </li></ul><ul><li>TC = FC + TVC </li></ul><ul><li>TC (Asahan) = RM30,000 + RM75(2,000) = RM180,000 </li></ul><ul><li>TC (Baling) = RM60,000 + RM45(2,000) = RM150,000 </li></ul><ul><li>TC (Chini) = RM110,000 + RM25(2,000) = RM160,000 </li></ul><ul><li>Baling is the best location because of the lowest cost. </li></ul>OPM 533 4-
  21. 21. Locational Break-Even Analysis – Select location based on economic basis <ul><li>The crossover point for Asahan and Baling </li></ul><ul><li>TC (Asahan) = TC (Baling) </li></ul><ul><li>30,000 + 75Q = 60,000 + 45Q </li></ul><ul><li>30Q = 30,000 </li></ul><ul><li> Q = 1,000 </li></ul><ul><li>The crossover point for Baling and Chini </li></ul><ul><li>TC (Baling) = TC (Chini) </li></ul><ul><li>60,000 + 45Q = 110,000 + 25Q </li></ul><ul><li>20Q = 50,000 </li></ul><ul><li> Q = 2,500 </li></ul>OPM 533 4-
  22. 22. Locational Break-Even Crossover Chart OPM 533 4- 0 50000 100000 150000 200000 0 500 1000 1500 2000 2500 3000 Volume Annual Cost Asahan Chini Baling Baling lowest cost Chini lowest cost Asahan lowest cost
  23. 23. Center of Gravity Method <ul><li>Finds location of single distribution center serving several destinations that can minimize distribution center </li></ul><ul><li>Used primarily for services </li></ul><ul><li>Considers </li></ul><ul><ul><li>Location of existing destinations </li></ul></ul><ul><ul><ul><li>Example: Markets, retailers etc . </li></ul></ul></ul><ul><ul><li>Volume to be shipped </li></ul></ul><ul><ul><li>Shipping distance (or cost) </li></ul></ul><ul><ul><ul><li>Shipping cost/unit/mile is constant </li></ul></ul></ul>OPM 533 4-
  24. 24. Center of Gravity Method Steps <ul><li>Place existing locations on a coordinate grid </li></ul><ul><ul><li>Grid has arbitrary origin & scale </li></ul></ul><ul><ul><li>Maintains relative distances </li></ul></ul><ul><li>Calculate X & Y coordinates for ‘center of gravity’ </li></ul><ul><ul><li>Gives location of distribution center </li></ul></ul><ul><ul><li>Minimizes transportation cost </li></ul></ul>OPM 533 4-
  25. 25. Center of Gravity Method Equations OPM 533 4- d ix = x coordinate of location i W i = Volume of goods moved to or from location i d iy = y coordinate of location i X Coordinate Y Coordinate
  26. 26. Center-of-Gravity Method Example Quain’s Discount Department Store has four stores located in Chicago, Pittsburg, New York and Atlanta. They are currently being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the chain first store. The firm has decided to find some “central” location in which to build a new warehouse . Data on demand rates and the current location of each store are as above. Number of Containers Store Location Coordinate Shipped per Month Chicago (30, 120) 2,000 Pittsburgh (90, 110) 1,000 New York (130, 130) 1,000 Atlanta (60, 40) 2,000
  27. 27. Center-of-Gravity Method - Example North-South East-West 120 – 90 – 60 – 30 – – | | | | | | 30 60 90 120 150 Arbitrary origin Chicago (30, 120) New York (130, 130) Pittsburgh (90, 110) Atlanta (60, 40)
  28. 28. Center-of-Gravity Method Example Number of Containers Store Location Coordinate Shipped per Month Chicago (30, 120) 2,000 Pittsburgh (90, 110) 1,000 New York (130, 130) 1,000 Atlanta (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
  29. 29. Coordinate Locations of Four Quain’s Department Stores and the Center of Gravity OPM 533 4-
  30. 30. Transportation Model <ul><li>The objective of the transportation model is to determine the best pattern of shipments from several point of supply (sources) to several point of demands destinations so as to minimize total production and transportation costs. </li></ul><ul><li>Finds amount to be shipped from several sources to several destinations </li></ul><ul><li>Used primarily for industrial locations </li></ul><ul><li>Type of linear programming model </li></ul><ul><ul><li>Objective: Minimize total production & shipping costs </li></ul></ul><ul><ul><li>Constraints </li></ul></ul><ul><ul><ul><li>Production capacity at source (factory) </li></ul></ul></ul><ul><ul><ul><li>Demand requirement at destination </li></ul></ul></ul>OPM 533 4-
  31. 31. Service Location Strategy <ul><li>The focus in the service sector is on maximizing revenue. </li></ul><ul><li>The eight (8) major components of volume and revenue for the service firm are: </li></ul><ul><li>1. Purchasing power of customer drawing area </li></ul><ul><li>2. Service and image compatibility with demographics of the customer drawing area </li></ul><ul><li>3. Competition in the area </li></ul><ul><li>4. Quality of the competition </li></ul><ul><li>5. Uniqueness of the firm’s and competitor’s locations </li></ul><ul><li>6. Physical qualities of facilities and neighboring businesses </li></ul><ul><li>7. Operating policies of the firm </li></ul><ul><li>8. Quality of management </li></ul>OPM 533 4-
  32. 32. Location Strategies – Service vs. Industrial <ul><li>Service/Retail/Professional </li></ul><ul><li>Revenue Focus </li></ul><ul><li>Volume/revenue </li></ul><ul><ul><li>Drawing area, purchasing power </li></ul></ul><ul><ul><li>Competition; advertising/pricing </li></ul></ul><ul><li>Physical quality </li></ul><ul><ul><li>Parking/access; security/ lighting; appearance/image </li></ul></ul><ul><li>Cost determinants </li></ul><ul><ul><li>Rent </li></ul></ul><ul><ul><li>Management caliber </li></ul></ul><ul><ul><li>Operations policies (hours, wage rates) </li></ul></ul><ul><li>Goods-Producing Location </li></ul><ul><li>Cost Focus </li></ul><ul><li>Tangible costs </li></ul><ul><ul><li>Transportation cost of raw materials </li></ul></ul><ul><ul><li>Shipment cost of finished goods </li></ul></ul><ul><ul><li>Energy and utility cost; labor; raw material; taxes, etc. </li></ul></ul><ul><li>Intangible and future costs </li></ul><ul><ul><li>Attitude toward union </li></ul></ul><ul><ul><li>Quality of life </li></ul></ul><ul><ul><li>Education expenditures by state </li></ul></ul><ul><ul><li>Quality of state and local government </li></ul></ul>OPM 533 4-
  33. 33. Location Strategies – Service vs. Industrial <ul><li>Service/Retail/Professional Techniques </li></ul><ul><li>Regression models to determine importance of various factors </li></ul><ul><li>Factor-rating method </li></ul><ul><li>Traffic counts </li></ul><ul><li>Demographic analysis of drawing area </li></ul><ul><li>Purchasing power analysis of drawing area </li></ul><ul><li>Center of gravity method </li></ul><ul><li>Geographic information systems </li></ul><ul><li>Goods Producing Location </li></ul><ul><li>Techniques </li></ul><ul><li>Linear Programming (Transportation method) </li></ul><ul><li>Factor-rating method </li></ul><ul><li>Locational breakeven analysis </li></ul><ul><li>Crossover charts </li></ul>OPM 533 4-
  34. 34. Location Strategies – Service vs. Industrial <ul><li>Service/Retail/Professional </li></ul><ul><li>Assumptions </li></ul><ul><li>Location is a major determinate of revenue </li></ul><ul><li>High customer-contact issues are critical </li></ul><ul><li>Costs are relatively constant for a given area; therefore, the revenue function is critical </li></ul><ul><li>Goods-Producing Location </li></ul><ul><li>Assumptions </li></ul><ul><li>Location is a major determinate of cost </li></ul><ul><li>Most major costs can be identified explicitly for each site </li></ul><ul><li>Low customer contact allows focus on identifiable costs </li></ul><ul><li>Intangible costs can be evaluated </li></ul>OPM 533 4-
  35. 35. Final Thought OPM 533 4- The ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest. © 1995 Corel Corp.