by sachin sharma manipal jaipur

1. Learning ObjectivesLearning Objectives
♦When you complete this chapter, you should
be able to :
♦Identify or Define:
♦ Objective of location strategy
♦ International location issues
♦ Clustering
♦ Explain location decisions
♦Describe or explain:
♦ Three methods of solving the location problem
♦ Factor-rating method

2. Objective of Location StrategyObjective of Location Strategy
♦Maximize the benefit of location to the firm

3. Industrial Location DecisionsIndustrial Location Decisions
♦Cost focus
♦ Revenue varies little
between locations
♦ Location is a major
cost factor
♦ Affects shipping &
production costs (e.g., labor)
♦ Costs vary greatly between
locations
© 1995 Corel Corp.

4. Service Location DecisionsService Location Decisions
♦Revenue focus
♦ Costs vary little between market areas
♦Location is a major
revenue factor
♦ Affects amount of
customer contact
♦ Affects volume of
business

5. In General - Location DecisionsIn General - Location Decisions
♦Long-term decisions
♦Difficult to reverse
♦Affect fixed & variable costs
♦ Transportation cost
♦ As much as 25% of product price
♦ Other costs: Taxes, wages, rent etc.
♦Objective: Maximize benefit of location to
firm

6. Location Decision SequenceLocation Decision Sequence
Country
© 1995
Corel
Corp.
Region/Community
© 1995 Corel Corp.
Site
© 1995
Corel
Corp.

7. FACTORS INFLUENCING PLANTFACTORS INFLUENCING PLANT
LOCATION/FACILITY LOCATIONLOCATION/FACILITY LOCATION
♦ Location conditions are complex and each comprises a different
Characteristic of a tangible (i.e. Freight rates, production costs)
and non-tangible (i.e. reliability, Frequency security, quality)
nature.
♦ Location conditions are hard to measure. Tangible cost based
factors such as wages and products costs can be quantified
precisely into what makes locations better to compare. On the
other hand non-tangible features, which refer to such
characteristics as reliability, availability and security, can only be
measured along an ordinal or even nominal scale. Other non-
tangible features like the percentage of employees that are
unionized can be measured as well. To sum this up non-tangible
features are very important for business location decisions.

8. It is appropriate to divide the factors, which influence the plant
location or facility location on the basis of the nature of the
organisation as:
1. General locational factors, which include controllable and
uncontrollable factors for all type of organisations.
2. Specific locational factors specifically required for manufacturing
and service organisations.

10. Specific Locational Factors forSpecific Locational Factors for
Manufacturing OrganisationManufacturing Organisation
DOMINANT FACTORS:
1. Favorable labor climate
2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs
SECONDARY FACTORS:
Room for expansion, construction costs, accessibility to multiple modes
of transportation, the cost of shuffling people and materials
between plants, competition from other firms for the workforce,
community attitudes, and many others.

11. Specific Locational Factors forSpecific Locational Factors for
Service OrganisationService Organisation
♦DOMINANT FACTORS:
The factors considered for manufacturers are also applied to
service providers, with one important addition — the impact of
location on sales and customer satisfaction. Customers usually
look about how close a service facility is, particularly if the process
requires considerable customer contact.
♦ PROXIMITY TO CUSTOMERS
♦ TRANSPORTATION COSTS AND PROXIMITY TO MARKETS
♦ LOCATION OF COMPETITORS

12. Factors Affecting CountryFactors Affecting Country
♦ Government rules,
attitudes, stability,
incentives
♦ Culture & economy
♦ Market location
♦ Labor availability,
attitudes, productivity, and
cost
♦ Availability of supplies,
communications, energy
♦ Exchange rate
© 1995 Corel Corp.

13. Region Location DecisionsRegion Location Decisions
♦Corporate desires
♦Attractiveness of region (culture, taxes,
climate, etc.)
♦Labor, availability, costs, attitudes towards
unions
♦Costs and availability of utilities
♦Environmental regulations of state and town
♦Government incentives
♦Proximity to customers & suppliers
© 1995 Corel Corp.

14. Factors Affecting SiteFactors Affecting Site
♦Site size and cost
♦Air, rail, highway, and waterway systems
♦Zoning restrictions
♦Nearness of services/supplies needed
♦Environmental impact issues
© 1995 Corel Corp.

15. Location Decision ExampleLocation Decision Example
In 1992, BMW
decided to build its
first major
manufacturing plant
outside Germany in ,
South Carolina.
© 1995 Corel Corp.

16. Country Decision FactorsCountry Decision Factors
♦Market location
♦ U.S. is world’s largest luxury car market
♦ Growing
♦Labor
♦ Lower manufacturing labor costs
♦ Higher labor productivity
♦ Other
♦ Lower shipping cost
♦ New plant & equipment
would increase
productivity

17. Region/Community DecisionRegion/Community Decision
FactorsFactors
♦Labor
♦ Lower wages
♦
♦Government incentives
♦ $135 million in state & local tax breaks
♦ Free-trade zone from airport to plant
♦ No duties on imported components or on exported cars

18. Organizations That Need To BeOrganizations That Need To Be
Close to MarketsClose to Markets
♦Government agencies
♦ Police & fire departments
♦ Post Office
♦Retail Sales and Service
♦ Fast food restaurants, supermarkets, gas stations
♦ Drug stores, shopping malls
♦ Bakeries
♦Services
♦ Doctors, lawyers, accountants, barbers
♦ Banks, auto repair, motels

19. Location Evaluation MethodsLocation Evaluation Methods
♦ Factor-rating method
♦ Locational break-even
analysis
♦ Center of gravity method
♦ Transportation model
© 1995 Corel Corp.

20. Factor-Rating MethodFactor-Rating Method
♦Most widely used location technique
♦Useful for service & industrial locations
♦Rates locations using factors
♦ Intangible (qualitative) factors
♦ Example: Education quality, labor skills
♦ Tangible (quantitative) factors
♦ Example: Short-run & long-run costs

21. Steps in Factor Rating MethodSteps in Factor Rating Method
♦List relevant factors
♦Assign importance weight to each factor (0 -
1)
♦Develop scale for each factor (1 - 100)
♦Score each location using factor scale
♦Multiply scores by weights for each factor &
total
♦Select location with maximum total score

22. Let us assume that a new medical facility, Health-care, is to beLet us assume that a new medical facility, Health-care, is to be
located in Delhi. The location factors, factor rating and scores for twolocated in Delhi. The location factors, factor rating and scores for two
potential sites are shown in the following table. Which is the bestpotential sites are shown in the following table. Which is the best
location based on factor rating method?location based on factor rating method?

25. Locational Break-Even AnalysisLocational Break-Even Analysis
♦Method of cost-volume analysis used for
industrial locations
♦Steps
♦ Determine fixed & variable costs for each location
♦ Plot total cost for each location
♦ Select location with lowest total cost for expected
production volume
♦ Must be above break-even

28. Locational Break-Even AnalysisLocational Break-Even Analysis
ExampleExample
You’re an analyst for AC Delco. You’re
considering a new manufacturing plant in
Akron, Bowling Green, or Chicago. Fixed
costs per year are $30k, $60k, & $110k
respectively. Variable costs per case are $75,
$45, & $25 respectively. The price per case is
$120. What is the best location for an
expected volume of 2,000 cases per year?
© 1995 Corel Corp.

29. Locational Break-Even CrossoverLocational Break-Even Crossover
ChartChart
0
50000
100000
150000
200000
0 500 1000 1500 2000 2500 3000
Volume
AnnualCost
Akron
Chicago
Bowling Green
Akron
lowest
cost
Bowling Green
lowest cost
Chicago
lowest
cost

30. Center of Gravity MethodCenter of Gravity Method
♦Finds location of single distribution center
serving several destinations
♦Used primarily for services
♦Considers
♦ Location of existing destinations
♦ Example: Markets, retailers etc.
♦ Volume to be shipped
♦ Shipping distance (or cost)
♦ Shipping cost/unit/mile is constant

31. Center of Gravity Method StepsCenter of Gravity Method Steps
♦Place existing locations on a coordinate grid
♦ Grid has arbitrary origin & scale
♦ Maintains relative distances
♦Calculate X & Y coordinates for ‘center of
gravity’
♦ Gives location of distribution center
♦ Minimizes transportation cost

34. Center of Gravity MethodCenter of Gravity Method
EquationsEquations
ddixix = x coordinate of= x coordinate of
location ilocation i
WWii == Volume ofVolume of
goods moved to or fromgoods moved to or from
location ilocation i
ddiyiy = y coordinate of= y coordinate of
location ilocation i
X CoordinateX Coordinate
Y CoordinateY Coordinate
∑
∑
=
i
i
i
iix
x
W
Wd
C
∑
∑
=
i
i
i
iiy
y
W
Wd
C

35. Figure 8.4Figure 8.4

36. Transportation ModelTransportation Model
♦Finds amount to be shipped from several
sources to several destinations
♦Used primarily for industrial locations
♦Type of linear programming model
♦ Objective: Minimize total production
& shipping costs
♦ Constraints
♦ Production capacity at source (factory)
♦ Demand requirement at destination

37. Components of Volume andComponents of Volume and
Revenue for a Service FirmRevenue for a Service Firm
♦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 competitor’s
locations
♦6. Physical qualities of facilities and

38. Location Strategies – Service vs.Location Strategies – Service vs.
IndustrialIndustrial
♦Service/Retail/Profes
sional Revenue
Focus
♦Volume/revenue
♦ Drawing area,
purchasing power
♦ Competition;
advertising/pricing
♦Physical quality
♦ Parking/access;
♦Industrial Revenue
Focus
♦Tangible costs
♦ Transportation cost
of raw materials
♦ Shipment cost of
finished goods
♦ Energy and utility
cost; labor; raw
material; taxes, etc.

39. Location Strategies –Location Strategies –
Service vs. IndustrialService vs. Industrial
♦Service/Retail/Profes
sional Techniques
♦Correlation analysis
to determine
importance of
factors for a
particular type of
operation
♦Traffic counts
♦Demographic
♦Industrial
Techniques
♦Linear Programming
(Transportation
method)
♦Weighted approach
to intangibles
♦Breakeven analysis
♦Crossover charts

40. Major Methods of SolvingMajor Methods of Solving
Location ProblemsLocation Problems
♦Weighted methods which:
♦ Assign weights and points to various factors
♦ Determine tangible costs
♦ Investigate intangible costs
♦Center of Gravity Method
♦ Find best distribution center location
♦Location breakeven methods
♦ Special case of breakeven analysis
♦Transportation method