Location Planning and Analysis

Based on Operations Management (11th Edition) by William J. Stevenson

1. Location
Planning
Operations Management (11
th

Edition) William J. Stevenson

2. NATURE OF LOCATION
DECISION

3. 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
Long-term decisions
Once committed to a location, many resource and
cost issues are difficult to change

4. The objective of location
strategy is to MAXIMIZE the
benefit of location to the firm.

5. Location Options include:
Expanding existing facilities
Maintain existing and add sites
Closing existing and relocating

6. Decide on the criteria
Identify the important factors
Develop location alternatives
Evaluate the alternatives
•Identify general region
•Identify a small number of community
alternatives
•Identify site alternatives
Evaluate and make selection
Making Location
Decisions

7. 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

8. “Invented” overnight delivery.
Uses “hub” concept.
Enables service to more locations with fewer aircraft.
Concentrates package flows to exploit transportation
economies of scale.
Enables sorting economies of scale.
Key issue: Where to locate hubs??

9. Industrial Location Decisions
COST focused.
•Revenue varies little between locations.
Production separate from consumption.
Location is major cost factor.
•Costs vary greatly between locations.
Shipping costs.
Production costs (e.g., labor).

10. Service Location Decisions
 REVENUE focus.
Costs vary little between market areas.
 Production/service together with consumption.
 Location is a major revenue factor.
Affects amount of customer contact.
Affects volume of business.

11. Organizations That Locate
Close to Markets/Customers
Government agencies.
•Police & fire departments, post offices, public
libraries.
Retail sales and Services.
•Fast food restaurants, supermarkets, gas stations.
•Doctors, lawyers, barbers, banks, auto repair, etc.
When transporting finished goods is more
expensive than transporting materials.
•Bottling plants, breweries.
•Electricity production.

12. Organizations That Locate
Close to Suppliers or
Materials
By necessity.
•Mining, fishing, farming, etc.
When transporting materials is more expensive
than transporting finished goods.
•Perishable raw materials. (Seafood processing.)
•Heavy or bulky raw materials. (Steel producers.)
•Processing reduces bulk. (Lumber mills, paper
production.)

13. Location Decision Factors
Regional
Site-related
Factors
Multiple Plant
Strategies
Community
Considerations

14. Factors Affecting Country
Decision
Government rules, attitudes, stability,
incentives.
Labor availability, attitudes, productivity, cost.
Availability of supplies, communications,
energy.
Culture & economy.
Location of markets.
Exchange rate.

15. Ranking of the Business
Environment in 20 Countries,
2015 (Forbes)
1.Denmark
2.New Zealand
3.Norway
4.Ireland
5.Sweden
6.Finland
7.Canada
8.Singapore
9.Netherlands
10.United Kingdom
11.Hong Kong
12.Switzerland
13.Iceland
14.Australia
15.Belgium
16.Portugal
17.Lithuania
18.Germany
19.Estonia
20.Slovenia

16. Factors Affecting
Region/Community Decision
•Attractiveness of region (culture, taxes,
climate, etc.).
•Labor availability, costs, attitudes towards
unions.
•Environmental regulations of state and town.
•Proximity to customers & suppliers.
•Corporate desires.
•Costs and availability of utilities.
•Government incentives.
•Land/construction costs.

17. Factors Affecting Site
Decision
•Access to air, rail, highway, and waterway
systems.
•Proximity to needed services/supplies.
•Site size and cost.
•Zoning restrictions.
•Environmental impact issues.
.

18. Product plant strategy
Market area plant strategy
Process plant strategy
Multiple Plant Strategies

19. Trends in Locations
Foreign producers locating in U.S.
“
Made in USA”
C
urrency fluctuations
Just-in-time manufacturing techniques
Microfactories
Information Technology

20. Location Decision Example -
BMW
In 1992, BMW decided to build
its first major manufacturing
plant outside Germany in
Spartanburg, South Carolina.

21. Country Decision - BMW
Market location.
U.S. is world’s largest luxury car market & is
growing.
Labor.
U.S. has lower manufacturing labor costs.
$17/hr. (U.S.) vs. $27 (Germany).
U.S. may have higher labor productivity.
11 holidays (U.S.) vs. 31 (Germany).
Other.
Lower shipping cost ($2,500/car less).
New plant & equipment would increase productivity
(lower cost/car $2,000-3000).

22. Region/Community Decision -
BMW
Labor.
Lower wages in South Carolina (SC).
About $17,000/yr in SC vs. $27,051/yr in U.S.
(based on 1993).
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.

23. Global Locations

24. Facilitating Factors
•Trade agreements
•Technology
Benefits
•Markets
•Cost savings
•Legal and regulatory
•Financial

25. Globalization
Disadvantages
•Transportation costs
•Security
•Unskilled labor
•Import restrictions
•Criticisms
Risks
•Political
•Terrorism
•Legal
•Cultural

27. Evaluating Locations
Cost-Profit-Volume Analysis
•Determine fixed and variable costs
•Plot total costs
•Determine lowest total costs

28. Location Cost-Volume Analysis
Assumptions
•Fixed costs are constant
•Variable costs are linear
•Output can be closely estimated
•Only one product involved

29. Example 1: Cost-Volume Analysis
Fixed and variable costs for
four (4) potential locations
L o c a t i o n F i x e d
C o s t
V a r i a b l e
C o s t
A
B
C
D
$ 2 5 0 , 0 0 0
1 0 0 , 0 0 0
1 5 0 , 0 0 0
2 0 0 , 0 0 0
$ 1 1
3 0
2 0
3 5

30. Example 1: Solution
F i x e d
C o s t s
V a r i a b l e
C o s t s
T o t a l
C o s t s
A
B
C
D
$ 2 5 0 , 0 0 0
1 0 0 , 0 0 0
1 5 0 , 0 0 0
2 0 0 , 0 0 0
$ 1 1 ( 1 0 , 0 0 0 )
3 0 ( 1 0 , 0 0 0 )
2 0 ( 1 0 , 0 0 0 )
3 5 ( 1 0 , 0 0 0 )
$ 3 6 0 , 0 0 0
4 0 0 , 0 0 0
3 5 0 , 0 0 0
5 5 0 , 0 0 0

31. Example 1: Solution
800
700
600
500
400
300
200
100
0
Annual Output (000)
$(000)
8 101214 166420
A
B
C
B Superior
C Superior
A Superior
D

32. Location Evaluation Methods
1.Factor-rating method.
2.Locational break-even
analysis.
3.Center of gravity method.
4.Transportation model.

33. Factor-Rating Method
Most widely used location technique.
Useful for service & industrial locations.
Rates locations using factors. Decision based on
quantitative and qualitative inputs.
•Intangible (qualitative) factors.
Example: Education quality, labor skills.
•Tangible (quantitative) factors.
Example: Short-run & long-run costs.
Based on weighted average.

34. Steps in Factor Rating
Method
•List relevant factors.
•Assign importance weight to each factor (0-
1).
•Make weights sum to one.
•Set a scale for scoring each factor (1-10 or 1-
100).
•Score each location using factor scale.
•Multiply scores by weights for each factor &
sum.
•Select location with maximum total score.
•Consider sensitivity to weights and scores.

35. Factors Affecting Location
Labor costs and availability, including wages,
productivity, attitudes, age, distribution,
unionization, and skills.
Site costs, including land cost, parking,
drainage, expansion opportunities, etc.
Proximity to raw materials and suppliers.
Proximity to markets.
State and local government fiscal policies
(including incentives, taxes, unemployment
compensation).

36. Factors Affecting Location -
continued
Utilities, including availability and costs.
Transportation availability (road, rail, air,
water, pipeline).
Quality-of-life issues (education, cost of living,
health care, sports, cultural activities, housing,
entertainment, religious facilities, etc.).
Foreign exchange, including rates and
stability.
Government, including stability, honesty,
attitudes toward new business, etc.

37. Factor Rating Example
Three locations: A, B and C; Four factors.
1. Assign weights to each factor.
2. Score each location on each factor.
3. Multiply the weight and score and sum for each
location.
Factor weight A B C
Cost 0.3
Proximity to trans.0.2
Taxes 0.1
Labor 0.4

38. Factor Rating Example
Factor weight A B C
Cost 0.310 9 7
Proximity to trans.0.27 310
Taxes 0.17 510
Labor 0.46 8 5
7.577.1
Three locations: A, B and C; Four factors.
A is best; B and C are
similar.
Note that if the labor score for A was 5, not 6, then all
locations are similar.

39. Locational Break-Even Analysis
Cost-volume analysis used for location.
Steps:
•Determine fixed & variable costs for each
location.
•Find break-even point.
•Plot cost for each location.
•Select location with lowest total cost for
expected production volume.
Must be above break-even.

40. Locational Break-Even
Analysis Example
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?

41. Locational Break-Even
Analysis Example
A=Akron: Total Cost = TC = 30000 +
75x
B=Bowling Green: Total Cost = TC =
60000 + 45x
C=Chicago: Total Cost = TC =
110000 + 25x
For all: Total Revenue = TR =
120x
At x=2000 cases/year:
A: Profit = 240,000 - (30,000 + 150,000) =
60,000
B: Profit = 240,000 - (60,000 + 90,000) =
90,000
C: Profit = 240,000 - (110,000 + 50,000) =
80,000
B is
Best

42. Locational Break-Even
Analysis Example
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.
Over what range of output is each location
preferred?

43. Locational Break-Even
Analysis Example
A=Akron: TC = 30000 + 75x
B=Bowling Green: TC = 60000 + 45x
C=Chicago: TC = 110000 + 25x
A is best at x=0.
A < B for x < 1000/yr and A < C for x < 1600/yr,
so
A is best over range 0<x<1000/yr.
B < C for x < 2500/yr so,
B is best over range 1000<x<2500/yr.
C is best over range 2500/yr < x

44. Locational Crossover Chart
0
50,000
100,000
150,000
200,000
0 50010001500200025003000
Volume
$
Akron
Chicago
Bowling Green
Akron lowest
cost
Bowling Green
lowest cost
Chicago
lowest cost

45. Locational Crossover Chart
0
50,000
100,000
150,000
200,000
0 50010001500200025003000
Volume
$
Akron
R
e v
e n
u
e
Chicago
Bowling Green
Akron lowest
cost
Bowling Green
lowest cost
Chicago
lowest cost

46. Locational Break-Even
Analysis Example
A is unprofitable for low volumes.
Use break-even analysis with A to find
break-even point = 666.67/yr.
A is best and profitable over range 666.67<x<1000/yr.
B is best and profitable over range 1000<x<2500/yr.
C is best and profitable over range 2500/yr < x.

47. Center of Gravity Method
Decision based on minimum distribution costs
Finds location of single facility serving several
destinations.
Used for services and distribution centers.
Requires:
•Location of existing destinations (Markets,
retailers etc.)
•Volume to be shipped.
•Shipping distance (or cost).

48. Center of Gravity Method
Steps
Find X and Y coordinates for all destinations.
Can use an arbitrary coordinate grid.
Calculate center of gravity location for facility as
weighted average of X & Y coordinates.
Approximately minimizes transportation cost.
Location is not necessarily optimal, but is
usually close.

49. Center of Gravity Method
Equations
dd
ix ix = x coordinate of = x coordinate of
location ilocation i
WW
ii==Volume of goods Volume of goods
moved to or from moved to or from
location i location i
dd
iy iy = y coordinate of = y coordinate of
location ilocation i
X CoordinateX Coordinate
Y Y CoordinateCoordinate
å
å
=
i
i
i
iix
x
W
Wd
C
å
å
=
i
i
i
iiy
y
W
Wd
C

50. Center of Gravity Example
Location Volume
Chicago 200
Pittsburgh 100
New York 100
Atlanta 200
Given 4 cities with volume demanded and (x,y) coordinates.
Find location for one warehouse to minimize total distance
to supply these cities.
Chicago (30,120)
New York (130,130)
Pittsburgh (90,110)
Atlanta (60,40)
0 12060
60
120
0

51. Center of Gravity Example
Location Volume X-Coordinate Y-Coordinate
Chicago 200 30 120
Pittsburgh 100 90 110
New York 100 130 130
Atlanta 200 60 40
X coordinate of warehouse:
C
x
=(200x30+100x90+100x130+200x60)/(200+100+100+200) = 66.7
Y coordinate of warehouse:
C
y
=(200x120+100x110+100x130+200x40)/(200+100+100+200) = 93.3

52. Center of Gravity Example
Location Volume
Chicago 2000
Pittsburgh 1000
New York 1000
Atlanta 2000
Chicago (30,120)
New York (130,130)
Pittsburgh (90,110)
Atlanta (60,40)
0 12060
60
120
0
X
Center of gravity = (66.7, 93.3)

53. Transportation Model
Decision based on movement costs of raw materials or
finished goods
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 capacities at sources (factories).
Demand requirements at destinations.

54. Transportation Model
Example
Atlanta
Chicago
St. Louis
London
From To Cost per unit
flow
Chicago London $40
Chicago St. Louis
$10
St. Louis Chicago
$8
St. Louis Atlanta
$20
Atlanta London $35
Chicago Chicago $1
St. Louis St. Louis
$1
Atlanta Atlanta $1
Supply is in green
Demand is in red
800
500
300
200
900
300
1000

55. Transportation Model
Example
x
ij
= Flow from origin i to destination j.
Objective is minimize cost for all flows.
Constraints for supply at each origin (3) and
demand at each destination (4).
Atlanta 300
Chicago 500
900 Atlanta
800 Chicago
300 St. Louis
London 1000
St. Louis 200
Supply
Demand
$40
$10
$20
$8
$35
$1
$1
$1

56. Integer Programming for
Location
x
1 = 1 if a warehouse is located at Boston; 0 otherwise.
x
2
= 1 if a warehouse is located at Hartford; 0 otherwise.
x
3
= 1 if a warehouse is located at Albany; 0 otherwise.

¨ Minimize the cost to locate warehouses:
Minimize C
1
x
1
+ C
2
x
2
+ C
3
x
3

¨ At most two warehouses can be opened:
x
1
+ x
2
+ x
3
£ 2
¨ Either Boston or Hartford should have a warehouse:
x
1
+ x
2


£ 1

57. Location for Service
Organizations
Focus on Revenue and Volume of Business,
which are determined by:
Purchasing power and demographics of customer
drawing area.
Competition in the area (amount and quality).
Relative attractiveness of the firm’s and
competitor’s locations.
•Uniqueness of location and offerings.
•Physical qualities of facilities and neighboring
businesses.
•Operating policies and quality of management.

58. Service vs. Industrial
Location
SERVICE LOCATION
Techniques
Regression models to determine
importance of different factors.
Factor rating.
Traffic counts & demographic analysis
of drawing area.
Center of gravity.
Assumptions
Location is major determinate of
revenue.
High customer contact issues
dominate.
Costs are relatively constant for a given
area.
INDUSTRIAL LOCATION
Techniques
Linear and Integer Programming
(Transportation method).
Factor rating.
Breakeven and crossover analysis.
Center of gravity.
Assumptions
Location is major determinate of
cost.
Costs can be identified for each site.
Low customer contact allows focus
on costs.
Intangible costs can be objectively
evaluated.

59. Telemarketing and Internet
Industries
Require neither face-to-face contact with
customers (or employees) nor movement of
material.
Keys are:
•Labor costs and productivity.
•Information systems infrastructure (including
training and management).
•Government incentives (including taxes).

60. Geographic Information
Systems - GIS
New tool to help in location analysis.
Combines spatial (locational) data and attribute
data (for example, demographics).
Uses spatial analyses to identify best or
satisfactory locations.
Allows intuitive graphical display using maps.