Location Strategies

Location Strategies

• Firms need location strategies to maximize benefits for the company
• Location is among the most important strategic decision that organizations make.
• Location is a significant cost and revenue driver.
• Objective of location strategy is to maximize the benefit of location to the firm

Learning Outcomes

• The learning outcomes include understanding the strategic importance of location.
• Identify and explain major factors that affect locations decisions.
• Apply factor-rating method.
• Complete a locational break-even analysis graphically and mathematically.
• Apply center-of-gravity method

Strategic Importance of Location

• Companies increasingly make location decisions infrequently
• Location strategy options include expanding an existing facility, maintaining current sites while adding another facility, or closing an existing facility and moving to another location
• Location has the power to make or break a business and is a significant cost and revenue driver
• Optimal facility location is a good investment

Location and Innovation

• Cost is not always the most important aspect of strategic decision
• The four key attributes when location strategy is based on innovation are as follows
• Presence of high quality and specialized inputs such as scientific and technical talent.
• An environment that encourages investment and local rivalry
• Pressure and insight gained from a sophisticated local market
• Local presence of related and supporting industries

Information about plant relevant to location decision

• Size of the plant, product lines to be produced, and process technology to be used are all relevant to a location decision.
• Required acreage and square feet of space are needed, with constraints that might arise as a result of special needs.
• Consideration is given to the number of workers, particular skills needed, and transportation needs in the location decision.
• Depending on the nature of the raw materials, plants may have to be near major highways or rail lines.
• Utility requirements include special needs for plants with unusual power needs which should be located where energy is less expensive or near sources of hydroelectric power.
• International considerations include whether to locate new plants domestic or overseas
• Tax treatment variables in making location decisions include favorable tax treatment given by some countries

Factors that affect location decisions

• Sequence of location decisions often starts with choosing a country in which to operate
• One approach to selecting a country is to identify critical success factors (CSFs) needed to achieve competitive advantage
• The final step is choosing a specific site within a community

Location Decision Factors

• Country decisions consider political risks, government, rules, incentives, and cultural and economic issues
• Location decisions are based on labor, talent, attitudes, productivity, costs, markets, availability of supplies, communications, energy, exchange rates, and currency risks
• Regional decisions are based on corporate desires, regional attractiveness, labor availability, costs, attitudes towards unions, utilities availability, and costs
• Locations are selected based on environmental regulations, government, incentives, fiscal policies, proximity to raw materials, customers, land, as well as constructions costs
• Site decisions account for site size and cost of construction, air, rail, highway, and waterway systems, zoning
• Location strategies account for proximity of services, supplies needed, as well as environmental impact issues

Factors Affecting Location Decisions

• Major factors affect the location decision of labor productivity, foreign exchange, culture, proximity to markets, suppliers, and competitors
• Management may be tempted to select a location because of an area's low wage but wage rates are not the only cost

Factors Affecting Location Decisions

• Companies can take advantage of favorable exchange rates by relocating or exporting to a foreign country
• Locations should be divided into tangible and intangible
• Tangible, easily measured costs are utilities, labor, materials, taxes, transportation of raw materials and finished goods and site construction cost
• Intangible costs that are less easy to quantify include education, public transportation, community, quality-of-life, government
• Location decisions based on cost alone can lead to ethical situations

Political Risk, Values, and Culture

• Worker attitudes towards turnover, unions, and absenteeism are relevant
• Unionization can motivate a firm to expand an existing facility as opposed to building a new facility, to eliminate union influence
• Some locations offer a fresh labor force that may be more difficult to organize
• Globally cultures have different attitudes towards punctuality, legal, and ethical issues such as bribery

Proximity

• It's important that some firms locate near customers
• Manufacturing firms find it useful to be close to customers in scenarios of expensive or difficult transportation of finished goods.
• JIT systems push those suppliers need to locate near users
• Proximity to suppliers and resources find firms that need to locate near raw materials and suppliers that handle perishable goods, high transportation costs, and/or bulky products.

Proximity to Competitors

• Clustering occurs when a major resource is found in that region such as natural resources, information, venture capital, talent in both manufacturing and service industries

Quality of life

• Attractiveness to employees may help in recruiting key personnel – especially true in high-tech industries that must compete for workers with particular skills

Clustering of Companies

• Examples of industrial clustering include Wine making, Napa Valley (US), Bordeaux region (France), Software firms, Silicon Valley, Boston, Bangalore (India), and Race car builders Huntington/North Hampton region (England).
• The reasoning for clustering includes natural resources of land, climate, talent, resources of bright graduates in scientific technical areas, venture capitalist nearby critical mass, and mass of talent and information.
• Other industrial clustering include theme parks, Electronics firms, fast-food chains,

Methods to Evaluate Location Alternatives

• Methods used for solving location problems include the factor rating method, locational break-even analysis, and the center of gravity method

Factor-Rating Method

• The firsts of six steps is to develop a list of relevant factors called critical success factors
• Each factor needs to be weighted, scaled, and have corresponding scores
• Scores are multiplied by the corresponding weights to achieve a total for each location
• The location with the highest point score should be recommended
• When decisions are sensitive to minor changes, further analysis of weighting and points assigned might be appropriate

Locational Break-Even Analysis

• This cost volume analysis use fixed and variable costs used to make an economic comparison of location alternatives.
• Done mathematically or graphically
• The method involves determining fixed and variable costs for each location
• Plot the cost for each location with costs on the vertical axis and annual volume on the horizontal axis
• Select location with lowest total cost for expected production volume

Centre-of-Gravity Method

• This is a mathematical technique used for finding the location of a distribution center that minimizes distribution costs.
• The method accounts for the location of markets, volume of goods shipped to those markets, and shipping costs for finding the best location for a distribution center.
• The method assumes cost is directly proportional to both distance and volume shipped.
• The x and y coordinates are calculated with the formulas.

Service location strategies

• The location analysis is minimizing cost the focus for manufacturing
• Service location strategies focus on maximizing revenue.
• The location focus for service is on determining volume of business revenue

Major components of volume and revenue for service firms

• Consider areas such as customer locations, service and image compatibility with demographics, competition, uniqueness of the firm and the operating policies, the quality of management, physical quality, and potential client interaction.

Service versus Retail/Professional Location

• The revenue focus can be evaluated based volume purchased, the cost to create the goods, and customer satisfaction
• Tangible costs focus on transportation, shipment, raw material price and other related areas.
• Intangible costs consider things like Education, government regulations and government assistance programs.
• Retail strategies would look closer at things like demographics, regression models ,and geographic placement or information.

Facility and Plant Layout

• Facility layout refers to the size shape of the facility, as well as the relative size and shape of functional areas
• Plant layout is used synonymously with layout facility and focuses on the layout of machinery, equipment, and materials
• Plant determined at the beginning of operations
• Facility layout, planning and design is concerned with laying out a new facility and or making changes to an existing facility.

Strategic Importance of Layout Decisions

• One of the decisions that determine the long run efficiency of operations
• Layouts have numerous strategic implications
• Effective layouts can help organizations to achieve strategies that support differentiation, low cost of response
• Layout strategy objectives is to develop an efficient and effective layout that will meet the competitive requirements.
• Requires substantial investments.
• Have significant impact on cost in short term operations.

Reasons for the need of a layout decision

• There are several reasons to focus on a good layout decision; inefficient operations, accidents or safety hazards, changes in the design of products or services.
• New process or methods become available as well.

Layout and Design

• Layouts must achieve the following: logical workflow and minimum travel distance, space and equipment that is used in higher efficiency.
• Improve information and employee morale at safe working conditions.
• Layout must be flexible and advanced in a way that provides client interaction.

Determinants of Layout

• Good Material handling equipment that makes decisions about the types of equipment that storage and use of retrievals.
• Environment and aesthetics of the equipment and spaces.
• Good flow of information that must be facilitated that has proximity, open spaces, and private offices, as well as considering the cost of moving between the working areas

Types of Planning and Layouts

• There are three major basic types of plant layouts process, produce and fix position layouts.
• Production quantity Q-number of units or a given part that a facility produces a variety of different products that are made in a plant.
• Process layouts capable of handling low volume and high variety of production
• Product oriented assembly lines and machine-paced assembly
• High production, 10,000 to millions of units.

P and Q Relationships in Layout and Planning

• As a variety of products increases in production that there must be high production quantity of high variety of products
• There will need to be varying process layouts to make those products in which you can be efficient.

Process Layout

• Equipment is arranged according to function also termed functional
• Good for handling a variety of low volume high variety work
• It's the traditional way to support differentiation strategy most efficient when making products with equipment requirements
• Different parts of products are process through operations and batches in which they are transported through the batch process.

Advantages and Disadvantages of Process Layouts

• There's a lot of flexibility in this type of environment but may need to use small batches or a wide variety of other components

Repetitive Product-Oriented Layout

• Production is organized around same high volume low variety production
• Significant investment, as the layouts design for readily adapts to different types of product
• If product demand goes the equipment can be easily moved

Repetitive and Product

• Very large number of products in an organized efficient way such that volume is adequate for equipment used to make product is justified
• High investment which allows for high standardization production

Orientated Layout

• Fabricated assembly line, machines and balance, put together parts, space, and balance.

Advantages and Disadvantages of Product Layout's

• Low variable cost per product unit, there is a higher volume of equipment used, standard processes, low cost of transport and the volume is high enough and steady.

Assembly Line Balancing

• With assembly lines there is a need to minimize and balance
• Line balancing ensures that assignments of work stations is streamlined for better workflow

Assembly Line Balancing

• Separate work tasks for different workstations
• Precedence relationships should be known.
• In advance IE or time and motion specialists that identify the process

Task and Element Identification

• Element identification shows that task B and E cannot be accomplished if Task A has not been
• Cycle time is required
• There is a theoretical minimum for each amount
• Steps for assembly assign specific tasks for

Line Balancing Heuristics

• Choose task with most subsequent work tasks that need to be done in a systematic way
• These heuristics and analysis can be applied to workflow.

Layouts-Fixed positioning

• Some types of goods such as big machines, heavy parts, etc need to be assembled while workers and equipment are brought to product.
• There can be limited space here, especially when using dynamic changing material.