Operations Management: Chapter 8 Location Strategy PDF

Operations Management: Sustainability and Supply Chain Fourth Canadian Edition Management Chapter 8 Location Strategy Copyright © 2023 Pearson Canada Inc.  Learning Objecti...

Operations Management: Sustainability and Supply Chain Fourth Canadian Edition Management Chapter 8 Location Strategy Copyright © 2023 Pearson Canada Inc.  Learning Objectives When you complete this chapter you should be able to: 1. Identify and explain seven major factors that effect location decisions 2. Compute labour productivity 3. Apply the factor-rating method 4. Complete a locational break-even analysis graphically and mathematically Copyright © 2023 Pearson Canada Inc. 8-2  Learning Objectives When you complete this chapter you should be able to: 5. Use the centre-of-gravity method 6. Understand the differences between service- and industrial-sector location analysis Copyright © 2023 Pearson Canada Inc. 8-3  Location Strategy  One of the most important decisions a firm makes, is where to locate there operations such as FedEx, Mercedes Benz and others  Significant impact on fixed and variable costs, for example transportation cost contribute to around 25% of the product selling price. Copyright © 2023 Pearson Canada Inc. 8-4  Location Strategy  Other costs includes taxes, wages, raw material cost and others.  So the total cost associated with location strategy can reach up to 50%. Copyright © 2023 Pearson Canada Inc. 8-5  Location Strategy  Location and Costs  Location and Innovation Copyright © 2023 Pearson Canada Inc. 8-6  Location and Costs  Once in place, location-related costs are fixed in place and difficult to reduce such as energy cost, labor cost, insurance cost etc.  Location decisions based on low cost require careful consideration  Determining optimal facility location is a good investment Copyright © 2023 Pearson Canada Inc. 8-7  Location and Innovation  Cost is not always the most important aspect of a strategic decision  Four key attributes when strategy is based on innovation  Local presence of related and supporting industries  High-quality and specialized resources  An environment that encourages investment and local competition  A sophisticated local market Copyright © 2023 Pearson Canada Inc. 8-8  Location and Innovation  Intel opened not in Asia but in U.S. due to:  The skilled labor requirements  Protection of intellectual property Copyright © 2023 Pearson Canada Inc. 8-9  Factors that affect Location Decisions  The location decision factors are divided into three stages:  Country Decision  Region/ Community Decision  Site Decision Copyright © 2023 Pearson Canada Inc. 8 - 10  Location Decisions Country Decision Key Success Factors Political risks, government rules, attitudes, incentives Exchange rates and currency risks Location of markets Cultural and economic issues Availability of supplies, communications, energy Copyright © 2023 Pearson Canada Inc. 8 - 11  Location Decisions Region/ Community Decision Key Success Factors 1. Labour availability and costs 2. Costs and availability of utilities 3. Proximity to raw materials and customers 4. Corporate desires 5. Attractiveness of region 6. Environmental regulations 7. Government incentives and fiscal policies 8. Land/construction costs Copyright © 2023 Pearson Canada Inc. 8 - 12  Location Decisions Site Decision Key Success Factors 1. Air, rail, highway, and waterway systems 2. Zoning restrictions 3. Site size and cost 4. Environmental impact issues 5. Proximity of services/ supplies needed Copyright © 2023 Pearson Canada Inc. 8 - 13  Factors That Affect Location Decisions  Labour productivity  Wage rates are not the only cost  Lower productivity may increase total cost Labour cost per day = Cost per unit Productivity (units per day) Connecticut Juarez $70 $25 = $1.17 per unit = $1.25 per unit 60 units 20 units Copyright © 2023 Pearson Canada Inc. 8 - 14  Factors That Affect Location Decisions  Exchange rates and currency risks  Can have a significant impact on costs  Rates change over time  Costs  Tangible - easily measured costs such as utilities, labour, materials, taxes  Intangible - less easy to quantify and include education, public transportation, community, quality-of-life Copyright © 2023 Pearson Canada Inc. 8 - 15  Factors That Affect Location Decisions  Political risk, values, and culture  Globally cultures have different attitudes towards:  Labor unions  legal, and ethical issues  private and intellectual property Copyright © 2023 Pearson Canada Inc. 8 - 16  Factors That Affect Location Decisions  Proximity to markets, suppliers and co  JIT systems  high transportation costs may make it important to manufacturers  Access to a significant resource pool (labour, raw materials, etc.) often drives competitors to locate near one another Copyright © 2023 Pearson Canada Inc. 8 - 17  Factors That Affect Location Decisions  Proximity to competitors  Clustering: the location of competing companies near each other  For example, in the restaurant world, studies have shown that more total customers will visit restaurants that are located near each other than would if they are not. Copyright © 2023 Pearson Canada Inc. 8 - 18  Methods of Evaluating Locations Alternative  Factor-Rating Method  Locational Break-Even Analysis  Centre-of-Gravity Method  Transportation Model Copyright © 2023 Pearson Canada Inc. 8 - 19  Factor-Rating Method  Six steps in the method 1. Develop a list of relevant factors called key success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score Copyright © 2023 Pearson Canada Inc. 8 - 20  Factor-Rating Example Key Scores Success (out of 100) Weighted Scores Factor Weight France Denmark France Denmark Labour availability and attitude.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0 People-to- car ratio.05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0 Per capita income.10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0 Tax structure.39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3 Education and health.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7 Totals 1.00 70.4 68.0 Copyright © 2023 Pearson Canada Inc. 8 - 21  Locational Break-Even Analysis  Method of cost-volume analysis used for industrial locations  Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost for expected production volume Copyright © 2023 Pearson Canada Inc. 8 - 22  Locational Break-Even Analysis Example Three locations: Selling price = $120 Expected volume = 2000 units Fixed Variable Total City Cost Cost Cost Timmins $30 000 $75 $180 000 Sault Ste. Marie $60 000 $45 $150 000 North Bay $110 000 $25 $160 000 Total Cost = Fixed Cost + (Variable Cost x Volume) Copyright © 2023 Pearson Canada Inc. 8 - 23  Locational Break-Even Analysis Example Three locations: Selling price = $120 Expected volume = 2000 units Total Cost = Fixed Cost + (Variable Cost x Volume) Total cost for option 2= 60000+45(2000)=$150000 Total revenue – Total Cost = 120(2000)-150000=$90000 per year Copyright © 2023 Pearson Canada Inc. 8 - 24  Locational Break-Even Analysis Example – $180 000 – – $160 000 – $150 000 – e – s t curv o $130 000 – h B ay c r t – No Annual cost $110 000 – e Mari – te r v e S – ul t cu t a s $80 000 – S co – s i n ve $60 000 – mm ur – Ti st c – co Timmins North Bay $30 000 – Sault Ste. Marie lowest lowest – lowest cost cost cost $10 000 – | | | | | | | – Figure 8.2 0 500 1000 1500 2000 2500 3000 Volume Copyright © 2023 Pearson Canada Inc. 8 - 25  Centre-of-Gravity Method  Such methods are particularly useful for warehouses and distribution centers  Finds location of distribution centre that minimizes distribution costs  Considers  Location of markets  Volume of goods shipped to those markets  Copyright © 2023 Pearson Canada Inc. 8 - 26  Centre-of-Gravity Method  Place existing locations on a coordinate grid  Grid origin and scale is arbitrary  Maintain relative distances  Calculate X and Y coordinates for ‘centre of gravity’  Assumes cost is directly proportional to distance and volume shipped Copyright © 2023 Pearson Canada Inc. 8 - 27  Centre-of-Gravity Method ∑dixQi i x - coordinate = ∑Q i i ∑diyQi i y - coordinate = ∑Q i i where dix = x-coordinate of location i diy = y-coordinate of location i Copyright © 2023 Pearson Canada Inc. Qi = Quantity of 8 - 28  Centre-of-Gravity Method Number of Containers Store Location Shipped per Month Owen Sound 2000 Oshawa 1000 Kingston 1000 Erie, PA 2000 Copyright © 2023 Pearson Canada Inc. 8 - 29  Centre-of-Gravity Method Figure 8.3 Copyright © 2023 Pearson Canada Inc. 8 - 30  Centre-of-Gravity Method The x, y coordinate Store Location for each location Owen Sound 30,120 Oshawa 90,110 Kingston 130,130 Erie, PA 60,40 (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) x-coordinate = 2000 + 1000 + 1000 + 2000 = 66.7 (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 1000 + 2000 = 93.3 Copyright © 2023 Pearson Canada Inc. 8 - 31  Centre-of-Gravity Method North-South Kingston (130, 130) Owen Sound (30, 120) 120 – Oshawa (90, 110) 90 – + Centre of gravity (66.7, 93.3) 60 – 30 – Erie, PA (60, 40) | | | | | | – East-West 30 60 90 120 150 Arbitrary origin Figure 8.3 Copyright © 2023 Pearson Canada Inc. 8 - 32  Transportation Model  Finds amount to be shipped from several points of supply to several points of demand  Solution will minimize total production and shipping costs  The transportation model is one of the classic linear programming applications. Copyright © 2023 Pearson Canada Inc. 8 - 33  Service Location Strategy 1. Purchasing power of customer-drawing area 2. Competition in the area 3. Quality of the competition 4. Uniqueness of the firm’s and competitors’ locations 5. Service and image compatibility with demographics of the customer-drawing area 6. Physical qualities of facilities and neighbouring businesses 7. Operating policies of the firm 8. Quality of management Copyright © 2023 Pearson Canada Inc. 8 - 34  How Hotel Chains Select Sites  Location is a strategically important decision in the hospitality industry  Different factors could affect the location selection but the most imprtant ones are:  Price of the hotel  Median income levels  State population per hotel  Location of nearby colleges Copyright © 2023 Pearson Canada Inc. 8 - 35  The Call Centre Industry  Requires neither face-to-face contact nor movement of materials  Has very broad location options  Traditional variables are no longer relevant  Cost and availability of labour may drive location decisions Copyright © 2023 Pearson Canada Inc. 8 - 36  Summary  Location may determine up to 50% of operating expense  Critical to determine revenue potential  Industrial firms need to consider both tangible and intangible costs  Some methods: factor-rating, break-even analysis, centre-of-gravity, etc.  Service, retail, professional organizations should consider: purchasing power in area, competition, advertising, physical qualities of location, operating policies of organization, etc. Copyright © 2023 Pearson Canada Inc. 8 - 37