Lean Systems PDF

Lean Systems ⚫ Lean manufacturing is a production method aimed primarily at reducing times within the production system as well as response times from suppliers and to customers. ⚫ Lean systems affect a firm’s internal linkages between its core and supporting processes and its ext...

Lean Systems ⚫ Lean manufacturing is a production method aimed primarily at reducing times within the production system as well as response times from suppliers and to customers. ⚫ Lean systems affect a firm’s internal linkages between its core and supporting processes and its external linkages with its customers and suppliers. ⚫ One of the most popular systems that incorporate the generic elements of lean systems is the just-in-time (JIT) system which focuses on eliminating waste. ⚫ The goal is to eliminate the eight types of waste. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–1 Eight Wastes TABLE 8.1 | THE EIGHT TYPES OF WASTE OR MUDA Waste Definition 1. Overproduction Manufacturing an item before it is needed. 2. Inappropriate Using expensive high precision equipment when simpler Processing machines would suffice. 3. Waiting Wasteful time incurred when product is not being moved or processed. 4. Transportation Excessive movement and material handling of product between processes. 5. Motion Unnecessary effort related to the ergonomics of bending, stretching, reaching, lifting, and walking. 6. Inventory Excess inventory hides problems on the shop floor, consumes space, increases lead times, and inhibits communication. 7. Defects Quality defects result in rework and scrap, and add wasteful costs to the system in the form of lost capacity, rescheduling effort, increased inspection, and loss of customer good will. 8. Underutilization of Failure of the firm to learn from and capitalize on its employees’ Employees knowledge and creativity impedes long term efforts to eliminate waste. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–2 1. Supply Chain Considerations in Lean System ⚫ Close supplier ties ◆ Low levels of capacity slack or inventory ⚫ Supplies must be shipped frequently, have short lead times, arrive on schedule, and be of high quality. ◆ Look for ways to improve efficiency and reduce inventories throughout the supply chain ◆ JIT II A supplier representative works right in the company’s plant, making sure that there is an appropriate supply on hand. ◆ Benefits to both buyers and suppliers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–3 ⚫ Small lot sizes ◆ Reduce the average level of inventory ◆ Pass through system faster ◆ Create uniform workload and prevent overproduction ◆ Increase setup frequency Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–4 2. Process Considerations in Lean System 1. Pull method of workflow ⚫ in which customer demand activates the production of a good or service. ⚫ Push method (involves using forecasts of demand and producing the item before the customer orders it. 2. Uniform workstation loads ⚫ A lean system works best if the daily load on individual workstations is relatively uniform. Service processes can achieve uniform workstation loads by using reservation. Example: Hospitals ⚫ Another approach is to use differential pricing of the service to manage the demand for it systems. Example: Airlines red-eye flights. ⚫ For manufacturing processes, uniform loads can be achieved by assembling the same type and number of units each day, Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–5 3. Quality at the source ⚫ is a philosophy whereby defects are caught and corrected where they are created. ⚫ The goal for workers is to act as their own quality inspectors and never pass on defective units to the next process. ⚫ Jidoka Automatically stopping the process when something is wrong and then fixing the problems on the line itself as they occur. Jidoka represents a visual management system whereby status of the system in terms of safety, quality, delivery, and cost performance relative to the goals in an assembly line is clearly visible to workers on the floor at all times ◆ Poka-yoke ⚫ mistake-proofing methods aimed at designing fail-safe systems that attack and minimize human error. ⚫ Example: The company could use the poka-yoke method by making different parts of the modular product in such a way that allows them to be assembled in only one way—the correct way. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–6 ⚫ Andon, which is a system that gives machines and machine operators the ability to signal the occurrence of any abnormal condition such as tool malfunction, shortage of parts, or the product being made outside the desired specifications. It can take the form of audio alarms, blinking lights, LCD text displays Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–7 Process Considerations 4. Standardized components and work methods ⚫ In highly repetitive service operations, great efficiencies can be gained by analyzing work methods and documenting the improvements for all employees to use. For example, UPS consistently monitors its work methods, from sorting packages to delivering them, and revises them as necessary to improve service. 5.Flexible workforce ⚫ Workers in flexible workforces can be trained to perform more than one job. ⚫ A benefit of flexibility is the ability to shift workers among workstations to help relieve bottlenecks as they arise without the need for inventory buffers—an important aspect of the uniform flow of lean systems. ⚫ Also, workers can step in and do the job for those who are on vacation or who are out sick. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–8 6. Automation ⚫ Money freed up because of inventory reductions or other efficiencies can be invested in automation to reduce costs. The benefits, of course, are greater profits, greater market share (because prices can be cut), or both. Automation can play a big role when it comes to providing lean services. For example, banks offer ATMs that provide various bank services on demand 24 hours a day. 7.Total Preventive Maintenance (TPM) ⚫ Total Preventive Maintenance (TPM) can reduce the frequency and duration of machine downtime. ⚫ After performing their routine maintenance activities, technicians can test other machine parts that might need to be replaced. Replacing parts during regularly scheduled maintenance periods is easier and quicker than dealing with machine failures during production. Maintenance is done on a schedule that balances the cost of the preventive maintenance program against the risks and costs of machine failure. Routine preventive maintenance is important for service businesses that rely heavily on machinery, such as the rides at Walt Disney World or Universal Studios Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8–9 Five S Method TABLE 8.2 | 5S DEFINED 5S Term 5S Defined 1. Sort Separate needed from unneeded items (including tools, parts, materials, and paperwork), and discard the unneeded. 2. Straighten Neatly arrange what is left, with a place for everything and everything in its place. Organize the work area so that it is easy to find what is needed. 3. Shine Clean and wash the work area and make it shine. 4. Standardize Establish schedules and methods of performing the cleaning and sorting. Formalize the cleanliness that results from regularly doing the first three S practices so that perpetual cleanliness and a state of readiness are maintained. 5. Sustain Create discipline to perform the first four S practices, whereby everyone understands, obeys, and practices the rules when in the plant. Implement mechanisms to sustain the gains by involving people and recognizing them via a performance measurement system. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 10 Designing Lean System Layouts ⚫ Line flows recommended (how people or items involved in the manufacturing process are moved from step to step, from the start of the process to the end) ◆ Eliminate waste ⚫ One worker, multiple machines (OWMM) ⚫ Group technology ◆ Group parts or products with similar characteristics into families Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 11 ⚫ One Worker, Multiple Machines If volumes are not sufficient to keep several workers busy on one production line, the manager might set up a line small enough to keep one worker busy. The one- worker, multiple-machines (OWMM) cell is a workstation in which a worker operates several different machines simultaneously to achieve a line flow. Having one worker operate several identical machines is not unusual. However, with an OWMM cell, several different machines are in the line. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 12 The Kanban System ⚫ kanban system developed by Toyota. Kanban, meaning “card” or “visible record” in Japanese, refers to cards used to control the flow of production through a factory. ⚫ In the most basic kanban system, a card is attached to each container of items produced. ⚫ The container holds a given percent of the daily production requirements for an item. ⚫ When the user of the parts empties a container, the card is removed from the container and put on a receiving post. The empty container is then taken to the storage area, and the lack of card signals the need to produce another container of the part. ⚫ When the container has been refilled, the card is put back on the container, which is then returned to a storage area. ⚫ The cycle begins again when the user of the parts retrieves the container with the card attached. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 13 Value Stream Mapping (VSM) ⚫ Value stream mapping Product is a qualitative lean family tool for eliminating waste Current state drawing ⚫ Creates a visual “map” of every process Future state involved in the flow of drawing materials and information in a product’s value chain Work plan and implementation Figure 8.6 – Value Stream Mapping Steps Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 14 ⚫ These maps consist of a current state drawing, a future state drawing, and an implementation plan. ⚫ Value stream mapping spans the supply chain from the firm’s receipt of raw materials or components to the delivery of the finished good to the customer. ⚫ In value stream the first step is to focus on one product family for which mapping can be done. It is then followed by drawing a current state map of the existing production situation: Analysts start from the customer end and work upstream to draw the map by hand and record actual process times rather than rely on information not obtained by firsthand observation. Information for drawing the material and information flows can be gathered from the shop floor, including the data related to each process: cycle time (C/T), setup or changeover time (C/O), uptime (on-demand available machine time expressed as a percentage), production batch sizes, number of people required to operate the process, number of product variations, pack size (for moving the product to the next stage), working time (minus breaks), and scrap rate. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 15 Supply Chain Design ⚫ The goal is to reduce costs as well as increase performance. ⚫ Supply chains must be managed to coordinate the inputs with the outputs in a firm to achieve the appropriate competitive priorities of the firm’s enterprise processes. ⚫ The Internet offers firms an alternative to traditional methods for managing the supply chain. ⚫ A supply chain strategy is essential for service as well as manufacturing firms. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 16 Supply Chains ⚫ Every firm or organization is a member of some supply chain ⚫ Services ◆ Provide support for the essential elements of various services the firm delivers ⚫ Manufacturing ◆ Control inventory by managing the flow of materials ◆ Suppliers identified by position in supply chain – “tiers” ◆ Suppliers and customers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 17 Inventory and Supply Chain ⚫ Inventory is a stock of materials used to satisfy customer demand or to support the production of services or goods. ⚫ Figure shows how inventories are created at one node in a supply chain through the analogy of a water tank. ⚫ The flow of water into the tank raises the water level. ⚫ The inward flow of water represents input materials, such as steel, component parts, office supplies, or a finished product. The water level represents the amount of inventory held at a plant, service facility, warehouse, or retail outlet. ⚫ The flow of water from the tank lowers the water level in the tank. The outward flow of water represents the demand for materials in inventory, such as customer orders for a Huffy bicycle or service requirements for supplies such as soap, food, or furnishings. ⚫ The rate of the outward flow also reflects the ability of the firm to match the demand for services or products. ⚫ Another possible outward flow is that of scrap, which also lowers the level of useable inventory. Together, the difference between input flow rate and the output flow rate determines the level of inventory. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 18  Inventory and Supply Chains ⚫ An inventory manager’s job is to balance the advantages and disadvantages of both small and large inventories and find a happy medium between the two levels. ⚫ Pressures for small inventories ⚫ inventory represents a temporary monetary investment. As such, the firm incurs an opportunity cost, which we call the cost of capital, arising from the money tied up in inventory that could be used for other purposes. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 19 1. Inventory Holding Cost: ◆ Inventory holding cost Inventory holding cost is the sum of the cost of capital plus the variable costs of keeping items on hand, such as storage and handling costs and taxes, insurance, and shrinkage costs. The annual cost to maintain one unit in inventory typically ranges from 15 to 35 percent of its value. ◆ Cost of capital ⚫ The cost of capital is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk. ◆ Storage and handling costs ◆ Taxes, insurance, and shrinkage Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 20 Inventory and Supply Chains ⚫ Pressures for large inventories 1. Customer service ⚫ Creating inventory can speed delivery and improve the firm’s on-time delivery of goods. High inventory levels reduce the potential for stockouts and backorders. ⚫ A stockout is an order that cannot be satisfied, resulting in loss of the sale. ⚫ A backorder is a customer order that cannot be filled when promised or demanded but is filled later. 2. Ordering cost ⚫ Each time a firm places a new order, it incurs an ordering cost, or the cost of preparing a purchase order for a supplier or a production order for manufacturing. For the same item, the ordering cost is the same, regardless of the order size. 3. Setup cost ⚫ The cost involved in changing over a machine or workspace to produce a different item. Setup cost also is independent of order size, which creates pressure to make or order a large supply of the items and hold them in inventory rather than order smaller batches Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 21  4. Labor and equipment utilization ⚫ Building inventories improves resource utilization by stabilizing the output rate when demand is cyclical or seasonal. The firm uses inventory built during slack periods to handle extra demand in peak seasons. 5. Transportation cost ⚫ Having inventory on hand allows more full-carload shipments to be made and minimizes the need to expedite shipments by more expensive modes of transportation. ⚫ Placing these orders at the same time will increase inventories because some items will be ordered before they are actually needed; nonetheless, it may lead to rate discounts, thereby decreasing the costs of transportation and raw materials. 6. Payments to supplier ⚫ firm often can reduce total payments to suppliers if it can tolerate higher inventory levels. Suppose that a firm learns that a key supplier is about to increase its prices. In this case, it might be cheaper for the firm to order a larger quantity than usual—in effect delaying the price increase—even though inventory will increase temporarily. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 22 Types of Inventory ⚫ Three aggregate categories ◆ Raw materials ◆ Work-in-process ◆ Finished goods ⚫ Classified by how it is created ◆ Cycle inventory ◆ Safety stock inventory ◆ Anticipation inventory ◆ Pipeline inventory Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 23 Types of Inventory 1. Cycle Inventory ⚫ The portion of total inventory that varies directly with lot size is called cycle inventory. Determining how frequently to order, and in what quantity, is called lot sizing. Two principles apply. ⚫ 1. The lot size, Q, varies directly with the elapsed time (or cycle) between orders. If a lot is ordered every 5 weeks, the average lot size must equal 5 weeks’ demand. ⚫ 2. The longer the time between orders for a given item, the greater the cycle inventory must be. ⚫ At the beginning of the interval, the cycle inventory is at its maximum, or Q. At the end of the interval, just before a new lot arrives, cycle inventory drops to its minimum, or 0. The average cycle inventory is the average of these two extremes: Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 24 Safety Stock and Anticipation Inventory 2. Safety Stock inventory is a surplus inventory that protects against uncertainties in demand, lead time, and supply changes. ⚫ To create safety stock, a firm places an order for delivery earlier than when the item is typically needed. The replenishment order therefore arrives ahead of time, giving a cushion against uncertainty. Example: Suppose that the average lead time from a supplier is 3 weeks, but a firm orders 5 weeks in advance just to be safe. This policy creates a safety stock equal to a 2 weeks’ supply (5 – 3). Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 25 3. Anticipation inventory Is used to absorb uneven rates of demand or supply which businesses often face. ⚫ Predictable, seasonal demand patterns requires the use of anticipation inventory. ⚫ Uneven demand can motivate a manufacturer to stockpile anticipation inventory during periods of low demand so that output levels do not have to be increased much when demand peaks. Anticipation inventory also can help when suppliers are threatened with a strike or have severe capacity limitations. 4. Pipeline Inventory ⚫ Inventory that is created when an order for an item is issued but not yet received is called pipeline inventory. This form of inventory exists because the firm must commit to enough inventory (on-hand plus in-transit) to cover the lead time for the order. Longer lead times or higher demands per week create more pipeline inventory. 8 – 26 Mass Customization ⚫ Often customers want more than a wide selection of standard services or products; they want a personalized service or product and they want it fast. ⚫ A firm’s supply chain must be capable of addressing mass customization to gain competitive advantages. ⚫ Competitive advantages ◆ Managing customer relationships ⚫ Mass customization requires detailed inputs from customers so that the ideal service or product can be produced. The firm can learn a lot about its customers from the data it receives. Once customers are in the database, the firm can keep track of them over time. A significant competitive advantage is realized through these close customer relationships based on a strategy of mass customization. ◆ Eliminate finished goods inventory ◆ Increased perceived value of services or products Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 27 ⚫ Producing to a customer’s order is more efficient than producing to a forecast because forecasts are not perfect. The trick is to have everything you need to produce the order quickly. Dell uses a configurator that allows customers to design their own computer from a set of standard components that are in stock. Once the order is placed, the product is assembled and then delivered. ⚫ Increasing Perceived Value of Services or Products. With mass customization, customers can have it their way. In general, mass customization often has a higher value in the mind of the customer than it actually costs to produce. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 28 Outsourcing Processes ⚫ All businesses buy at least some inputs to their processes (such as professional services, raw materials, or manufactured parts) from other producers. Most businesses also purchase services to get their products to their customers. These decisions are sometimes called make-or-buy decisions, with a make decision meaning more vertical integration and a buy decision meaning more outsourcing ⚫ Vertical integration ⚫ strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers. ◆ Backward integration A firm’s movement upstream toward the sources of raw materials, parts, and services through acquisitions. ⚫ such as a major grocery chain having its own plants to produce house brands of ice cream, frozen pizza dough, and peanut butter. Backward integration has the effect of reducing the risk of supply. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 29 ⚫ Forward integration ⚫ Forward integration means that the firm acquires more channels of distribution, such as its own distribution centers (warehouses) and retail stores. It can also mean that the firm goes even farther by acquiring its business customers ⚫ Outsourcing ⚫ Paying suppliers and distributors to perform processes and provide needed services and materials. ⚫ Offshoring is a supply chain strategy that involves moving processes to another country. As such, offshoring is more encompassing than outsourcing because it also includes vertical integration by locating internal processes in other countries. Firms are motivated to initiate operations offshore by the market potential and the cost advantages it provides. The firm may be able to create new markets because of its presence in other countries and its ability to offer competitive prices due to its cost efficiencies. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 30  Product Design and Process Selection Product design is the process of defining all of the product’s characteristics. o Product design must support product manufacturability (the ease with which a product can be made). o Product design defines a product’s characteristics of appearance, materials, dimensions, tolerances, and performance standards. Process selection is the development of the process necessary to produce the designed product. LO 1 31 8 – 31  Design of Services versus Goods Service design is unique in that both the service and the entire service concept are being designed. Service design is the process of establishing all the characteristics of the service, including physical, sensual, and psychological benefits. Product and service design must match the needs and preferences of the targeted customer group. LO 1 32 8 – 32  Steps in the Product Design Process, Steps Step 1 – Idea development: Someone thinks of a need and a product/service design to satisfy it; customers, marketing, engineering, competitors, benchmarking, reverse engineering. Step 2 – Product screening: Every business needs a formal/structured evaluation process; fit with facility and labor skills, size of market, contribution margin, break-even analysis, return on sales. Step 3 – Preliminary design and testing: Technical specifications are developed, prototypes built, testing starts. Step 4 – Final design: Based on test results, facility, equipment, material, and labor skills defined, suppliers identified. LO 2 33 8 – 33  Idea Development (2 of 2) Idea development: all products begin with an idea, whether from o customers, o competitors, or o suppliers Competitors as source of ideas: o Benchmarking: studying “best-in-class” companies and comparing to your company’s performance. o Reverse engineering: process of disassembling a product to analyze its design features. Early supplier involvement (ESI): involving suppliers in the early stages of product design. LO 2 34 8 – 34  Factors in Product Life Cycle Product life cycle: A series of stages that products pass through in their lifetime, characterized by changing product demands over time. Product life cycle stages: o introduction, growth, maturity, decline ◼ Facility and process investment depends on life cycle. LO 3 35 8 – 35  Sequential Design and Concurrent Engineering Old “over-the-wall” sequential design process should not be used. o Each function did its work and passed it to the next function. Replace with a concurrent engineering process. o An approach that brings many people together in the early phase of product design in order to simultaneously design the product and the process. LO 3 36 8 – 36  Remanufacturing Uses components of old products in the production of new ones and has: o environmental benefits o cost benefits Popular in the production of: o computers o televisions o automobiles LO 3 37 8 – 37  Types of Processes Intermittent operations: o Processes used to produce a variety of products with different processing requirements in lower volumes (such as a healthcare facility). Repetitive operations: o Processes used to produce one or a few standardized products in high volume (such as a cafeteria or car wash). LO 4 38 8 – 38  Process Selection Product design considerations must include the process. Differences between intermittent and repetitive operations: 1) the amount of product volume produced, and 2) the degree of product standardization. LO 4 39 8 – 39  Process Types Process types can be: o Project process: make a one-at-a-time product exactly to customer specifications o Batch process: small quantity of product in groups or batches based on customer orders or specifications o Line process: large volume of a standardized product o Continuous process: very high volumes of a fully standardized product Process types exist on a continuum LO 4 40 8 – 40  Designing Processes Design considerations include: o Make-to-stock strategy: Produces standard products and services for immediate sale or delivery o Assemble-to-order strategy: Produces standard components that can be combined to customer specifications o Make-to-order strategy: Produces products to customer specifications after an order has been received LO 5 41 8 – 41  Symbols: The typical symbols used are arrows to represent flows, triangles to represent decision points, inverted triangles to represent storage of goods, and rectangles as tasks. Figure 3.7(a) shows flows between stages in a simple multistage process, which is a process with multiple activities (“stages”). Arrows indicate a simple flow of materials between the different stages. Often, multiple stages have storage areas or “buffers” between them for placement of either partially completed (work-in-process) or fully completed (finished goods) inventory, shown in Figure 3.7(b). This enables the two stages to operate independently of each other. Often stages in the production process can be performed in parallel, as shown here in (c) and (d). The two stages can produce different products (c) or the same product (d). 42 8 – 42 Process Charts ⚫ An organized way to document all the activities performed by a person or group ⚫ Activities are typically organized into five categories ◆ Operation, ⚫ ◆ Transportation,  ◆ Inspection, ◼ ◆ Delay,  ◆ Storage,  Copyright © 2010 Pearson Education, Inc. 8 – 43  Definition of Location Decision: The process of selecting the most suitable geographical site for a facility to optimize operational efficiency and profitability. Importance in Operations Management Directly impacts cost, service delivery, and competitive advantage. Examples of Facilities: Manufacturing plants, distribution centers, corporate offices, and retail stores. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 44 Strategic Importance Cost Optimization: Reduces transportation, labor, and operational costs. Customer Proximity: Enhances service quality and delivery time. Supply Chain Efficiency: Facilitates seamless flow of materials and products. Scalability: Ensures room for future expansion. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 45 Location Decisions for manufacturing ⚫ Labor Climate: Specific labor-related considerations like availability of skilled labor, labor turnover rates, wage differentials by region, and presence of labor unions. Examples include where labor costs significantly influence location, such as textile manufacturing shifting to countries with lower wages. ⚫ Proximity to Markets: Being close to key markets can minimize delivery times, reduce shipping costs, and improve customer responsiveness. Industries, such as automotive or perishable goods, where proximity to market is crucial. ⚫ Quality of Life: quality of life factors, such as housing, schools, and healthcare, can impact employee satisfaction and retention, which is critical for locations requiring high-skill labor. ⚫ Utilities, Taxes, and Real Estate Costs: For instance, tax incentives offered by some governments can make certain locations financially attractive for manufacturing operations. ⚫ Transportation Infrastructure: Connectivity via roads, railways, ports, and airports. ⚫ Access to Resources: Availability of raw materials, energy, and suppliers. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 46 Location Decisions for services Dominant factors in services ⚫ Proximity to Customers: Essential for convenience-based services like retail or fast food. ⚫ Population Demographics: Income levels, age groups, and cultural preferences affect demand. ⚫ Visibility and Accessibility: High-traffic areas with easy parking or public transport options. ⚫ Competition: Presence of competitors or complementary businesses. ⚫ Cost Considerations: Rental, property, and utility costs. ⚫ Regulatory Environment: Zoning laws and permits. ⚫ Quality of Surroundings: Attractive neighborhoods for premium services. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 47 Geographic Information Systems ⚫ GIS is a powerful tool for analyzing and visualizing spatial data, making it highly valuable in making informed location decisions. Here's how GIS contributes to the process: ⚫ Spatial Data Visualization ⚫ GIS creates detailed maps showing demographic, economic, and geographic data. Visual representations of customer density, competitors, and traffic flow help identify optimal locations. ⚫ Demographic Analysis ⚫ Helps analyze population characteristics such as age, income, education, and purchasing behavior. ⚫ Businesses can align location choices with target customer demographics. ⚫ Example: Retailers use GIS to locate stores in areas with high concentrations of their target audience. 8 – 48 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.  GPS and Site Selection in the Fast Food Industry ⚫ Until recently, fast-food chains used consultants to analyze geodemographic data (demographic data in conjunction with geographic location) for strategic planning, and making franchise location. ⚫ Now with the availability of easy-to-use, low cost, GIS systems that can be operated on a regular PC, small and large fast-food chains are doing it on their own. ⚫ These programs can estimate the total dollars up for grabs in a market by analyzing local age and income data from the U.S. Census Bureau as well as sales data from stores in an area. ⚫ The programs can also tell the optimal number and locations of stores in a market, and how much in sales a store can expect. Analyses can be run for any U.S. market and can rank markets in order of viability. 8 – 49  Using GIS to Identify Starbucks Locations ⚫ Example ⚫ On the first map, note that Oakville has more store locations than Hamilton even though it has lower population density, suggesting that store location is not being driven by population density alone. ⚫ The second map shows the demographics by average per capita household income. Note that in this case, the store locations are based in more affluent areas. 8 – 50  Onsite Expansion, New Location, or Relocation ⚫ Managers must first decide whether to expand onsite, build another facility, or relocate to another site. ⚫ Onsite expansion has the advantage of keeping people together, reducing construction time and costs, and avoiding splitting up operations. ◆ However, as a firm expands a facility, at some point diseconomies of scale set in. ⚫ A new plant allows it to hire more employees, install newer, more-productive machinery and better technology, and reduce transportation costs. ◆ Most firms that choose to relocate are small (comprised of less than 10 employees). ◆ More than 80 percent of all relocations are made within 20 miles of companies’ original locations, which enables the firms to retain their current employees. 8 – 51 Selecting a New Facility Step 1: Identify the important location factors and categorize them as dominant or secondary Step 2: Consider alternative regions; then narrow to alternative communities and finally specific sites Step 3: Collect data on the alternatives Step 4: Analyze the data collected, beginning with the quantitative factors Step 5: Bring the qualitative factors pertaining to each site into the evaluation Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 52 ⚫ Step 1: Identify Important Location Factors Categorize Factors: Dominant Factors: These are critical and must-have features, such as access to transportation, labor availability, or proximity to customers. Secondary Factors: These are less critical but still influential, such as community quality of life or expansion opportunities. Examples: Dominant: Proximity to raw materials for manufacturing. Secondary: Aesthetic appeal of the area for employee satisfaction. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 53 ⚫ Step 2: Consider Alternative Locations Regions: Start with broader geographical areas that align with business needs. Communities: Narrow down to specific cities or towns based on regional analysis. Specific Sites: Finally, evaluate individual properties within chosen communities. Tools: Use GIS, demographic data, and market research to prioritize areas. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 54 ⚫ Step 3: Collect Data on Alternatives Gather data on each potential location, focusing on: Quantitative Data: Costs (real estate, taxes), infrastructure, and logistical support. Qualitative Data: Community support, employee preferences, and environmental impact. Sources: Local government reports, market studies, and site visits. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 55 ⚫ Step 4: Analyze Quantitative Factors Perform a thorough cost-benefit analysis for each site, including: Real estate and utility costs. Transportation and logistics expenses. Labor availability and wages. Use tools like: Factor Rating Method. Cost-Volume-Profit Analysis. Weighted Scoring Models. Incorporate qualitative considerations into the decision-making process, such as:Community and cultural alignment with business goals. Proximity to educational institutions for talent acquisition. Employee and stakeholder preferences. ⚫ Combine these factors with the quantitative analysis to finalize the decision. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 8 – 56