Operations Management: Sustainability and Supply Chain Management Twelfth Edition PDF

Operations Management: Sustainability and Supply Chain Management Twelfth Edition Chapter 8 Location Strategies Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights...

Operations Management: Sustainability and Supply Chain Management Twelfth Edition Chapter 8 Location Strategies Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Outline Global Company Profile: FedEx The Strategic Importance of Location Factors That Affect Location Decisions Methods of Evaluating Location Alternatives Service Location Strategy Geographic Information Systems Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location Provides Competitive Advantage for FedEx Central hub concept – Enables service to more locations with fewer aircraft – Enables matching of aircraft flights with package loads – Reduces mishandling and delay in transit because there is total control of packages from pickup to delivery Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Learning Objectives (1 of 2) 8.1 Identify and explain seven major factors that effect location decisions 8.2 Compute labor productivity 8.3 Apply the factor-rating method 8.4 Complete a locational break-even analysis graphically and mathematically Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 8.5 Use the center-of-gravity method 8.6 Understand the differences between service- and industrial-sector location analysis Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved The Strategic Importance of Location (1 of 3) One of the most important decisions a firm makes Increasingly global in nature Significant impact on fixed and variable costs Decisions made relatively infrequently Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved The Strategic Importance of Location (2 of 3) Long-term decisions Once committed to a location, many resource and cost issues are difficult to change Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved The Strategic Importance of Location (3 of 3) The objective of location strategy is to maximize the benefit of location to the firm Options include 1. Expanding existing facilities 2. Maintain existing and add sites 3. Closing existing and relocating Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location and Costs Location decisions require careful consideration Once in place, location-related costs are fixed in place and difficult to reduce Effort spent determining optimal facility location is a good investment Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions Globalization adds to complexity Drivers of globalization – Market economics – Communication – Rapid, reliable transportation – Ease of capital flow – Differing labor costs Identify key success factors (KSFs) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location Decisions (1 of 3) Figure 8.1 Some Considerations and Factors That Affect Location Decisions Key Success Factors Country Decision 1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor talent, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location Decisions (2 of 3) Figure 8.1 [continued] Key Success Factors Region/Community 1. Corporate desires Decision 2. Attractiveness of region 3. Labor availability and costs 4. Costs and availability of utilities 5. Environmental regulations 6. Government incentives and fiscal policies 7. Proximity to raw materials and customers 8. Land/construction costs Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location Decisions (3 of 3) Figure 8.1 [continued] Key Success Factors Site Decision 1. Site size and cost 2. Air, rail, highway, and waterway systems 3. Zoning restrictions 4. Proximity of services/supplies needed 5. Environmental impact issues 6. Customer density and demographics Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Global Competitiveness Index of Countries (1 of 2) Table 8.1 Competitiveness of 144 Selected Countries, Based on Annual Surveys of 13,000 Business Executives Country 2015 Ranking Switzerland 1 Singapore 2 U.S. 3 Finland 4 Germany 5 Japan 6 Canada 15 Israel 27 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Global Competitiveness Index of Countries (2 of 2) Table 8.1 [continued] Country 2015 Ranking China 28 Russia 53 Mexico 61 Vietnam 68 Haiti 137 Chad 143 Guinea 144 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions (1 of 6) Labor productivity – Wage rates are not the only cost – Lower productivity may increase total cost Labor cost per day Labor costper unit Productivity units per day  South Carolina Mexico $70 $25 $1.17 per unit $1.25 per unit 60 units 20 units Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions (2 of 6) Exchange rates and currency risks – Can have a significant impact on costs – Rates change over time Costs – Tangible – easily measured costs such as utilities, labor, materials, taxes – Intangible – not as easy to quantify and include education, public transportation, community, quality- of-life Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions (3 of 6) Location decisions based on costs alone can create difficult ethical situations Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions (4 of 6) Political risk, values, and culture – National, state, local governments’ attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux – Worker attitudes toward turnover, unions, absenteeism – Globally cultures have different attitudes toward punctuality, legal, and ethical issues Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Ranking Corruption Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions (5 of 6) Proximity to markets – Very important to services – JIT systems or high transportation costs may make it important to manufacturers Proximity to suppliers – Perishable goods, high transportation costs, bulky products Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factors That Affect Location Decisions (6 of 6) Proximity to competitors (clustering) – Often driven by resources such as natural, information, capital, talent – Found in both manufacturing and service industries Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Clustering of Companies (1 of 3) Table 8.3 Clustering of Companies Industry Locations Reason for Clustering Wine making Napa Valley (U.S.) Natural resources of land and Bordeaux region climate (France) Software firms Silicon Valley, Talent resources of bright Boston, Bangalore, graduates in Israel scientific/technical areas, venture capitalists nearby Clean energy Colorado Critical mass of talent and information, with 1,000 companies Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Clustering of Companies (2 of 3) Table 8.3 [continued] Industry Locations Reason For Clustering Theme parks (Disney Orlando, A hot spot for entertainment, World, Universal Florida warm weather, tourists, and Studios, and Sea World) inexpensive labor Electronics firms (Sony, Northern NAFTA, duty free export to U.S. IBM, HP, Motorola, and Mexico Panasonic) Computer hardware Singapore, High technological penetration manufacturers Taiwan rate and per capita GDP, skilled/educated workforce with large pool of engineers Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Clustering of Companies (3 of 3) Table 8.3 [continued] Industry Locations Reason For Clustering Fast food chains Sites within 1 mile of Stimulate food sales, high (Wendy’s, each other traffic flows McDonald’s, Burger King, Pizza Hut) General aviation Wichita, Kansas Mass of aviation skills aircraft (Cessna, Learjet, Boeing, Raytheon) Athletic footwear, Portland, Oregon 300 companies, many outdoor wear owned by Nike, deep talent pool and outdoor culture Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factor-Rating Method Popular because a wide variety of factors can be included in the analysis 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 and total the score for each location 6. Make a recommendation based on the highest point score Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Factor-Rating Example Table 8.4 Weights, Scores, and Solution Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Locational Cost-Volume Analysis An economic comparison of location alternatives 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 © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Locational Cost-Volume Analysis Example (1 of 3) Three locations: Selling price = $120 Expected volume = 2,000 units City Fixed Cost Variable Cost Total Cost Athens $30,000 $75 $180,000 Brussels $60,000 $45 $150,000 Lisbon $110,000 $25 $160,000 Total Cost Fixed Cost  Variable Cost Volume  Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Locational Cost-Volume Analysis Example (2 of 3) Crossover point – Athens/Brussels 30,000  75( x )  60,000  45( x ) 30( x )  30,000 x  1,000 Crossover point – Brussels/Lisbon 60,000  45( x )  110,000  25( x ) 20( x )  50,000 x  2,500 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Locational Cost-Volume Analysis Example (3 of 3) Figure 8.2 Crossover Chart for Locational Cost–Volume Analysis Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (1 of 7) Finds location of distribution center that minimizes distribution costs Considers – Location of markets – Volume of goods shipped to those markets – Shipping cost (or distance) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (2 of 7) Place existing locations on a coordinate grid – Grid origin and scale are arbitrary – Maintain relative distances Calculate x and y coordinates for ‘center of gravity’ – Assumes cost is directly proportional to distance and volume shipped Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (3 of 7) x-coordinate of the xQ i i i center of gravity  Q i i y-coordinate of the yQi i i  center of gravity Q i i Where xi  x  coordinate of location i y i  y  coordinate of location i Qi  Quantity of goods moved to or from location i Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (4 of 7) Table 8.5 Demand for Quain’s Discount Department Stores Number of Containers Store Location Shipped Per Month Chicago 2,000 Pittsburgh 1,000 New York 1,000 Atlanta 2,000 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (5 of 7) Figure 8.3 Coordinate Locations of Four Quain’s Department Stores and Center of Gravity Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (6 of 7) x - coordinate  30 2000   90 1000   130 1000   60 2000  2000  1000  1000  2000  6 6.7 y - coordinate  120 2000   110 1000   130 1000   40 2000  2000  1000  1000  2000  9 3.3 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Center-of-Gravity Method (7 of 7) Figure 8.3 [continued] Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved 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 A special class of linear programming problems Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Worldwide Distribution of Volkswagens and Parts Figure 8.4 Volkswagen, the Third Largest Automaker in the World, Finds It Advantageous to Locate Its Plants Throughout the World Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Service Location Strategy 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 competitors’ locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location Strategies (1 of 2) Table 8.6 Location Strategies – Service vs. Goods-Producing Organizations Service/Retail/Professional Goods-producing Revenue Focus Cost Focus Volume/revenue Tangible costs Drawing area; purchasing power Transportation cost of raw material Competition; advertising/pricing Shipment cost of finished goods Energy and utility cost; labor; raw Physical quality material; taxes, and so on Parking/access; security/lighting; appearance/ image Intangible and future costs Attitude toward union Cost determinants Quality of life Rent Education expenditures by state Management caliber Quality of state and local Operation policies (hours, wage government rates) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Location Strategies (2 of 2) Table 8.6 [continued] Service/Retail/Professional Goods-producing Techniques Techniques Regression models to determine importance of Transportation method various factors Factor-rating method Factor-rating method Locational cost–volume analysis Traffic counts Crossover charts Demographic analysis of drawing area Purchasing power analysis of area Center-of-gravity method Geographic information systems Assumptions Assumptions Location is a major determinant of revenue Location is a major determinant of cost High customer-contact issues are critical Most major costs can be identified explicitly for Costs are relatively constant for a given area; each site therefore, the revenue function is critical Low customer contact allows focus on the identifiable costs Intangible costs can be evaluated Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved How Hotel Chains Select Sites (1 of 2) Location is a strategically important decision in the hospitality industry La Quinta started with 35 independent variables and worked to refine a regression model to predict profitability The final model had only four variables – Price of the inn – Median income levels – State population per inn – Location of nearby colleges Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved How Hotel Chains Select Sites (2 of 2) R 2 .51 51% of the profitability is predicted by just these four variables! Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Geographic Information Systems (GIS) (1 of 2) Important tool to help in location analysis Enables more complex demographic analysis Available data bases include – Detailed census data – Detailed maps – Utilities – Geographic features – Locations of major services Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Geographic Information Systems (GIS) (2 of 2) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Copyright Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved