Chapter 8 - Location Strategies PDF

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IAF716 - Operations Management Chapter 8 - Location Strategies November 11, 2018 What are the Seven Major Factors that affect location decisions? Location is one of the most important decisions a firm makes ➔ Significantly impacts on fixed and variable costs ➔ Decisions are made relatively infrequently ➔ Objective: maximize the benefit of location to the firm ➔ Increasingly global in nature ➔ Long term decision ➔ Once committed → many resource and cost issues are difficult to change Location and Cost ➔ Location decisions based on low cost require careful consideration ➔ location -related costs = fxed ⇒difficult to reduce ➔ Determining optimal facility location = good investment Location and Innovation ➔ Cost = not always the most important aspect of a strategic decision ➔ Four Key Attribute when strategy is based on innovation ◆ High Quality and specialised inputs ◆ An environment that encourages investment and local rivalry ◆ A sophisticated local market ◆ Local presence of related and supporting industries Location Decisions (Three Levels) 1.

Country Decision

1. 2. 3. 4. 5. 6. ●

Political risks, government rules, attitudes, incentives (gov’t stability - political risk) Cultural and economic issues Location of markets Labour talent, attitudes, productivity, costs Availability of supplies, communications, energy Exchange rates and currency risks Transportation costs, attitude towards foreign investors/incentives. Tariffs, taxes, legal system

2.

Region/Com munity Decision

1. 2. 3. 4. 5. 6. 7. 8.

Corporate Desires Attractiveness of region Labour availability and costs Costs and availability of utilities Environmental regulations Government incentives and fiscal policies Proximity to raw materials and customers Land/construction costs

3.

Site Decision

1. 2. 3. 4. 5.

Site,size and cost Air, rail, highway, and waterway systems Zoning restrictions Proximity of services/supplies needed Environmental impact issues

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Factors Affecting Location Decisions 1. Labour Productivity

➔ Wage Rates are not the only cost ➔ Lower Productivity may increase total cost

2. Exchange rates and currency risks

➔ Can have a significant impact on costs ➔ Rates change over time

3. Costs → Location Decisions based on costs alone can create difficult ethical situations

➔ Tangible - easily measured costs (utilities, labour, materials, taxes ➔ Intangible - less easy to quantify (education, public transportation, community, quality-of-life)

4. Political risk, values, and culture

➔ National, state, local government attitudes toward private and intellectual property, zoning, pollution, employment stability may be in flux ➔ Worker attitudes towards turnover, unions, absenteeism ➔ Globally cultures have different attitudes towards punctuality, legal, and ethical issues

5. Proximity to markets

➔ Very important to services ➔ JIT systems or high transportation costs may make it important to manufacturers

6. Proximity to suppliers

➔ Perishable goods, high transportation costs, bulky products

7. Proximity to competitors

➔ Called clustering ➔ Often driven by resources (natural, information, capital, talent) ➔ Found in both manufacturing and service industries

How do you Compute Labour Productivity

What is the Factor-Rating Method and How do you Apply it ➔ Popular because a wide variety of factors can be included in the analysis ➔ Six Steps 1. Develop a list of relevant factors, called Key Success Factors(KSF) 2. Assign a weight to each factor 3. Develop a scale for each factor (0.1 to 1 OR 1 to 10) 4. Score each location for each factor 2 of 5

5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest score What is a Locational Break-Even Analysis - Graphically and Mathematically ➔ Locational Break-Even Analysis - a method of cost-volume analysis used for industrial locations ➔ Three Steps: 1. Determine fixed and variable costs for each location 2. Plot the costs for each location (Calculate the total cost for each location) 3. Select location with lowest total cost for expected production volume

What is Centre of Gravity Method ➔ Centre-of-Gravity Method - finds location of distribution centre that minimizes distribution costs ➔ Considers ◆ Location of Markets ◆ Volume of goods shipped to those markets ◆ Shipping costs(or distance) ➔ Steps ◆ Place Existing Locations of 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

What is

the

differences between service- and industrial-sector location analysis Service Location Strategy 1. Purchasing power of customer-drawing area

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2. 3. 4. 5. 6. 7. 8.

Service and image compatibility with demographics of the customer-drawing area Competition in the area Quality of competition Uniqueness of the firm’s and competitors’ locations Physical qualities of facilities and neighbouring businesses Operating policies of the firm Quality of management

2 Types of Plant Location 1. Localization/centralization - concentration of similar types of industries at some particular place a. E.g. stock brokers at Wall Street, oil related industries in Alberta 2. Delocalization/decentralization - spreading of similar types of industries at different places a. I.e. banking industries

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Transportation Model

Hotel Chains - Site Location Process

➔ Location is a strategically ➔ Finds amount to be important decision n the shipped from several hospitality industry points of supply to ➔ La Quinta started w/ 35 several points of independent variables and demand worked to refine a regression ➔ Solution will minimize model to predict profitability total production and ➔ The Final Model had only four variables ships costs ◆ Price of the inn ➔ A special class of linear ◆ Median Income Levels ➔ Programming problems ◆ State population per inn ◆ Location of nearby colleges

Call Centre Industry

Geographic Information Systems (GIS)

➔ Important tool to help in ➔ Requires neither location analysis face-to-face contact ➔ Enables more complex nor movement of demographic analysis materials ➔ Available Databases ➔ Has very broad include: location options ◆ Detailed census data ➔ Traditional ◆ Detailed Maps variables are no ◆ Utilities longer relevant ◆ Geographic features ➔ Cost and ◆ Locations of Major availability of Services labour may drive location decisions

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