FILAMER CHRISTIAN UNIVERSITY

School of Graduate Studies

Roxas Avenue, Roxas City

OPERATIONAL MANAGEMENT

Roselyn B. Bantes Dr. Matt Numer Ofalla

Reporter Professor

LOCATION DECISION

The Need for Location Decisions

Location decisions arise for a variety of reasons:

 Addition of new facilities
 As part of a marketing strategy to expand markets
 Growth in demand that cannot be satisfied by expanding existing facilities
 Depletion of basic inputs requires relocation
 Shift in markets
 Cost of doing business at a particular location makes relocation attractive

Location Decisions: Strategically Important

 Location decisions:
 Are closely tied to an organization’s strategies
 Low-cost
 Convenience to attract market share
 Effect capacity and flexibility
 Represent a long-term commitment of resources
 Effect investment requirements, operating costs, revenues, and operations
 Impact competitive advantage
 Importance to supply chains

Location Decisions: Objectives

 Location decisions are based on:
 Profit potential or cost and customer service
 Finding a number of acceptable locations from which to choose
 Position in the supply chain
 End: accessibility, consumer demographics, traffic patterns, and local customs are important
 Middle: locate near suppliers or markets
 Beginning: locate near the source of raw materials
 Web-based retail organizations are effectively location independent

Supply Chain Considerations

 Supply chain management must address supply chain configuration:
 Number and location of suppliers, production facilities, warehouses and distribution centers
 Centralized vs. decentralized distribution

The importance of such decisions is underscored by their reflection of the basic strategy for accessing
customer marketsof their service users

Location: Options

Existing companies generally have four options available in location planning:

1. Expand an existing facility

2. Add new locations while retaining existing facilities
3. Shut down one location and move to another
4. Do nothing
Location Decision: General Procedure
 Steps:
1. Decide on the criteria to use for evaluating location alternatives
2. Identify important factors, such as location of markets or raw materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives
 4. Evaluate the alternatives and make a decision
Location: Identifying a Region
 Primary regional Factors:
Location of raw materials
 Necessity
 Pershibility
 Transportation costs
Location of markets
 As part of a profit-oriented company’s competitive strategy
 So not-for-profits can meet the needs of their service users
 Distribution costs and pershibility
Labor factors
 Cost of labor
 Availabiltiy of suitably skilled workers
 Wages rates in the area
 Labor productivity
 Attitudes toward work
 Whether unions pose a serious potential problem
Other factors
 Climates and taxes may play an important role in location decisions
Location: Identifying a Community
 Many communities actively attempt to attract new businesses they perceive to be a good fit for
the community.
 Businesses also actively seek attractive communities based on such factors:
 Quality of life
 Services
 Attitudes
 Taxes
 Environmental Regulations
 Utilities
 Development support
 Location: Identifying a Site
 Primary site location considerations are
Land, Transportation, Zoning and other restrictions.

Multiple Plant Manufacturing Stragegies

 Organizing operations
 Product plant strategy
Entire products or product lines are produced in separate plants, and each plant usually
supplies the entire domestic market.
 Market area plant strategy
Plants are designated to serve a particular geographic segment of the market.
Plants produce most, if not all, of a company’s products
 Process plant strategy
Different plants focus on different aspects of a process.
Example: Automobiles manufacturers – engine plant, body stamping plant, etc.
Coordination across the system becomes a significant issue.
Service and Retail Locations
 Considerations:
-Nearness to raw materials is not usually a consideration
-Customer access is a
Prime consideration for some: restaurants, hotels, etc.
Not an important consideration for others: service call centers etc.
- Tend to be profit or revenue driven, and so are
Concerned with demographics, competition, traffic/volume patterns, and convenience
- Clustering
Similar types of businesses locate near one another
 LOCATION DECISION
CASE STUDY

5 Mini Case Studies: Successful Supply Chain Cost Reduction and

Management
1. Deere & Company
Deere & Company (brand name John Deere) is well known for the
manufacture and supply of machinery used in agriculture,
construction, and forestry, as well as diesel engines and lawn care
equipment. In 2014, Deere & Company was listed 80th in the Fortune
500 America’s ranking and in 2013 was 307th in the Fortune Global
500 ranking.
Supply Chain Cost Reduction Challenges: Deere and company has a
complex product range, which includes a mix of heavy machinery for
the consumer market and industrial equipment, which is made to
order. Retail activity is extremely seasonal, with the majority of
sales made between March and July.
The company was replenishing dealers’ inventory on a weekly
basis, by direct shipment and cross-docking operations, from source
warehouses located near Deere & Company’s manufacturing facilities.
This operation was proving too costly and too slow, so the company
embarked on an initiative to achieve a 10% supply chain cost
reduction over a four-year period.
The Path to Cost Reduction: The company undertook a supply chain
network redesign program, resulting in the commissioning of
intermediate “merge centers” and optimization of cross-dock terminal
locations.
Deere & Company also began consolidating shipments and using
break-bulk terminals during the seasonal peak. The company also
increased its use of third-party logistics providers and effectively
created a network that could be tactically optimized at any given
point in time.
Supply Chain Cost Management Results: Deere & Company’s supply
chain cost management achievements included inventory reduction of
$1 billion, a significant reduction in customer delivery lead times
(from ten days to five or less) and annual transportation cost
savings of around 5%.
2. Intel
One of the world’s largest manufacturers of computer chips, Intel
needs little introduction. However, the company needed to make some
significant supply chain cost reductions after bringing its low-cost
“Atom” chip to market. Supply chain costs of around $5.50 per chip
were bearable for units selling for $100, but the price of the new
chip was a fraction of that, at about $20.
The Supply Chain Cost Reduction Challenge: Somehow Intel had to
reduce the supply chain costs for the Atom chip, but had only one area
of leverage—inventory.
The chip had to work, so there were no service trade-offs that
could be made. Being a single component, there was also no way to pay
less in the way of duties. Intel had already whittled packaging down
to a minimum and with a high value-to-weight ratio, the chips’
distribution costs could not really be pared down any further.
The only option was to try to reduce levels of inventory, which,
up to that point, had been kept very high in order to support a nine-
week order cycle. The only way Intel could find to make supply chain
cost reductions was to bring this cycle time down and therefore reduce
inventory.
The Path to Cost Reduction: Intel decided to try what was
considered an unlikely supply chain strategy for the semiconductor
industry: a true make-to-order scenario. The company began with a
pilot operation using a manufacturer in Malaysia. Through a process of
iteration, they gradually sought out and eliminated supply chain
inefficiencies to incrementally reduce order cycle time. Further
improvement initiatives included:
Reduced the chip assembly test window from a five-day schedule,
to a bi-weekly, 2-day-long process. Introduced a formal S&OP planning
process. Moved to a vendor-managed inventory model wherever it was
possible to do so
Supply Chain Cost Management Results: Through its incremental
approach to cycle time improvement, Intel eventually drove the order
cycle time for the Atom chip down from nine weeks to just two. As a
result, the company achieved a supply chain cost reduction of more
than $4 per unit for the $20 Atom chip—a far more palatable rate than
the original figure of $5.50.

3. Starbucks
Like Intel, Starbucks is pretty much a household name. But like many
of the most successful worldwide brands, the coffee shop giant has
been through its periods of supply chain pain. In fact, during 2007
and 2008, Starbucks leadership began to have serious doubts about the
company’s ability to supply its 16,700 outlets. As in most commercial
sectors at that time, sales were falling. At the same time though,
supply chain costs rose by more than $75 million.

Supply Chain Cost Reduction Challenges: When the supply chain

executive team began investigating the rising costs and supply chain
performance issues, they found that service was indeed falling short
of expectations. Findings included the following problems
Fewer than 50% of outlet deliveries were arriving on time
A number of poor outsourcing decisions had led to excessive 3PL
expenses
The supply chain had, (like those of many global organizations)
evolved, rather than grown by design, and had hence become
unnecessarily complex. The Path to Cost Reduction: Starbucks’
leadership had three main objectives in mind to achieve improved
performance and supply chain cost reduction. These were to:
Reorganize the supply chain
Reduce cost to serve
Lay the groundwork for future capability in the supply chain
In order to meet these objectives, Starbucks divided all its supply
chain functions into three key groups, known as “plan” “make” and
“deliver”. It also opened a new production facility, bringing the
total number of U.S. plants to four.
Next, the company set about terminating partnerships with all but
its most effective 3PLs. The remaining partners were then managed via
a weekly scorecard system, which was aligned with renewed service
level agreements.
Supply Chain Cost Management Results: By the time Starbucks’
supply chain transformation program was completed, the company had
made savings of more than $500 million over the course of 2009 and
2010, of which a large proportion came out of the supply chain,
according to Peter Gibbons, then Executive Vice President of Global
Supply Chain Operations.

‘4. AGCO

Like Deere & Company, AGCO is a leading global force in the

manufacture and supply of agricultural machinery. The company grew
substantially over the course of two decades, with a considerable
proportion of that growth achieved by way of acquisitions.
As commonly happens when enterprises grow in this way, AGCO
experienced increasing degrees of supply chain complexity, along with
associated increases in cost, but for many years, did little to
address the issue directly, largely due to the decentralized and
fragmented nature of its global network.
In 2012, AGCO’s leaders recognised that this state of affairs
could not continue and decided to establish a long-term program of
strategic optimisation.
Supply Chain Cost Reduction Challenges: With five separate brands
under its umbrella, AGCO’s product portfolio is vast. At the point
when optimisation planning began, sourcing and inbound logistics were
managed by teams in various countries, each with different levels of
SCM maturity, and using different tools and systems.
As a result of the decentralised environment, in which inbound
logistics and transport management were separate operational fields,
there was insufficient transparency in the supply chain. Synergies and
economies of scale (and the benefits of the same) were not being taken
advantage of, and all these issues were set against a backdrop of a
volatile, seasonal market.
The Path to Cost Reduction: Following a SCOR supply chain
benchmarking exercise, AGCO decided to approach its cost reduction and
efficiency goals Supply Chain SCOR Model by blending new technology—in
the form of a globally integrated transport management system (TMS)—
with a commitment to form a partnership with a suitably capable 3PL
provider.
 As North and South American divisions of the company were already
working with a recently implemented TMS, it was decided that the
blended approach would be implemented first in Europe, with
commitments to replicate the model, if successful, in its other
operating regions.
With the technology and partnership in place, a logistics control
tower was developed, which integrates and coordinates all daily
inbound supply activities within Europe, from the negotiation of
carrier freight rates, through inbound shipment scheduling and
transport plan optimisation to self-billing for carrier payment.
Supply Chain Cost Management Results: Within a year and a half of
their European logistics solution’s go-live, AGCO achieved freight
cost reductions of some 18%, and has continued to save between three
and five percent on freight expenditure, year-on-year, ever since.
Having since rolled the new operating model out in China and North
America, the company has reduced inbound logistics costs by 28%,
increased network performance by 25% and cut inventory levels by a
quarter.
‘5. Terex
Headquartered in Westport Connecticut, Terex Corporation may not
be such a well-known name, but if your company has ever rented an
aerial working platform (a scissor-lift or similar), there is a good
chance it was manufactured by Terex and originally dispatched to the
rental company from a transfer center in North Bend, Washington.
The North Bend facility is always filled with lifting equipment,
most pieces made to order and uniquely customised for specific
customers. Terex maintained a manual system for yard management at the
transfer centre, which generated excessive costs for what should have
been a relatively simple process of locating customers’ units to prep
them for delivery.
The Supply Chain Cost Reduction Challenge: A wallboard and
sticker system was a low-tech solution for identifying equipment items
in the yard at Terex. While inexpensive in itself, the solution cost
around six minutes every time an employee had to locate a unit in the
yard. It also required a considerable number of hours to be spent each
month taking physical inventories and updating the company’s ERP
platform.
The Path to Cost Reduction: Terex decided to replace the outdated
manual yard management process with a new, digital solution using RFID
tracking. A yard management software (YMS) product was chosen, and the
transfer centre was surveyed before implementation of a pilot project
covering a small portion of the yard.
After a successful pilot, the solution was approved for full-
scale implementation, replacing stickers, yard maps, and wallboard
with electronic tracking and digital inventory management. As at
December of 2017, Terex was making plans to integrate the yard
management solution with its ERP platform to enable even greater
functionality.
Supply Chain Cost Management Results: While the YMS cannot
reconcile inventory automatically with the Terex ERP application, it
does at least provide a daily inventory count via its business
intelligence module. That alone has saved the labour costs previously
incurred in carrying out manual counts.
More importantly though, the RFID-based unit identification and
location process has saved the company around 70 weeks per year in
labour costs, by cutting the process time down from six minutes, to a
mere 30 seconds per unit.