Amity International Business School PG Sem Ii: Production & Operations Management

Amity International Business School

PG Sem II
Production & Operations Management
Location Planning
and Analysis
Need for Location Decisions

• Marketing Strategy
• Cost of Doing Business
• Growth
• Depletion of Resources
Location Strategy
 One of the most important decisions a
firm makes
 Increasingly global in nature
 Significant impact on fixed and variable
costs
 Decisions made relatively infrequently
 The objective is to maximize the benefit
of location to the firm
 Factors That Affect Location Decisions

 Labor Productivity
 Exchange Rates and Currency Risks
 Costs
 Political Risk, Values, and Culture
 Proximity to Markets
 Proximity to Suppliers
 Proximity to Competitors (Clustering)
Comparison of Service and

Manufacturing Considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,

income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking
Location Strategies
Service/Retail/Professional Location Goods-Producing Location

Assumptions Assumptions
Location is a major Location is a major

determinant of revenue determinant of cost
High customer-contact Most major costs can be
issues are critical identified explicitly for
Costs are relatively each site
constant for a given Low customer contact
area; therefore, the allows focus on the
revenue function is identifiable costs
critical Intangible costs can be
evaluated
Location Strategies

Revenue Focus Cost Focus
Volume/revenue Tangible costs

Drawing area; purchasing Transportation cost of raw
power material
Competition; Shipment cost of finished
advertising/pricing goods
Physical quality Energy and utility cost;
Parking/access; labor; raw material; taxes,
security/lighting; and so on
appearance/image Intangible and future costs
Cost determinants Attitude toward union
Rent Quality of life
Management caliber Education expenditures by
Operations policies (hours, state
wage rates) Quality of state and local
government
Location Strategies

Techniques Techniques
Regression models to Transportation method

determine importance of Factor-rating method
various factors Locational break-even
Factor-rating method analysis
Traffic counts Crossover charts
Demographic analysis of
drawing area
Purchasing power analysis of
area
Center-of-gravity method
Geographic information
systems
Making Location Decisions

• Decide on the criteria
• Identify the important factors
• Develop location alternatives
• Evaluate the alternatives
• Make selection
Outline – Continued
 Methods of Evaluating Location
Alternatives
 The Factor-Rating Method
 Locational Break-Even Analysis
 Center-of-Gravity Method
 Transportation Model
Critical 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
Location Decisions
Community
Regional Factors Considerations
Multiple Plant Site-related

Strategies Factors
Location Decision Factors

Regional Factors
• Location of raw materials

• Location of markets
• Labor factors
• Climate and taxes
Community Considerations
• Quality of life
• Services
• Attitudes
• Taxes
• Environmental regulations
• Utilities
• Developer support
Site Related Factors

• Land
• Transportation
• Environmental
• Legal
Multiple Plant Strategies

• Product plant strategy
• Market area plant strategy
• Process plant strategy
Factors That Affect Amity International Business School
Location Decisions
 Exchange rates and currency risks
 Can have a significant impact on cost
structure
 Rates change over time
 Costs
 Tangible - easily measured costs such as
utilities, labor, materials, taxes
 Intangible - less easy to quantify and include
education, public transportation, community,
quality-of-life
Location Decisions
 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 towards turnover, unions,
absenteeism
 Globally cultures have different attitudes
towards punctuality, legal, and ethical issues
Factors That AffectAmity International Business School
Location Decisions
 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
Location Decisions
 Proximity to competitors
 Called clustering
 Often driven by resources such as natural,
information, capital, talent
 Found in both manufacturing and service
industries
Factors That Affect
Location Decisions
 Labor productivity
 Wage rates are not the only cost
 Lower production may increase total cost
Labor cost per day

= Cost per unit
Production (units per day)
Connecticut Juarez
$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units
Location and Costs

 Location decisions based on low cost
require careful consideration
 Once in place, location-related costs
are fixed in place and difficult to
reduce
 Determining optimal facility location is
a good investment
Location and Innovation

 Cost is not always the most important
aspect of a strategic decision
 Four key attributes when strategy is
based on innovation
 High-quality and specialized inputs
 An environment that encourages
investment and local rivalry
 A sophisticated local market
 Local presence of related and supporting
industries
Clustering of Companies
Reason for
Industry Locations
clustering
Wine making Napa Valley (US) Natural resources
Bordeaux of land and climate
region (France)
Software Silicon Valley, Talent resources of
firms Boston, bright graduates in
Bangalore scientific/technical
(India) areas, venture
capitalists nearby
Race car Huntington/Nort Critical mass of
builders h Hampton talent and
region (England) information
Industry Locations Reason for clustering
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal weather, tourists, and
Studios) inexpensive labor
Electronics Northern Mexico NAFTA, duty free
firms export to US
Computer Singapore, Taiwan High technological

hardware penetration rate and
manufacturers per capita GDP,
skilled/educated
workforce with large
pool of engineers
Industry Locations Reason for clustering
Fast food Sites within 1 mile Stimulate food sales,
chains of each other high traffic flows
(Wendy’s,
McDonald’s,
Burger King,
and Pizza Hut)
General aviation Wichita, Kansas Mass of aviation skills
aircraft
(Cessna,
Learjet, Boeing)
Orthopedic Warsaw, Indiana Ready supply of skilled
devices workers, strong U.S.
market
Factor-Rating Method
Factor-Rating Method Amity International Business School
 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 critical
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
EXAMPLE 1 Amity International Business School
• The Dynaco Manufacturing Company is

going to build a new plant to manufacture
ring bearings ( used in automobiles and
trucks). The site selection is evaluating 3
sites and they have scored the important
factors for each as follows. Compare the
locations using the rating method
Location Weight Site 1 Site 2 Site 3

Factor
Labour pool 0.30 80 65 90
Proximity to 0.20 100 91 75
suppliers
Wage rate 0.15 60 95 72
Community 0.15 75 80 80
Environment
Proximity to 0.10 65 90 95
customers
Shipping 0.05 85 92 65
modes
Air service 0.05 50 65 90
Solution
Location Site 1 Site 2 Site 3
Factor
Labour pool 24 19.50 27
Proximity to 20 18.20 15
suppliers
Wage rate 9 14.25 10.80
Community 11.25 12 12
Environment
Site 3 has the
Proximity to 6.50 9 9.50 highest rating
customers factor
Shipping 4.25 4.60 3.25
modes
Air service 2.50 3.25 4.50
Total 77.50 80.80 82.05
Factor-Rating Example
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
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
Cost-Profit-Volume Analysis
Evaluating Locations
• Cost-Profit-Volume Analysis
– Determine fixed and variable costs
– Plot total costs
– Determine lowest total costs
Location Cost-Volume Analysis

• Assumptions
– Fixed costs are constant
– Variable costs are linear
– Output can be closely estimated
– Only one product involved
Example 1: Cost-Volume Analysis
Fixed and variable costs for

four potential locations
L o c a tio n F ix e d V a r ia b le
C ost C ost
A $ 2 5 0 ,0 0 0 $11
B 1 0 0 ,0 0 0 30
C 1 5 0 ,0 0 0 20
D 2 0 0 ,0 0 0 35
Example 1: Solution
Fixed Variable Total

Costs Costs Costs
A $250,000 $11(10,000) $360,000

B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000
$(000)
Example 1: Solution
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16
Annual Output (000)

Locational Break-Even Analysis Example

Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000
Total Cost = Fixed Cost + (Variable Cost x Volume)

Cost-Profit-Volume Analysis
also known as
Locational
Break-Even Analysis
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
Locational Break-Even Analysis Example
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
Annual cost
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
Akron Chicago
$30,000 – lowest
Bowling Green
lowest cost
– cost
lowest cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Volume
Thank you

Amity International Business School PG Sem Ii: Production & Operations Management

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Amity International Business School

Amity International Business School

Need for Location Decisions

 Factors That Affect Location Decisions

Comparison of Service and

Cost Focus Revenue focus

Transportation modes/costs Demographics: age,

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

Service/Retail/Professional Location Goods-Producing Location

Location is a major Location is a major

Service/Retail/Professional Location Goods-Producing Location

Volume/revenue Tangible costs

Service/Retail/Professional Location Goods-Producing Location

Regression models to Transportation method

Making Location Decisions

Critical Success Factors

Multiple Plant Site-related

Location Decision Factors

• Location of raw materials

Site Related Factors

Multiple Plant Strategies

 Lower production may increase total cost

Labor cost per day

Location and Costs

Location and Innovation

Computer Singapore, Taiwan High technological

 Popular because a wide variety of factors can be

• The Dynaco Manufacturing Company is

Location Weight Site 1 Site 2 Site 3

Location Cost-Volume Analysis

Fixed and variable costs for

Fixed Variable Total

A $250,000 $11(10,000) $360,000

Annual Output (000)

Locational Break-Even Analysis Example

Total Cost = Fixed Cost + (Variable Cost x Volume)

Locational Break-Even Analysis Example

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