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Location Planning and Analysis

Operations Management

William J. Stevenson

8th edition


Location Planning and Analysis


Location Planning and Analysis


Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.


Location Planning and Analysis

Need for Location Decisions

Marketing Strategy, part of e.g banks , fast food chains ,

retails stores , In these cases location helps to expand their mkts

Cost of Doing Business

Growth in demand may require new locations

Depletion of Resources, fishing


Location Planning and Analysis

Other Reasons for location

Fishing and Logging operations Mining and petroleum operations , they generally have a longer time horizon Shift in Markets Nature of Location Decisions Infrequent But have a significant impact


Location Planning and Analysis

Nature of Location Decisions

Long term commitment/costs ( low cost strategy ) Impact on investments, revenues, and operations Supply chains Profit potential No single location may be better than others Identify several locations from which to choose
Also where u are in the supply chain Web based businesses can operate from anywhere

Strategic Importance

Objectives of LD


Location Planning and Analysis

Location Options

Options, Four in Nb Generally

Expand existing facilities, if there is adequate room for expansion Add new facilities, e.g retail operations . This can be a defensive startegy to increase mkt presence and share . Take care that it dosent cannibalise the existing ones Move: Shut down at one and move to another e.g US to China , Nortel Networks , canada to China , Comdev. Status Quo : if the alternatives do not yield anything substantial , maintain the present status


Location Planning and Analysis

Procedure for Making Location Decisions

Decide on the criteria e.g inc revenue or customer service Identify the important factors in the supply chain Develop location alternatives Evaluate the alternatives Make selection


Location Planning and Analysis

Location Decision Factors

Community Considerations

Regional Factors

Multiple Plant Strategies

Site-related Factors


Location Planning and Analysis

Regional Factors

Location of raw materials Location of markets Labor factors Climate and taxes

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Raw Materials

Three reasons for proximity to RM Neccessity: Mining , farming, forestry & fishes Perishability : Canning & freezing of food products Transportation Costs

Some factors may dominate sometimes

8-11 Location Planning and Analysis

Energy in Mfr Water Supply Cooling for Nuclear Reactors Traffic Patterns in Service Industry Convenience in service e.g car rental near airport Competitor location in Service

8-12 Location Planning and Analysis

Community Considerations

Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support

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Site Related Factors

Land Transportation Environmental Legal

8-14 Location Planning and Analysis

Multiple Plant Strategies

Product plant strategy Market area plant strategy Process plant strategy

8-15 Location Planning and Analysis

Comparison of Service and Manufacturing Considerations

Revenue focus Demographics: age,income,etc Population/drawing area Competition Traffic volume/patterns

Table 8.2 Manufacturing/Distribution

Cost Focus Transportation modes/costs Energy availability, costs Labor cost/availability/skills Building/leasing costs

Customer access/parking

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Trends in Locations

Foreign producers locating in U.S.

Made in USA Currency fluctuations

Just-in-time manufacturing techniques Microfactories Information Technology

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Table 8.3
Foreign Government a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards b. Stability issues Living circumstances for foreign workers / dependents Religious holidays/traditions Possible buy locally sentiment

Cultural Differences Customer Preferences Labor


Level of training and education of workers Work practices Possible regulations limiting number of foreign employees Language differences Availability and quality of raw materials, energy, transportation

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Evaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs Plot total costs Determine lowest total costs

8-19 Location Planning and Analysis

Location Cost-Volume Analysis


Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved

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Example 1: Cost-Volume Analysis

Fixed and variable costs for four potential locations

L o c a tio n A B C D F ix e d C ost $ 2 5 0 ,0 0 1 0 0 ,0 0 1 5 0 ,0 0 2 0 0 ,0 0 V a r ia b le C ost $11 30 20 35

0 0 0 0

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Example 1: Solution
Variable Costs $11(10,000) 30(10,000) 20(10,000) 35(10,000) Total Costs $360,000 400,000 350,000 550,000

Fixed Costs A B C D $250,000 100,000 150,000 200,000

8-22 Location Planning and Analysis

Example 1: Solution

$(000) 800 700 600 500 400 300 200 100 0 0

A Superior C Superior B Superior





Annual Output (000)

8-23 Location Planning and Analysis

Evaluating Locations

Transportation Model

Decision based on movement costs of raw materials or finished goods Decision based on quantitative and qualitative inputs

Factor Rating

Center of Gravity Method

Decision based on minimum distribution costs