Location Strategies

Location Strategies

Hassan AbualolaCharles AngottoShaun JamesonJohn Reardon

Joel Vastl

Agenda

• The Strategic Importance of Location

• Factors that Affect Location Decisions

• Methods of Evaluation Location Alternatives

• Service Location Strategy

The Strategic Importance of Location

• Location Strategy

• Location and Costs

• Location and Innovation

Location Strategy

• It is one of the most important strategic decisions made by many

companies (FedEx, Mercedes-Benz, and Hard Rock)

• Has a significant impact on both fixed costs and variable costs

• Companies make location decisions relatively infrequently

• 3 Location options

• Decision making often depends on the type of business

• “The objective of location strategy is to maximize the benefit of location to

the firm”

Location and Costs

• Location decisions often has the power to make or break a

company’s business strategy because it is such a significant cost

and revenue driver.

• Once management has committed to a specific location, many

costs are firmly in place and difficult to reduce

• Hard work to determine an optimal facility location is a good

investment

Location and Innovation

• Cost is not always the most important aspect of a strategic

decision

• Four attributes that seem to affect overall competitiveness as

well as innovation

1. Presence of high quality and specialized inputs

2. An environment that encourages investment and intense local

rivalry

3. Pressure and insight gained from a sophisticated local market

4. Local presence of related and supporting industries

Factors That Affect Location Decisions

• The Basics:

1. Country Decision

2. Region/ Community Decision

3. Site Decision

• Labor Productivity

• Exchange Rates and Currency Risks

• Costs

• Political Risk, Values and Culture

• Proximity

Country DecisionKey Success Factors

1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues

3. Location of markets4. Labor talent, attitudes,

productivity, costs5. Availability of supplies,

communications, energy6. Exchange rates and

currency risks

Region/Community DecisionKey Success Factors

1. Corporate desires2. Attractiveness of region 3. Labor availability and costs4. Costs and availability of

utilities5. Environmental regulations6. Government incentives

and fiscal policies7. Proximity to raw materials

and customers8. Land/construction costs

MN

WI

MI

IL IN OH

Site DecisionKey Success Factors

1. Site size and cost2. Air, rail, highway, and

waterway systems3. Zoning restrictions4. Proximity of

services/ supplies needed

5. Environmental impact issues

Labor Productivity

• Area’s wage rate• Companies do not want to go to low• ↓Wage Rate = ↓Knowledge • ↑Wage Rate = ↑Knowledge

Labor cost per dayProductivity (units per day)

= Cost per unit

Exchange Rates and Currency Risk

• With the low wage rate that particular country must have GOOD exchange rates

Costs

• Tangible Costs- easily measured costs such as utilities, labor, materials, taxes

• Intangible costs- less easy to quantify and include education, public transportation, community, quality-of-life

Political Risk, Values and Culture

• National, State, Local governments’ attitudes towards

private company

• National, State, Local property, zoning and pollution laws

• Workers values differ with culture

• Do not want to insult a different countries beliefs,

morals, and or culture

Proximity

•→ MarketsNear customers

•→ SuppliersNear raw material

•→ Competitors clustering

Methods of Evaluating Location Alternatives

• 4 Types of Methods• The Factor-Rating Method• Example• Locational Break-Even Analysis• Example• Example• Center-of-Gravity Method• Example• Example• Transportation Model

Four Types of Methods• The Factor-Rating Method: A location method that instills

objectivity into the process of identifying hard to evaluate costs.

• Locational Break-Even Analysis: The use of cost-volume analysis to make an economic comparison of location alternatives.

• Center-of-Gravity Method: A mathematical technique used for finding the location of a distribution center that will minimize distribution costs.

• Transportation Model: The objective of the transportation model is to determine the best pattern of shipments from several points of supply to several points of demand.

The Factor-Rating Method• Popular method because a wide variety of factors can be

included in the analysis.• Qualitative and Quantitative

• Six Steps• Develop a list of relevant factors called key success factors• Assign a weight to each factor• Develop a scale for each factor• Score each location for each factor• Multiply score by weights for each factor for each location• Recommend the location with the highest point score

Example

Locational Break-Even Analysis

• Used to determine which location provides the lowest cost• Can be done mathematically or graphically

• Three Steps• Determine the fixed and variable cost for each location• Plot the cost for each location• Select location with the lowest total cost for expected

production volume.

Example• Three locations:

Selling price = $120Expected volume = 2,000 units

Akron $30,000 $75 $180,000Bowling Green $60,000 $45 $150,000Chicago $110,000 $25 $160,000

Fixed Variable TotalCity Cost Cost Cost

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

Example

–$180,000 –

–$160,000 –$150,000 –

–$130,000 –

–$110,000 –

––

$80,000 ––

$60,000 –––

$30,000 ––

$10,000 ––

Annu

al co

st

| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000Volume

Bowling Green

cost curve

Akron cost

curve

Chicago cost curve

Center-of-Gravity Method

• Finds location of distribution center that minimizes distribution costs• This method takes into account the…• Location of markets• Volume of goods shipped to those markets• Shipping Costs for distribution center

• Steps• Place existing locations on a coordinate grid• Calculate X and Y coordinates for ‘center of gravity’

ExampleNorth-South

East-West

120 –

90 –

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

Center of gravity (66.7, 93.3)+

ExampleNumber of Containers

Store Location Shipped per Month

Chicago (30, 120) 2,000Pittsburgh (90, 110) 1,000New York (130, 130) 1,000Atlanta (60, 40) 2,000

x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000= 66.7

y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000= 93.3

Transportation Model

• Finds an initial feasible solution and then makes step-by-step improvements until an optimal solution is reached.• Solutions will minimize total production

and shipping costs

Service Location Strategy

• Service Location Strategy

• Service/Retail Location Strategy

• Goods Producing Location

• Service/Retail Techniques

• Goods Production Techniques

• Service/Retail Assumptions

• Goods Producing Assumptions

• Hotel Location Selection

• Call Center Industry

• Geographical Info Systems

Service Location Strategy

• Purchasing power of customer-drawing area

• Service and image compatibility with demographics of the

customer-drawing area

• Competition/Quality of the competition

• Uniqueness of the firm’s and competitors’ locations

• Physical qualities of facilities and neighboring businesses

• Operating policies of the firm

• Quality of management

Service/Retail Location Strategy

• Revenue focus• Volume/revenue

• Drawing area; purchasing power• Competition; advertising/pricing

• Physical quality• Parking/access; security/lighting; appearance/image

• Cost determinants• Rent• Management caliber• Operations policies (hours, wage rates)

Goods Producing Location

• Cost Focus• Tangible costs

• Transportation cost of raw material/ finished goods• Energy and utility cost; labor; raw material; taxes,

• Intangible and future costs• Attitude toward union• Quality of life• Education expenditures by state• Quality of state and local government

Service/Retail Techniques

• Regression models to determine importance of various

factors

• Factor-rating method

• Traffic counts

• Demographic analysis of drawing area

• Purchasing power analysis of area

• Center-of-gravity method

• Geographic information systems

Goods Production Techniques• Transportation method

• Factor-rating method

• Locational break-even analysis

• Crossover charts

Service/Retail Assumptions• Location is a major determinant of revenue

• High customer-contact issues are critical

• Costs are relatively constant for a given area; therefore, the revenue function is critical

Goods Producing Assumptions• Location is a major determinant of cost

• Most major costs can be identified explicitly for each site

• Low customer contact allows focus on the identifiable costs

• Intangible costs can be evaluated

Hotel Location Selection

• Strategically Most Important Decision

• La Quinta used 35 variables

• Refined to 4 variables:• Price of the hotel• Median income levels• State population for hotel• Nearby colleges

Call Center Industry

• No face to face or movement of materials

• Very broad location options

• Traditional variables are not relevant

• Cost and availability of labor may drive location decisions

Geographical Info Systems

• 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