Operations management location strategies (lecture)

Operations Management

Location StrategiesChapter 8

Learning ObjectivesWhen you complete this chapter, you should be

able to :Identify or Define:

– Objective of location strategy– International location issues– Clustering– Geographic Information Systems

Describe or explain:– Three methods of solving the location problem

• Factor-rating method• Locational breakeven analysis• Center -of-gravity method

– Describe the factors affecting location decisions

Federal Express

• Stresses “hub” concept• Advantages:

– enables service to more locations with fewer aircraft

– enables matching of aircraft flights with package loads

– reduces mishandling and delay in transit because there is total control of packages from pickup to delivery

Objective of Location Strategy

Maximize the benefit of location to the firm

Industrial Location Decisions

• Cost focus– Revenue varies little

between locations

• Location is a major cost factor– Affects shipping &

production costs (e.g., labor)

– Costs vary greatly between locations

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Service Location Decisions• Revenue focus

– Costs vary little between market areas

• Location is a major revenue factor– Affects amount of

customer contact

– Affects volume ofbusiness

In General - Location Decisions• Long-term decisions• Difficult to reverse• Affect fixed & variable costs

– Transportation cost • As much as 25% of product price

– Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location to firm = Cost or Revenue = $’s! for either Manufacturing or service.

Location Decision SequenceCountry

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Region/Community

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Site

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Factors That Affect Location Decisions

Factors Affecting Country• Government rules, attitudes,

political risk, incentives

• Culture & economy

• Market location

• Labor availability, attitudes, productivity, and cost

• Availability of supplies, communications, energy

• Exchange rates and currency risks

Region Location Decisions• Corporate desires

• Attractiveness of region (culture, taxes, climate, etc.)

• Labor, availability, costs, attitudes towards unions

• Costs and availability of utilities

• Environmental regulations of state and town

• Government incentives

• Proximity to raw materials & customers

• Land/construction costs© 1995 Corel Corp.

Factors Affecting Site• Site size and cost

• Air, rail, highway, and waterway systems

• Zoning restrictions

• Nearness of services/supplies needed

• Environmental impact issues

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Location Decision Example

BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.

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Country Decision Factors• Market location

– U.S. is world’s largest luxury car market

– Growing (baby boomers)

• Labor– Lower manufacturing labor

costs• $17/hr. (U.S.) vs. $27

(Germany)

– Higher labor productivity• 11 holidays (U.S.) vs.

31 (Germany)

• Other– Lower shipping cost

($2,500/car less)– New plant &

equipment would increase productivity (lower cost/car $2,000-3000)

– Laws of U.S.A.

Transportation Model• Finds amount to be shipped from several

sources to several destinations• Used primarily for industrial locations• Type of linear programming model

– Objective: Minimize total production & shipping costs

– Constraints• Production capacity at source (factory)• Demand requirement at destination

Components of Volume and Revenue for a Service Firm

1. Purchasing power of customer drawing area2. Service and image compatibility with demographics of

the customer drawing area3. Competition in the area4. Quality of the competition5. Uniqueness of the firm’s and competitor’s locations6. Physical qualities of facilities and neighboring

businesses7. Operating policies of the firm8. Quality of management

Location Strategies – Service vs. Industrial

Service/Retail/Professional 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 LocationCost Focus

Tangible costs Transportation cost of raw

materials Shipment cost of finished goods Energy and utility cost; labor;

raw material; taxes, etc. Intangible and future costs

Attitude toward union Quality of life Education expenditures by state Quality of state and local

government

Major Methods of Solving Location Problems

• Weighted methods which:– Assign weights and points to various factors– Determine tangible costs– Investigate intangible costs

• Center of Gravity Method– Find best distribution center location

• Location breakeven methods– Special case of breakeven analysis

• Transportation method– A specialized linear programming method

Telemarketing and Internet Industries

• Require neither face-to-face contact with customers (or employees) nor movement of material

• Presents a whole new perspective on the location problem

Geographic Information Systems

• New tool to help in location analysis

• Enables combination of many parameters

Final ThoughtThe ideal location for many companies in the future will be a floating factory ship that will go from port to port, from country to country – wherever cost per unit is lowest.

Operations Management

Layout StrategyChapter 9

Learning ObjectivesWhen you complete this chapter, you should be

able to :Identify or Define:

– Fixed-position layout– Process-oriented layout– Work cells– Focused work center– Office layout– Retail layout– Warehouse layout– Product-oriented layout– Assembly-line factory

Learning ObjectivesWhen you complete this chapter, you

should be able to :

Describe or explain:– How to achieve a good layout for the process

facility– How to balance production flow in a

repetitive or product-oriented facility

McDonald’s - New Kitchen Layout

– No food prepared ahead except patty

– Elimination of some steps, shortening of others– New bun toasting machine (11 seconds vs 30 seconds)

– Repositioning condiment containers (one motion, not two)

– Sandwiches assembled in order

– Production levels controlled by computer

– Discard only meat when sandwiches do not sell fast enough

– Savings of $100,000,000 per year in food costs

Innovation at McDonald’s

• Indoor seating (1950’s)

• Drive-through window (1970s)

• Adding breakfast to the menu (1980s)

• Adding play areas (1990s)

(three out of the four are layout decisions)

Objectives of the Layout Strategy

• Develop an economical layout which will meet the requirements of:– product design and volume (product strategy)

– process equipment and capacity (process strategy)

– quality of work life (human resource strategy)

– building and site constraints (location strategy)

Types of Layouts

• Fixed-position layout – Product does not move• Process-oriented layout – Product low volume

specialized• Office layout –People Information Layout• Retail layout – Customer preference and access

Layout• Warehouse layout – Material handling & space• Product-oriented layout – Product Layout is for

max efficiency high volume

What is Facility Layout ?

• Location or arrangement of everything within & around buildings

• Objectives are to maximize– Customer satisfaction

– Utilization of space, equipment, & people

– Efficient flow of information, material, & people

– Employee morale & safety

Strategic Importance of Layout

Proper layout enables:• Higher utilization of space, equipment,and people• Improved flow of information, materials, or people• Improved employee morale and safer working

conditions• Improved customer/client interaction• Flexibility

Layout Strategies

Project(fixed-position)

Job Shop(Process-oriented)

Office Retail Warehouse(storage)

Repetitive/Continuous

(product-oriented)

Examples

Pittsburgh Airport

Related Issues to solve

Ingal Ship Building Corp.

Trump Plaza

Shouldice Hospital

Olive Garden

Allstate Insurance

Microsoft

Kroger’s Supermarket

Walgreens

Bloomingdales

Federal-Mogul’s Warehouse

The Gap’s distribution center

Sony’s TV Assembly Line

Dodge Caravans Minivans

Move material to the limited storage areas around the site

Manage varied material flow for each product

Locate workers requiring frequent contact close to each other

Expose customer to high-margin items

Balance low-cost storage with low-cost material handling

Equalize the task time at each workstation

Requirements of a Good Layout

an understanding of capacity and space requirements

selection of appropriate material handling equipment

decisions regarding environment and aestheticsidentification and understanding of the

requirements for information flowidentification of the cost of moving between the

various work areas

Constraints on Layout Objectives

• Product design & volume

• Process equipment & capacity

• Quality of work life

• Building and site

Areas of Concern in Layout Strategy

LayoutStrategy

MaterialFlow

Communication

WorkCell

Safety

MaterialAttributes

Warehousing

ServiceAreas

Operations Management

Human Resources and Job DesignChapter 10

Learning Objectives

When you complete this chapter, you should be able to :

Identify or Define: – Job design– Job specialization– Job expansion– Tools of methods analysis– Ergonomics– Labor standards– Andon

Learning Objectives - ContinuedWhen you complete this chapter, you

should be able to :

Describe or explain: – Requirements of good job design– The visual workplace

Southwest Airlines

• Profitable for 26 years while United, Northwest, and U.S. Air lost billions.

• Strategy: Human resources– Culture of caring for people in the totality of their lives,

not just at work.

– Spends more to recruit and train than any other airline

Southwest Airlines

• Empowered employees

• Wages higher than industry average

• Stock options for some employees

• Employees treated like customers

• Everybody understands what everybody else’s problems are

• No gimmicks!

People and Work System Aspects

Job Design

Job Design

Labor Standards

Labor Standards

Productivity in Relation to Annual Turnover Rate

$200,000

$153,000

$150,000

$130,000

$125,000

$120,000

<3%

3-5%

6-10%

11-15%

16-20%

>20%

Job Design• Specifying the tasks that make up

a job for an individual or group

• Involves determining– What is to be done (i.e., responses)– How it is to be done (i.e., tools etc.)– Why it is to be done (i.e., purpose)

• Results in job description– Shows nature of job in task-related behaviors

Components of Job Design

• Job specialization

• Job expansion – enrichment-enlargement

• Psychological components

• Self-directed teams

• Motivation and incentive systems

• Ergonomics and work methods

• Praise?

Job Expansion• Process of adding more variety to jobs• Intended to reduce boredom associated with

labor specialization• Methods

– Job enlargement– Job enrichment– Job rotation– Employee empowerment

Job Rotation

Geriatrics© 1995 Corel Corp.

Pediatrics

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Maternity

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Employee EmpowermentEmployee Empowerment

ControlControl

Decision-MakingDecision-Making

PlanningPlanning

Psychological Components of Job Design

• Individuals have values, attitudes, and emotions that affect job results– Example: Work is a social experience

that affects belonging needs

• Effective worker behavior comes mostly from within the individual– Scientific management argued for external

financial rewards

• First examined in ‘Hawthorne studies’

Self-Directed Teams• Group of empowered individuals working

together for a common goal• May be organized for short-term or

long-term objectives• Reasons for effectiveness

– Provide employee empowerment– Provide core job characteristics– Meet psychological needs (e.g., belonging)

Motivation

• Worker performance depends on– Motivation– Ability– Work environment

• Motivation is the set of forces that compel behavior

• Money may serve as a psychological & financial motivator

Motivation and Money• Taylor’s scientific management (1911)

– Workers are motivated mainly by money

– Suggested piece-rate system

• Maslow’s theory (1943)– People are motivated by hierarchy of needs, which

includes money

• Herzberg (1959)– Money either dissatisfies or is neutral in its effect

Maslow’s Hierarchy of NeedsSelf-Actualization

Use of abilities Self-fulfillment

SocialGroup Interaction

Job StatusSafety

Physical Safety Job SecurityPhysiology

Food Shelter

Ego Self Respect

Ergonomics and Work Methods

• Worker performance depends on– Motivation

– Ability

– Work environment

• Foundation laid by Frederick Taylor – Match employees to task

– Develop work methods

– Establish work standards

Ergonomics

• Study of work

• Also called ‘human factors’

• Involves human-machine interface

• Examples– Mouse

– Keyboard

What is Work Measurement?

• Determining the amount of worker time required to generate one unit of output

• Provides labor standards – Target amount of time required to perform a

job under normal working conditions

Uses of Labor Standards• Costing labor content of products

• Planning staffing needs

• Cost & time estimates for bids

• Planning production

• Wage-incentive plans

• Employee efficiency

Sources of Labor Standards• Historical experience

• Time studies

• Predetermined time standards (MTM)

• Work sampling

Labor Standards - Historical Experience

• Labor standards are based on how many labor-hours were needed in past

• Least preferred method• Advantages

– Easy and inexpensive to obtain standard

• Disadvantages– Unknown accuracy due to unusual occurrences,

unknown pace etc.

A Final ThoughtTwo stonecutters were asked what they were doing. The first said, ‘I’m cutting this stone into blocks.’ The second one replied, ‘I’m on a team that’s building a cathedral.’

— Old Story