Unit05 - Location_Strategies

Dr. Rameez Khalid, PMP, CQSSBB Faculty, Department of Management

Institute of Business Administration, Karachi

Factors Affecting Location Decisions

Labor Productivity Exchange Rates and Currency Risks Costs Political Risk, Values, and Culture Proximity to Markets Proximity to Suppliers Proximity to Competitors

Unit-5: Location Strategies [email protected] 2

The Factor-Rating Method Locational Break-Even Analysis Center-of-Gravity Method Transportation Model

Methods of Evaluating Location Alternatives


Federal Express

Central hub concept 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


Location Decision Factors


• Location of raw materials • Location of markets • Labor factors • Climate, culture and taxes • Political risks, government

rules, attitudes, incentives • Exchange rates and

currency risks

Regional Factors


1. Corporate desires 2. Attractiveness of region 3. Labor availability, costs, attitudes

towards unions 4. Costs and availability of utilities 5. Environmental regulations 6. Government incentives and fiscal

policies 7. Proximity to raw materials and

customers 8. Land/construction costs 9. Quality of life – Services, Utilities

Community Considerations

MN

WI

MI

IL IN OH


Site Related Factors

1. Land Site size and cost

2. Transportation Air, rail, highway, and waterway systems

3. Environmental impact issues

4. Legal Zoning restrictions

5. Proximity of services/ supplies needed



Labor productivity Wage rates are not the only cost Lower production may increase total cost

Labor cost per day Production (units per day) = Cost per unit

Connecticut

= $1.17 per unit $70

60 units

Juarez

= $1.25 per unit $25

20 units



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 based on costs alone can create difficult ethical situations


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 Affecting 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

Proximity to competitors Called clustering Often driven by resources such as natural, information, capital, talent Found in both manufacturing & service

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Clustering of Companies Industry Locations Reason for clustering

Software firms Silicon Valley, Boston, Bangalore (India)

Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby

Computer hardware manufacturers

Singapore, Taiwan High technological penetration rate and per capita GDP, skilled/educated workforce with large pool of engineers

Fast food chains (Wendy’s, McDonald’s, Burger King, and Pizza Hut)

Sites within 1 mile of each other

Stimulate food sales, high traffic flows


Factor-Rating Method

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 Unit-5: Location Strategies [email protected] 15

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



Critical Scores Success (out of 100) Weighted Scores Factor Weight Alt. 1 Alt. 2 Alt. 1 Alt. 2

Proximity to existing store .10 100 60 (.1)(100) = 10.0 (.1)(60) = 6.0 Traffic Volume .05 80 80 (.05)(80) = 4.0 (.05)(80) = 4.0 Rental Costs .40 70 90 (.40)(70) = 28.0 (.40)(90) = 36.0 Size .10 86 92 (.10)(86) = 8.6 (.10)(92) = 9.2 Layout .20 40 70 (.20)(40) = 8.0 (.20)(70) = 14.0 Operating costs .15 80 90 (.15)(80) = 12.0 (.15)(90) = 13.5 Totals 1.00 70.6 82.7


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


Three locations:

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

Fixed Variable Total City Cost Cost Cost

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

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



– $180,000 –

– $160,000 – $150,000 –

– $130,000 –

– $110,000 –

– –

$80,000 – –

$60,000 – – –

$30,000 – –

$10,000 – –

Annu

al c

ost

| | | | | | |

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

Akron lowest cost

Bowling Green lowest cost

Chicago lowest cost


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Fixed and variable costs for four potential locations

Location Fixed Cost

Variable Cost

A B C D

$250,000 100,000 150,000 200,000

$11 30 20 35



FixedCosts

VariableCosts

TotalCosts

ABCD

$250,000100,000150,000200,000

$11(10,000)30(10,000)20(10,000)35(10,000)

$360,000400,000350,000550,000



800 700 600 500 400 300 200 100 0

Annual Output (K)

$(K)

8 10 12 14 16 6 4 2 0

A

B C

B Superior C Superior

A Superior

D


5 11.11

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Center-of-Gravity Method

Finds location of distribution center that minimizes distribution costs Considers

Location of markets Volume of goods shipped to those markets Shipping cost (or distance)


Place existing locations on a coordinate grid

Grid origin and scale is arbitrary

Maintain relative distances Calculate X and Y coordinates for ‘center of gravity’

Assumes cost is directly proportional to distance and volume shipped



x - coordinate = xiQi

Qi i

i

yiQi

Qi i

i

y - coordinate =

where xi = x-coordinate of location i yi = y-coordinate of location i Qi = Quantity of goods moved to or from location i



North-South

East-West

120 –

90 –

60 –

30 –

– | | | | | |

30 60 90 120 150 Arbitrary origin

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

Pittsburgh (90, 110)

Atlanta (60, 40)


Units Location per Month

Chicago 2,000 Pittsburgh 1,000 New York 1,000 Atlanta 2,000

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Number of Containers Store Location Shipped per Month

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


30

North-South

East-West

120 –

90 –

60 –

30 –

– | | | | | |

30 60 90 120 150 Arbitrary origin

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

Pittsburgh (90, 110)

Atlanta (60, 40)

Center of gravity (66.7, 93.3) +


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Transportation Model Shipment from multiple sources to multiple destinations Solution will minimize total production and shipping costs A special class of linear programming problems D

demand

D

demand

D

demand

D

demand

S (supply)

S (supply)

S (supply)

Unit-5: Location Strategies 33

Worldwide Distribution of Volkswagens and Parts


Transportation Model: MODI Method

STEPS in Modified Distribution Method:

1. Make an initial allocation using the intuitive method. 2. Obtain an index number for each row and column. Do this

using only completed cells. a. Begin by assigning a zero to the first row. b. Determine the column index for any completed cells in

row 1 using the relationship: Column index = Cell cost - Row index.

c. Continue until all rows and columns have index numbers, using only completed cells.

3. Obtain cell evaluations for empty cells using the relationship: Cell evaluation = Cell cost - (Row index + Column index)


Transportation Model: MODI Method

Cell Evaluation 1-A 4 - (0 + 4) = 0 1-B 7 - (0 + 7) = 0 1-C 7 - (0 + 12) = -5 2-A 12 - (-4 + 4) = 12 2-D 8 - (-4 + 1) = 11 3-B 10 - (4 + 7) = -1

Total Cost 1-C ………… 10($7) = $ 70 1-D ………… 90($1) = 90 2-B ………… 90($3) = 270 2-C ………… 110($8) = 880 3-A ………… 80($8) = 640 3-D ………… 70($5) = 350

$2,300


Service Location Strategy

1. Purchasing power of customer-drawing area 2. Service and image compatibility with demographics of the

customer-drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firm’s and competitors’ locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management


Location Strategies Service/Retail/Professional Location Goods-Producing Location Revenue Focus Cost 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)

Tangible costs Transportation cost of raw material Shipment cost of finished goods Energy and utility cost; labor; raw

material; taxes, and so on Intangible and future costs Attitude toward union Quality of life Education expenditures by state Quality of state and local government


Service/Retail/Professional Location Goods-Producing Location Techniques 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

Transportation method Factor-rating method Locational break-even analysis Crossover charts

Location Strategies


Service/Retail/Professional Location Goods-Producing Location Assumptions 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

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

Location Strategies


The Call Center Industry

Requires neither face-to-face contact nor movement of materials Has very broad location options Traditional variables are no longer relevant Cost and availability of labor may drive location decisions


Geographic Information Systems (GIS)

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


Geographic Information Systems (GIS)


SITE Area Mauripur Road/Manghopir Road

Advantages o Good for small and medium industries o Nearer to both Airport and Seaport o Good facilities/utilities o Easy availability of Labor o Near to residential area

Disadvantages o Costly land (both rent and purchase) o Vulnerable to Law and order conditions of city o Not enough room for Large scale industries

Famous industries o Siemens o Phillips o Gandhara Nissan o Atlas Honda o Hino Pak

Nooriabad Industrial Area Advantages

o Good for cement and fertilizer plants o Good facilities o Cheaper land (both rent and purchase) o Unaffected by Law and order conditions of city

Disadvantages o Away from residential area o Labor is not easily available o Away from Airport and Seaport

Famous industries o Dada Bhoay Cement o Lucky Cement o Essa Cement

Unit-5: Location Strategies [email protected]

Korangi/Landhi Industrial Area Advantages

o Good for small and medium industries (Specially Pharmaceutical)

o Cheaper land (both rent and purchase) o Near to Airport o Good facilities o Easy availability of Labor o Near to residential area

Disadvantages oAway from Seaport oDuring rain season, this area is usually cut-of from rest of the city for several days due to drainage problem.

Famous industries oDawood Cotton oGul Ahmed oAL- Karam

Bin Qasim Industrial Zone Advantages

o Good for large industries (cement, fertilizers, oil and gas sector) o Very close to seaport o Excellent for exporters o Many industries save their transport o Good facilities/utilities o Cheaper land (both rent and purchase) o Unaffected by Law and order conditions of city

Disadvantages o Away from residential area o Labor is not easily available

Famous industries o ICI o IMC o Avion Edible Oil o BOC o National foods

HUB o Small industrial area o Away from both Airport and Seaport o Transport problem

Famous Industries o Attock Cement o Agri Autos o Bawanny Oxygen o Pioneer Cables o Balouchistan Wheels


F.B Area/ North Karachi Industrial Area

o Good for small industries (mostly small textile mills) o Facilities/utilities available as it is in the residential area o Easy availability of labor o Land is easily available

Famous industries o Afroze textile o Fazal Mill o Zafa Pharma o Dawn Bread o Lucky Textile


Vindar Industrial State

o Started with excellent facilities but failed as it is 60-65 KM away from city

o Good for Small Industries

o LG and Siddique Sons are working there

o Companies are facing a lot of problems and most of the industries have been shifted back to their previous locations.


Final Thought

The 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.


REFERENCES

•Operations Management William J. Stevenson

•Operations Management Barry Render & Jay Heizer

[email protected] 54

Unit05 - Location_Strategies

Documents

location strategies

location alternatives

location decisions proximity

location decision factors

life location decisions

units unit

oh unit

competitors unit