Location Strategies

8
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition

PowerPoint slides by Jeff Heyl

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 8-1
 Location Provides Competitive
Advantage for FedEx

▶ 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

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 8-2
 The Strategic Importance of
Location
► One of the most important decisions
a firm makes
► Increasingly global in nature
► Significant impact on fixed and
variable costs
► Decisions made relatively
infrequently

© 2014 Pearson Education, Inc. 8-3

 The Strategic Importance of
Location
► Long-term decisions
► Once committed to a location, many
resource and cost issues are
difficult to change

© 2014 Pearson Education, Inc. 8-4

 The Strategic Importance of
Location
The objective of location strategy is
to maximize the benefit of location
to the firm
Options include
1.Expanding existing facilities
2.Maintain existing and add sites
3.Closing existing and relocating

© 2014 Pearson Education, Inc. 8-5

 Location Decisions
Country Decision Key Success Factors
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
Figure 8.1 risks
© 2014 Pearson Education, Inc. 8-6
 Location Decisions
Region/ Key Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
MN 3. Labor availability and costs
WI 4. Costs and availability of utilities
MI 5. Environmental regulations
IL IN
OH 6. Government incentives and fiscal
policies
7. Proximity to raw materials and
customers
Figure 8.1
8. Land/construction costs
© 2014 Pearson Education, Inc. 8-7
 Location Decisions
Site Decision Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

Figure 8.1

© 2014 Pearson Education, Inc. 8-8

 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 key
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. Make a recommendation based on the highest
point score
© 2014 Pearson Education, Inc. 8-9
 Factor-Rating Example
TABLE 8.4 Weights, Scores, and Solution

SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK

Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude

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
.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
health
Totals 1.00 70.4 68.0

© 2014 Pearson Education, Inc. 8 - 10

 Locational
Cost-Volume Analysis
► An economic comparison of location
alternatives
► 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

© 2014 Pearson Education, Inc. 8 - 11

 Locational Cost-Volume
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000

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

© 2014 Pearson Education, Inc. 8 - 12

 Locational Cost-Volume
Analysis Example
Figure 8.2
–
$180,000 –
–
$160,000 –
$150,000 –
– e
o s t curv
$130,000 – c
L i sbon
Annual cost

–
$110,000 –
– ls
s s e rv e
– B ru t c u
s
$80,000 – co
–
$60,000 – e ns v e
t h ur
– A tc
s
– co
$30,000 – Athens Lisbon
Brussels
– lowest lowest
lowest cost
cost cost
$10,000 –
–
| | | | | | |

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

Volume
© 2014 Pearson Education, Inc. 8 - 13