Post on 21-Dec-2015
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Location DecisionsLocation Decisions
Long-term decisions (expand existing facilities, add new facilities, move)
Difficult to reverseAffect 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
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Need for Location DecisionsNeed for Location Decisions
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources
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Nature of Location DecisionsNature of Location Decisions
Strategic Importance of location decisions Long term commitment/costs Impact on investments, revenues, and operations Supply chains
Objectives of location decisions Profit potential No single location may be better than others Identify several locations from which to choose
Location Options Expand existing facilities Add new facilities Move
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Industrial Location DecisionsIndustrial Location DecisionsCost focus
Revenue varies little between locations
Location is a major cost factorAffects shipping &
production costs (e.g., labor)Costs vary greatly between
locations
© 1995 Corel Corp.
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Service Location DecisionsService Location DecisionsRevenue focus
Costs vary little between market areasLocation is a major
revenue factorTraffic volume, good transportation, customer safety and convenience most important
Affects amount of customer contact
Affects volume ofbusiness
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Comparison of Service and Comparison of Service and Manufacturing ConsiderationsManufacturing Considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking
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Organizations That Need To Be Organizations That Need To Be Close to MarketsClose to Markets
Government agenciesPolice & fire departmentsPost Office
Retail Sales and ServiceFast food restaurants, supermarkets, gas stationsDrug stores, shopping mallsBakeries
Other ServicesDoctors, lawyers, accountants, barbersBanks, auto repair, motels
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General Procedure for Making General Procedure for Making Location DecisionsLocation Decisions
Decide on the criteria to use for evaluating alternatives
Identify important factorsDevelop location alternatives
- identify the general region for a location- identify community alternatives- identify site alternatives
Evaluate alternatives and make a selection
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FactorsFactors That Affect Location Decisions That Affect Location Decisions
Regional Factors
Site-related Factors
Multiple Plant Strategies
Community Considerations
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Location of raw materials Location of markets Labor factors Climate and taxes
Regional FactorsRegional Factors
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Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support
Community ConsiderationsCommunity Considerations
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Plant StrategiesPlant StrategiesSingle Plant StrategyMulti-Plant Strategies
* Product Plant Strategy
* Market Area Plant Strategy
* Process Plant Strategy
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Location Decision SequenceLocation Decision SequenceCountry
© 1995 Corel Corp.
Region/Community
.
Site
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Global Location FactorsGlobal Location Factors Government stabilityGovernment stability Government regulationsGovernment regulations Political and economic Political and economic
systemssystems Economic stability and growthEconomic stability and growth Exchange ratesExchange rates CultureCulture ClimateClimate Export import regulations, Export import regulations,
duties and tariffsduties and tariffs
Raw material availability Raw material availability Number and proximity of Number and proximity of
supplierssuppliers Transportation and Transportation and
distribution systemdistribution system Labor cost and educationLabor cost and education Available technologyAvailable technology Commercial travelCommercial travel Technical expertiseTechnical expertise Cross-border trade regulationsCross-border trade regulations Group trade agreementsGroup trade agreements
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Regional Location FactorsRegional Location Factors (1 of 2) (1 of 2)
Labor (availability, Labor (availability, education, cost and education, cost and unions)unions)
Proximity of customersProximity of customers Number of customersNumber of customers Construction/leasing costsConstruction/leasing costs Land costsLand costs Modes and quality of Modes and quality of
transportationtransportation Transportation costsTransportation costs
Incentive packages Incentive packages GovernmentalGovernmental, legal , legal
regulationsregulations, policies and , policies and barriersbarriers
Environmental regulationsEnvironmental regulations Raw material availabilityRaw material availability Commercial travelCommercial travel ClimateClimate InfrastructureInfrastructure (cost and (cost and
availability of utilities)availability of utilities) Quality of lifeQuality of life
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Regional Location FactorsRegional Location Factors (2 of 2) (2 of 2)
Community governmentCommunity government Local business regulationsLocal business regulations Government servicesGovernment services Business climateBusiness climate Community servicesCommunity services TaxesTaxes Environmental impact Environmental impact
issuesissues
Availability of sitesAvailability of sites Financial ServicesFinancial Services Community inducementsCommunity inducements Proximity of suppliersProximity of suppliers Education systemEducation system Free trade zonesFree trade zones
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Site Location FactorsSite Location Factors Customer baseCustomer base Construction/ leasing costConstruction/ leasing cost Site costs (land, expansion, Site costs (land, expansion,
parking, etc.parking, etc. Quality of life issues in the Quality of life issues in the
community (education, health community (education, health care, sports, cultural activities care, sports, cultural activities etc.) etc.)
Site sizeSite size TransportationTransportation TrafficTraffic
Zoning restrictionsZoning restrictions Safety/securitySafety/security CompetitionCompetition Area business climateArea business climate Income levelIncome level Host communityHost community Competitive advantageCompetitive advantage UtilitiesUtilities including gas, including gas,
electric, water and their electric, water and their costs costs
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Location IncentivesLocation Incentives
Tax creditsTax creditsRelaxed government Relaxed government
regulationregulation Job trainingJob training Infrastructure improvementInfrastructure improvementMoneyMoney
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Location Evaluation MethodsLocation Evaluation Methods(Methods of Solving Location Problems)(Methods of Solving Location Problems)
1) Factor-rating method
2) Center of gravity method
3) Load-distance method
4) Locational break-even analysis
5) Transportation model (a specialized linear programming method)
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Factor-Rating MethodFactor-Rating Method (1 of 4) (1 of 4)
Decision based on minimum distribution costs Most widely used location technique Useful for service & industrial locations Rates locations using factors
Tangible (quantitative) factorsExample: Short-run & long-run costs
Intangible (qualitative) factorsExample: Education quality, labor skills
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Steps in Factor Rating MethodSteps in Factor Rating Method (2 of (2 of 4)4) Identify important relevant factors Assign importance weight to each factor (0.00 –
1.00) Develop scale for each factor (such as 1 – 100) Score each location along each factor Multiply scores by weights for each factor & sum
weighted factors Select location with maximum total score
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Location Factor Rating Location Factor Rating (3 of 4)(3 of 4)
Labor pool and climateLabor pool and climateProximity to suppliersProximity to suppliersWage ratesWage ratesCommunity environmentCommunity environmentProximity to customersProximity to customersShipping modesShipping modesAir serviceAir service
LOCATION FACTORLOCATION FACTOR
..3030
.20.20
.15.15
.15.15
.10.10
.05.05
.05.05
WEIGHTWEIGHT
8080100100
60607575656585855050
Site 1Site 1
6565919195958080909092926565
Site 2Site 2
9090757572728080959565659090
Site 3Site 3
SCORES (0 TO 100)SCORES (0 TO 100)
Weighted Score Site 1 = (0.30)(80) = 24Weighted Score Site 1 = (0.30)(80) = 24
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Location Factor Rating Location Factor Rating (4 of 4)(4 of 4)
Labor pool and climateLabor pool and climateProximity to suppliersProximity to suppliersWage ratesWage ratesCommunity environmentCommunity environmentProximity to customersProximity to customersShipping modesShipping modesAir serviceAir service
LOCATION FACTORLOCATION FACTOR
..3030
.20.20
.15.15
.15.15
.10.10
.05.05
.05.05
WEIGHTWEIGHT
8080100100
60607575656585855050
Site 1Site 1
6565919195958080909092926565
Site 2Site 2
9090757572728080959565659090
Site 3Site 3
SCORES (0 TO 100)SCORES (0 TO 100)
24.0020.00
9.0011.25
6.504.252.50
77.50
Site 1
19.5018.2014.2512.00
9.004.603.25
80.80
Site 2
27.0015.0010.8012.00
9.503.254.50
82.05
Site 3
WEIGHTED SCORES
Best one
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2. 2. Center of Gravity Center of Gravity (Centroid) (Centroid) MethodMethod (1 of 10) (1 of 10)
Decision based on minimum distribution costs Finds location of single distribution center serving several
destinations Used primarily for services Considers
Location of existing destinations Example: Markets, retailers etc.
Volume to be shipped Shipping distances (or costs)
Shipping cost/unit/mile is constant
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Locate facility at center of geographic area Based on weight and distance traveledEstablish grid-map of area Identify coordinates
and weights shipped for each location
Center-of-Gravity Center-of-Gravity Method (2 of 10)Method (2 of 10)
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Center of Gravity MethodCenter of Gravity Method:: Steps Steps (3 of 10)(3 of 10)
This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria
Place existing locations on a coordinate gridGrid has arbitrary origin & scale Maintains relative distances
Calculate X & Y coordinates for ‘center of gravity’Gives location of distribution centerMinimizes transportation cost
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Grid-Map CoordinatesGrid-Map Coordinates (4 of 10) (4 of 10)
where,where,CCxx, , CCyy ==coordinates of coordinates of
the new facility at the new facility at center of gravitycenter of gravityxxii, y, yii ==coordinates of coordinates of
existing facility existing facility iiVVii = =annual annual volumevolume
shipped fromshipped from or to the or to the ith locationith location
nn
VVii
i = i = 11
xxiiVVii
i = i = 11
nn
CCxx = =
nn
VVii
i = i = 11
yyiiVVii
i = i = 11
nn
CCyy = =
xx11 xx22 xx33 xx
yy22
yy
yy11
yy33
1 (1 (xx11, , yy11), ), VV11
2 (2 (xx22, , yy22), ), VV22
3 (3 (xx33, , yy33), ), VV33
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Center-of-Gravity TechniqueCenter-of-Gravity Technique (5 of 10) (5 of 10)Example 1Example 1
AA BB CC DD
xx 200200 100100 250250 500500yy 200200 500500 600600 300300VVtt 7575 105105 135135 6060
yy
700700
500500
600600
400400
300300
200200
100100
00 xx700700500500 600600400400300300200200100100
AA
BB
CC
DD
(135)(135)
(105)(105)
(75)(75)
(60)(60)
MilesMiles
Mil
esM
iles
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Center-of-Gravity TechniqueCenter-of-Gravity Technique (6 of 10) (6 of 10)Example 1Example 1
yy
700700
500500
600600
400400
300300
200200
100100
00 xx700700500500 600600400400300300200200100100
AA
BB
CC
DD
(135)(135)
(105)(105)
(75)(75)
(60)(60)
MilesMiles
Mil
esM
iles
Cx = = = 238n
Wii = 1
xiWii = 1
n
n
Wii = 1
yiWii = 1
n
Cy = = = 444(200)(75) + (500)(105) + (600)(135) + (300)(60)
75 + 105 + 135 + 60
(200)(75) + (100)(105) + (250)(135) + (500)(60)
75 + 105 + 135 + 60
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Center-of-Gravity TechniqueCenter-of-Gravity Technique (7 of 10) (7 of 10)Example 1Example 1
AA BB CC DD
xx 200200 100100 250250 500500yy 200200 500500 600600 300300WtWt 7575 105105 135135 6060
yy
700700
500500
600600
400400
300300
200200
100100
00 xx700700500500 600600400400300300200200100100
AA
BB
CC
DD
(135)(135)
(105)(105)
(75)(75)
(60)(60)
MilesMiles
Mil
esM
iles
Center of gravity Center of gravity (238, 444)(238, 444)
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CentCentre of Gravity re of Gravity MethodMethod (8 of 10) (8 of 10)
Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?
Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?
Example 2Example 2 Several automobile showrooms are located according to the following grid which
represents coordinate locations for each showroom
S howroom No o f Z-Mo b ile s s o ld p e r mo nth
A 1250
D 1900
Q 2300X
Y
A(100,200)
D(250,580)
Q(790,900)
(0,0)
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Centroid MethodCentroid Method (9 of 10) (9 of 10) Example 2Example 2
To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.
To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.
X
Y
A(100,200)
D(250,580)
Q(790,900)
(0,0)
You must also have the volume information on the business activity at the existing facilities.
You must also have the volume information on the business activity at the existing facilities.
S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth
A 1250
D 1900
Q 2300
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Centroid Method Centroid Method (10 of 10) (10 of 10) Example 2Example 2
C = 100(1250) + 250(1900) + 790(2300)
1250 + 1900 + 2300 =
2,417,000
5,450 = x 443.49C =
100(1250) + 250(1900) + 790(2300)
1250 + 1900 + 2300 =
2,417,000
5,450 = x 443.49
C = 200(1250) + 580(1900) + 900(2300)
1250 + 1900 + 2300 =
3,422,000
5,450 = y 627.89C =
200(1250) + 580(1900) + 900(2300)
1250 + 1900 + 2300 =
3,422,000
5,450 = y 627.89
S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth
A 1250
D 1900
Q 2300X
Y
A(100,200)
D(250,580)
Q(790,900)
(0,0)
You then compute the new coordinates using the formulas:You then compute the new coordinates using the formulas:
ZZ
New location of facility Z about (443,627)
New location of facility Z about (443,627)
You then take the coordinates and place them on the map:You then take the coordinates and place them on the map:
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Locational Break-Even AnalysisLocational Break-Even Analysis
Method of cost-volume analysis used for industrial locations
Steps Determine fixed & variable costs for each
location Plot total cost for each location (Cost on
vertical axis, annual volume on horizontal axis) Select location with lowest total cost for
expected production volume Must be above break-even
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Location Location Break-EvenBreak-Even Analysis Analysis Assumptions
Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved
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Locational Break-Even Analysis Locational Break-Even Analysis ExampleExample 1(1 of 2) 1(1 of 2)
You’re an analyst for AC Delco. You’re considering a new manufacturing plant in Akron, Bowling Green, or Chicago. Fixed costs per year are $30k, $60k, & $110k respectively. Variable costs per case are $75, $45, & $25 respectively. The price per case is $120. What is the best location for an expected volume of 2,000 cases per year?
© 1995 Corel Corp.
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Locational Break-Even Crossover Locational Break-Even Crossover ChartChart (2 of 2) (2 of 2)
0
50000
100000
150000
200000
0 500 1000 1500 2000 2500 3000
Volume
Ann
ual C
ost
Akron
Chicago
Bowling Green
Bowling Green lowest cost
Chicago lowest cost
Akron lowest cost
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Example Example 22: Cost-Volume Analysis: Cost-Volume Analysis (1 of 3)(1 of 3)
Fixed and variable costs for four potential locationsL o c a t i o n F i x e d
C o s tV a r i a b l e
C o s tABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 13 02 03 5
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Example Example 22: Solution: Solution (2 of 3) (2 of 3)
F i x e dC o s t s
V a r i a b l eC o s t s
T o t a lC o s t s
ABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )
$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0
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Example Example 22: Solution: Solution (3 of3) (3 of3)
800700600500400300200100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
B
C
B SuperiorC Superior
A Superior
D
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Transportation ModelTransportation Model Decision based on movement costs of raw materials or finished
goods Finds amount to be shipped from several sources to several
destinations Used primarily for industrial locations Seeks to minimize costs of shipping n units to m destinations Type of linear programming model
Objective: Minimize total production & shipping costs (shipping n units to m destinations)
ConstraintsProduction capacity at source (factory)Demand requirements at destinations
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Global LocationsGlobal Locations
Reasons for globalization Benefits Disadvantages Risks Global operations issues
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GlobalizationGlobalization
Facilitating Factors Trade agreements Technology
Benefits Markets Cost savings Legal and regulatory Financial
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GlobalizationGlobalization
Disadvantages Transportation costs Security Unskilled labor Import restrictions Criticisms
Risks Political Terrorism Legal Cultural
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Foreign Government
a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards Liability laws
b. Stability issues
Cultural Differences
Living circumstances for foreign workers / dependents Religious holidays/traditions
Customer Preferences
Possible buy locally sentiment
Labor Level of training and education of workers Work ethic Possible regulations limiting number of foreign employees Language differences
Resources Availability and quality of raw materials, energy, transportation infrastructure
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Telemarketing and Internet Telemarketing and Internet IndustriesIndustries
Require neither face-to-face contact with customers (or employees) nor movement of material
Presents a whole new perspective on the location problem