DOM 511: OPERATIONS MANAGEMENT PRACTICE

Magutu Obara Peterson /S.O Nyamwange

University of NairobiSchool of Business

Département of Management ScienceJan April 2013

1magutumop2011

FACILITIES LOCATION

32

Facilities Location• Top question on the strategic agendas of contemporary manufacturing & services

firms in this age of global markets & global production

• Question of location linked to 2 competitive imperatives;

– 1. need to produce closer to customers due to time based competition, trade agreements & shipping costs

– 2. Need to locate near appropriate labor pool to take advantage of low wage costs or high technical skills

32

Facilities Location

Location Decision Process

Typically conducted hierarchically & involves 4 basic decisions where appropriate;

1. Global (nation) location2. Regional location3. District or community location4. Local site selection

32

Macro FACTORS for Location Decision 1. Proximity to customers – buyers want their goods delivered

yesterday & their needs incorporated in products being developed & built

2. Business climate – presence of similar-sized businesses, companies in same industry, other foreign companies, probusiness govt legislation, subsidies, tax incentives etc

3. Total costs – inbound/outbound distribution cost, land, construction, labor, taxes, energy costs make up regional costs

4. Infrastructure – adequate road, rail, air, & sea transport, energy & telecommunications

5. Quality of labor – educational & skills levels of labor pool must match coy needs

6. Suppliers – a high-quality and competitive supplier base. Also supports lean production

32

MACRO FACTORS7. Raw materials – necessity, perishability

8. Free trade zones

9. Political risk

10. Government, cultural barriers

11. Environmenal regualtion

barriers

32

MiCRO FACTORS• Land

• Transportation

• Services

• Restrictions

• Community receptivity to business

barriers

Manufacturing Vs SERVICES

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

32

Steps in Making Location Decision• Determine the criteria that will be used to evaluate alternatives

• Identify the factors that are important eg location to markets, raw materials

• Develop location alternatives

– Identify the general region for a location

– Identify a small number of community- site alternatives

• Evaluate the alternatives & make a selection

32

Evaluation of Location Alternatives

• Issue is to find locations that will minimize on costs & maximize on revenues

• Service industries tend to consider the revenue generating potential – production & consumption closely linked to market

• Goods producing industries concentrate on cost minimization – costs are accumulated in the product which can be shipped to various markets

32

Evaluation of Location Alternatives

• We make use of economic analysis methods

– Location Break even analysis

– Factor rating Method

– Transportation method

– Centroid Method or center of gravity method

32

Location Break – Even Analysis

• Concerned with the impact that operating variables ( costs, selling price, volume ) have on operating income

• If revenue per unit is independent of location then only costs need to be considered

Cost-Profit-Volume Analysis

– Determine fixed and variable costs

– Plot total costs

– Determine lowest total costs

Example 1: Cost-Volume Analysis

Fixed and variable costs for three potential locations in thousands

A B C

FIXED 5000 2000 3000

VARIABLE 220 600 400

Factor-Rating Method

Popular because a wide variety of factors can be included in the analysis

– Considers quantitative & Qualitative factors– Six steps in the method

Factor-Rating Method

Develop a list of relevant factors called critical success factors

Assign a weight to each factorDevelop a scale for each factorScore each location for each factorMultiply score by weights for each factor

for each locationRecommend the location with the

highest point (composite) score

Location Factor Rating

Identify important factors Weight factors (0.00 - 1.00) Subjectively score each factor (0 - 100) Sum weighted scores

Location Factor Rating: Example

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

.30.30

.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 for “Labor pool and climate” for Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24Site 1 = (0.30)(80) = 24

Location Factor Rating: Example(cont.)

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

Site 3 has the highest factor rating

CENTER OF GRAVITY METHODDetermines the X & Y coordinates(location) of

a single facilityMethod does not explicitly address customer service

objectives Assists managers in balancing cost & service

objectivesDistance is a major criterion though demand (volume,

transactions etc ) is also consideredCOG is defined as the location that minimizes the

weighted distance between the facility & its supply & demand points

CENTER OF GRAVITY METHODProcedurePlace the locations of existing supply & demand points

on a coordinate systemOrigin & scale are arbitrary as long as the relative

distances are correctly represented.COG is determined by;

Cx = ∑Xi Wi /∑Wi

Cy = ∑Yi Wi /∑Wi

Grid-Map Coordinates

where,where,xx, , y y ==coordinates of new coordinates of new facility at center of gravityfacility at center of gravityxxii, y, yii ==coordinates of existing coordinates of existing

facility facility iiWWii = =annual weight shipped annual weight shipped

from facility from facility ii

nn

WWii

i = i = 11

xxiiWWii

i = i = 11

nn

x =x =

nn

WWii

i = i = 11

yyiiWWii

i = i = 11

nn

y =y =

xx11 xx22 xx33 xx

yy22

yy

yy11

yy33

1 (1 (xx11, , yy11), ), WW11

2 (2 (xx22, , yy22), ), WW22

3 (3 (xx33, , yy33), ), WW33

Center-of-Gravity Technique: Example

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 Technique: Example (cont.)

x = = = 238n Wi

i = 1

xiWii = 1

n

n

Wii = 1

yiWii = 1

n

y = = = 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

CENTER OF GRAVITY METHODTwo factories distribute output to 4 towns as shown. Board has authorized

construction of a warehouse to serve the four markets. Identify the warehouse location using COG method