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Operations ManagementOperations Management

Location StrategyLocation Strategysource: (Heizer & Render 2008) and source: (Heizer & Render 2008) and

(Slack,Chamber & Johnson 2007)(Slack,Chamber & Johnson 2007)

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Today’s Learning ObjectivesToday’s Learning Objectives

• Identify and explain the factors that Identify and explain the factors that effect location decisionseffect location decisions

• Compute labor productivityCompute labor productivity• Apply the factor-rating methodApply the factor-rating method• Complete a location break-even Complete a location break-even

analysis graphically and analysis graphically and mathematicallymathematically

• Use the center-of-gravity method?Use the center-of-gravity method?

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Why is location important?Why is location important?• One of the most important decisions a firm One of the most important decisions a firm

makesmakes• Decisions made relatively infrequentlyDecisions made relatively infrequently• Increasingly global in natureIncreasingly global in nature• Significant impact on fixed and variable costsSignificant impact on fixed and variable costs

– Once in place, location-related costs are fixed in place Once in place, location-related costs are fixed in place and difficult to reduceand difficult to reduce

• The objective is to maximize the benefit of The objective is to maximize the benefit of location to the firmlocation to the firm

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Lowest Cost?Lowest Cost?• Cost is not always the most important Cost is not always the most important

aspect of a strategic decisionaspect of a strategic decision• Four key attributes when strategy is based Four key attributes when strategy is based

on innovationon innovation– High-quality and specialized inputsHigh-quality and specialized inputs– An environment that encourages investment An environment that encourages investment

and local rivalryand local rivalry– A sophisticated local marketA sophisticated local market– Local presence of related and supporting Local presence of related and supporting

industriesindustries

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ScenarioScenario• A friend of yours called Erin is starting a A friend of yours called Erin is starting a

company called Elite Hardware that will design, company called Elite Hardware that will design, manufacture and sell high end door handles and manufacture and sell high end door handles and knockers. Erin believes that there is a good knockers. Erin believes that there is a good market for this product in New Zealand. Erin is market for this product in New Zealand. Erin is an Interior Architect by trade and knows little an Interior Architect by trade and knows little about running a company. She heard that you about running a company. She heard that you have taken a course in Operations Management have taken a course in Operations Management and has asked for your help. Her goal is to do and has asked for your help. Her goal is to do things right the first time.things right the first time.

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Elite HardwareElite Hardware• Erin has had the Erin has had the

following samples following samples made up by a local made up by a local ‘job shop’. She has ‘job shop’. She has already received already received several preorders several preorders from hardware stores from hardware stores around New Zealand around New Zealand and has secured and has secured funding from a funding from a National Bank.National Bank.

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Group 1Group 1• Erin need to evaluate setting up a facility in NZ Erin need to evaluate setting up a facility in NZ

or overseas (Fiji, China, Indonesia etc ), she has or overseas (Fiji, China, Indonesia etc ), she has heard this might be much cheaper! What heard this might be much cheaper! What countrycountry factors she should take in to account factors she should take in to account when choosing a location?when choosing a location?

• Share these with the classShare these with the class• Explain, using an example how you would Explain, using an example how you would

compute labour productivity to compare compute labour productivity to compare locations.locations.

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Group 2Group 2• Erin will probably set up a manufacturing facility Erin will probably set up a manufacturing facility

somewhere in NZ, what somewhere in NZ, what regional and siteregional and site factors she should take in to account when factors she should take in to account when choosing a location that maximises benefits to choosing a location that maximises benefits to Elite?Elite?

• Share these with the classShare these with the class

• Explain using an example how you would use the Explain using an example how you would use the llocational break-even analysis graphically and ocational break-even analysis graphically and mathematically to evaluate different regionsmathematically to evaluate different regions

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Group 3Group 3• Erin thinks that it is important to have a retail Erin thinks that it is important to have a retail

presence (shop) in Christchurch. Identify and presence (shop) in Christchurch. Identify and explain the explain the sitesite factors (for a service location factors (for a service location p 328)that she should take in to account p 328)that she should take in to account when choosing a location that maximises when choosing a location that maximises revenue?revenue?

• Share these with the class.Share these with the class.• Explain using an example how you would use Explain using an example how you would use

the factor rating method to look at different the factor rating method to look at different locations.locations.

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CountryCountry

1.1. Political risks, government Political risks, government rules, attitudes, incentivesrules, attitudes, incentives

2.2. Cultural and economic Cultural and economic issuesissues

3.3. Location of marketsLocation of markets4.4. Labor talent, attitudes, Labor talent, attitudes,

productivity, costsproductivity, costs5.5. Availability of supplies, Availability of supplies,

communications, energycommunications, energy6.6. Exchange rates and Exchange rates and

currency riskscurrency risks

Country DecisionCountry Decision

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RegionRegionRegion/ Region/ Community Community

DecisionDecision1.1. Corporate desiresCorporate desires2.2. Attractiveness of region Attractiveness of region 3.3. Labour availability, costs, Labour availability, costs,

attitudes towards unionsattitudes towards unions4.4. Costs and availability of utilitiesCosts and availability of utilities5.5. Environmental regulationsEnvironmental regulations6.6. Government incentives and Government incentives and

fiscal policiesfiscal policies7.7. Proximity to raw materials and Proximity to raw materials and

customerscustomers8.8. Land/construction costsLand/construction costs

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SiteSiteSite DecisionSite Decision

1.1. Site size and costSite size and cost2.2. Air, rail, highway, and Air, rail, highway, and

waterway systemswaterway systems3.3. Zoning restrictionsZoning restrictions4.4. Proximity of services/ Proximity of services/

supplies neededsupplies needed5.5. Environmental impact Environmental impact

issuesissues

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Service Location StrategyService Location Strategy1. Purchasing power of customer-drawing area1. Purchasing power of customer-drawing area2. Service and image compatibility with 2. Service and image compatibility with

demographics of the customer-drawing areademographics of the customer-drawing area3. Competition in the area3. Competition in the area4. Quality of the competition4. Quality of the competition5. Uniqueness of the firm’s and competitors’ 5. Uniqueness of the firm’s and competitors’

locationslocations6. Physical qualities of facilities and neighboring 6. Physical qualities of facilities and neighboring

businessesbusinesses7. Operating policies of the firm7. Operating policies of the firm8. Quality of management8. Quality of management

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Seven Major Factors That Affect Seven Major Factors That Affect Location DecisionsLocation Decisions

• Labor Productivity ‘low wage’Labor Productivity ‘low wage’• Exchange Rates and Currency RisksExchange Rates and Currency Risks• Costs – tangible and intangibleCosts – tangible and intangible

• Labour, material, taxes, transportationLabour, material, taxes, transportation• Education, community attitudes, quality of Education, community attitudes, quality of

employeesemployees

• Political risk, values, and culturePolitical risk, values, and culture• Governments attitudes, IP, Environmental, Governments attitudes, IP, Environmental,

Unions, Work CultureUnions, Work Culture

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Seven Major Factors That Affect Seven Major Factors That Affect Location DecisionsLocation Decisions

• Proximity to marketsProximity to markets– ServicesServices– JIT systems or high transportation costs may JIT systems or high transportation costs may

make it important to manufacturersmake it important to manufacturers• Proximity to suppliersProximity to suppliers

– Perishable goods, high transportation costs, Perishable goods, high transportation costs, bulky productsbulky products

• Proximity to competitorsProximity to competitors– Clustering Clustering

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Hotels -siteHotels -site• Location is a strategically important Location is a strategically important

decision in the hospitality industrydecision in the hospitality industry• La Quinta started with 35 independent La Quinta started with 35 independent

variables and worked to refine a variables and worked to refine a regression model to predict profitabilityregression model to predict profitability

• The final model had only four variablesThe final model had only four variables– Price of the innPrice of the inn– Median income levelsMedian income levels– State population per innState population per inn– Location of nearby collegesLocation of nearby colleges

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Mathematical TechniquesMathematical Techniques

• Factor Rating Method -CSFFactor Rating Method -CSF• Break Evan Analysis Example 2 p324Break Evan Analysis Example 2 p324• Centre of GravityCentre of Gravity

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Factor-Rating ExampleFactor-Rating ExampleCriticalCritical ScoresScores

SuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor WeightWeight FranceFrance DenmarkDenmark FranceFrance DenmarkDenmark

Labor Labor availability availability

and attitude and attitude .25.25 7070 6060 (.25)(70) = 17.5(.25)(70) = 17.5 (.25)(60) = 15.0(.25)(60) = 15.0People-to-People-to-

car ratiocar ratio .05.05 5050 6060 (.05)(50) = 2.5(.05)(50) = 2.5 (.05)(60) = 3.0(.05)(60) = 3.0Per capitaPer capita

incomeincome .10.10 8585 8080 (.10)(85) = 8.5(.10)(85) = 8.5 (.10)(80) = 8.0(.10)(80) = 8.0Tax structureTax structure .39.39 7575 7070 (.39)(75) = 29.3(.39)(75) = 29.3 (.39)(70) = 27.3(.39)(70) = 27.3

EducationEducation and healthand health .21.21 6060 7070 (.21)(60) = 12.6(.21)(60) = 12.6 (.21)(70) = 14.7(.21)(70) = 14.7TotalsTotals 1.001.00 70.470.4 68.068.0

Table 8.4Table 8.4

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Locational Break-Even Locational Break-Even Analysis ExampleAnalysis Example

–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

Ann

ual c

ost

Ann

ual c

ost

| | | | | | |

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000VolumeVolume

Akron Akron lowest lowest costcost

Bowling Green Bowling Green lowest costlowest cost

Chicago Chicago lowest lowest costcost

Chicago cost curve

Chicago cost curve

Akron co

st

Akron co

st

curve

curve

Bowling Green

Bowling Green

cost curve

cost curve

Figure 8.2Figure 8.2

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Center-of-Gravity MethodCenter-of-Gravity MethodNorth-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary

originorigin

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

Pittsburgh Pittsburgh (90, 110)(90, 110)

Atlanta Atlanta (60, 40)(60, 40)

Center of gravity Center of gravity (66.7, 93.3)(66.7, 93.3)+

Figure 8.3Figure 8.3

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ReferencesReferences• Heizer, J., & Render, B. (2008). Heizer, J., & Render, B. (2008). Operations managementOperations management (9th (9th

ed.). Saddle River, New Jersey: Pearson Prentice Hall.ed.). Saddle River, New Jersey: Pearson Prentice Hall.

• Slack, N., Chambers, S. & Johnson, R.(2007). Operations Slack, N., Chambers, S. & Johnson, R.(2007). Operations Management (5Management (5thth ed.). Harlow, Essex, England, Pearson ed.). Harlow, Essex, England, Pearson Education Limited.Education Limited.