OPSM 301 Operations Management

1. Koç University OPSM 301 Operations Management Class 18: Location (Chapter 8) Zeynep Aksin zaksin@ku.edu.tr

2. Efficiency Responsiveness Supply chain structure Inventory Transportation Facilities Information Drivers Drivers of Supply Chain Performance

3. The Logistics Network The Logistics Network consists of: • Facilities:Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers • Raw materials and finished products that flow between the facilities.

4. Customers, demand centers sinks Field Warehouses: stocking points Sources: plants vendors ports Regional Warehouses: stocking points Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Transportation costs Inventory & warehousing costs

5. Decision Classifications • Strategic Planning: Decisions that typically involve major capital investments and have a long term effect 1. Determination of the number, location and size of new plants, distribution centers and warehouses 2. Acquisition of new production equipment and the design of working centers within each plant 3. Design of transportation facilities, communications equipment, data processing means, etc.

6. Decision Classifications • Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months 1. Work-force size 2. Inventory policies 3. Definition of the distribution channels 4. Selection of transportation and trans-shipment alternatives

7. Decision Classifications • Operational Control: Includes day-to-day operational decisions 1. The assignment of customer orders to individual machines 2. Dispatching, expediting and processing orders 3. Vehicle scheduling

8. Competitive Imperatives Impacting Location • The need to produce close to the customer due to time-based competition, trade agreements, and shipping costs • The need to locate near the appropriate labor pool to take advantage of low wage costs and/or high technical skills Article from Financial Times

9. Site selection and Location • Site selection • Short-term focus • Accessibility of consumers and workers • “Cost” driven decision • Location • stability • Long-term market position • Strategies for back-office operations

10. Facility Location • Location decisions are made for facilities that produce and deliver both products and services • Both quantitative and qualitative factors can be important to location decisions • Several levels of quantitative analysis are possible • Cost comparisons • Break-even analysis • Linear programming

11. Proximity to Customers Business Climate Total Costs Infrastructure Quality of Labor Suppliers Other Facilities Free Trade Zones Political Risk Government Barriers Trading Blocs Environmental Regulation Host Community Locational Factors

12. Characteristics of a Good Location • Proximity to target market • Residences, hospitals, schools, offices, airports, military bases • Proximity to destination points • Malls tourist attractions, anchor stores • Ease of access • Proximity to competition • Proximity to other units of the same type Problem: accurate identification and trade-offs

13. Demand Sensitive Services • Solution Techniques: • Informal judgment • Factor Rating • Regression • Case: • La Quinta Hotels - Regression based site selection

14. Location Evaluation Methods • Factor-rating method • Locational break-even analysis • Center of gravity method • Transportation model

15. Factor-Rating Method • Most widely used location technique • Useful for service & industrial locations • Rates locations using factors • Tangible (quantitative) factors • Example: Short-run & long-run costs • Intangible (qualitative) factors • Example: Education quality, labor skills

16. Steps in Factor Rating Method • List relevant factors • Assign importance weight to each factor (such as 0 – 1) • Develop scale for each factor (such as 1 – 100) • Score each location using factor scale • Multiply scores by weights for each factor & total • Select location with maximum total score

17. Demand Sensitive Service Facility Location Factor Rating example Item ScaleMultiplier Income of neighborhood 0-10 .40 Proximity to shopping centers 0-10 .25 Accessibility 0-10 .15 Visibility 0-10 .10 Traffic 0-10 .10

18. Demand Sensitive Service Facility Location Factor Rating Example Score

19. Fixed Variable Location Cost Cost A $250,000 $11 B 100,000 30 C 150,000 20 D 200,000 35 Cost-Volume Analysis Fixed and variable costs for four potential locations:

20. Cost-Volume Analysis $(000) 800 700 600 500 400 300 200 100 0 D B C A A Superior C Superior B Superior 0 2 4 6 8 10 12 14 16 Annual Output (000)

21. Center of Gravity Method • Finds location ofsingle distribution center serving several destinations • Used primarily for services • Considers • Location of existing destinations • Example: Markets, retailers etc. • Volume to be shipped • Shipping distance (or cost) • Shipping cost/unit/mile is constant

22. Center of Gravity Method Steps • Place existing locations on a coordinate grid • Grid has arbitrary origin & scale • Maintains relative distances • Calculate X & Y coordinates for ‘center of gravity’ • Gives location of distribution center • Minimizes transportation cost

23. Center of Gravity Method Equations X Coordinate dix = x coordinate of location i Wi = Volume of goods moved to or from location i diy = y coordinate of location i Y Coordinate

24. Example: retail stores Store Location No of containers shipped/month Location A 400 Location B 300 Location C 200 Location D 100 Location E 300 Location F 100

26. Remarks • Geographic center is not equal to the cost center • Define distance concept carefully

27. Hotelling’s

28. Hotelling’s: round 1 A B

29. Hotelling’s: round 2 A B

30. Hotelling’s: round 3 B A

31. Hotelling’s: final configuration A B

32. Conclusion • Why is McDonalds always next to Burger King? Gloria Jeans next to Starbucks? • Remember that others can move when you are planning locations • In general: dynamics of competitive location matter