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LOCATION STRATEGIES

LOCATION STRATEGIES. Operations Management Session 5 Henry Y. The Strategic Importance of Location.

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LOCATION STRATEGIES

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  1. LOCATION STRATEGIES Operations Management Session 5 Henry Y.

  2. The Strategic Importance of Location • Location options include (1) expanding an existing facility instead of moving; (2) maintaining current sites while adding another facility elsewhere; (3) closing the existing facility and moving to another location. • The objective of location strategy is to maximize the benefit of location to the firm. • Location and Costs • Location and Innovation

  3. Factors that affect location decisions • Globalization : (1) market economics; (2) better international communications; (3) more rapid, reliable travel and shipping; (4) ease of capital flow between countries; (5) high differences in labor costs. • Labor productivity :

  4. ... • Exhange Rates and Currency Risk • Cost (tangible and intangible) • Ethical Issues • Attitudes • Proximity to Markets • Proximity to Suppliers • Proximity to Competitors (Clustering)

  5. Methods of Evaluating Location Alternatives The Factor-Rating Method • Most widely used location technique • Useful for service & industrial locations • Steps : • Develop a list of relevant factors called critical success factors (CSFs) • Assign a weight to each factor to reflect its relative importance to the company. • Develop a scale for each factor (ex 10 to 100) • Have management score each location for each factor and total the score for each location. • Multiply the score by the weight for each factor. • Make a recommendation based on the maximum point score.

  6. ... • Locational 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

  7. Example 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?

  8. 200000 Akron 150000 Chicago 100000 Annual Cost Bowling Green Bowling Green lowest cost 50000 Chicago lowest cost Akron lowest cost 0 0 500 1000 1500 2000 2500 3000 Volume Locational Break-Even Crossover Chart

  9. ... • 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

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

  11. ... • Transportation Model • Finds amount to be shipped from severalsources to several destinations • Used primarily for industrial locations • Type of linear programming model • Objective: Minimize total production & shipping costs • Constraints • Production capacity at source (factory) • Demand requirement at destination

  12. Service Location Decisions • Industrial-sector location analysis is on minimizing cost, while in the service sector is on maximizing revenue. • Geographic Information Systems

  13. Some Extension of Location Decision Location strategies of broad-line retailers(Kiran Karandea and J.R. Lombardb, 2004) • Broad-line specialists tend to use proximity (distance) in trade areas with high income, highpopulation density, high per capita income, with younger populations, and high home ownership. Warehouse location selection (Tuncay Özca,et al, 2011) • Based on multicriteria decision making. Criterias including: unit price, stock holding capacity, average distance to stop, average distance to main suppliers, movement flexibility)

  14. International Chain Hotel Location Selection (Chou et al., 2008)

  15. ... Location planning for urban distribution centers (

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