Lecture 5 LOCATION DECISION

1. 1 Lecture 5 LOCATION DECISION

2. 2 1. Nature of Location Decisions - Location decision is the process of choosing region and specific location to accomplish the business strategy. - Location Options Expand existing facilities Add new facilities Move

3. 3 1. Nature 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

4. 4 2. TRENDS IN LOCATIONS Location in foreign country Benefits:

5. 5 2. TRENDS IN LOCATIONS Location in suburb Reasons:

6. 6 2. TRENDS IN LOCATIONS Location in industrial zone Reasons:

7. 7 3. Location Decision Factors

8. 8 Raw materials Market factors (market scale, market trends, competition,�) Labor factors (labour requirements, labour cost and productivity,�) Infrastructure (transportation, information system) 3.1.Regional Factors

9. 9 Cultural factors Social factors (local attitudes, development policies) Environmental regulations 3.2. Community Considerations

10. 10 Size and costs of each site Transportation Available of Utilities (electricity, water,�) Safety 3.3. Site Related Factors

11. 11 4. Making Location Decisions Decide on the criteria Identify the important factors Develop location alternatives Evaluate the alternatives Identify general region Identify a small number of community alternatives Identify site alternatives Evaluate and make selection

12. 12 5. EVALUATING LOCATIONS (METHODS FOR CHOOSING LOCATION) 5.1. Factor Rating Steps: Identify important factors; Give weight of each factor depending on its importance; Give score for each location at each factor; Multiply weight with score for each factor; Calculate total score of each location; Choose location which has the highest total score.

13. 13 Example: A tourism company wants to choose a location to set up a new hotel. There are two alternatives, Hue and Quang Binh.

14. 14 5. Evaluating Locations 5.2. Cost-Volume Analysis Determine fixed and variable costs Plot total costs Determine lowest total costs

15. 15 5.2. Location Cost-Volume Analysis Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved Y = a + bx Y: total cost a: fixed cost b: variable cost per unit X: number of products per year

16. 16 5.2. Location Cost-Volume Analysis Identify fixed cost and variable cost for alternative locations; Draw costs of each location on a graph, in which costs are described on vertical axis and product quantity are illustrated on horizontal axis. Choose the location where has the lowest total cost according to the expected product quantity.

17. 17 5.2. Location Cost-Volume Analysis Example: A company intends to choose a location for building a factory. There are 3 alternatives: Dong Hoi city, Hue city and Danang city. Fixed cost for the 3 above locations are estimated at 300 million dongs, 600 mil dongs and 1,100 mil dongs, respectively. Variable cost for each unit are 0.75 mil dongs, 0.45 mil dongs and 0.25 mil dongs, respectively. Which location is the best one for the company?

18. 18 When capacity is determined, i.e. 2000 units Y�H = 300 + 0,75 ? 2000 = 1.800 mil. dong YH= 600 + 0,450 ? 2000 = 1.500 mil. dong Y�N = 1.100 + 0,250 ? 2000 = 1.600 mil. dong

19. 19 When capacity has not determined yet Y�H = 300 + 0,75x YH= 600 + 0,450 x Y�N = 1.100 + 0,250 x

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