Location Planning and Analysis

Chapter 8: Location Planning and Analysis Location choices can impact capacity and flexibility. Certain locations may be subject to space constraints that limit future expansion options, local restrictions may restrict the type of product/service that can be offered, or locating near a road can have shipping benefits Location decisions are strategically important for several reasons including::: 1) entail a long-term commitment. 2) often have an impact on investment requirements, operating costs, revenues, and operations. 3) can impact competitive advantage. 4) important to supply chains. Profit-oriented organizations base their decisions on profit potential, whereas nonprofit organizations strive to achieve a balance between cost and the level of customer service they provide In many instances, no single location may be significantly better than the others Most organizations don’t set out with the intention of identifying the one best location, they hope to find a number of acceptable locations from which to choose Location criteria can depend on where a business is in the supply chain At the retail end of the supply chain, site selection tends to focus more on accessibility, consumer demographics, traffic patterns, and local customs. Businesses at the beginning of the supply chain want to be located near raw materials Supply chain management must address supply chain configuration ((includes determining the number and location of suppliers, production facilities, warehouses, and distribution centers)) Centralized distribution – generally yields scale economies as well as tighter control than decentralized distribution, sometimes incurs higher transportation costs Decentralized distribution – tends to be more responsive to local needs Managers of existing companies generally consider 4 options in location planning:::: 1) expand an existing facility (if there’s adequate room for expansion). 2) add new locations while retaining existing ones (adding locations can be a defensive strategy designed to maintain market share). 3) shut down at one location and move to another (organization must weigh the costs of a move and the resulting benefits against costs). 4) do nothing Globalization has opened new markets and it has meant increasing dispersion of manufacturing and service operations around the world Two key factors have made globalization attractive and feasible for business organizations::: 1) trade agreements (agreements that are fair to all sides can help trade flourish). 2) technology (advances in communication and info sharing have helped trade) Benefits of globalization::: markets (companies can expand their markets), cost savings (transportation costs, labor, taxes can be lower), legal and regulatory (favorable laws or less restrictive regulations in other countries), financial (companies can avoid some of the impact of currency changes/tariffs), other (new ideas, new perspectives, etc). Disadvantages of global operations:: transportation costs (high costs can occur because of shipping great distances), security costs (increased risks can increase costs), unskilled labor (low labor skills may impact quality/productivity), import restrictions, criticisms, productivity. Risks with global operations can be substantial including::: protecting intellectual property rights (companies that outsource to foreign countries need assurance that intellectual rights will be preserved), political (instability/unrest), terrorism (personnel/assets at risk), economic (instability, inflation), legal (laws can change), ethical (corruption, bribery), cultural, quality (lax quality controls) Although global operations offer many benefits, these operations often create new issues for management to deal with Automation is having a major influence on the decision of where to produce goods, particularly if the main markets are domestic Steps for making location decisions::: 1) decide on criteria to use for evaluation. 2) ID important factors. 3) develop location alternatives (country, general region, community alternatives). 4) evaluation the alternatives and make a selection Many factors influence location decisions, however, it often happens that one or a few factors are so important that they dominate the decision **see table 8.1 for important factors relating to foreign locations** Some US manufacturing companies set up foreign subsidiaries to not only take advantage of low labor rates but also to avoid/delay paying tax on their profits Primary regional factors involve raw materials, markets, and labor considerations Raw materials – firms locate near raw materials for necessity, perishability, and transportation costs Markets – profit-oriented firms locate near the markets they serve as part of their competitive strategy, nonprofits locate near the people they need to serve/meet needs Labor – cost and availability of labor, wage rates in an area, labor productivity and attitudes toward work, and whether unions are a serious potential problem Some organizations discover that even though overall community attitude is favorable, there may still be opposition to locating their facility there Community size can be important if a firm will be a major employer in the community Primary considerations related to sites are land, transportation, and zoning/restrictions Product plant strategy – entire products/product lines are produced in separate plants and each plant supplies the entire domestic market Market area plant strategy – plants are designed to serve a particular geographic segment of a market, individual plants produce most of a companys products and supply a limited geographical area Process plant strategy – different plants concentrate on different aspects of a process, best suited for products that have numerous components, coordination is a major concern General purpose plant strategy – plants are flexible and capable of handling a range of products, allows for quick response to product or market changes Geographic information system (GIS) – computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps; relies on an integrated system of computer hardware/software/data/trained personnel to make info available Service and retail are typically governed by different considerations than manufacturing organizations in making location decisions Manufacturers tend to be cost focused, concerned with labor/energy/material costs and availability/distribution costs Service and retail tend to be profit/revenue focused and concerned with demographics Retail sales and services are usually found near the center of the markets they serve Retailers typically place traffic volume and convenience high on the list of important factors, they tend to want to be near other retailers ( clustering) Steps for locational cost-profit-volume analysis::: 1) determine the fixed and variable costs associated with each location alternative. 2) plot the total-cost lines for all alternatives (on the same graph). 3) determine which location will have the lowest total cost for the expected output level. Locational cost-profit-volume analysis assumes that fixed costs are constant, variable costs are linear, the required level of output can be estimated, and there’s only 1 product Total cost = fixed cost + (variable cost per unit * quantity/volume of output) Total profit = quantity/volume of output * (revenue per unit – variable cost per unit) – fixed cost If a facility will be the sole source or destination of shipments, the company can include the transportation costs in a locational cost-volume analysis by incorporating the transportation cost per unit being shipping into the variable cost per unit When a problem involves the shipment of goods from multiple points TO multiple points, the company should undertake a separate analysis of transportation (called TRANSPORTATION MODEL) Factor rating – technique that can be applied to a wide range of decisions, general approach that is useful for evaluating a given alternative and comparing alternatives Procedure to develop a factor rating::: 1) determine which factors are relevant. 2) assign a weight to each factor that indicates its relative importance. 3) decide on a common scale for all factors (ex. 1-100). 4) score each location alternative. 5) multiply factor weight by factor score, sum results. 6) choose alternative with highest composite score Average of x coordinates = sum of x coordinates of destinations / number of destinations Average of y coordinates = sum of y coordinates of destinations / number of destinations