Chapter 8 Location Strategies Short Answers

SHORT ANSWERS 87. Why does FedEx use a "hub-and-spoke" airline network, rather than a "point-to-point" network? Describe FedEx's approach to choosing the airports that serve as its hubs. The hub system is more centralized, and allows for greater control; greater control reduces package mishandling and transit delays. Their U.S. hub in Memphis reflects a need to be geographically centralized, and in a location where schedules can more reliably be kept. (Global company profile, moderate) 88. State the fundamental objective of a firm's location strategy. How is this basic objective carried out by industrial or goods-producing firms; how does that differ for service firms? Answer in a clear, convincing paragraph. The fundamental objective is to maximize the benefit of location to the firm. For industrial location decisions, the focus is frequently on minimizing cost, because cost often varies dramatically from one location to another. Service location decisions focus on maximizing revenues. Service location alternatives may vary little in cost, but have dramatic differences in revenue or volume, because of differences in population, income, traffic count, or other variables. (The strategic importance of location, moderate) 89. Identify the changes that have fostered globalization. Changes that foster globalization include better international communications; more rapid, reliable travel and shipping; ease of capital flow between countries; and high differences in labor costs. (The strategic importance of location, moderate) {AACSB: Multiculture and Diversity} 90. Motorola is in an industry where there are intense pressures to keep costs low. Why did Motorola reject a possible location that offered low manufacturing costs? While there are pressures to keep costs low, cost is not the only driver for location choices. Motorola is also in an industry that values innovation and creativity; the firm needs highquality labor inputs. Motorola felt that the location lacked infrastructure and education levels that would support its specific production technologies. (Factors that influence locat decisions, moderate) 91. Consider the table of Critical Success Factors in your textbook. Why do some items appear at the country level only, while others are present at both country and regional levels? Select one CSF as an example, and use it in your discussion. A critical success factor should appear wherever it is relevant. A factor loses its ability to differentiate one location from another if it is the same for all alternatives. For this reason, the CSF "exchange rates" is listed at the country level. There are significant costs and risks associated with foreign currency trading and foreign currency accounting; these costs and risks vary from country to country. But there is no exchange rate risk between two U.S. states or cities, or between two sites within a city. (Factors that affect location decisions, difficult) {AACSB: Reflective Thinking} 202 92. Identify five factors that affect location decisions at the site level. Factors that affect location decisions at the site level include site size and cost; air, rail, highway, waterway systems; zoning restrictions; nearness of services/supplies needed; and environmental impact issues. (Factors that affect location decisions, moderate) 93. What is the role of labor productivity in location decisions? Why is it more important than low wages in location decisions? Labor productivity is the number of units output per hour of labor input. For location decisions, this is more often displayed in the form of "labor content," which is the dollar labor cost per unit. Labor content provides a useful comparison in cases where wage rates and productivities vary greatly from country to country. (Factors that affect location decisions, moderate) 94. What is the impact of exchange rates on location decisions? Exchange rates fluctuate, and can negate savings from low wage rates. (Factors that affect location decision, moderate) {AACSB: Multiculture and Diversity} 95. Why is "quality of life" an element of intangible costs associated with location decisions? Provide an example as part of your discussion. Quality of life affects location decisions in at least one indirect way. Consider a firm that has narrowed its location to two cities. One city has an abundance of educational and recreational facilities, good hospitals and parks. The other has very little of these elements. If you were a prospective employee, in which city would you rather live? Low quality of life can drive up labor costs, and might also have an impact on training costs and health care costs. (Factors that affect location decisions, moderate) {AACSB: Reflective Thinking} 96. "Proximity" or closeness implies that a firm should locate "close" to something. What are the three kinds of proximity described in the text? What are the basic conditions under which each is appropriate? What kinds of firms are likely to use each of these? The three are proximity to markets, proximity to suppliers, and proximity to competitors. Proximity to markets is appropriate when customers will not travel far to get the good or service, or when delivering the product to the customer is costly or difficult. Many services must be close to their markets, as must home construction. Proximity to suppliers is appropriate when raw materials are perishable, or when supplies are costly or bulky to transport. Seafood processors need to be near the docks, and smelters need to be near the mines. Proximity to competitors reflects a kind of synergy—retailers find that volume is higher when there are more competitors nearby, because this clustering brings higher traffic counts. (Factors that affect location decisions, difficult) 203 97. Consider the table of Critical Success Factors in your textbook. From items on that list, select two which might involve ethical issues or issues of social responsibility, and cite a possible example of each. Write a brief explanation of each of your examples. Cite and describe a third example, from an area not covered by the CSFs. At the country level, good candidates are cultural and economic issues, labor availability and costs. (Bribery, corruption, child labor, slave labor, racial and gender discrimination in the work force all raise ethical issues.) At the regional level, environmental concerns, and land cost are good candidates. (Corruption, bribery, or cronyism might be associated with land deals; or managers might be tempted to locate where environmental laws are less likely to be enforced.) At the site level, zoning and environmental impact are easy targets. (There might be bribery or corruption related to zoning issues or environmental permits.) Off the list of CSFs, student examples can include corruption and bribery in exchange for incentives. (Factors that affect location decisions, difficult) {AACSB: Ethical Reasoning} 98. Identify those factors identified in the textbook as creating legal or ethical issues for operations mangers as they analyze location decisions. The text identifies bribery, corruption, child labor, sweatshop and other poor working conditions. The text also identifies allegiance—does a firm owe anything to a town or state that it is about to depart from? (Factors that affect location decisions, moderate) {AACSB: Ethical Reasoning} 99. What is it called when competing companies locate next to each other? Why do they do this? It is called clustering. In many cases, this occurs because of a critical mass of information, talent, venture capital, or natural resources. Alternately, clustering occurs because several firms close together create a larger total market than the same firms separated. (Factors that affect location decisions, moderate) 100. Identify the four major quantitative methods for solving location problems. Factor rating method, locational break-even analysis, center-of-gravity method, and transportation method. (Methods of evaluating location alternatives, moderate) 101. What are the advantages and disadvantages of the use of factor rating schemes? Factor rating can handle a mix of quantitative and qualitative variables; its calculations are simple and straightforward. Factor rating is subject to sensitivity to small swings in weights and scores, and is subject to subjectivity (different judges see different scores for same site). (Methods of evaluating location alternatives, moderate) 102. What kinds of location decisions are appropriate for use of crossover analysis? Write a brief paragraph explaining how crossover analysis (break-even analysis) can assist an operations manager choose among alternative sites in making a location decision. Crossover analysis is appropriate when the primary focus of a location decision is cost. For each alternative site, crossover analysis constructs a total cost curve composed of a fixed cost and a variable cost that depends upon volume. Where these cost curves intersect (or cross over) is the point at which two alternatives have the same cost. The graph of the cost curves of all alternative sites will display the range of volumes over which each site has the lowest cost of all alternatives. (Methods of evaluating location decisions, moderate) 204 103. What kinds of location decisions are appropriate for use of center-of-gravity analysis? What variable is being optimized in this analysis? The center-of-gravity technique is appropriate when the location decision must find a single centrally-located site to serve any number of outlying points; locating a distribution center to serve a dozen retail stores is an example. The analysis leads to a location that (approximately) minimizes the distribution cost (or total distance traveled) between all outlying points and the center or hub. (Methods of evaluating location decisions, moderate) 104. Is Starbucks Coffee a user of Geographic Information Systems? Support your answer with examples. Starbucks is clearly a user of GIS. Databases reveal population, age, purchasing power, traffic count, and more, for the blocks around each potential site. Sites are compared on the basis of these variables. (Service location strategy, easy) {AACSB: Use of IT} 105. How does the Starbucks Coffee case illustrate the general principles of service location strategy? Starbucks Coffee clearly selects sites on the basis of revenue or volume, not cost. They clearly pay attention to such variables as drawing power, competition, and traffic counts, all of which are appropriate for service location decisions. Starbucks Coffee is a user of GIS, which is more a tool of service location than of industrial location. There is no indication that Starbucks Coffee uses shipment costs, labor cost, break-even analysis, or transportation method, which are variables and tools associated with industrial location decisions. (Service location strategy, easy) 106. Service location strategies and goods-producing location strategies rely on very different sets of assumptions. What are the assumptions associated with goods-producing locations? How do these assumptions lead to a location strategy? The assumptions for goods-producing locations are: location is a major determinant of cost; most major costs can be identified explicitly for each site; low customer contact allows focus on the identifiable costs; and intangible cost can be objectively evaluated. On the basis of these assumptions, the location strategy for goods-producing firms is usually aimed at minimizing cost. (Methods of evaluating location alternatives, moderate) 107. How do service facility location decisions differ from industrial location decisions in terms of the techniques used to analyze them? Service location decisions tend to focus on the revenue function, whereas manufacturing/industrial location decisions tend to focus on costs. The service sector uses techniques such as correlation analysis, traffic counts, demographic analysis, and purchasing power analysis. The industrial decision uses transportation method, factor-weighting approach, break-even analysis, and crossover charts. (Service location strategy, moderate) 205