Learning Objectives. Location Planning. Nature of Location Decisions. Need for Location Decisions. Location Decision Factors

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1 Learning Objectives Location Planning Dr. Richard Jerz List some of the main reasons organizations need to make location decisions. Explain why location decisions are important. Discuss the options that are available for location decisions. Describe some of the major factors that affect location decisions. Outline the decision process for making these kinds of decisions. Understand quantitative techniques to solving location problems Need for Location Decisions Nature of Location Decisions Marketing Strategy Cost of Doing Business Growth Depletion of Resources Importance Long term commitment/costs Often difficult to reverse decision Transportation cost As much as 5% of product price Options Expand existing facilities Add new facilities Move Do nothing 5 Location Decision Sequence Location Decision Factors Country Region/Community Site 995 Corel Corp. 995 Corel Corp. 995 Corel Corp. 6 7

2 Location Factors Community Considerations Corporate desires Location of raw materials Location of markets Labor factors (e.g. cost, skills) Climate and taxes Foreign locations Government Exchange rates & currency risks Quality of life Services Attitudes Taxes Environmental regulations Developer support 8 9 Site Related Factors Trends in Locations Land Transportation Environmental Legal Manufacture overseas Use modern transportation systems Supply chain Smaller factories Information highway 0 Disadvantages Transportation costs Security Unskilled labor Import restrictions Criticisms Risks Political Terrorism Legal Cultural Globalization Quantitative Models for Location Planning Factor Rating Decision based on quantitative and qualitative inputs Break-Even analysis Compare fixed and variable costs of alternative at different production volumes Transportation Model Decision based on movement costs of raw materials or finished goods Center of Gravity Method Decision based on minimum distribution costs

3 Factor-Rating Method Steps in 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 List relevant factors Assign importance weight to each factor (such as 0 ) Develop scale for each factor (such as 00) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score 4 5 Factor-Rating Example Location Break-Even Analysis Critical Scores Success (out of 00) Weighted Scores Factor Weight France Denmark France Denmark Labor availability and attitude (.5)(70) = 7.5 (.5)(60) = 5.0 People-to car ratio (.05)(50) =.5 (.05)(60) =.0 Per capita income (.0)(85) = 8.5 (.0)(80) = 8.0 Tax structure (.9)(75) = 9. (.9)(70) = 7. Education and health (.)(60) =.6 (.)(70) = 4.7 Totals Method of cost-volume analysis used for industrial locations Steps Determine fixed & variable costs for each location Plot total cost for each location versus production volume Select location with lowest total cost for expected production volume 6 7 Cost-Volume Analysis Example Solution Fixed and variable costs for four potential locations L o c a tio n A B C D F ix e d Cost $50,000 00,000 50,000 00,000 Variable Cost $ $(000) B Superior 4 6 D B C A A Superior C Superior Annual Output (000) 8 9

4 Center of Gravity Method Center of Gravity - Steps Finds location of single 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. 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 0 Center of Gravity - Equations Center-of-Gravity Method X Coordinate Y Coordinate dixwi C = i x Wi i diywi C = i y Wi i d ix = x coordinate of W i = Volume of goods moved to or from d iy = y coordinate of Center of Gravity - Solution Transportation Model Finds amount to be shipped from several sources 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 4 5 4

5 Linear Programming A Transportation Table Warehouse A B C D Factory Factory 00 can supply units per 00 period Demand Warehouse B can use 90 units per period 50 Total supply 450 capacity per 450 period Total demand per period 6 7 Excel Template 8 5