Chapter 5 Location and Layout Strategies Outline The Strategic Importance Of Location Factors That Affect Location Decisions Methods Of Evaluating Location Alternatives The Strategic Importance Of Layout Decisions 2 1
Outline Types of Layout Office Layout Retail Layout Warehousing and Storage Layouts Fixed-Position Layout Process-Oriented Layout Work Cells Repetitive and Product-Oriented Layout 3 Location Strategy One of the most important decisions a firm makes Increasingly global in nature Long term impact and decisions are difficult to change The objective is to maximize the benefit of location to the firm 4 2
Location and Innovation Cost is not always the most important aspect of a strategic decision Four key attributes when strategy is based on innovation High-quality and specialized inputs An environment that encourages investment and local rivalry A sophisticated local market Local presence of related and supporting industries 5 Location Decisions Long-term decisions Decisions made infrequently Decision greatly affects both fixed and variable costs Once committed to a location, many resource and cost issues are difficult to change 6 3
Location Decisions Country Decision Critical Success Factors 1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor availability, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks 7 Location Decisions Region/ Community Decision MN WI IL IN MI OH Critical Success Factors 1. Corporate desires 2. Attractiveness of region 3. Labor availability, costs, attitudes towards unions 4. Costs and availability of utilities 5. Environmental regulations 6. Government incentives and fiscal policies 7. Proximity to raw materials and customers 8. Land/construction costs 8 4
Location Decisions Site Decision Critical Success Factors 1. Site size and cost 2. Air, rail, highway, and waterway systems 3. Zoning restrictions 4. Nearness of services/ supplies needed 5. Environmental impact issues 9 Factor-Rating Method Popular because a wide variety of factors can be included in the analysis Six steps in the method 1. Develop a list of relevant factors called critical success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score 10 5
Factor-Rating Example Critical Scores Success (out of 100) Weighted Scores Factor Weight France Denmark France Denmark Labor availability and attitude.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0 People-to car ratio.05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0 Per capita income.10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0 Tax structure.39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3 Education and health.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7 Totals 1.00 70.4 68.0 11 Locational Break-Even Analysis Method of cost-volume analysis used for industrial locations Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost for expected production volume 12 6
Locational Break-Even Analysis Example Three locations: Fixed Variable Total City Cost Cost Cost Akron $30,000 $75 $180,000 Bowling Green $60,000 $45 $150,000 Chicago $110,000 $25 $160,000 Selling price = $120 Expected volume = 2,000 units Total Cost = Fixed Cost + Variable Cost x Volume 13 Locational Break-Even Analysis Example Annual cost $180,000 $160,000 $150,000 $130,000 $110,000 $80,000 $60,000 $30,000 $10,000 Chicago cost curve Bowling Green cost curve Akron cost curve Akron lowest cost Bowling Green lowest cost Chicago lowest cost 0 500 1,000 1,500 2,000 2,500 3,000 Volume 14 7
Center-of-Gravity Method Finds location of distribution center that minimizes distribution costs Considers Location of markets Volume of goods shipped to those markets Shipping cost (or distance) 15 Center-of-Gravity Method Place existing locations on a coordinate grid Grid origin and scale is arbitrary Maintain relative distances Calculate X and Y coordinates for center of gravity Assumes cost is directly proportional to distance and volume shipped 16 8
Center-of-Gravity Method x - coordinate = y - coordinate = d ix Q i i Q i i d iy Q i i Q i i where d ix = x-coordinate of location i d iy = y-coordinate of location i Q i = Quantity of goods moved to or from location i 17 Center-of-Gravity Method North-South Chicago (30, 120) 120 New York (130, 130) Pittsburgh (90, 110) 90 60 30 Atlanta (60, 40) 30 Arbitrary origin 60 90 120 150 East-West 18 9
Center-of-Gravity Method Number of Containers Store Location Shipped per Month Chicago (30, 120) 2,000 Pittsburgh (90, 110) 1,000 New York (130, 130) 1,000 Atlanta (60, 40) 2,000 (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) x-coordinate = 2000 + 1000 + 1000 + 2000 = 66.7 (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 1000 + 2000 = 93.3 19 Center-of-Gravity Method North-South Chicago (30, 120) 120 90 + New York (130, 130) Pittsburgh (90, 110) Center of gravity (66.7, 93.3) 60 30 Atlanta (60, 40) 30 Arbitrary origin 60 90 120 150 East-West 20 10
Transportation Model Finds amount to be shipped from several points of supply to several points of demand Solution will minimize total production and shipping costs A special class of linear programming problems 21 Worldwide Distribution of Volkswagens and Parts 22 11
Strategic Importance of Layout Decisions The objective of layout strategy is to develop an economic layout that will meet the firm s competitive requirements 23 Good Layouts Consider 1. Material handling equipment 2. Capacity and space requirements 3. Environment and aesthetics 4. Flows of information 5. Cost of moving between various work areas 24 12
Types of Layout 1. Office layout 2. Retail layout 3. Warehouse layout 4. Fixed-position layout 5. Process-oriented layout 6. Work cell layout 7. Product-oriented layout 25 Office Layout Grouping of workers, their equipment, and spaces to provide comfort, safety, and movement of information Movement of information is main distinction Typically in state of flux due to frequent technological changes 26 13
Relationship Chart Value Closeness President Chief Technology Officer Engineer s area Secretary Office entrance Central files Equipment cabinet Photocopy equipment Storage room 1 2 O 3 U 4 A A 5 I I 6 O I I 7 I I U 8 A I O O 9 A E U O X E E U U A O O U I O X U A E E A E I O U X Absolutely necessary Especially important Important Ordinary OK Unimportant Not desirable 27 Supermarket Retail Layout Objective is to maximize profitability per square foot of floor space Sales and profitability vary directly with customer exposure 28 14
Five Helpful Ideas for Supermarket Layout 1. Locate high-draw items around the periphery of the store 2. Use prominent locations for high-impulse and high-margin items 3. Distribute power items to both sides of an aisle and disperse them to increase viewing of other items 4. Use end-aisle locations 5. Convey mission of store through careful positioning of lead-off department 29 Store Layout 30 15
Warehousing and Storage Layouts Objective is to optimize trade-offs between handling costs and costs associated with warehouse space Maximize the total cube of the warehouse utilize its full volume while maintaining low material handling costs 31 Warehousing and Storage Layouts Material Handling Costs All costs associated with the transaction Incoming transport Storage Finding and moving material Outgoing transport Equipment, people, material, supervision, insurance, depreciation Minimize damage and spoilage 32 16
Warehousing and Storage Layouts Warehouse density tends to vary inversely with the number of different items stored Automated Storage and Retrieval Systems (ASRS) can significantly improve warehouse productivity Dock location is a key design element 33 Cross-Docking Materials are moved directly from receiving to shipping and are not placed in storage in the warehouse Requires tight scheduling and accurate shipments, typically with bar code identification 34 17
Random Stocking Typically requires automatic identification systems (AISs) and effective information systems Random assignment of stocking locations allows more efficient use of space 1. Maintain list of open locations 2. Maintain accurate records 3. Sequence items to minimize travel time 4. Combine picking orders 5. Assign classes of items to particular areas 35 Customization Value-added activities performed at the warehouse Enable low cost and rapid response strategies Assembly of components Loading software Repairs Customized labeling and packaging 36 18
Fixed-Position Layout Product remains in one place Workers and equipment come to site Complicating factors Limited space at site Different materials required at different stages of the project Volume of materials needed is dynamic 37 Alternative Strategy As much of the project as possible is completed off-site in a productoriented facility This can significantly improve efficiency but is only possible when multiple similar units need to be created 38 19
Process-Oriented Layout Like machines and equipment are grouped together Flexible and capable of handling a wide variety of products or services Scheduling can be difficult and setup, material handling, and labor costs can be high 39 Process-Oriented Layout Surgery ER triage room Patient A - broken leg Emergency room admissions Patient B - erratic heart pacemaker Laboratories Radiology ER Beds Pharmacy Billing/exit 40 20
Process-Oriented Layout Arrange work centers so as to minimize the costs of material handling Basic cost elements are Number of loads (or people) moving between centers Distance loads (or people) move between centers 41 Layout at Arnold Palmer Hospital 42 21
Process-Oriented Layout Minimize cost = X ij C ij i = 1 j = 1 n n where n = total number of work centers or departments i, j = individual departments X ij = number of loads moved from department i to department j C ij = cost to move a load between department i and department j 43 Process Layout Example Arrange six departments in a factory to minimize the material handling costs. Each department is 20 x 20 feet and the building is 60 feet long and 40 feet wide. 1. Construct a from-to matrix 2. Determine the space requirements 3. Develop an initial schematic diagram 4. Determine the cost of this layout 5. Try to improve the layout 6. Prepare a detailed plan 44 22
Process Layout Example Number of loads per week Department Assembly Painting Machine Receiving Shipping Testing (1) (2) Shop (3) (4) (5) (6) Assembly (1) Painting (2) Machine Shop (3) Receiving (4) Shipping (5) 50 100 0 0 20 30 50 10 0 20 0 100 50 0 0 Testing (6) 45 Process Layout Example Room 1 Room 2 Room 3 Assembly Painting Machine Shop Department Department Department (1) (2) (3) 40 Receiving Shipping Testing Department Department Department (4) (5) (6) Room 4 Room 5 Room 6 60 46 23
Process Layout Example Cost = X ij C ij i = 1 j = 1 n n Cost = $50 + $200 + $40 (1 and 2) (1 and 3) (1 and 6) + $30 + $50 + $10 (2 and 3) (2 and 4) (2 and 5) + $40 + $100 + $50 (3 and 4) (3 and 6) (4 and 5) = $570 47 Process Layout Example Interdepartmental Flow Graph 100 50 30 1 2 3 50 20 10 20 100 4 5 6 50 48 24
Process Layout Example Cost = X ij C ij i = 1 j = 1 n n Cost = $50 + $100 + $20 (1 and 2) (1 and 3) (1 and 6) + $60 + $50 + $10 (2 and 3) (2 and 4) (2 and 5) + $40 + $100 + $50 (3 and 4) (3 and 6) (4 and 5) = $480 49 Process Layout Example Interdepartmental Flow Graph 30 50 100 2 1 3 10 20 50 100 50 50 4 5 6 50 25
Process Layout Example Room 1 Room 2 Room 3 Painting Assembly Machine Shop Department Department Department (2) (1) (3) 40 Receiving Shipping Testing Department Department Department (4) (5) (6) Figure 9.8 Room 4 Room 5 Room 6 60 51 Computer Software Graphical approach only works for small problems Computer programs are available to solve bigger problems CRAFT ALDEP CORELAP Factory Flow 52 26
Work Cells Reorganizes people and machines into groups to focus on single products or product groups Group technology identifies products that have similar characteristics for particular cells Volume must justify cells Cells can be reconfigured as designs or volume changes 53 Advantages of Work Cells 1. Reduced work-in-process inventory 2. Less floor space required 3. Reduced raw material and finished goods inventory 4. Reduced direct labor 5. Heightened sense of employee participation 6. Increased use of equipment and machinery 7. Reduced investment in machinery and equipment 54 27
Improving Layouts Using Work Cells Current layout - workers in small closed areas. Cannot increase output without a third worker and third set of equipment. Improved layout - cross-trained workers can assist each other. May be able to add a third worker as additional output is needed. 55 Improving Layouts Using Work Cells Current layout - straight lines make it hard to balance tasks because work may not be divided evenly Improved layout - in U shape, workers have better access. Four cross-trained workers were reduced. U-shaped line may reduce employee movement and space requirements while enhancing communication, reducing the number of workers, and facilitating inspection 56 28
Requirements of Work Cells 1. Identification of families of products 2. A high level of training and flexibility on the part of employees 3. Either staff support or flexible, imaginative employees to establish work cells initially 4. Test (poka-yoke) at each station in the cell 57 Staffing and Balancing Work Cells Determine the takt time Takt time = total work time available units required Determine the number of operators required Workers required = total operation time required takt time 58 29
Staffing Work Cells Example 600 Mirrors per day required Mirror production scheduled for 8 hours per day From a work balance chart total operation time = 140 seconds 60 Standard time required 50 40 30 20 10 0 Assemble Paint Test Label Pack for shipment Operations 59 Staffing Work Cells Example 600 Mirrors per day required Mirror production scheduled for 8 hours per day From a work balance chart total operation time = 140 seconds Takt time = (8 hrs x 60 mins) / 600 units =.8 mins = 48 seconds Workers required = total operation time required takt time = 140 / 48 = 2.91 60 30
Repetitive and Product- Oriented Layout Organized around products or families of similar high-volume, low-variety products Volume is adequate for high equipment utilization Product demand is stable enough to justify high investment in specialized equipment Product is standardized or approaching a phase of life cycle that justifies investment Supplies of raw materials and components are adequate and of uniform quality 61 Product-Oriented Layouts Fabrication line Builds components on a series of machines Machine-paced Require mechanical or engineering changes to balance Assembly line Puts fabricated parts together at a series of workstations Paced by work tasks Balanced by moving tasks Both types of lines must be balanced so that the time to perform the work at each station is the same 62 31
Product-Oriented Layouts Advantages 1. Low variable cost per unit 2. Low material handling costs 3. Reduced work-in-process inventories 4. Easier training and supervision 5. Rapid throughput Disadvantages 1. High volume is required 2. Work stoppage at any point ties up the whole operation 3. Lack of flexibility in product or production rates 63 Assembly-Line Balancing Objective is to minimize the imbalance between machines or personnel while meeting required output Starts with the precedence relationships 1. Determine cycle time 2. Calculate theoretical minimum number of workstations 3. Balance the line by assigning specific tasks to workstations 64 32
Copier Example Performance Task Must Follow Time Task Listed Task (minutes) Below A 10 B 11 A C 5 B D 4 B E 12 A F 3 C, D G 7 F H 11 E I 3 G, H Total time 66 This means that tasks B and E cannot be done until task A has been completed 65 Copier Example Performance Task Must Follow Time Task Listed Task (minutes) Below A 10 B 11 A C 5 B D 4 B E 12 A F 3 C, D G 7 F 10 H 11 E A I 3 G, H Total time 66 5 C 11 3 B F 4 12 D 11 E H 7 G 3 I Figure 9.13 66 33
Copier Example Performance Task Must Follow Time Task Listed Task (minutes) Below A 10 B 11 A C 5 B D 4 B E 12 A F 3 C, D G 7 F H 11 E Cycle time = I 3 Minimum G, H Total time 66 number of = workstations 480 available mins per day 40 units required Production time available per day Units required per day = 480 / 40 = 12 minutes per unit n Time for task i i = 1 Cycle time = 66 / 12 = 5.5 or 6 stations 67 Copier Example Line-Balancing Heuristics 1. Longest task time Choose the available task with the Performance Task Must longest Follow task time Time Task Listed Task 2. Most (minutes) following tasks Below Choose the available task with the A 10 largest number of following tasks B 11 A C 3. Ranked 5positional weight BChoose the available task for D 4 Bwhich the sum of following task E 12 Atimes is the longest F 3 C, D G 4. Shortest 7 task time F Choose the available task with the shortest task time H 11 E I 5. Least number 3 of G, Choose H the available task with the Total following time 66 tasks least number of following tasks 68 34
Copier Example Performance Task Must Follow Time Task Listed Task (minutes) Below A 10 B 11 A Station C 5 5 2 B D 4 C B E 10 12 11 A F A B3 C, D 4 G 7 F H 11 D E I 3 12 G, H Total Station time 66 E 1 Station 3 Station 4 480 available mins per day 40 units required Cycle time = 12 mins Minimum = 5.5 or 6 workstations 3 7 F G 11 H Station 5 3 I Station 6 Figure 9.14 69 Copier Example Performance Task Must Follow 480 available mins Time Task Listed per day Task (minutes) Below 40 units required A 10 Cycle time = 12 mins B 11 A Minimum C 5 B workstations = 5.5 or 6 D 4 B E 12 A F 3 C, D G 7 F Task times Efficiency = H 11(actual number of E workstations) x (largest cycle time) I 3 G, H = 66 minutes / (6 stations) x (12 minutes) Total time 66 = 91.7% 70 35