Operations Management

Chapter 5 Location Strategies

Learning Objectives
1. Able to define facility location. 2. Identify objectives and importance of location

decision. 3. Describe factors Influencing Location Decisions: - Tangible Factors - Intangible Factors 4. Understand Plant Location Models: - Factor Rating Technique - Break-Even Point Analysis - Location Break-Even Point Analysis

Introduction
Location has a major impact on the overall risk and profit of the

company. Firms throughout the world are using the concepts and techniques of this chapter to address the location decision because location greatly affects both fixed and variable costs.
Company need location that can provide abundant, skills, productive

and low cost labors.

The location decision often depends on the type of business The objective of location strategy is to maximize the benefit of location

to the firm.

Definition of facility location

Facility location is the process of determining a geographic site for a firms operation. @ Facility location is a place where a factory, warehouse , office or any other business enterprise is built.

Importance of facility location

1. Profitability & Long-term Survival - Location decision involves large amounts of capital. Once decision is made and implemented, it cannot be changed without substantial cost. The cost is large and difficult to be reduced. Impact on operating costs - Location decisions often to have an impact on operating costs(fixed cost and variable cost) and revenues. Competition - A firms location affect its ability to compete and many other aspects of its operation. Hidden Effects - The effects of location can be risky since they are not directly observable. The management should always be alert to the need to evaluate location effectively.

2.

3.

4.

Importance of facility location

5.

Improve customer service by locating near customers - service providers like fast food restaurants locate near one another to draw customers to one location, while retail stores to attract a higher volume of customer. Better working environment for workers - management should consider employees interest as well. Location of the factories or outlets should have an access to all amenities such as housing, education, shopping and other service. To balance costs through choosing the best location Reduce investment costs & maximize the benefit of location.

6.

7. 8.

Factors Influencing Location Decision

1. Tangible/Quantitative/Economic

Factors. 2. Intangible/Qualitative Factors.

Tangible/Quantitative/Economic Factors
1. Facility costs (Land/Building/Office).

2. Proximity to Suppliers & Resources.

3. Labour Costs. 4. Distribution Costs. 5. Utilities and Taxes Costs.

Intangible/Qualitative Factors
1. Worker education, skills & attitude. 2. Local & government policies. 3. Attractiveness of location. 4. Quality of life issues.

5. Economic/Political sentiment.
6. Community acceptance/feelings.

Methods of evaluating Location Analysis

1. Factor rating technique 2. Break-Even Point Analysis 3. Location Break-Even Analysis 4. The Center of Gravity Method

5. The Load Distance Model

6. The Transportation Method

Our syllabus concentrates on the first three methods

1. Factor rating technique

March 2004 (QA1)
A company is planning on expanding and building a new plant in one of the three Southeast Asian countries. Harris Baker, the manager in charge of the decision making,has determined that five factors can be used to evaluate the prospective countries. Baker used a rating system of 1 (least desirable country) to 5 (most desirable) to evaluate each factor

1. Factor rating technique

Ratings

Intangible Factors Weight Technology 0.2

Thailand Malaysia Vietnam

Level of education
Political and legal aspects Social and cultural aspects Economic factors

0.1
0.4

3
2

4
3

2
2

0.1
0.2

4
3

4
3

3
2

1. Factor rating technique

Intangible Factors

Weight

Weighted Scores (WS) Thailand Malaysia Vietnam

Techn Edu Politic Social Eco

0.2 0.1 0.4 0.1 0.2

4x0.2=0.8 3x0.1=0.3 2x0.4=0.8 4x0.1=0.4 3x0.2=0.6 =2.9

5x0.2=1.0 4x0.1=0.4 3x0.4=1.2 4x0.1=0.4 3x0.2=0.6

2x0.2=0.4 2x0.1=0.2 2x0.4=0.8 3x0.1=0.3 2x0.2=0.4 =2.1

Total WS

=3.6

1. Factor rating Intangible Factors

Weighted Scores Thailand Malaysia Vietnam

Total WS Ranking

2.9 2

3.6 3

2.1 1

Based on the total weighted scores, Malaysia is chosen as the prefered location because of its highest score.

1. Factor rating Tangible/Costs

Cost Factors
Thailand
RM Malaysia

Vietnam

Fixed Costs Variable Costs

Total Costs

30,000 150,000
180,000

60,000 90,000
150,000

110,000 50,000
160,000

Ranking

1. Factor rating Integrated Table

Factors
Tangible

Weigh t
2

Weighted Scores (WS) Thailand Malaysia Vietnam

1x2=2 3x2=6 2x2=4

Intangible

2x1=2

3x1=3

1x1=1

Total WS

=4

=9

=5

Ranking

2.Break-Even Point Analysis (Contribution Margin (CM) Concept)

CM = Selling Price (SP) Variable Cost (VC)/unit (This amount is used to cover Fixed Costs) It is important to achieve break-even (BE) BE Point (BEP) in unit = Total Fixed Costs CM

BEP in RM = BEP(unit) x SP

2.Break-Even Point Analysis (Contribution Margin (CM) Concept)

Oktober 2004 (QA1) A manufacturing firm is operating with a fixed cost of RM40,000 per month and a variable cost made up of raw materials of RM 4 per unit, direct labor cost of RM12 per unit and overhead cost of RM4 per unit. The firm sells its product at RM40 per unit. FC = RM40K/mth SP = RM40/unit VC = (RM4 + RM12 + RM4)= RM20/unit

2.Break-Even Point Analysis (Contribution Margin (CM) Concept)

FC = RM40K/mth; SP = RM40; VC = RM20/unit

a) Calculate the breakeven point. BEP (unit) = RM40,000 (RM40 RM20) = 2,000 units
b) Determine the total revenue required to breakeven. BEP(RM) = 2,000 units x RM40 = RM80,000

2. Break-Even Point Analysis (Contribution Margin (CM) Concept)

FC = RM40K/mth; SP = RM40; VC = RM20/unit

c) Calculate the profit if sales volume is 3000 units. Sales Volume = FC + Profit CM 3,000 units = RM40,000 + Profit RM20 Profit = (RM20 x 3000 units) -RM40000 = RM20,000

2. Break-Even Point Analysis (Contribution Margin (CM) Concept)

FC = RM40K/mth; SP = RM40; VC = RM20/unit

d) Determine the production volume if the firm's target profit is RM40,000 per month. Sales Volume = FC + Profit CM Sales Volume = RM40,000 + RM40,000 RM20 Sales Volume = RM80,000 RM20 = 4,000 units

2. Break-Even Point Analysis (Contribution Margin (CM) Concept)

FC = RM40K/mth; SP = RM40; VC = RM20/unit
e) If the contribution margin increased by 5%, calculate the new breakeven point assuming the price remains the same.

CM (new) = RM20 + 1.00 = RM21 BEP (unit) = RM40,000 RM21 = 1,904.76 @ 1,905 units BEP(RM) = 1,905 units x RM40 = RM76,200

2.Break-Even Point Analysis (Contribution Margin (CM) Concept)

FC = RM40K/mth; SP = RM40; VC = RM20/unit
f) Illustrate your findings in a, b, c and d with a graph.

(a) BEP (unit) = 2,000 units (b) BEP(RM) = RM80,000 (c) Profit = RM20,000 (3,000 units) (d) Sales = 4,000 units

2.Break-Even Point Analysis (Contribution Margin (CM) Concept)

Total Revenue RM (c) RM20,000 Profit BEP (b)RM80,000 Variable Cost 40,000 Total costs

Loss

Fixed Cost 3,000 (d) 4,000 Volume (units)

0
(a) BEP = 2,000

Past Year Exam Question

April 2010 (QA1) Okt 2009 (QA1) April 2009 (QA5) April 2008 (QA1) April 2007 (QA1) Okt 2006 (QA1) April 2006 (QA1) Nov 2005 (QA1) Okt 2004 (QA1)