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6

Location Decisions
Weeks 6 (Chapter 8)

Operations Management, Sustainability and Supply Chain Management,


Global Edition, Eleventh Edition, PEARSON
Jay Heizer and Barry Rander © 2014 Pearson Education
Textbook for
Used

Operations Management, Sustainability and


Supply Chain Management,
Global Edition, Eleventh Edition, PEARSON
Jay Heizer and Barry Rander (2014)
Outline

► Global Company Profile : FedEx


► The Strategic Importance of Location
► Factors that Affect Location Decisions
► Method of Evaluating location
Alternatives
► Service location strategy
► Geographic Information Systems
© 2014 Pearson Education
Global Company Profile
FedEx © 2014 Pearson Education
the strategic importance
of
LOCATION
The objective of location strategy is to maximize the benefit
of location to the firm

The location decision often depends on the type of business


 Industrial location decisions, the strategy is usually minimizing costs, although
innovation and creativity may also be critical
 Retail and professional service organizations, the strategy focuses on maximizing
revenue
 Warehouse location strategy, however, may be driven by a combination of cost
and speed of delivery.

© 2014 Pearson Education


the strategic importance
of
LOCATION

Options include
1. Expanding existing facility instead of moving
2. Maintaining current sites while adding another facility
elsewhere
3. Closing the existing facility and moving to another location

© 2014 Pearson Education


factor that affect location
DECISIONS

Globalization factor:
1. Market economics
2. Better international communications
3. More rapid, reliable travel and shipping
4. Ease of capital flow between countries
5. High differences in labor costs

© 2014 Pearson Education


factor that affect location
DECISIONS

Labor Productivity:
1. Market economics
2. Better international communications
3. More rapid, reliable travel and shipping
4. Ease of capital flow between countries
5. High differences in labor costs

© 2014 Pearson Education


factor that affect location
DECISIONS

1. Labor productivity
2. Exchange rates and currency risk
3. Costs
4. Political risk, values and culture
5. Proximity to markets
6. Proximity to suppliers
7. Proximity to competitors (clustering)
© 2014 Pearson Education
methods of evaluating location
ALTERNATIF
The Factor-Rating Method
A location method that instills objectivity into the process of identifying hard to
evaluate costs

1. Develop a list relevant factors called Key Success Factors


2. Assign a weight to each factor to reflect its relative importance in the
company’s objectives
3. Develop a scale for each factor (for example, 1 to 100 points)
4. Have management score each location for each factor, using scale in step 3
5. Multiply the score by the weights for each factor and total the score for
each location
6. Make a recommendation based on the maximum points score, considering
the results of other quantitative approaches as well
© 2014 Pearson Education
The factor-rating method
EXPAMPLE
weights, scores and solution
SCORES (OUT OF 100) WEIGHTED SCORES
Key Success factor (KSF)
WEIGHT FRANCE DENMARK FRANCE DENMARK
Labor availability and
0,25 70 60 (0,25)(70) = 17,5 (0,25)(60) = 15,0
attitude
People-to-car ratio 0,05 50 60 (0,05)(50) = 2.5 (0,05)(60) = 3,0
Per capita income 0,10 85 80 (0,10)(85) = 8,5 (0,10)(80) = 8,0
Tax structure 0,39 75 70 (0,39)(75) = 29,3 (0,39)(70) = 27,3
Education and health 0,21 60 70 (0,21)(60) = 12,6 (0,21)(70) = 14,7
Totals 1,00 70,4 68,0

© 2014 Pearson Education


methods of evaluating location

ALTERNATIF
Locational Cost-Volume Analysis
A method of making an economic comparison of location alternatives.

3 step to locational cost-volume analysis are as follows:


1. Determine the fixed and variables cost for each location
2. Plot the costs for each location, with costs on the vertical axis of the
graph and annual volume on the horizontal axis
3. Select the location that has the lowest total cost for the expected
production volume
© 2014 Pearson Education
Location Cost-Volume Analysis
EXPAMPLE

.
.





Annual cost










– Athens Brussels Lisbon lowest
– lowest cost lowest cost cost

| | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
© 2014 Pearson Education
Location Cost-Volume Analysis
EXPAMPLE
3 Locations:

Selling price = $120


Expected volume = 2,000 units
City Fixed Cost Variable Cost Total Cost
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000
Total Revenue – Total Cost = $120(2,000) - $120(2,000) - $ 150,000 = $90,000 per-year

© 2014 Pearson Education


Location Cost-Volume Analysis
EXPAMPLE
Crossover point – Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000

Crossover point – Brussels/Lisbon


60,000 + 45(x) = 110,000 + 25(x)
20(x) = 50,000
(x) = 2,500
© 2014 Pearson Education
methods of evaluating location

ALTERNATIF
Center-of-Gravity Method
A mathematical technique used for finding the best location for a single
distribution point that services several stores or areas.

The methods takes into account: the Location of markets,


Volume of goods shipped to those markets and Shipping
costs in finding the best location for a distribution center

© 2014 Pearson Education


Center-of-gravity method
FORMULA
åd Q ix i
x-coordinate of the = i
center of gravity åQ i
i

y-coordinate of the
å d Q iy i
= i
center of gravity åQ i
i

dix = x-coordinate of location i


diy = y-coordinate of location i
Qi = Quantity of goods moved to or from location i

© 2014 Pearson Education


Center-of-gravity method
EXAMPLE
Number of Containers Shipped
Store Location per-month
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 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
© 2014 Pearson Education
Center-of-gravity method
EXAMPLE
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –
Center of gravity (66.7, 93.3)
60 –

30 –
Atlanta (60, 40)

| – | | | | |
East-West
Arbitrary 30 60 90 120 150
origin
© 2014 Pearson Education
methods of evaluating location
ALTERNATIF
Transportation Model
A technique for solving a class of linear programming problems

Although the linear programming (LP) technique can be used to solve this
type of problem, more efficient, special-purpose algorithms have been
developed for the transportation application.

© 2014 Pearson Education


service location
STRATEGY

6 Major determinants of volume and revenue for the service firm


1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of the
customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management
© 2014 Pearson Education
Thankyou very much
Operations Management, Sustainability and Supply Chain
Management,
Global Edition, Eleventh Edition, PEARSON
Jay Heizer and Barry Rander (2014)