OPERATIONS

MANAGEMENT

LOCATION & DISTRIBUTION

FACILITIES LOCATION PLANNING

Facilities :
Manufacturing Locations
Warehousing Locations
Your experience

LOCATION STRATEGY
One of the most important decisions a firm
makes
A strategic decision
Global in nature
Impacts fixed & variable costs of operation
Objective : Maximize benefits

FACTORS
National Factors

Political, social, economic stability;

Currency exchange rates; . . . . .

Regional Factors

Climate; Customer concentrations;

Degree of unionization; . . . . .

Community Factors

Transportation system availability;

Preference of management; . . . . .

Site Factors

Site size/cost; Environmental impact;

Zoning restrictions; . . . . .

NATIONAL FACTORS
1. Political risks, government rules, attitudes,
incentives
2. National, state, local governments attitudes
toward private and intellectual property, zoning,
pollution, employment stability
3. Cultural and economic issues
4. Location of markets
5. Labor talent, attitudes, productivity, costs
6. Availability of supplies, communications, energy
7. Exchange rates and currency risks

Growth Competitiveness Index of

Countries
Country
Switzerland
USA
Japan
Germany
UK
Israel
Canada
New Zealand
Italy
China
Mexico
Russia

2006-2007 Rank
1
6
7
8
10
15
16
23
42
54
58
62

2005 Rank
4
1
10
6
9
23
13
22
38
48
59
53

Ranking Corruption
Rank
1
1
1
5
7
11
14
15
16
17
20
34
70
121

Country
Finland
Iceland
New Zealand
Singapore
Switzerland
UK
Canada
Hong Kong
Germany
Japan
USA, Belgium
Israel, Taiwan
Brazil, China, Mexico
Russia

2006 CPI Score (out of 10)

9.6
Least
Corrupt
9.6
9.6
9.4
9.1
8.6
8.5
8.3
8.0
7.6
7.3
5.9
Most
3.3
Corrupt
2.5

REGIONAL FACTORS

Corporate desires
Attractiveness of region
Labor availability, costs, attitudes towards unions
Costs and availability of utilities
Environmental regulations
Government incentives and fiscal policies
Proximity to raw materials and customers
Land/construction costs
Communication

SITE FACTORS

Site size and cost

Air, rail, highway, and waterway systems
Zoning restrictions
Proximity of services/ supplies needed
Environmental impact issues
School & Health care facilities

QUANTITATIVE FACTORS

Site acquisition, preparation and construction

costs
Labor costs, skills and availability
Utilities costs and availability
Transportation costs
Govt. policies :Taxes/exemptions, Economic
zones
Proximity to customers

NON QUANTITAVE FACTORS

Labor attitudes and traditions

Training and employment services
Communitys attitude
Schools and health care
Recreation and cultural attractions

Amount and type of housing available

Business climate
Political risks
Infrastructure
Suppliers
Govt. legislation / Barriers
Environmental regulations
Host community

SOME EXAMPLES
Mining, Quarrying, and Heavy Manufacturing
Near their raw material sources
Abundant supply of utilities
Land and construction costs are inexpensive

Light Manufacturing
Availability and cost of labor

Warehousing
Proximity to transportation facilities
Incoming and outgoing transportation costs

SOME EXAMPLES
R&D and High-Tech Manufacturing
Ability to recruit/retain scientists, engineers, etc.
Near companies with similar technology interests

Retailing and For-Profit Services

Near concentrations of target customers

Government and Health/Emergency Services

Near concentrations of constituents

FACILITY LOCATION DECISION REVIEW

Changes in the market
Expansion
Contraction
Geographic shift

Changes in inputs
Labor skills and/or costs
Materials costs and/or availability
Utility costs

FACILITY LOCATION DECISION REVIEW

Changes in the environment
Regulations and laws
Attitude of the community

Changes in technology

Analyzing Manufacturing/Service
Location Decisions
Consumer Behavior
Research
Market Research

Why do customers buy our

products and services?

Who are our customers?

What are their characteristics?

Data Gathering for

Each Location Alternative

Where are our customers concentrated?

What are their traffic/spending patterns?

Revenue Projections for

Each Location Alternative

What are the economic projections?

What is the time-phased revenue?

Profit Projections for

Each Location Alternative

What are the projected revenues

less time-phased operating costs?

Integrating Qualitative & Quantitative

Factors
Trade off qualitative factors against
quantitative ones
Qualitative factors are considered to short list
possible sites
Each site gets a weighted factor
This factor can be integrated with quantitative
methods

FACTOR RATING SYSTEMS

Develop a list of relevant factors called critical
success factors
Assign a weight to each factor
Develop a scale to get score for each factor
Score each location for each factor
Multiply score by weights for each factor for each
location
Recommend the location with the highest point
score

FACTOR RATING SYSTEMS

FACTOR
WEIGHTAGE LOCATION 1 LOCATION 2 LOCATION 3
Safety
10
2
10
8
Convenient for
customers
5
4
1
6
Cost of operation
7
1
7
6
Convenience for
workers
3
8
2
2
Availability of
workers
5
8
4
5
Sales forecast
7
10
2
4
Impact of duties
4
1
10
10

FACTOR RATING SYSTEMS

Rating
FACTOR
Safety
Convenient for
customers
Cost of operation
Convenience for
workers
Availability of
workers
Sales forecast
Impact of duties

Weighted Rating

WEIGHTAGE LOCATION 1 LOCATION 2 LOCATION 3 LOCATION 1 LOCATION 2 LOCATION 3

10

10

20

20

80

5
7

4
1

1
7

6
6

40
10

2
14

60
60

80

20

5
7
4

8
10
1

4
2
10

5
4
10

80
100
10

8
4
20

50
40
100

TOTAL

340

72

410

QUANTITATIVE METHODS
Locating a Single Facility
conventional cost analysis
CG Method
Pros ease of communication and understanding
Cons time value of money ignored and
qualitative factors not considered

More sophisticated techniques are often used:

Linear programming, computer simulation, network
analysis, and others

QUANTITATIVE METHODS
SINGLE FACILITY LOCATION
20
19
18

15
14
13

5
4
6
2
3
1

10

7
6

10

Center-of-Gravity Method
dixQi

x - coordinate =

Qi
i

diyQi

y - coordinate =

Qi
i

where

dix =
diy =
Qi =

x-coordinate of location i
y-coordinate of location i
Quantity of goods moved to or from
location i

C G METHOD
CENTER

VOLUME

1
2
3
4
5
6

175
100
275
350
150
50

6
8
10
10
6
6

13
15
14
19
20
18

n
Xi Vi
Xcg =
Vi

MULTI FACILITY LOCATIONS

How many facilities are required
Where should each facility be located
What should be allocation from each facility to
each customer

A MTHEMATICAL MODELLING
COMPUTER SIMULATION
Linear Programming Model
Transportation model
Computer Simulation

LOAD DISTANCE MATRIX

FROM / TO

Z
A
B
C
D
..
G

------

MULTIFACILITY LOCATIONS
i = 10
Minimize Total Cost = Fj +

Cij X Di
i = 1

Fj = Fixed cost at location j

Cij = Unit cost to serve user i from location j
Di = Demand for user i

MULTIATTRIBUTES LOCATION
OBJECTIVE
FACTOR COST
LOCATIONRs CRORES
1
2
3
4
5
6

3
5.5
4.1
3.5
3.9
3.2

TRANSPORT LABOUR

INFRASTRU - COMMUNITY
CTURE
SUPPORT

GOOD
GOOD
FAIR
VERY GOOD
EXCELLENT
FAIR
GOOD EXCELLENT
GOOD
GOOD EXCELLENT GOOD
FAIR
VERY GOOD GOOD
FAIR
GOOD
FAIR
VERY GOOD VERY GOOD
VERY GOOD EXCELLENT VERY GOOD EXCELLENT

CLASSIFICATION OF FACTORS
Critical : Precludes location ( 0 or 1 )
Objective : Quantified
Subjective : Community support

MULTIPLE ATTRIBUTES
LMi =CFMi X [ K X OFMi + ( 1 - K ) X SFMi]

Maximum OFC - OFCi

OFMi =
Max OFC - Min OFC

SFMi =

( SFWk X Swik )

MULTIPLE ATTRIBUTES
LOCATION

TRANSPORT
( 0.2 )

LABOUR
( 0.3 )

1
2
3
4
5
6

0.5
1
0.5
0
0.5
0.75

0.5
0
0.5
0.75
0
1

OBJECTIVE
FACTOR
LOCATION MEASURE
1
2
3
4
5
6

1
0
0.56
0.8
0.64
0.92

COMMUNITY SUBJECTIVE
INFRASTRU - SUPPORT
FACTOR
CTURE( 0.3 )
(0.3)
MEASURE
0
0.5
1
0.5
0.75
0.75

SUBJECTIVE
FACTOR
LOCATION
MEASURE
MEASURE
0.4
0.55
0.65
0.375
0.475
0.875

0.88
0.11
0.578
0.715
0.607
0.911

0.75
1
0.5
0
0.75
1

0.4
0.55
0.65
0.375
0.475
0.875

Location Strategies
Service/Retail/Professional Location

Goods-Producing Location

Revenue Focus

Cost Focus

Volume/revenue
Drawing area; purchasing power
Competition; advertising/pricing
Physical quality
Parking/access; security/lighting;
appearance/image
Cost determinants
Rent
Management caliber
Operations policies (hours, wage rates)

Tangible costs
Transportation cost of raw material
Shipment cost of finished goods
Energy and utility cost; labor; raw
material; taxes, and so on
Intangible and future costs
Attitude toward union
Quality of life
Education expenditures by state
Quality of state and local government

Location Strategies
Service/Retail/Professional Location

Goods-Producing Location

Techniques

Techniques

Regression models to determine importance

of various factors
Factor-rating method
Traffic counts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems

Transportation method
Factor-rating method
Locational break-even analysis
Multiple attributes

Location Strategies
Service/Retail/Professional Location

Goods-Producing Location

Assumptions

Assumptions

Location is a major determinant of revenue

Location is a major determinant of cost
High customer-contact issues are critical
Most major costs can be identified explicitly
for each site
Costs are relatively constant for a given area;
therefore, the revenue function is critical
Low customer contact allows focus on the
identifiable costs
Intangible costs can be evaluated

HOTEL CHAINS
La Quinta started with 35 independent
variables and worked to refine a regression
model to predict profitability
The final model had only four variables
Price of the inn
Median income levels

State population per inn

Location of nearby colleges

r2 = .51
51% of the profitability
is predicted by just
these four variables!

The Call Center Industry

Requires neither face-to-face contact nor
movement of materials
Has very broad location options
Traditional variables are no longer relevant
Cost and availability of labor may drive
location decisions