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P501: Managing Operations & Supply Chain: Lecture - 6: Location Planning

The document discusses various factors to consider when making location planning decisions for facilities and supply chains. It covers reasons for opening new locations or relocating existing ones, such as expanding markets or reducing costs. Key criteria that should be evaluated include the location of markets, raw materials, labor, and how the position in the supply chain impacts site selection. Various quantitative models are also summarized that can help analyze tradeoffs and identify optimal location alternatives.

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60 views20 pages

P501: Managing Operations & Supply Chain: Lecture - 6: Location Planning

The document discusses various factors to consider when making location planning decisions for facilities and supply chains. It covers reasons for opening new locations or relocating existing ones, such as expanding markets or reducing costs. Key criteria that should be evaluated include the location of markets, raw materials, labor, and how the position in the supply chain impacts site selection. Various quantitative models are also summarized that can help analyze tradeoffs and identify optimal location alternatives.

Uploaded by

halaku dutta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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P501: Managing Operations &

Supply Chain

Lecture – 6: Location Planning


 Expand an existing facility

 Add new locations while retaining existing ones

 Shut down at one location and move to another

 Do nothing
 Addition of new facilities

 As part of a marketing strategy to expand markets

 Growth in demand that cannot be satisfied by

expanding existing facilities


 Depletion of basic inputs requires relocation

 Shift in markets

 Cost of doing business at a particular location makes

relocation attractive
 Profit potential or cost and customer service

 Finding a number of acceptable locations from which to


choose
 Position in the supply chain

 End: accessibility, consumer demographics, traffic patterns, and local


customs are important

 Middle: locate near suppliers or markets

 Beginning: locate near the source of raw materials

 Web-based retail organizations are effectively location


independent
 Location decisions are closely tied to an organization’s

strategies.
 Low-cost producer: locating where labor/material costs are low, or

locating near markets or raw materials to reduce transportation


costs.
 Increasing profits by increasing market share: locating in high-

traffic areas
 Convenience for the customer: having many locations where

customers can transact their business or make purchases (e.g.,


branch banks, ATMs, service stations, fast-food outlets).
 Location choices can impact capacity and flexibility.

 Space constraints that limit future expansion options

 Local restrictions may restrict the types of products or services that can

be offered, thus limiting future options for new products or services.

 Location decisions are strategically important for other reasons

as well.
 Entail a long-term commitment, which makes mistakes difficult to

overcome
 Often have an impact on investment requirements, operating costs and

revenues, and operations.


1. Decide on the criteria to use for evaluating location
alternatives
2. Identify important factors, such as location of markets or
raw materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives

4. Evaluate the alternatives and make a decision


 Benefits

 New Markets, Cost savings, Legal and regulatory, Financial

 Disadvantages

 Transportation costs, Security costs, Unskilled labor, Import

restrictions, Productivity

 Risks

 Political, Economic, Legal, Ethical, Cultural, Quality


Government Policies on foreign ownership of production facilities
Local content requirements
Import restrictions, Currency restrictions
Environment regulations
Local product standards
Liability laws
Stability issues
Cultural differences Living circumstances for foreign workers and their dependents
Ways of doing business
Religious holidays/traditions
Customer preferences Possible “buy locally” sentiment

Labor Level of training and education of workers


Work ethic, Wage rates
Possible regulations limiting the number of foreign employees
Language differences

Resources Availability and quality of raw materials, energy, transportation infrastructure

Financial Financial incentives, tax rates, inflation rates, interest rates

Technological Rate of technological change, rate of innovations

Market Market potential, competition

Safety Crime, terrorism threat


 Location of raw materials
 Necessity, Perishability, Transportation costs
 Location of markets
 Competitive strategy
 Meet the needs of the service users
 Distribution costs and perishability
 Labor factors
 Cost of labor (Wage rates in the area)
 Availability of suitably skilled workers
 Labor productivity, Attitudes toward work
 Whether unions pose a serious potential problem
 Other factors
 Climate and taxes may play an important role in location decisions
 Businesses also actively seek attractive communities based

on such factors such as:


 Quality of life

 Services

 Attitudes

 Taxes

 Environmental regulations

 Utilities

 Development support
 Primary site location considerations are:

 Land

 Transportation

 Zoning

 Other restrictions
 Product Plant Strategy

 Market Area Plant Strategy

 Process Plant Strategy

 General-Purpose Plant Strategy


 Considerations:
 Nearness to raw materials is not usually a consideration
 Customer access is a
 Prime consideration for some: restaurants, hotels, etc.

 Not an important consideration for others: service call centers,


etc.
 Tend to be profit or revenue driven, and so are
 Concerned with demographics, competition, traffic/volume
patterns, and convenience
 Clustering
 Similar types of businesses locate near one another
 Locational cost-volume-profit analysis

 Transportation model

 Factor rating

 Center of gravity method


 Locational Cost-Profit-Volume Analysis

 Technique for evaluating location choices in economic terms

 Steps:

1. Determine the fixed and variable costs for each alternative


2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or
highest profit) for the expected level of output
 Transportation model
 Uses linear programming to determine the minimum
transportation cost of a potential new location

 Can also be used if a number of new facilities are to be added or if


an entire new system is being developed.

 Used to analyze each of the possible configurations and reveals the


minimum costs each would provide.
 Factor Rating

1. Determine which factors are relevant


2. Assign a weight to each factor.
 Weights typically sum to 1.00
3. Decide on a common scale for all factors, and set a minimum acceptable
score if necessary
4. Score each location alternative
5. Multiply the factor weight by the score for each factor, and sum the results
for each location alternative
6. Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score
 Center of Gravity Method

 Method for locating a distribution center that minimizes

distribution costs
 Treats distribution costs as a linear function of the distance and the

quantity shipped
 The quantity to be shipped to each destination is assumed to be fixed

 The method includes the use of a map that shows the locations of

destinations
 The map must be accurate and drawn to scale

 A coordinate system is overlaid on the map to determine relative

locations

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