Foreign Trade University

CONTENT
Location planning & analysis

Facility layout

Design of work systems

Project management
Foreign Trade University
 Learning Objectives
Determine factors affecting location decisions
 Plan and analyze location alternatives
Apply different techniques for evaluating
location alternatives
Location Planning and Analysis
Location strategies

Factors affecting location decisions

Techniques of evaluating location

alternatives
Location Planning and Analysis
 One of the most important decisions a firm
makes
 Increasingly global in nature
 Significant impact on fixed and variable costs
 Decisions made relatively infrequently
 Once committed to a location, many resource
and cost issues are difficult to change
 The objective is to maximize the benefit of
location to the firm
Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus

Volume/revenue Tangible costs

Drawing area; purchasing power Transportation cost of raw
Competition; advertising/pricing material
Shipment cost of finished goods
Physical quality Energy and utility cost; labor;
raw material; taxes, and so on
Parking/access; security/lighting;
appearance/image
Intangible and future costs
Cost determinants Attitude toward union
Rent Quality of life
Management caliber Education expenditures by state
Operations policies (hours, wage Quality of state and local
rates) government
Location Strategies
Service/Retail/Professional Location Goods-Producing Location

Techniques Techniques
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Locational break-even
Traffic counts analysis
Demographic analysis of Crossover charts
drawing area
Purchasing power analysis of
area
Center-of-gravity method
Geographic information systems
Location Strategies
Service/Retail/Professional Location Goods-Producing Location

Assumptions Assumptions

Location is a major Location is a major

determinant of revenue determinant of cost
High customer-contact issues Most major costs can be
are critical identified explicitly for each
Costs are relatively constant site
for a given area; therefore, Low customer contact allows
the revenue function is focus on the identifiable costs
critical Intangible costs can be
evaluated
Example:
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
Factors That Affect Location
Decisions
 Labor Productivity
 Exchange Rates and Currency Risks
 Costs
 Political Risk, Values, and Culture
 Proximity to Markets
 Proximity to Suppliers
 Proximity to Competitors (Clustering)
Factors That Affect Location
Decisions
 Labor productivity
 Wage rates are not the only cost
 Lower production may increase total cost

Labor cost per day

= Cost per unit
Production (units per day)

Connecticut Juarez

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units
Factors That Affect Location
Decisions
 Exchange rates and currency risks
 Can have a significant impact on cost
structure
 Rates change over time
 Costs
 Tangible - easily measured costs such as
utilities, labor, materials, taxes
 Intangible - less easy to quantify and
include education, public transportation,
community, quality-of-life
Factors That Affect Location
Decisions
 Political risk, values, and culture
 National, state, local governments attitudes
toward private and intellectual property,
zoning, pollution, employment stability may
be in flux
 Worker attitudes towards turnover, unions,
absenteeism
 Globally cultures have different attitudes
towards punctuality, legal, and ethical
issues
Factors That Affect Location
Decisions
 Proximity to markets
 Very important to services
 JIT systems or high transportation costs
may make it important to manufacturers
 Proximity to suppliers
 Perishable goods, high transportation
costs, bulky products
Factors That Affect Location
Decisions
 Proximity to competitors
 Called clustering
 Often driven by resources such as natural,
information, capital, talent
 Found in both manufacturing and service
industries
Clustering of Companies
Industry Locations Reason for clustering
Wine making Napa Valley (US) Natural resources of
Bordeaux region land and climate
(France)
Software firms Silicon Valley, Talent resources of
Boston, Bangalore bright graduates in
(India) scientific/technical
areas, venture
capitalists nearby
Race car Huntington/North Critical mass of talent
builders Hampton region and information
(England)
Clustering of Companies
Industry Locations Reason for clustering
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal weather, tourists, and
Studios) inexpensive labor
Electronics Northern Mexico NAFTA, duty free
firms export to US

Computer Singapore, Taiwan High technological

hardware penetration rate and
manufacturers per capita GDP,
skilled/educated
workforce with large
pool of engineers
Clustering of Companies
Industry Locations Reason for clustering
Fast food Sites within 1 mile Stimulate food sales,
chains of each other high traffic flows
(Wendy’s,
McDonald’s,
Burger King,
and Pizza Hut)
General Wichita, Kansas Mass of aviation skills
aviation aircraft
(Cessna,
Learjet, Boeing)
Orthopedic Warsaw, Indiana Ready supply of skilled
devices workers, strong U.S.
market
 HONDA VIETNAM
QUESTION

Which factors Honda did consider and finalize

in order to set up a new manufacturing plant
in Southeast Asia market?
Techniques of evaluating
location alternatives
 The Factor-Rating Method
 Locational Break-Even Analysis
 Center-of-Gravity Method
 Transportation Model
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
 Factor-Rating - Example 1
Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
availability
and attitude .25 70 60
People-to-
car ratio .05 50 60
Per capita
income .10 85 80
Tax structure .39 75 70
Education
and health .21 60 70
Totals 1.00
 Factor-Rating - Example 2
A Korean restaurant wants to open the third
branch. The director of this restaurant now
has two options:
Hue street
Chua Lang street
Factors weights Option 1 Option 2 Option 1 Option 2

Chua Hue str. Chua Lang str. Hue str.

Lang str.

Customer Characteristics .10 100 70 10 7

Transportation .05 80 90 4 4,5

Rent .40 90 80 32 32

Area Around .10 85 95 8,5 9,5

Ground .20 40 70 8 14
Rates and other costs .15 80 65 12 9,75

1.00 74,5 76,75

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
Locational Break-Even Analysis
Example 1
Three locations:

Selling price = $120

Expected volume = 2,000 units

Fixed Variable Total

City Cost Cost Cost

Akron $30,000 $75

Bowling Green $60,000 $45
Chicago $110,000 $25

Total Cost = Fixed Cost + (Variable Cost x Volume)

Question: Choose the best place for the new location of

the organisation?
 EXERCISE 2
Dua dua company wants to
Dua Dua
choose one of four following
Co., Ltd.
location to build up
manufacturing plant for salted
cucumber and other products

-A- Nam Dinh

-B- Thai Binh
-C- Ninh Binh
-D- Hanoi
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)
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
 Center-of-Gravity Method
∑dixQi
i
x - coordinate =
∑i Qi

∑diyQi
i
y - coordinate =
∑i Qi
where dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved
to or from location i
Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)

90 –

60 –

30 – Atlanta (60, 40)

| | | | | |
– East-West
30 60 90 120 150
Arbitrary
origin
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

Question: Calculate x-coordinate and y-coordinate in

order to find the best place?
 CASE STUDY
Your friend and you want to set up a business
(specialized in fast-food and coffee). The location is
essential for success. You are required to make a
plan for potential locations and find out the most
suitable one for you.
You can either to find out a location for other service
business (eg: English centre)
Describe any factors you think they are important
and make sense for your location.