Operation management 10e heizer render chapter 08

Operations
Management
Chapter 8 –
Location Strategies
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
© 2008 Prentice Hall, Inc.

8–1


Outline
 Global Company Profile:
FedEx
 The Strategic Importance of
Location

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8–2


Outline – Continued
 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)
© 2008 Prentice Hall, Inc.

8–3


Outline – Continued
 Methods of Evaluating Location
Alternatives
 The Factor-Rating Method
 Locational Break-Even Analysis
 Center-of-Gravity Method
 Transportation Model

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8–4


Outline – Continued
 Service Location Strategy
 How Hotel Chains Select Sites
 The Call Center Industry
 Geographic Information Systems

© 2008 Prentice Hall, Inc.

8–5

Learning Objectives
When you complete this chapter you
should be able to:
1. Identify and explain seven major factors
that effect location decisions
2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-even
analysis graphically and mathematically
5. Use the center-of-gravity method
© 2008 Prentice Hall, Inc.

8–6


Federal Express
 Central hub concept
 Enables service to more locations with
fewer aircraft
 Enables matching of aircraft flights with
package loads
 Reduces mishandling and delay in transit
because there is total control of
packages from pickup to delivery

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8–7

Location Strategy
 One of the most important decisions a
firm makes
 Increasingly global in nature
 Significant impact on fixed and
variable costs
 Decisions made relatively infrequently
 The objective is to maximize the
benefit of location to the firm
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8–8


Location and Costs
 Location decisions based on low
cost require careful consideration
 Once in place, location-related
costs are fixed in place and
difficult to reduce
 Determining optimal facility
location is a god investment

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8–9

Location and Innovation
 Cost is not always the most important
aspect of a strategic decision
 Four key attributes when strategy is
based on innovation
 High-quality and specialized inputs
 An environment that encourages
investment and local rivalry
 A sophisticated local market
 Local presence of related and
supporting industries
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8 – 10


Location Decisions
 Long-term decisions
 Decisions made infrequently
 Decision greatly affects both fixed
and variable costs
 Once committed to a location,
many resource and cost issues
are difficult to change
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8 – 11


Location Decisions

Country Decision

Figure 8.1
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Critical Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
currency risks
8 – 12


Location Decisions
Region/
Community
Decision
MN
WI
MI
IL

IN

OH

Critical Success Factors
1.
2.
3.
4.
5.
6.
7.

Figure 8.1
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8.

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
8 – 13

Location Decisions
Site Decision

Critical Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

Figure 8.1
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8 – 14


Growth Competitiveness
Index of Countries
Country
Switzerland
USA
Japan
Germany
UK
Israel
Canada

New Zealand
Italy
China
Mexico
Russia

© 2008 Prentice Hall, Inc.

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
Table 8.1
53

8 – 15


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
= $1.17 per unit
60 units

$25
= $1.25 per unit
20 units

© 2008 Prentice Hall, Inc.

8 – 16


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
© 2008 Prentice Hall, Inc.

8 – 17


Factors That Affect
Location Decisions
 Exchange rates and currency risks
 Can have a significant impact on cost
Location
structure
decisions

based
 Rates change over
time

on costs alone
 Costs
can create
 Tangible - easily measured costs such as
difficult ethical
utilities, labor, materials, taxes
situations

Intangible - less easy to quantify and
include education, public transportation,
community, quality-of-life

© 2008 Prentice Hall, Inc.

8 – 18


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

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8 – 19


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

Country
2006 CPI Score (out of 10)
Finland
9.6

Least
Corrupt
Iceland
9.6
New Zealand
9.6
Singapore
9.4
Switzerland
9.1
UK
8.6
Canada
8.5
Hong Kong
8.3
Germany
8.0
Japan
7.6
USA, Belgium
7.3
Israel, Taiwan
5.9
Most
Brazil, China, Mexico
3.3
Corrupt
Russia
2.5

Table 8.2

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8 – 20


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

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8 – 21


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

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8 – 22


Clustering of Companies
Industry

Locations

Reason for clustering

Wine making

Napa Valley (US)
Bordeaux region
(France)

Natural resources of
land and climate

Software firms

Silicon Valley,
Boston, Bangalore
(India)

Talent resources of

bright graduates in
scientific/technical
areas, venture
capitalists nearby

Race car
builders

Huntington/North
Hampton region
(England)

Critical mass of talent
and information

© 2008 Prentice Hall, Inc.

Table 8.3

8 – 23


Clustering of Companies
Industry

Locations

Reason for clustering

Theme parks

(Disney World,
Universal
Studios)

Orlando, Florida

A hot spot for
entertainment, warm
weather, tourists, and
inexpensive labor

Electronics
firms

Northern Mexico

NAFTA, duty free
export to US

Computer
hardware
manufacturers

Singapore, Taiwan

High technological
penetration rate and
per capita GDP,
skilled/educated
workforce with large

pool of engineers

© 2008 Prentice Hall, Inc.

Table 8.3

8 – 24


Clustering of Companies
Industry

Locations

Reason for clustering

Fast food
chains
(Wendy’s,
McDonald’s,
Burger King,
and Pizza Hut)

Sites within 1 mile
of each other

Stimulate food sales,
high traffic flows

General

Wichita, Kansas
aviation aircraft
(Cessna,
Learjet, Boeing)

Mass of aviation skills

Orthopedic
devices

Ready supply of skilled
workers, strong U.S.
market

© 2008 Prentice Hall, Inc.

Warsaw, Indiana

Table 8.3

8 – 25