Operations Management- Chapter 8: Location Strategy

Minimizing costs
-the strategy for industrial location decisions
Maximizing revenue
-the strategy for retail and professional service organizations
Labor cost per day/ Production (units per day)
-Labor cost per unit
Key success factors of COUNTRIES
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 risk
Key success factors of REGION
1. corporate desires
2. attractiveness of region (culture, taxes, climate)
3. labor availability, costs, attitudes towards unions
4. cost and availability of utilities
5. environmental regulations of state and town
6. government incentives and fiscal policies
7. proximity to raw materials and customers
8. land/construction costs
Key success factors for SITES
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
Tangible costs
readily identifiable costs that can be measured with some precision
Ex. utilities, labor, material, taxes, depreciation, transportation of raw materials, transportation of finished goods, site construction, and government incentives
Intangible costs
a category of location costs that cannot be easily quantified, such as quality and government
Ex. quality of education, public transportation facilities, community attitudes toward the industry and the company, and quality attitudes of prospective employees; quality-of-life variables (climate and sports teams)
1. perishability
2. transportation costs
3. bulk
-why do firms locate near their raw materials and suppliers?
-e.g. bakeries, dairy plants, and frozen seafood processors
Factor-rating method
-most widely used location technique
-a location method that instills objectivity into the process of identifying hard-to-evaluate costs
-a wide variety of factors (education, recreation, labor skills can all be objectively included)
Locational cost-volume analysis
-a method of making an economic comparison of location alternatives
-identifies fixed and variable costs to determine which one provides the lowest cost
Center-of-gravity method
-a mathematical technique used for finding the best location for a SINGLE distribution point that services several stores or areas and will minimize distribution costs
-takes into account the location of markets, the volume of goods shipped to those markets, and shipping costs in finding the best location
Transportation model
-objective is to determine the best pattern of shipments from several points of supply (sources) to several points of demand (destinations) so as to minimize total production and transportation costs
-finds an initial feasible solution and then makes a step-by-step improvement until an optimal solution is reached
Geographic information system (GIS)
-a system that stores and displays information that can be linked to a geographic location
-enables more complex demographic analysis
-by combing population, age, income, traffic flow, and density figures with geography, a retailer can pinpoint the best location for a new store or restaurant
labor productivity
wage rates are not the only cost; lower productivity may increase total cost
exchange rates and currency risks
can have a significant impact on costs; rates change over time
political risk, values and culture
globally cultures have different attitudes towards punctuality, legal and ethical issues
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
proximity to competitors (clustering)
often driven by resources such as natural, information, capital, talent; found in both manufacturing and service industries