Week 4 Assignment 2

Assignment 2: CH 8: Locations Strategies – Due Week 4

· The company of choice was GM from the last mission

· This is an assignment based on location strategies (CH 8).

· Your objective is to select the next location for your business (use your Assignment 1 business or any other). Assume that your business does not exist in the selected states.

· Also assume that I have no idea about your industry and your business.

· There are 2 critical analyses in this assignment:

· Briefly introduce your business (you can use from your earlier assignment)

· Identify and explain the major factors that affect your business location decisions(also study the Key Success Factors – Fig. 8.1).

· Use the Factor Rating Method to evaluate location alternatives. I need you to look at 3 alternative states/cities in your analysis so you can pick the right kinds of factors e.g. State can offer tax incentives while the city has a railroad station.  YOU MUST USE A TABLE AND SHOW YOUR NUMBERS

· Next, using well researched data, do a Crossover Chart for Location Cost-Volume Analysis – for expected volume of output – you could use an expected annual output in units (e.g. number of new savings accounts, mortgages in a bank; new students in a school; customers in a restaurant or retail; new patients etc.

· Analyze the lowest costs between all 3 locations and then indicate the cross over point for the highest profit

· As always, I need to see detailed explanation to justify the numbers – Don’t assume that I understand

· Detailed analysis is more critical rather than page length.

Operations Management: Sustainability and Supply Chain Management

Twelfth Edition

Chapter 8

Location Strategies

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Outline
Global Company Profile: FedEx
The Strategic Importance of Location
Factors That Affect Location Decisions
Methods of Evaluating Location Alternatives
Service Location Strategy
Geographic Information Systems

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Location Provides Competitive Advantage for FedEx
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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3

Learning Objectives (1 of 2)
8.1 Identify and explain seven major factors that effect location decisions
8.2 Compute labor productivity
8.3 Apply the factor-rating method
8.4 Complete a locational break-even analysis graphically and mathematically

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Learning Objectives (2 of 2)
8.5 Use the center-of-gravity method
8.6 Understand the differences between service- and industrial-sector location analysis

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The Strategic Importance of Location (1 of 3)
One of the most important decisions a firm makes
Increasingly global in nature
Significant impact on fixed and variable costs
Decisions made relatively infrequently

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The Strategic Importance of Location (2 of 3)
Long-term decisions
Once committed to a location, many resource and cost issues are difficult to change

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The Strategic Importance of Location (3 of 3)
The objective of location strategy is to maximize the benefit of location to the firm
Options include
Expanding existing facilities
Maintain existing and add sites
Closing existing and relocating

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Location and Costs
Location decisions require careful consideration
Once in place, location-related costs are fixed in place and difficult to reduce
Effort spent determining optimal facility location is a good investment

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Factors That Affect Location Decisions
Globalization adds to complexity
Drivers of globalization
Market economics
Communication
Rapid, reliable transportation
Ease of capital flow
Differing labor costs
Identify key success factors (K S F s)

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Location Decisions (1 of 3)
Figure 8.1 Some Considerations and Factors That Affect Location Decisions
Key Success Factors
Political risks, government rules, attitudes, incentives
Cultural and economic issues
Location of markets
Labor talent, attitudes, productivity, costs
Availability of supplies, communications, energy
Exchange rates and currency risks
Country Decision

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Location Decisions (2 of 3)
Figure 8.1 [continued]
Key Success Factors
Corporate desires
Attractiveness of region
Labor availability and costs
Costs and availability of utilities
Environmental regulations
Government incentives and fiscal policies
Proximity to raw materials and customers
Land/construction costs
Region/Community Decision

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Location Decisions (3 of 3)
Figure 8.1 [continued]
Key Success Factors
Site size and cost
Air, rail, highway, and waterway systems
Zoning restrictions
Proximity of services/supplies needed
Environmental impact issues
Customer density and demographics
Site Decision

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Global Competitiveness Index of Countries (1 of 2)
Table 8.1 Competitiveness of 144 Selected Countries, Based on Annual Surveys of 13,000 Business Executives
Country 2015 Ranking
Switzerland 1
Singapore 2
U.S. 3
Finland 4
Germany 5
Japan 6
Canada 15
Israel 27

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Global Competitiveness Index of Countries (2 of 2)
Table 8.1 [continued]
Country 2015 Ranking
China 28
Russia 53
Mexico 61
Vietnam 68
Haiti 137
Chad 143
Guinea 144

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Factors That Affect Location Decisions (1 of 6)
Labor productivity
Wage rates are not the only cost
Lower productivity may increase total cost

South Carolina

Mexico

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Factors That Affect Location Decisions (2 of 6)
Exchange rates and currency risks
Can have a significant impact on costs
Rates change over time
Costs
Tangible – easily measured costs such as utilities, labor, materials, taxes
Intangible – not as easy to quantify and include education, public transportation, community, quality-of-life

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Factors That Affect Location Decisions (3 of 6)
Location decisions based on costs alone can create difficult ethical situations

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Factors That Affect Location Decisions (4 of 6)
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 toward turnover, unions, absenteeism
Globally cultures have different attitudes toward punctuality, legal, and ethical issues

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Ranking Corruption

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Factors That Affect Location Decisions (5 of 6)
Proximity to markets
Very important to services
J I T 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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Factors That Affect Location Decisions (6 of 6)
Proximity to competitors (clustering)
Often driven by resources such as natural, information, capital, talent
Found in both manufacturing and service industries

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Clustering of Companies (1 of 3)
Table 8.3 Clustering of Companies
Industry Locations Reason for Clustering
Wine making Napa Valley (U.S.) Bordeaux region (France) Natural resources of land and climate
Software firms Silicon Valley, Boston, Bangalore, Israel Talent resources of bright graduates in scientific/technical areas, venture capitalists nearby
Clean energy Colorado Critical mass of talent and information, with 1,000 companies

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Clustering of Companies (2 of 3)
Table 8.3 [continued]
Industry Locations Reason For Clustering
Theme parks (Disney World, Universal Studios, and Sea World) Orlando, Florida A hot spot for entertainment, warm weather, tourists, and inexpensive labor
Electronics firms (Sony, I B M, H P, Motorola, and Panasonic) Northern Mexico N A F T A, duty free export to U.S.
Computer hardware manufacturers Singapore, Taiwan High technological penetration rate and per capita G D P, skilled/educated workforce with large pool of engineers

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Clustering of Companies (3 of 3)
Table 8.3 [continued]
Industry Locations Reason For Clustering
Fast food chains (Wendy’s, McDonald’s, Burger King, Pizza Hut) Sites within 1 mile of each other Stimulate food sales, high traffic flows
General aviation aircraft (Cessna, Learjet, Boeing, Raytheon) Wichita, Kansas Mass of aviation skills
Athletic footwear, outdoor wear Portland, Oregon 300 companies, many owned by Nike, deep talent pool and outdoor culture

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Factor-Rating Method
Popular because a wide variety of factors can be included in the analysis
Six steps in the method
Develop a list of relevant factors called key success factors
Assign a weight to each factor
Develop a scale for each factor
Score each location for each factor
Multiply score by weights for each factor and total the score for each location
Make a recommendation based on the highest point score

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Factor-Rating Example
Table 8.4 Weights, Scores, and Solution

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Locational Cost-Volume Analysis
An economic comparison of location alternatives
Three steps in the method
Determine fixed and variable costs for each location
Plot the cost for each location
Select location with lowest total cost for expected production volume

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Locational Cost-Volume Analysis Example (1 of 3)
Three locations:
Selling price = $120
Expected volume = 2,000 units
City Fixed Cost Variable Cost Total Cost
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000

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Locational Cost-Volume Analysis Example (2 of 3)
Crossover point – Athens/Brussels

Crossover point – Brussels/Lisbon

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Locational Cost-Volume Analysis Example (3 of 3)
Figure 8.2 Crossover Chart for Locational Cost–Volume Analysis

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Center-of-Gravity Method (1 of 7)
Finds location of distribution center that minimizes distribution costs
Considers
Location of markets
Volume of goods shipped to those markets
Shipping cost (or distance)

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Center-of-Gravity Method (2 of 7)
Place existing locations on a coordinate grid
Grid origin and scale are arbitrary
Maintain relative distances
Calculate x and y coordinates for ‘center of gravity’
Assumes cost is directly proportional to distance and volume shipped

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Center-of-Gravity Method (3 of 7)
x-coordinate of the center of gravity

y-coordinate of the center of gravity

Where

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Center-of-Gravity Method (4 of 7)
Table 8.5 Demand for Quain’s Discount Department Stores
Store Location Number of Containers
Shipped Per Month
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000

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Center-of-Gravity Method (5 of 7)
Figure 8.3 Coordinate Locations of Four Quain’s Department Stores and Center of Gravity

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Center-of-Gravity Method (6 of 7)

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Center-of-Gravity Method (7 of 7)
Figure 8.3 [continued]

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Transportation Model
Finds amount to be shipped from several points of supply to several points of demand
Solution will minimize total production and shipping costs
A special class of linear programming problems

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Worldwide Distribution of Volkswagens and Parts
Figure 8.4 Volkswagen, the Third Largest Automaker in the World, Finds It Advantageous to Locate Its Plants Throughout the World

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Service Location Strategy
Purchasing power of customer-drawing area
Service and image compatibility with demographics of the customer-drawing area
Competition in the area
Quality of the competition
Uniqueness of the firm’s and competitors’ locations
Physical qualities of facilities and neighboring businesses
Operating policies of the firm
Quality of management

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Location Strategies (1 of 2)
Table 8.6 Location Strategies – Service vs. Goods-Producing Organizations
Service/Retail/Professional Goods-producing
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
Operation 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

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Location Strategies (2 of 2)
Table 8.6 [continued]
Service/Retail/Professional Goods-producing
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 cost–volume analysis
Crossover charts
Assumptions Assumptions
Location is a major determinant of revenue
High customer-contact issues are critical
Costs are relatively constant for a given area; therefore, the revenue function is critical Location is a major determinant of cost
Most major costs can be identified explicitly for each site
Low customer contact allows focus on the identifiable costs
Intangible costs can be evaluated

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How Hotel Chains Select Sites (1 of 2)
Location is a strategically important decision in the hospitality industry
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

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How Hotel Chains Select Sites (2 of 2)

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

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Geographic Information Systems (G I S) (1 of 2)
Important tool to help in location analysis
Enables more complex demographic analysis
Available data bases include
Detailed census data
Detailed maps
Utilities
Geographic features
Locations of major services

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Geographic Information Systems (G I S) (2 of 2)

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Copyright

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