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
