GSU/AU –EMBA Program

LOCATION PLANNING &

ANALYSIS
Operations Management
Done by : Walid Reda Saleh
Supervised by :Dr. Salah Abdallah

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 LOCATION PLANNING

Every firm must use location planning techniques. A plant location

decision is either a choice to expand existing productive facilities, add new
locations, or substitute a new facility for an existing one. Subcontracting
may also be used as a substitute for substantial plant expansion. A plant
location decision can be made either before the capacity decision is made,
concurrently with the capacity decision, or after it. Companies that use
multiple plant strategies may have plants devoted to specific products,
specific markets, or specific processes.

Strategic importance of location decision :

1. Strategy of low-cost producer might result in locating where labor or

material costs are low or close to raw materials so transportation
costs are low.
2. Entail a long-term commitment, which makes mistakes difficult to
overcome.
3. Strategic importance to supply chains.

Objectives of Location Decisions:

1. Profit-oriented organizations base their decisions on profit potential.

2. Nonprofit organizations strive to achieve a balance between cost and
the level of customer service they can provide.
3. Most organizations hope to find a number of acceptable locations from
which to choose.
4. Retail end of the chain, site tends to focus on accessibility, consumer
demographics, traffic patterns, and local customs.
5. Middle of the chain, may locate near suppliers or near their markets.
6. Those businesses involved in storing and distributing goods often
choose a central location to minimize distribution costs.
7. Web-based retail businesses are much less dependent on location
decisions; they can exist just about anywhere.
 There are a variety of methods used to decide the best location or alternatives
for the corporation. Methods such as identifying the country, general region,
small number of community alternatives, and site alternatives. Plant or
warehouse location is a long term planning issue that requires a careful analysis of
several factors that affect location decisions.

Factors in Location Selection. Choosing a site involves considering a large

number of factors, some of which are:

Regional Factors
Raw Materials availability
Closer Markets
Labor Cost and availability of workers
Utilities & Taxes
Climate (for some industries)
Transportation

Community Related Factors

Service Facilities
Community Attitude
Community Size
Utilities
Environmental Regulations
Taxes
Others

Site Related Factors

Land
Transportation
Legal restrictions

Manufacturing vs Service Location:

Industrial Location Decision

It is a Cost focus decision as revenue varies little between locations Because
Location is a major cost factor which Affects shipping & production costs (e.g.,
labor)
So Costs vary greatly between locations.

Service Location Decisions

It is Revenue focus decision as Location is a major revenue factor which Affects
amount of customer contact and Affects volume of business.
Factors that influence location decisions are:‎

Manufacturing :‎
o Availability of energy and water
o Proximity to raw materials
o Transportation cost

Service:‎
o Traffic patterns
o Proximity to markets
o Location of competitors

•‎ Once‎important‎factors‎have‎been‎determined,‎an‎organization‎will‎narrow‎down‎
‎alternatives to a specific geographic region. These factors that influence location
‎selection are often different depending on whether the firm is a manufacturing or
‎service firm. When deciding on a location, mangers must take into account the
culture ‎shock employees might face after a location move. Culture shock can have
a big ‎impact on employees which might affect workers productivity, so it is
important that ‎mangers look at this.‎

IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE :

A. IDENTIFYING A COUNTRY
1. A decision maker must understand the benefits and risks as well as the
probabilities of them occurring

B.IDENTIFYING A REGION- 4 major considerations

1. Location to Raw Materials: The three most important reasons for a firm to locate
in a particular region includes raw materials, perishability, and transportation cost.
This often depends on what business the firm is in.
2. Location to Markets: Profit maximizing firms locate near markets that they want
to serve as part of their competitive strategy. A Geographic information
system(GIS) is a computer based tools for collecting, storing, retrieving, and
displaying demographic data on maps.
3.Labor Factors : Primary considerations include labor availability, wage rates,
productivity, attitudes towards work, and the impact unions may have.
4. Other : Climate is sometimes a consideration because bad weather can disrupt
operations. Taxes are also an important factor due to the fact that taxes affect the
bottom line in some financial statements.

C.IDENTIFYING A COMMUNITY
1. There are many important factors for deciding upon the community in which
move a business. They include facilities for education, shopping, recreation and
transportation among many others. From a business standpoint these factors
include utilities, taxes, and environmental regulation.

D. IDENTIFYING A SITE
1. The main considerations in choosing a site are land, transportation, zoning and
many others. When identifying a site I]it is important to consider to see if the
company plans on growing at this location. If so, the firm must consider whether or
not location is suitable for expansion. There are many decisions that go into
choosing exactly where a firm will establish its operations. First, a company must
determine the driving factors that will influence which areas are suitable locations.
After these factors have been determined, the company will identify potential
countries and examine the pros and cons of establishing operations in these
countries. After looking at pro and cons of the different countries and deciding on a
country, then decision makers will identify a region within the country. When
identifying a region, decision makers must take the four major factors explained
above into consideration. The last two stages of the search include choosing a
community and a site.

Global Factors to Consider:

Foreign ‎Government Policies on foreign ownership of production

facilities
Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
Liability laws
Government stability

Cultural ‎Differences: Living circumstances for foreign workers / dependents

Religious holidays/traditions

Customers ‎: Possible buy locally sentiment

Labor:Level of training and education of workers

Work ethic
Possible regulations limiting number of foreign employees
Language differences

Resources Raw material, energy, transportation infrastructure‎

Trends‎on‎Locations‎:

1. Multi-national corporations have been created by companies seeking

Lower cost labor (e.g. apparel, electronics, shoes)
Closeness to customer (e.g. Toyota, BMW)
Elimination of trade tariffs
Avoiding trade quotas
2. Just-in-Time manufacturing - proximity to customers for better
communication, coordinated planning, quicker deliveries (e.g. Target
Corporation,‎“speed‎is‎life”)
3. Technology is beginning to have an effect on location decisions (e.g.
information, video communication)
4.Foreign Government
. Policies on ownership of production facilities
. Local content requirements
. Import restrictions
. Currency restrictions
. Environmental restrictions
. Local product standards
. Stability
5.Cultural differences
6.Customer preferences
7. Labor
. Level of training
. Work practices
. Regulations limiting number of foreign employees
. Language differences
Resources (e.g. Materials, energy, water, phone, transportation)

Multiple Plant Manufacturing Strategies

-When companies have several manufacturing facilities t here are several different
ways for a company to organize their operations. These ways include: assigning
different product lines to different plants, assigning different market areas to
different plants, or assigning different processes to different plants. These
strategies carry their own cost and managerial implications, but they also carry a
certain competitive advantage. There are four different types of plant strategies:

1. Product Plant Strategy

* Products or product lines are produced in separate plants, and each plant is
usually responsible for supplying the entire domestic market.
* It is a decentralized approach as each plant focuses on a narrow set of
requirements that includes specialization of labor, materials, and equipment along
product lines.
* Specialization involved in this strategy usually results in economies of scale
and, compared to multipurpose plants, lower operating costs.
 * The plant locations may either be widely scattered or placed relatively close to
one another.

2. Market Area Plant Strategy

* Here, plants are designed to serve a particular geographic segment of a

market.
* The individual plants can produce either most, or all of the company's products
and supply a limited geographical area.
* The operating costs of this strategy are often times higher than those of product
plants, but savings on shipping costs for comparable products can be made.
* This strategy is useful when shipping costs are high due to volume, weight, or
other factors.
* It can also bring the added benefits of faster delivery and response times to
local needs.
* It requires a centralized coordination of decisions to add or delete plants, or to
expand or downsize current plants because of changing market conditions.

3. Process Plant Strategy

* Here, different plants concentrate on different aspects of a process.

* This strategy is most useful when products have numerous components;
separating the production of components results in less confusion than if all the
production were done in the same location.
* A major issue with this strategy is the coordination of production throughout the
system, and it requires a highly informed, centralized administration in order to be
an effective operation.
* It can bring about additional shipping costs, but a key benefit is that individual
plants are highly specialized and generate volumes that brings economies of scale.

4. General-Purpose Plant Strategy

Plants are flexible and have the ability to handle a range of products

* It allows for a quick response to products and market changes, but can be less
productive than a more focused approach.
* A benefit to this approach is the increase in learning opportunities that happens
when similar operations are being done in different plants. Solutions to problems as
well as improvements made at one plant can be shared with the other plants
In choosing a proper location for a plant, first regional factors are analyzed and a
suitable region is chosen. Then, a suitable community within the chosen region is
selected; the final step is narrowing down on the specific site within that community
where the plant will be built.

Some of the Techniques Used in Location Planning

Factor Rating
Locational Break-even Analysis
Grid Method
Linear Integer Programming

EVALUATING LOCATION ALTERNATIVES

- There are three specific analytical techniques available to aid in evaluating

location alternatives:

A. Location Cost-Volume-Profit Analysis:

1. The Cost-Volume-Profit (CVP) Analysis can be represented either
mathematically or graphically. It involves three steps: 1) For each location
alternative, determine the fixed and variable costs, 2) For all locations, plot the total-
cost lines on the same graph, and 3) Use the lines to determine which alternatives
will have the highest and lowest total costs for expected levels of output.
Additionally, there are four assumptions one must keep in mind when using this
method:
1. Fixed costs are constant.
2. Variable costs are linear.
3. Required level of output can be closely estimated.
4. There is only one product involved.

B. Total cost = FC = v(Q)

where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown
below but not in the same format)
 a. Factor Rating
1. This method involves qualitative and quantitative inputs, and evaluates
alternatives based on comparison after establishing a composite value for each
alternative. Factor Rating consists of six steps:
1. Determine relevant and important factors.
2. Assign a weight to each factor, with all weights totaling 1.00.
3. Determine common scale for all factors, usually 0 to 100.
4. Score each alternative.
5. Adjust score using weights (multiply factor weight by score factor); add
up scores for each alternative.
6. The alternative with the highest score is considered the best option.

b. Minimum scores may be established to set a particular standard, though

this is not necessary.

c. Center of Gravity Method:

* This technique is used in determining the location of a facility which will

either reduce travel time or lower shipping costs. Distribution cost is seen as a
linear function of the distance and quantity shipped. The Center of Gravity Method
involves the use of a visual map and a coordinate system; the coordinate points
being treated as the set of numerical values when calculating averages. If the
quantities shipped to each location are equal , the center of gravity is found by
taking the averages of the x and y coordinates; if the quantities shipped to each
location are different , a weighted average must be applied (the weights being the
quantities shipped).

References :

1. Operations Management -Krajewski & Ritzman

2. Locations Planning - Harland E. Hodges.
3. Location Analysis – Stevenson
4. Locations & distribution : Henry C. Co
Technology and Operations Management,
California Polytechnic and State University