1997 Prentice-Hall, Inc.

Principles of
Operations Management
Selecting the Location
Chapter 6

6-1

Learning Objectives
1997 Prentice-Hall, Inc.

Explain location decisions

Describe the factors affecting location

decisions

Explain the methods of evaluating

location alternatives

Factor rating method

Center of gravity method

6-2

Thinking Challenge
1997 Prentice-Hall, Inc.

Where do you want to live

after graduation? Why?

1995 Corel Corp.

6-3

Alone

Group Class

 1997 Prentice-Hall, Inc.

Cost focus

Industrial
Location Strategies

Revenue varies little

between locations

Location is a major
cost factor

1995 Corel Corp.

Affects shipping &

production costs (e.g., labor)
Costs vary greatly between
locations

6-4

 1997 Prentice-Hall, Inc.

Revenue focus

Service
Location Strategies

Costs vary little between market areas

Location is a major
revenue factor

Affects amount of
customer contact
Affects volume of
business
1995 Corel Corp.

6-5

Location Decisions
1997 Prentice-Hall, Inc.

Long-term decisions

Difficult to reverse

Affect fixed & variable costs

Transportation cost
As much as 25% of product price
Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of

location to firm
6-6

Factors Affecting Country

1997 Prentice-Hall, Inc.

Government

Culture & economy

Market location

Labor
Productivity
Cost

Infrastructure
1995 Corel Corp.

Exchange rate
6-7

Labor Productivity
1997 Prentice-Hall, Inc.

Low wages often

over-emphasized

Hourly Compensation ($)

Mfg. Workers (1994)

Labor productivity
important

Germany

27.37

Japan

21.38

U.S.

17.10

Labor cost per

unit should be
criterion:
Labor cost/day
Units made/day
6-8

Hong Kong

4.79

Mexico

2.57

 1997 Prentice-Hall, Inc.

Factors Affecting
Region/Community

Corporate desires

Attractiveness

Labor

Utility costs

Govt incentives

Proximity to
customers & suppliers

Land/construction $$$
6-9

1995 Corel Corp.

 1997 Prentice-Hall, Inc.

Factors Affecting
Site

Site size

Site cost

Transportation in/out

Proximity of
services

Environmental
impact
1995 Corel Corp.

6 - 10

Location Methods
1997 Prentice-Hall, Inc.

Factor weighting
method

Locational breakeven analysis

Center of gravity
method

Transportation
model
1995 Corel Corp.

6 - 11

Factor Rating Method

1997 Prentice-Hall, Inc.

Most widely used location technique

Useful for service & industrial

locations

Rates locations using factors

Intangible (qualitative) factors

Example: Education quality, labor skills
Tangible (quantitative) factors
Example: Short-run & long-run costs

6 - 12

 1997 Prentice-Hall, Inc.

Factor Rating Method

Steps

List relevant factors

Assign importance weight to each factor

Develop scale for each factor (0-1, etc.)

Score each location using factor scale

Multiply scores by weights for each

factor & total

Select location with maximum total

score
6 - 13

 1997 Prentice-Hall, Inc.

Factor Rating Method

Example

Youre an analyst for John

Deere. Youre considering
locating a new mfg. plant in
Omaha (NE) or Denver (CO).
Factor
Wgt NE CO
Mfg. costs
.7 $60k $62k
Cost of living .1 .7
.6
Labor avail. .2 1
.8
Where should you locate?
6 - 14

1995 Corel Corp.

 1997 Prentice-Hall, Inc.

Factor Rating Method

Solution
Omaha

Factor Wgt Econ Score

(0-1)

TOTAL
6 - 15

Denver
Wgt Econ Score Wgt
Score
(0-1) Score

 1997 Prentice-Hall, Inc.

Factor Rating Method

Thinking Challenge

Youre owner of a hot tub

store. Youre considering
relocating to Phoenix (AZ)
or Santa Fe (NM).
Factor
Wgt AZ NM
Population
.4 984k 56k
Competition .1 .3
.8
Life style
.5 .2
.9
Where should you locate?
6 - 16

Alone

Group Class

1995 Corel Corp.

 1997 Prentice-Hall, Inc.

Thinking Challenge
Solution*
Phoenix

Factor Wgt Econ Score

(0-1)

TOTAL
6 - 17

Santa Fe

Wgt Econ Score Wgt

Score
(0-1) Score

Center of Gravity Method

1997 Prentice-Hall, Inc.

Finds location of single distribution

center serving several destinations
Used primarily for services
Considers

Location of existing destinations

Example: Markets, retailers etc.
Volume to be shipped
Shipping distance (or cost)
Shipping cost/unit/mile is constant

6 - 18

 1997 Prentice-Hall, Inc.

Place existing locations on a

coordinate grid

Center of Gravity Method

Steps

Grid has arbitrary origin & scale

Maintains relative distances

Calculate X & Y coordinates for

center of gravity

Gives location of distribution center

Minimizes transportation cost

6 - 19

 1997 Prentice-Hall, Inc.

Center of Gravity Method

Equations

X Coordinate

dix Wi
Cx i
Wi
i

Y Coordinate

diy Wi
Cy i
Wi
i

6 - 20

dix = x coordinate
of location i
Wi = Volume of
goods moved to
or from location i

diy = y coordinate
of location i

 1997 Prentice-Hall, Inc.

Center of Gravity Method

Example

Youre an analyst for

Home Depot. You want
to find the best location
of a warehouse serving
retail stores in Lincoln
(coord. 90, 60), Columbia
(coord. 150, 30), & Austin
(coord. 90, 10). Monthly
demand is 2k, 3k, 5k
units respectively.
6 - 21

1995
Corel
Corp.

Columbia,
SC

Austin,
TX

Warehouse?

Lincoln, NE

 1997 Prentice-Hall, Inc.

Center of Gravity Method

Solution

90

Lincoln Store
(90,60)
2k demand

60

Austin Store
(90,10)
5k demand

30

Columbia Store
(150,30)
3k demand

0
0
6 - 22

30

60

90

120

150

1995
Corel
Corp.

Thinking Challenge
1997 Prentice-Hall, Inc.

Youre a planner for

Sears. You want to find
the best location of a
warehouse serving retail
stores in Seattle (50, 60),
Aberdeen (20, 35), &
Spokane (160, 50).
Monthly demand is
494k, 18k, 171k units
respectively.
6 - 23

Alone

Group Class

1995 Corel Corp.

Conclusion
1997 Prentice-Hall, Inc.

Explained location decisions

Described the factors affecting

location decisions

Explained the methods of evaluating

location alternatives

Factor rating method

Center of gravity method

6 - 25