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Name: JYOTHSNA DECHAMMA BIDDANDA

PGDM: 18183
Section: ‘C’
Date: 3/11/2018

OPERATIONS MANAGEMENT DIARY-SESSION 9

Class summary
Being in the right location is a key ingredient in a business's success. If a company selects the
wrong location, it may have adequate access to customers, workers, transportation, materials,
and so on. Consequently, location often plays a significant role in a company's profit and
overall success. A location strategy is a plan for obtaining the optimal location for a company
by identifying company needs and objectives and searching for locations with offerings that
are compatible with these needs and objectives. Generally, this means the firm will attempt to
maximize opportunity while minimizing costs and risks.

Topics covered in class


• Location strategies and its importance
• Characteristics of location strategies
• Objectives of Location Decisions
• Flexibility in the choice of locations
• How government solves the problem of industrial backwardness
• India’s most competitive cities
• Case of MRF Tyres, Sterlite Industries, TATA Motors and TATA Steel
• Factors that affect location decisions
• Labour productivity, exchange rates and currency risk, costs, Political risks,
proximity to markets and suppliers
• Methods evaluating location alternatives

Learnings from the class-


LOCATION DECISION:
➢ A location decision is about deciding the place when production or service system
will be set up.
For example: To decide where to locate the corporate headquarters, a R&D lab, a
showroom, a warehouse, a service centre etc.
➢ Location decisions for many types of businesses are made infrequently, but they tend
to have a significant impact on the organization.
➢ The location decision often depends on the type of business. For industrial location
decisions, the strategy is usually minimizing costs, although innovation and creativity
may also be critical. For retail and professional service organizations, the strategy
focuses on maximizing revenue. Warehouse location strategy, however, may be
driven by a combination of cost and speed of delivery. The objective of location
strategy is to maximize the benefit of location to the firm.
CHARACTERISTICS OF LOCATION DECISIONS:
➢ Long term decision
➢ Decisions are made once or twice
➢ Decision greatly affects both fixed and variable costs
➢ Once committed to a location, many resource and cost issues are difficult to change.

STRATEGY AND LOCATION CHOICES:


STRATEGY LOCATION DECISION
• To be a low-cost producer • Locate in places where labour or material
• To increase profit by increasing market costs are low
share • Locate near markets
• To emphasize convenience for the • Locate near raw materials sources
customer • Locate in high traffic area
• Quick expansion and capacity addition • Locate at many places where customers
can transact their businesses or make
purchases
(example: Banks, ATMs, Service
stations, fast food outlets)
• Locate in fast growing area or industry
hubs

MACRO LEVEL FACTORS CONSIDERED WHILE SELECTING A LOCATION:

POLITICAL

ECONOMIC

SOCIAL

TECHNOLOGICAL
LEGAL

ENVIRONMENTAL

FACTORS THAT AFFECT LOCATION DECISIONS:


Selecting a facility location is becoming much more complex with the globalization of the
work-place. Globalization has taken place because of the development of market economies,
better international communications, more rapid, reliable travel and shipping, ease of capital
flow between countries and high differences in labour costs.
FLEXIBILTY IN THE CHOICE OF LOCATION:
• Electronics and light manufacturing
• Textile, furniture
• Heavy machinery and equipment
• Petroleum, chemical and Plastics
• Mining, lumber and agriculture
• Hospitality
• Professional (legal, computer)
• Transportation and communication
• Education and non-profit organizations
• Governmental organizations
• Medical and emergency services

INDUSTRIAL LOCATIONS IN INDIA:


Ludhiana, Kanpur, Bhiwandi, Vijayawada, Firozabad, Panna, Panipat, Channapatna,
Kollam, Varanasi, etc.

INDIA’S MOST COMPETETIVE CITIES: (BUSINESS WORLD)


1. Delhi
2. Chennai
3. Mumbai
4. Bangalore
5. Kolkata
6. Hyderabad
7. Ahmedabad
8. Pune
9. Nagpur
10. Jaipur
A company when it grows opens up networks in other locations/across the country.
Example: MRF, Sterlite Industries, ACC etc.

INTERNATIONAL LOCATIONS-INDIAN COMPANIES:


• TVS Motor Company
• Venezuela-ONGC Videsh Ltd
• Oil India Ltd
• Engineers India Ltd
• Dr Reddy’s Laboratories Ltd
• Sun Pharmaceutical Industries Ltd
LOCATION DECISION – CONTROVERSY:
• Naveen Jindal Bolivia Exit
• Jindal steel & Power terminates contract with Bolivian Government. The termination
comes due to the anti-investor friendly attitude of the Bolivian Government.
• TATA Steel signed a memorandum of understanding in 2007 to set up an integrated
steel plant at the Vung Ag Economic Zone in central Vietnam Ha Tinh province.
After running into a series of difficulties, including having its original plot reallocated
to another firm even after receiving the land-planning certificate for the land, Tata
Steel in December 2009 applied for an investment license for the facility, a
prerequisite for such projects. The provincial government issues these licenses, in
accordance to Vietnamese regulations. Vietnam assures India clearance to Tata Steel
Project.
• TATA Nano Singur to Sanand in Gujarat (Tata Motor’s most unusual journey)

STEPS IN A LOCATION DECISION PROBLEM:


• Define the location objectives and associated constraints.
• Identify the relevant decision criteria
(i) Qualitative
(ii)Quantitative
• Relate the objectives to the criteria using appropriate models like minimum cost,
break even analysis, linear programming, factor analysis.
• Generate data through field research and use the models to evaluate alternative
locations.
• Select the location that best satisfies the criteria.
CRITICAL SUCCESS FACTORS:
NATIONAL:
• Political risks, government rules, attitudes, incentives
• Cultural and economic issues
• Location and markets
• Labour talent, attitudes, productivity, costs
• Availability of supplies, communications, energy
• Exchange rates and currency risk
• Stabilities of government, economy and political system
• Labour availability and Cost
• Export and import-quotas, duties and fees
• Climate
• Transport system
REGIONAL:
• Corporate desires
• Attractiveness of region (culture, taxes, climate, etc)
• Labour availability, costs, attitude toward unions
• Cost and availability of utilities
• Environmental regulations of state and town
• Government incentives and fiscal policies
• Proximity to raw materials and customers
• Land/construction costs
COMMUNITY
SITE:
• Site, size and cost
• Air, rail, highway, waterway systems
• Zoning restrictions
• Proximity of services/supplies needed
• Environmental impact issues
DECISION-MANUFACTURING COMPANY:
• Favourable labour climate
• Proximity to markets
• Quality of life
• Proximity of suppliers
• Proximity of Parent company

METHODS OF EVALUATING LOCATION ALTERNATIVES:


5 Major methods are used for solving location problems: the factor-rating method, locational
break-even analysis, the centre-of-gravity method, and the transportation model. This section
describes these approaches-
1. FACTOR-RATING METHOD – the factor rating method is popular because a wide
variety of factors from education to recreation to labour skills can be objectively
included.
2. LOCATION BREAK-EVEN ANALYSIS-is the use of cost volume analysis to make
an economic comparison of location alternatives.
3. CENTRE OF GRAVITY METHOD- is a mathematical technique used for finding the
location of a distribution centre that will minimize distribution costs. The method
takes into account the location of markets, the volume of goods, shipped to those
markets, and shipping costs in finding the best location for a distribution centre.
4. LOAD DISTANCE METHOD
5. TRANSPORTATION MODEL – the 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.
Questions:
1.What are the major factors that firms consider when choosing a country in which to
locate?
Selecting a facility location is becoming much more complex with the globalization of the
work-place. Globalization has taken place because of the development of market economies,
better international communications, more rapid, reliable travel and shipping, ease of capital
flow between countries and high differences in labour costs.
2.What factors affect region/community location decisions?
• Corporate desires
• Attractiveness of region (culture, taxes, climate, etc)
• Labour availability, costs, attitude toward unions
• Cost and availability of utilities
• Environmental regulations of state and town
• Government incentives and fiscal policies
• Proximity to raw materials and customers
• Land/construction costs
3.What are the three steps to locational break-even analysis?
• a) Determine the fixed and variable cost for each location
• b) Plot the costs for each location, with costs on the vertical axis on the graph and
annual volume on the horizontal axis.
• c)select the location that has the lowest total cost for the expected production volume.
4.What is clustering?
The location of competing companies near each other, often because of critical mass of
information, talent, venture capital, or natural resources is called clustering. Companies like
to locate, somewhat surprisingly, near competitors. This tendency, called clustering, often
occurs when a major resource is found in that region.
5. What is Centre of Gravity method and factor-rating method?
It is a mathematical technique used for finding the location of a distribution centre that will
minimize distribution costs. The method takes into account the location of markets, the
volume of goods, shipped to those markets, and shipping costs in finding the best location for
a distribution centre. The factor rating method is a wide variety of factors from education to
recreation to labour skills that can be objectively included. A location method instils
objectivity into the process of identifying hard-to-evaluate costs.
Feedback:
The session enabled the class to get extensive understanding about the competitive
environment. The detailed view on location strategies enabled us to understand how the
organizations make location decision and how significant cost and revenue driver, location has
power to make (or break) a company’s business strategy. Overall the session was interactive
and the content of the prescribed book was highly informative.

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