Location Strategy

Outline

The Strategic Importance of Location

Factors That Affect Location Decisions

Methods of Evaluating Location Alternatives

The Factor-Rating Method

Locational Break-Even Analysis

Center-of-Gravity Method

The Transportation Method

FedEx

Stresses on hub concept

Plant Location Decisions

Cost focus

Revenue varies little

between locations

Location is a major
cost factor

Affects shipping &

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

Plant Location Decisions

Revenue focus

Costs vary little between market areas

Location is a major
revenue factor

Affects amount of
customer contact

Affects volume of
business

In General - Location Decisions

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

Location Decision Sequence

country

region

sites

Factors Affecting Country

Government

Culture & economy

Market location

Labor availability, attitudes,

productivity, and cost

Infrastructure

Exchange rate

1995 Corel Corp.

Region Location Decisions

Corporate desires

Attractiveness

Labor

Utility costs

Government incentives

Proximity to customers & suppliers

Land/construction $$$

1995 Corel Corp.

Factors Affecting Site

Site size

Site cost

Transportation in/out

Proximity of
services
Environmental
impact

Location Decision Example

In 1992, BMW decided to build its first major
manufacturing plant outside Germany in Spartanburg, South
Carolina.

1995 Corel
Corp.

Country Decision Factors

Market location
U.S. is worlds largest
luxury car market
Growing

Labor

Lower manufacturing
labor costs

$17/hr. (U.S.) vs. $27

(Germany)

Higher labor
productivity

11 holidays (U.S.) vs.

31 (Germany)

Other

Lower shipping
cost ($2,500/car
less)
New plant &
equipment would
increase
productivity (lower
cost/car $2,0003000)

Region/Community Decision
Factors

Labor

Lower wages in South Carolina (SC)

About $17,000/yr (SC) vs. $27,051/yr (US)

Based on 1993 metropolitan averages for

all workers

Government incentives

state & local tax breaks

Free-trade zone from airport to plant

No duties on imported components or on exported cars

Close to market vs close to

material

Need to be Close to market :

Makers of bulky or heavy products

Japanese car makers

Food Industry

Auto parts suppliers

Consumer goods

Need to be Close to material :

Cement industry

Location Evaluation Methods

Factor-rating method

Locational break-even analysis

Center of gravity method

Transportation model

Factor-Rating Method

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

Steps in Factor Rating Method

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

Factors Affecting Location

Selection

Labor costs

Labor availability

Click to edit the outline

Environmental
text format
regulations

Proximity to materials
and suppliers

Second Outline Level

Utilities

Third Outline Level

Site costs

Proximity to markets

Fourth Outline
Transportation
Level
availability Fifth Outline
Level
Quality-of-life
Sixth Outline
Foreign exchange
Level
Seventh
Quality of government
Outline Level
Eighth

Government fiscal
policies
Environmental
regulations

Example

Click
to edit
thelocation.
outline
MyCompany.co has decided to build
a new
plant
text format
There are two possible sites: somewhere
and anywhere, the
weighting and the rating are shown
below

Second Outline Level

Scores (out of
100)
Factor

Weig
ht

Somewh
ere

Anywhe
re

25%

70

60

5%

50

60

Education &
health

10%

85

80

Tax structure

39%

75

70

Resource &
productivity

21%

60

70

Labor cost&
attitude
Transportation
system

Total

100%

scoresLevel
Weighted
Third Outline

Somewh
Anywhere
Fourth
Outline
ere Level

15.0
Fifth
Outline
Level
2.5 Sixth
3.0Outline
Level
8.5
8.0
Seventh
Outline
29.3
27.3 Level
Eighth
12.6
14.7
Selected
location
Outline
Level
17.5

70.4

68.0

Locational Break-Even Analysis

Method of cost-volume analysis used for industrial locations

Steps

Determine fixed & variable costs for each location

Plot total cost for each location

Select location with lowest total cost for expected production volume

Must be above break-even

Example
Youre an analyst for AC Delco. Youre
considering a new manufacturing plant in Akron,
Bowling Green, or Chicago. Fixed costs per year are
$30k, $60k, & $110k respectively. Variable costs
per case are $75, $45, & $25 respectively. The
price per case is $120. What is the best location
for an expected volume of 2,000 cases per year?

1995 Corel Corp.

Locational Break-Even
Crossover Chart
ron
k
A
o
Chicag

reen
G
ing
l
w
Bo

Akron
lowest cost

Bowling Green
lowest cost

Chicago
lowest
cost

Center of Gravity Method

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

Transportation Model

Finds amount to be shipped from several sources to

several destinations

Used primarily for industrial locations

Type of linear programming model

Objective: Minimize total production

& shipping costs

Constraints

Production capacity at source (factory)

Demand requirement at destination

Example
Cleveland
(200 units
required)

DesMoines
(100 unit
capacity)
Albuquerque
(300 units
required)

Boston
(200 units
required)
Evansville
(300 units
capacity)
Fort Lauderdale
(300 units
capacity)

The Problem

How much should be shipped from several sources to

several destinations

Sources: Factories, warehouses etc.

Destinations: Warehouses, stores etc.

Transportation models

Find lowest cost shipping arrangement

Used primarily for existing distribution systems

Transportation Table
To Albuquerque
From
(A)
5
Des Moines
(D)
8
Evansville
(E)
9
Fort Lauderdale
(F)
Warehouse
300
Requirements

Boston
(B)

200

Cleveland Factory
(C)
Capacity

200

100
300
300
700

Initial Solution Using

the Northwest Corner Rule
To Albuquerque
From
(A)
5
Des Moines
100
(D)
Evansville
8
200
(E)
9
Fort Lauderdale
(F)
Warehouse
300
Requirements

Boston
(B)

100
100
200

Cleveland Factory
(C)
Capacity

200
200

100
300
300
700

Stepping-Stone Method: Tracing a Closed Path for

the Des Moines to Cleveland Route
To Albuquerque
From
(A)
5
Des Moines
100
(D)
8
Evansville
200
(E)
+
9
Fort Lauderdale
(F)
Warehouse
300
Requirements

Boston
(B)

Cleveland Factory
(C)
Capacity
4

-100
+

100
200

4
7

Start

-200
200

3
3
5

100
300
300
700

Final Thought
The ideal location for many companies in
the future will be a floating factory ship
that will go from port to port, from country
to country wherever cost
per unit is lowest.

twijaya@ugm.ac.id