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Location Planning
and Analysis
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education
8-1
You should be able to:
LO 8.1 Identify some of the main reasons organizations need to
make location decisions
LO 8.2 Explain why location decisions are important
LO 8.3 Discuss the options that are available for location
decisions
LO 8.4 Give examples of the major factors that affect location
decisions
LO 8.5 Outline the decision process for making these kinds of
decisions
LO 8.6 Use the techniques presented to solve typical problems
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8-2
Location decisions arise for a variety of reasons:
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
LO 8.1
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8-3
Location decisions:
Are closely tied to an organization’s strategies
Low-cost
Convenience to attract market share
Effect capacity and flexibility
Represent a long-term commitment of resources
Effect investment requirements, operating costs, revenues, and operations
Impact competitive advantage
Importance to supply chains
LO 8.2
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8-4
Location decisions are based on:
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
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8-5
Supply chain management must address supply chain
configuration:
Number and location of suppliers, production facilities,
warehouses and distribution centers
Centralized vs. decentralized distribution
The importance of such decisions is underscored by their
reflection of the basic strategy for accessing customer
markets
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8-6
Existing companies generally have four options
available in location planning:
1.
2.
3.
4.
LO 8.3
Expand an existing facility
Add new locations while retaining existing facilities
Shut down one location and move to another
Do nothing
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8-7
Two key factors have contributed to the attractiveness
of globalization:
Trade agreements such as
North American Free Trade Agreement (NAFTA)
General Agreement on Tariffs and Trade (GATT)
U.S.-China Trade Relations Act
EU and WTO efforts to facilitate trade
Technology
Advances in communication and information technology
LO 8.3
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8-8
A wide range of benefits have accrued to organizations
that have globalized operations:
Markets
Cost savings
Legal and regulatory
Financial
Other
LO 8.4
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8-9
There are a number of disadvantages that may
arise when locating globally:
Transportation costs
Security costs
Unskilled labor
Import restrictions
Criticism for locating out-of-country
LO 8.4
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8-10
Organizations locating globally should be aware
of potential risk factors related to:
Political instability and unrest
Terrorism
Economic instability
Legal regulation
Ethical considerations
Cultural differences
LO 8.4
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8-11
Managerial implications for global operations:
Language and cultural differences
Risk of miscommunication
Development of trust
Different management styles
Corruption and bribery
Increased travel (and related) costs
Challenges associated with managing far-flung operations
Level of technology and resistance to technological change
Domestic personnel may resist locating, even temporarily
LO 8.4
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8-12
Steps:
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
LO 8.5
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8-13
Factors Relating to Foreign Locations
Government
a.
a.
LO 8.5
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
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8-14
Primary regional factors:
Location of raw materials
Necessity
Perishability
Transportation costs
Location of markets
As part of a profit-oriented company’s competitive strategy
So not-for-profits can meet the needs of their service users
Distribution costs and perishability
LO 8.5
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8-15
Labor factors
Cost of labor
Availability of suitably skilled workers
Wage rates in the area
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
LO 8.5
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8-16
Many communities actively attempt to attract new
businesses they perceive to be a good fit for the community
Businesses also actively seek attractive communities based
on such factors such as:
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Development support
LO 8.5
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8-17
Primary site location considerations are
Land
Transportation
Zoning
Other restrictions
LO 8.5
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8-18
Organizing operations
Product plant strategy
Entire products or product lines are produced in separate
plants, and each plant usually supplies the entire domestic
market
Market area plant strategy
Plants are designated to serve a particular geographic
segment of the market
Plants produce most, if not all, of a company’s products
LO 8.5
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8-19
Organizing operations
Process plant strategy
Different plants focus on different aspects of a process
Automobile manufacturers – engine plant, body stamping plant,
etc.
Coordination across the system becomes a significant issue
General-purpose plant strategy
Plants are flexible and capable of handling a range of
products
LO 8.5
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8-20
GIS
A computer-based tool for collecting, storing, retrieving,
and displaying demographic data on maps
Aids decision makers in
Targeting market segments
Identifying locations relative to their market potential
Planning distribution networks
Portraying relevant information on a map makes it
easier for decision makers to understand
LO 8.5
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8-21
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
LO 8.5
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8-22
Common techniques:
Locational cost-volume-profit analysis
Factor rating
Transportation model
Center of gravity method
LO 8.6
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8-23
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
LO 8.6
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8-24
Assumptions
Fixed costs are constant for the range of probable
output
2. Variable costs are linear for the range of probable
output
3. The required level of output can be closely estimated
4. Only one product is involved
1.
LO 8.6
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8-25
For a cost analysis, compute the total cost for each
alternative location:
Total Cost = FC + v Q
where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity or volume of output
LO 8.6
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8-26
Fixed and variable costs for four potential plant
locations are shown below:
LO 8.6
Location
Fixed Cost
per Year
Variable Cost
per Unit
A
$250,000
$11
B
$100,000
$30
C
$150,000
$20
D
$200,000
$35
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8-27
Plot of Location Total Costs
LO 8.6
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8-28
Range approximations
B Superior (up to 4,999 units)
C Superior (>5,000 to 11,111 units)
A superior (11,112 units and up)
LO 8.6
Total Cost of C = Total Cost of B
150,000 + 20Q = 100,000 + 30Q
50,000 = 10Q
Q = 5,000
Total Cost of A = Total Cost of C
250,000 + 11Q = 150,000 + 20Q
100,000 = 9Q
Q = 11,111.11
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8-29
Factor rating
General approach to evaluating locations that includes quantitative
and qualitative inputs
Procedure:
Determine which factors are relevant
Assign a weight to each factor that indicates its relative importance
compared with all other factors
1.
2.
3.
4.
5.
6.
LO 8.6
Weights typically sum to 1.00
Decide on a common scale for all factors, and set a minimum acceptable
score if necessary
Score each location alternative
Multiply the factor weight by the score for each factor, and sum the results
for each location alternative
Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score
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8-30
A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which is
better?
Scores
(Out of 100)
Factor
Weight
Alt 1
Alt 2
Proximity to
existing source
.10
100
60
Traffic volume
.05
80
80
Rental costs
.40
70
90
Size
.10
86
92
Layout
.20
40
70
Operating Cost
.15
80
90
1.00
LO 8.6
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8-31
A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which is
better?
Scores
(Out of 100)
Factor
Weight
Alt 1
Alt 2
Alt 1
Proximity to
existing source
.10
100
60
.10(100) = 10.0
.10(60) = 6.0
Traffic volume
.05
80
80
.05(80) = 4.0
.05(80) = 4.0
Rental costs
.40
70
90
.40(70) = 28.0
.40(90) = 36.0
Size
.10
86
92
.10(86) = 8.6
.10(92) = 9.2
Layout
.20
40
70
.20(40) = 8.0
.20(70) = 14.0
Operating Cost
.15
80
90
.15(80) = 12.0
.15(90) = 13.5
70.6
82.7
1.00
LO 8.6
Weighted Scores
Alt 2
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8-32
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
LO 8.6
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8-33
Figure 8.1
a) Map showing destinations
LO 8.6
b) Coordinate system added
c) Center of gravity
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8-34
If quantities to be shipped to every location are equal, you can obtain
the coordinates of the center of gravity by finding the average of the xcoordinates and the average of the y-coordinates.
x
x=
i
n
y
y=
i
n
where
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
n = Number of destinatio ns
LO 8.6
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8-35
Suppose you are attempting to find the center of
gravity for the problem depicted in Figure 8.1c.
Destination
x
y
D1
2
2
D2
3
5
D3
5
4
D4
8
5
18
16
x 18
x=
= = 4.5
i
n
4
y 16
y=
=
=4
i
n
4
Here, the center of gravity is (4.5,4). This is
slightly west of D3 from Figure 8.1.
LO 8.6
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8-36
When the quantities to be shipped to every location are unequal, you
can obtain the coordinates of the center of gravity by finding the
weighted average of the x-coordinates and the average of the ycoordinates.
xi Qi
x=
Qi
yQ
y=
Q
i
i
i
where
Qi = Quantity t o be shipped to destinatio n i
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
LO 8.6
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8-37
Suppose the shipments for the problem depicted in Figure 8.1a are not
all equal. Determine the center of gravity based on the following
information.
LO 8.6
Destination
x
y
Weekly
Quantity
D1
2
2
800
D2
3
5
900
D3
5
4
200
D4
8
5
100
18
16
2,000
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8-38
x Q 2(800) + 3(900) + 5(200) + 8(100) 6,100
x=
=
=
= 3.05
2,000
2,000
Q
i
i
i
yQ
2(800) + 5(900) + 4(200) + 5(100) 7,400
y=
i=
=
= 3.7
2,000
2,000
Q
i
i
i
The coordinates for the center of gravity are (3.05, 3.7). You may round
the x-coordinate down to 3.0, so the coordinates for the center of
gravity are (3.0, 3.7). This is south of destination D2 (3, 5).
LO 8.6
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8-39
LO 8.6
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8-40
Management of
Quality
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reproduction or distribution without the prior written consent of McGraw-Hill
Education
9-1
You should be able to:
LO 9.1 Discuss the philosophies of quality gurus
LO 9.2 Define the term quality as it relates to products and as it relates to
services
LO 9.3 Identify the determinants of quality
LO 9.4 Explain why quality is important and the consequences of poor
quality
LO 9.5 Distinguish the costs associated with quality
LO 9.6 Discuss the importance of ethics in managing quality
LO 9.7 Compare the quality awards
LO 9.8 Discuss quality certification and its importance
LO 9.9 Describe TQM
LO 9.10 Give an overview of problem solving
LO 9.11 Give an overview of process improvement
LO 9.12 Describe the six sigma methodology
LO 9.13 Describe and use various quality tools
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9-2
Quality
The ability of a product or service to consistently meet or
exceed customer expectations
For a decade or so, quality was an important focal point in
business. After a while, this emphasis began to fade as other
concerns took precedence
There has been a recent resurgence in attention to quality
given recent experiences with the costs and adverse attention
associated with highly visible quality failures:
Auto recalls
Toys
Produce
Dog food
Pharmaceuticals
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9-3
Walter Shewart
“father of statistical quality control”
Control charts
Variance reduction
W. Edwards Deming
Special vs. common cause variation
The 14 points
Joseph Juran
Quality Control Handbook, 1951
Viewed quality as fitness-for-use
Quality trilogy – quality planning, quality control, quality
improvement
LO 9.1
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9-4
Armand Feigenbaum
Quality is a “total field”
The customer defines quality
Philip B. Crosby
Zero defects
Quality is Free, 1979
Kaoru Ishikawa
Cause-and-effect diagram
Quality circles
Recognized the internal customer
LO 9.1
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9-5
Genichi Taguchi
Taguchi loss function
Taiichi Ohno and Shigeo Shingo
Developed philosophy and methods of kaizen
LO 9.1
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9-6
Performance – main characteristics of the product
Aesthetics – appearance, feel, smell, taste
Special features – extra characteristics
Conformance – how well the product conforms to design
specifications
Reliability – consistency of performance
Durability – the useful life of the product
Perceived quality – indirect evaluation of quality
Serviceability – handling of complaints or repairs
Consistency – quality doesn’t vary
LO 9.2
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9-7
Convenience – the availability and accessibility of the service
Reliability – ability to perform a service dependably, consistently, and
accurately
Responsiveness – willingness to help customers in unusual situations and
to deal with problems
Time – the speed with which the service is delivered
Assurance – knowledge exhibited by personnel and their ability to convey
trust and confidence
Courtesy – the way customers are treated by employees
Tangibles – the physical appearance of facilities, equipment, personnel, and
communication materials
Consistency – the ability to provide the same level of good quality repeatedly
Expectancy – meet (or exceed) customer expectations
LO 9.2
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9-8
Audit service to identify strengths and weaknesses
In particular, look for discrepancies between:
1.
Customer expectations and management perceptions of those
expectations
2. Management perceptions customer expectations and servicequality specifications
3. Service quality and service actually delivered
4. Service actually delivered and what is communicated about the
service to customers
5. Customers’ expectations of the service provider and their
perceptions of provider delivery
LO 9.2
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9-9
Quality of design
Intention of designers to include or exclude features in a product or service
Quality of conformance
The degree to which goods or services conform to the intent of the
designers
Ease-of-use and user instructions
Increase the likelihood that a product will be used for its intended purpose
and in such a way that it will continue to function properly and safely
After-the-sale service
Taking care of issues and problems that arise after the sale
LO 9.3
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9-10
Top management
Design
Procurement
Production/operations
Quality assurance
Packaging and shipping
Marketing and sales
Everyone in the
organization has some
responsibility for quality,
but certain areas of the
organization are involved
in activities that make
them key areas of
responsibility
Customer service
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9-11
Enhanced reputation for quality
Ability to command premium prices
Increased market share
Greater customer loyalty
Lower liability costs
Fewer production or service problems
Lower production costs
Higher profits
LO 9.4
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9-12
Loss of business
Liability
Productivity
Costs
LO 9.4
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9-13
Appraisal costs
Costs of activities designed to ensure quality or uncover
defects
Prevention costs
All TQ training, TQ planning, customer assessment,
process control, and quality improvement costs to
prevent defects from occurring
LO 9.5
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9-14
Failure costs – costs incurred by defective
parts/products or faulty services
Internal failure costs
Costs incurred to fix problems that are detected before the
product/service is delivered to the customer
External failure costs
All costs incurred to fix problems that are detected after the
product/service is delivered to the customer
LO 9.5
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9-15
Substandard work
Defective products
Substandard service
Poor designs
Shoddy workmanship
Substandard parts and materials
Having knowledge of this and failing to correct
and report it in a timely manner is unethical.
LO 9.6
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9-16
Award categories
1.
2.
3.
4.
5.
6.
Education
Healthcare
Manufacturing
Nonprofit/government
Service
Small Business
Purpose of the award
1.
2.
3.
LO 9.7
Stimulate efforts to improve quality
Recognize quality achievements
Publicize successful programs
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9-17
Leadership
II. Strategic planning
III. Customer focus
IV. Measurement, analysis, and knowledge management
V. Workforce focus
VI. Operations focus
VII. Results
I.
LO 9.7
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9-18
International Organization for Standardization
ISO 9000
Set of international standards on quality management and quality
assurance, critical to international business
ISO 14000
A set of international standards for assessing a company’s
environmental performance
ISO 24700
Pertains to the quality and performance of office equipment that
contains reused components
LO 9.8
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9-19
ISO 9000
Quality principles
Principle 1
Customer focus
Principle 2 Leadership
Principle 3 Involvement of people
Principle 4 Process approach
Principle 5 System approach to management
Principle 6 Continual improvement
Principle 7 Factual approach to decision making
Principle 8 Mutually beneficial supplier relationships
LO 9.8
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9-20
Business leaders are increasingly recognizing the
importance of their supply chains in achieving their
quality goals
Requires:
Measuring customer perceptions of quality
Identifying problem areas
Correcting these problems
Supply chain quality management can benefit from a
collaborative relationship with suppliers
Helping suppliers with quality assurance efforts
Information sharing on quality-related matters
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9-21
A philosophy that involves everyone in an organization
in a continual effort to improve quality and achieve
customer satisfaction
T
LO 9.9
Q
M
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9-22
1.
2.
3.
4.
5.
6.
Find out what the customer wants
Design a product or service that meets or exceeds
customer wants
Design processes that facilitate doing the job right the
first time
Keep track of results
Extend these concepts throughout the supply chain
Top management must be involved and committed
LO 9.9
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9-23
Continuous improvement
2. Competitive benchmarking
3. Employee empowerment
4. Team approach
5. Decision based on fact, not opinion
6. Knowledge of tools
7. Supplier quality
8. Champion
9. Quality at the source
10. Suppliers are partners in the process
1.
LO 9.9
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the prior written consent of McGraw-Hill Education
9-24
Continuous improvement
Philosophy that seeks to make never-ending
improvements to the process of converting inputs into
outputs
Kaizen
Japanese word for continuous improvement
LO 9.9
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the prior written consent of McGraw-Hill Education
9-25
The philosophy of making each
worker responsible for the quality of
his or her work
“Do it right” and “If it isn’t right, fix it”
LO 9.9
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the prior written consent of McGraw-Hill Education
9-26
Obstacles include:
1.
Lack of company-wide definition of quality
2. Lack of strategic plan for change
3. Lack of customer focus
4. Poor inter-organizational communication
5. Lack of employee empowerment
6. View of quality as a “quick fix”
7. Emphasis on short-term financial results
8. Inordinate presence of internal politics and “turf” issues
9. Lack of strong motivation
10. Lack of time to devote to quality initiatives
11. Lack of leadership
LO 9.9
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the prior written consent of McGraw-Hill Education
9-27
Act
Plan
Study
Do
Plan-Do-Study-Act (PDSA) cycle
Plan
Begin by studying and documenting the current process.
Collect data on the process or problem
Analyze the data and develop a plan for improvement
Specify measures for evaluating the plan
Do
Implement the plan, document any changes made, collect
data for analysis
LO 9.10
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
the prior written consent of McGraw-Hill Education
9-28
Act
Plan
Study
Do
Plan-Do-Study-Act (PDSA) cycle
Study
Evaluate the data collection during the do phase
