OPSM 301 Operations Management

Class 18:

Location(Chapter 8)

Koç University

Zeynep Aksinzaksin@ku.edu.tr

Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers

The Logistics Network

The Logistics Network consists of:

Facilities:Vendors, Manufacturing Centers, Warehouse/ Distribution Centers, and Customers

Raw materials and finished products that flow between the facilities.

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Decision Classifications

Strategic Planning: Decisions that typically involve major capital investments and have a long term effect

1. Determination of the number, location and size of new plants, distribution centers and warehouses

2. Acquisition of new production equipment and the design of working centers within each plant

3. Design of transportation facilities, communications equipment, data processing means, etc.

Decision Classifications

Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months

1. Work-force size

2. Inventory policies

3. Definition of the distribution channels

4. Selection of transportation and trans-shipment alternatives

Decision Classifications

Operational Control: Includes day-to-day operational decisions

1. The assignment of customer orders to individual machines

2. Dispatching, expediting and processing orders

3. Vehicle scheduling

Competitive Imperatives Impacting Location The need to produce close to the customer due

to time-based competition, trade agreements, and shipping costs

The need to locate near the appropriate labor pool to take advantage of low wage costs and/or high technical skills

Article from Financial Times

Site selection and Location

Site selection– Short-term focus– Accessibility of consumers and workers– “Cost” driven decision

Location– stability– Long-term market position– Strategies for back-office operations

Facility Location

Location decisions are made for facilities that produce and deliver both products and services

Both quantitative and qualitative factors can be important to location decisions

Several levels of quantitative analysis are possible– Cost comparisons– Break-even analysis– Linear programming

Locational Factors

Proximity to Customers

Business Climate Total Costs Infrastructure Quality of Labor Suppliers Other Facilities

Free Trade Zones Political Risk Government Barriers Trading Blocs Environmental

Regulation Host Community

Characteristics of a Good Location Proximity to target market

Residences, hospitals, schools, offices, airports, military bases

Proximity to destination points Malls tourist attractions, anchor stores

Ease of access Proximity to competition Proximity to other units of the same

type

Problem: accurate identification and trade-offs

Demand Sensitive Services

Solution Techniques:– Informal judgment– Factor Rating– Regression

Case:– La Quinta Hotels - Regression based

site selection

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

– Tangible (quantitative) factors• Example: Short-run & long-run costs

– Intangible (qualitative) factors• Example: Education quality, labor skills

Steps in Factor Rating Method List relevant factors Assign importance weight to each factor

(such as 0 – 1) Develop scale for each factor (such as 1 –

100) Score each location using factor scale Multiply scores by weights for each factor &

total Select location with maximum total score

Demand Sensitive Service Facility Location

Factor Rating example

Item Scale MultiplierIncome of neighborhood 0-10 .40Proximity to shopping centers 0-10 .25Accessibility 0-10 .15Visibility 0-10 .10Traffic 0-10 .10

Demand Sensitive Service Facility Location

Buyukdere 3.15

Etiler 8.00

Bostanci 9.20

Beyoglu 5.10

Buyukdere Etiler Bostanci Beyoglu

Income 4 8 10 6

Shopping 2 7 10 4

Access 1 9 8 4

Visibility 6 9 7 6

Traffic 3 8 8 5

Score

Factor Rating Example

Cost-Volume Analysis

Fixed and variable costs for four potential locations:

Location FixedCost

VariableCost

ABCD

$250,000100,000150,000200,000

$11302035

800700600500400300200100

0

Annual Output (000)

8 10 12 14 166420

$(000)

A

BC

B SuperiorC Superior

A Superior

D

Cost-Volume Analysis

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

Center of Gravity Method Steps

Place existing locations on a coordinate grid– Grid has arbitrary origin & scale – Maintains relative distances

Calculate X & Y coordinates for ‘center of gravity’– Gives location of distribution center– Minimizes transportation cost

Center of Gravity Method Equations

dix = x coordinate of location i

Wi = Volume of goods moved to or from location i

diy = y coordinate of location i

X Coordinate

Y Coordinate

ii

iiix

x W

WdC

ii

iiiy

y W

WdC

Example: retail stores

Store Location No of containers shipped/monthLocation A 400Location B 300Location C 200Location D 100Location E 300Location F 100

B

C

D

E

F

CGA

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00

East-West

No

rth

-So

uth

A

B

C

D

E

F

CG

Remarks

Geographic center is not equal to the cost center Define distance concept carefully

Hotelling’s

Hotelling’s: round 1

A B

Hotelling’s: round 2

A B

Hotelling’s: round 3

B A

Hotelling’s: final configuration

A B

Conclusion

Why is McDonalds always next to Burger King? Gloria Jeans next to Starbucks?

Remember that others can move when you are planning locations

In general: dynamics of competitive location matter