Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–1 CHAPTER...

Copyright Copyright © © 2005 The McGraw-Hill Companies. All rights reserved. 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11McGraw-Hill/Irwin 11––11

CHAPTER OBJECTIVES• Present a framework for evaluating alternative site

locations.

• Identify the quantitative and qualitative factors that should be considered when selecting a location for a manufacturing or service organization.

• Distinguish between factors that are important for locating a manufacturing facility and those that are important for locating a service operation.

• Introduce geographic information systems (GIS) as a tool for evaluating locations.


Managerial Issues• Deciding how large, when, where and what processes to

include in the construction of a facility.

• Understanding the different risks associated with back-of-the-house and front-of-the-house investments as they relate to customer demographics and characteristics of a given location for product manufacturing and service producing firms.

• Factoring the complications of globalization into location decision.


Locating Manufacturing Facilities• Products that decrease in weight and volume during

manufacturing tend to be located near the sources of raw materials.

• Products that increase in weight and volume during manufacturing tend to be located near the consumers.

• One site cost disadvantage such as transportation may be offset by a cost savings advantage specific to the site such as low labor costs.

• A location analysis should consider both qualitative and quantitative factors


Qualitative Location Factors

• Local Infrastructure–Institutional (e.g., reliable electrical power grid)

–Transportational (e.g., railway systems)

• Worker Education and Skills–Education and skills of local workers.

• Product Content Requirements–The minimum percentage of product that must be produced in a country in order for the product to be sold in that country.

• Political/Economic Stability


Quantitative Location Factors

• Labor Costs–Labor costs vary dramatically, depending on location. Cheap labor often lacks needed education and skills.

• Distribution Costs–Distance and the time required to deliver products can offset lower location costs.

• Facility Costs–Special economic zones (SEZ)

• Duty-free areas established to attract foreign investment in the form of manufacturing facilities.


Quantitative Location Factors

• Exchange Rates–Variations in rates can have a significant effect on sales and profits.

• Tax Rates–Taxes vary considerably between countries and within countries.

–All forms of taxes should be considered (property, payroll, inventory, and investment taxes).


Customer Requirements and Location Strategies for Service Operations

Exhibit 11.2Source: Adapted from Hal Reid, “Retailers Seek the Unique,” Business Geographics 5, no. 2 (February 1997), pp. 32–35. Courtesy GeoTec Media, http://www.geoplace.com.


Types of Service Facilities

• Facilities with a Direct Interface with the Customer–Brick and mortar facilities (front-of-the-house) that require the customer to be present.

• Facilities with Indirect Customer Contact–Services that link only indirectly with the customer who is not required to be present.

• Facilities with No Customer Contact–Back-of-the-house operations that are involved with the processing and distribution of goods.


Methods for Evaluating Potential Locations

• Factor Rating System1. Identify the specific criteria or factors to be

considered.

2. Assign a weight to each factor.

3. Select a common scale for rating each factor.

4. Rate each potential location on each of the factors.

5. Multiply each factor’s score by its weight.

6. Sum the weighted scores and select the location with the highest score.


Evaluation of Potential Locations

• Macro-analysis– The evaluation of alternative regions,

subregions, and communities.

• Micro-analysis– Evaluation of specific sites in a selected

community.• Center-of-gravity method


Evaluating Potential Locations

• Center-of-Gravity Method

–Used to determine the optimal location of a facility based on minimizing the transportation costs between where the goods are produced and where they are sold or redistributed.

–Locate each existing operation on an X and Y coordinate grid map.

–Calculate X coordinate of center of gravity.

–Calculate Y coordinate of center of gravity.


Factors Affecting Capacity Decisions

• External Factors–Government regulations–Union agreements–Supplier capabilities

• Internal–Product and service design–Personnel and jobs–Plant layout and process flow–Equipment capabilities and maintenance–Materials management–Quality control systems–Management capabilities


Capacity Decisions

• Production System Capacity Affects:

–Response rate to market changes

–Overall product cost structure

–Composition of the workforce

–Level of production technology utilized

–Extent of management and staff support

–General inventory strategy


Capacity Utilization and Service Level

• Balancing Capacity and Demand

–Demand exceeds capacity, customers are turned away.

–Demand exceeds optimum capacity, customers receive poor service.

–Demand equals optimum capacity, customers are service properly.

–Demand is less than optimum capacity, there is idle capacity.

• Too much capacity—costs rise.

• Too little capacity—customers are lost.


Comparing Capacity and Demand for a Food Service Facility

Exhibit 11.5Source: Managing Services, 2nd ed. by Christopher Lovelock, © 1992.Adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ.


Important Capacity Concepts

• Best Operating Level–The capacity (production volume) for which the average unit cost of output is at a minimum.

• Economies of Scales–The output range in which average units costs decrease as unit production volumes increase.

• Diseconomies of Scale–The output range in which average unit costs rise due to added costs incurred at operating levels exceeding the best operating level.


Important Capacity Concepts

• Capacity Flexibility–Ability to provide a wider range of products and volumes with short lead times.• Flexible plants • Flexible processes• Flexible workers • Use of External Capacity• Subcontracting • Sharing capacity

• Agile Manufacturing–The capability of a manufacturing process to respond quickly to marketplace changes.

• Capacity Balance–Balanced internal operational capacities


Capacity Strategies

• Proactive– Anticipating future growth and building a

facility so that it is up and running when the demand is there.

• Neutral– Additional capacity becomes available when

demandis about 50 percent of planned added capacity. The issue is how best to satisfy demand before the plant is up and operating.

• Reactive– plant capacity is not added until all of the

planned output from the facility can be sold.


Capacity Planning

• Capacity Planning

– Determining which level of capacity to operate at to meet customer demand in a cost efficient manner.

1. Forecast sales for each product line.

2. Forecast sales for individual products within each line.

3. Calculate labor and equipment requirements to meet product line forecasts.

4. Project labor and equipment availabilities over the planning horizon.


Capacity Measures

• Capacity–The output of a process or facility over a given time period.

• Capacity Utilization–The percentage of the available capacity that is actually being used.

Copyright © 2005 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 11–1 CHAPTER...

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