Plant Location Decision

Outline – ContinuedOutline – Continued Factors That Affect Location DecisionsFactors That Affect Location Decisions

Labor ProductivityLabor Productivity Exchange Rates and Currency RisksExchange Rates and Currency Risks CostsCosts AttitudesAttitudes Proximity to MarketsProximity to Markets Proximity to SuppliersProximity to Suppliers Proximity to Competitors (Clustering)Proximity to Competitors (Clustering)

Outline – ContinuedOutline – Continued

Methods Of Evaluating Location Methods Of Evaluating Location AlternativesAlternatives The Factor-Rating MethodThe Factor-Rating Method Locational Break-Even AnalysisLocational Break-Even Analysis Center-of-Gravity MethodCenter-of-Gravity Method The Transportation MethodThe Transportation Method

Outline – ContinuedOutline – Continued

Service Location StrategyService Location Strategy How Hotel Chains Select SitesHow Hotel Chains Select Sites The Telemarketing IndustryThe Telemarketing Industry Geographic Information SystemsGeographic Information Systems

Location StrategyLocation Strategy

One of the most important decisions a firm One of the most important decisions a firm makesmakes

Increasingly global in natureIncreasingly global in nature Long term impact and decisions are Long term impact and decisions are

difficult to changedifficult to change The objective is to maximize the benefit of The objective is to maximize the benefit of

location to the firmlocation to the firm

Location and InnovationLocation and Innovation Cost is not always the most important aspect Cost is not always the most important aspect

of a strategic decisionof a strategic decision Four key attributes when strategy is based Four key attributes when strategy is based

on innovationon innovation High-quality and specialized inputsHigh-quality and specialized inputs An environment that encourages investment An environment that encourages investment

and local rivalryand local rivalry A sophisticated local marketA sophisticated local market Local presence of related and supporting Local presence of related and supporting

industriesindustries

Location DecisionsLocation Decisions

Long-term decisions Long-term decisions Decisions made infrequentlyDecisions made infrequently Decision greatly affects both fixed and Decision greatly affects both fixed and

variable costs variable costs Once committed to a location, many Once committed to a location, many

resource and cost issues are difficult to resource and cost issues are difficult to changechange

Location DecisionsLocation DecisionsCountry DecisionCountry Decision Critical Success FactorsCritical Success Factors

1.1. Political risks, government Political risks, government rules, attitudes, incentivesrules, attitudes, incentives

2.2. Cultural and economic issuesCultural and economic issues3.3. Location of marketsLocation of markets4.4. Labor availability, attitudes, Labor availability, attitudes,

productivity, costsproductivity, costs5.5. Availability of supplies, Availability of supplies,

communications, energycommunications, energy6.6. Exchange rates and currency Exchange rates and currency

risksrisksFigure 8.1Figure 8.1

Location DecisionsLocation DecisionsRegion/ Region/

Community Community DecisionDecision

Critical Success FactorsCritical Success Factors1.1. Corporate desiresCorporate desires2.2. Attractiveness of region Attractiveness of region 3.3. Labor availability, costs, attitudes Labor availability, costs, attitudes

towards unionstowards unions4.4. Costs and availability of utilitiesCosts and availability of utilities5.5. Environmental regulationsEnvironmental regulations6.6. Government incentives and fiscal Government incentives and fiscal

policiespolicies7.7. Proximity to raw materials and Proximity to raw materials and

customerscustomers8.8. Land/construction costsLand/construction costs

MN

WI

MI

IL IN OH

Location DecisionsLocation DecisionsSite DecisionSite Decision Critical Success FactorsCritical Success Factors

1.1. Site size and costSite size and cost2.2. Air, rail, highway, and Air, rail, highway, and

waterway systemswaterway systems3.3. Zoning restrictionsZoning restrictions4.4. Nearness of services/ Nearness of services/

supplies neededsupplies needed5.5. Environmental impact issuesEnvironmental impact issues

Factors That Affect Factors That Affect Location DecisionsLocation Decisions

Labor productivityLabor productivity Wage rates are not the only costWage rates are not the only cost Lower productivity may increase total costLower productivity may increase total cost

Labor cost per dayLabor cost per dayProductivity (units per day)Productivity (units per day)

= cost per unit= cost per unit

LodhikaLodhika

= $1.17 per unit= $1.17 per unit$70$7060 units60 units

Lodhika GIDCLodhika GIDC

= $1.25 per unit= $1.25 per unit$25$25

20 units20 units


Exchange rates and currency risksExchange rates and currency risks Can have a significant impact on cost structureCan have a significant impact on cost structure Rates change over timeRates change over time

CostsCosts Tangible - easily measured costs such as utilities, Tangible - easily measured costs such as utilities,

labor, materials, taxeslabor, materials, taxes Intangible - less easy to quantify and include Intangible - less easy to quantify and include

education, public transportation, community, education, public transportation, community, quality-of-lifequality-of-life


AttitudesAttitudes National, state, local governments toward private National, state, local governments toward private

and intellectual property, zoning, pollution, and intellectual property, zoning, pollution, employment stabilityemployment stability

Worker attitudes towards turnover, unions, Worker attitudes towards turnover, unions, absenteeismabsenteeism

Globally cultures have different attitudes towards Globally cultures have different attitudes towards punctuality, legal, and ethical issuespunctuality, legal, and ethical issues


Proximity to marketsProximity to markets Very important to servicesVery important to services JIT systems or high transportation costs may make JIT systems or high transportation costs may make

it important to manufacturersit important to manufacturers

Proximity to suppliersProximity to suppliers Perishable goods, high transportation costs, bulky Perishable goods, high transportation costs, bulky

productsproducts


Proximity to competitorsProximity to competitors Called clusteringCalled clustering Often driven by resources such as natural, Often driven by resources such as natural,

information, capital, talentinformation, capital, talent Found in both manufacturing and service Found in both manufacturing and service

industriesindustries

Growth Competitiveness Index of Growth Competitiveness Index of CountriesCountries

CountryCountry 2004 Rank2004 Rank 2003 Rank2003 RankFinlandFinland 11 11USAUSA 22 22SwedenSweden 33 33TaiwanTaiwan 44 55JapanJapan 99 1111UKUK 1111 1515GermanyGermany 1313 1313CanadaCanada 1515 1616New ZealandNew Zealand 1818 1414FranceFrance 2727 2626RussiaRussia 7070 7070

Clustering of CompaniesClustering of CompaniesIndustryIndustry LocationsLocations Reason for clusteringReason for clustering

Wine makersWine makers Napa Valley (US) Napa Valley (US) Bordeaux region Bordeaux region (France)(France)

Natural resources of Natural resources of land and climateland and climate

Software firmsSoftware firms Silicon Valley, Silicon Valley, Boston, Bangalore Boston, Bangalore (India)(India)

Talent resources of Talent resources of bright graduates in bright graduates in scientific/technical scientific/technical areas, venture areas, venture capitalists nearbycapitalists nearby

Race car Race car buildersbuilders

Huntington/North Huntington/North Hampton region Hampton region (England)(England)

Critical mass of talent Critical mass of talent and informationand information


Theme parksTheme parks OrlandoOrlando A hot spot for A hot spot for entertainment, warm entertainment, warm weather, tourists, and weather, tourists, and inexpensive laborinexpensive labor

Electronic firmsElectronic firms Northern MexicoNorthern Mexico NAFTA, duty free NAFTA, duty free export to USexport to US

Computer Computer hardware hardware manufacturersmanufacturers

Singapore, TaiwanSingapore, Taiwan High technological High technological penetration rate and penetration rate and per capita GDP, per capita GDP, skilled/educated skilled/educated workforce with large workforce with large pool of engineerspool of engineers


Fast food Fast food chainschains

Sites within one Sites within one mile of each othermile of each other

Stimulate food sales, Stimulate food sales, high traffic flowshigh traffic flows

General General aviation aircraftaviation aircraft

Wichita, KansasWichita, Kansas Mass of aviation skillsMass of aviation skills

Factor-Rating MethodFactor-Rating Method Popular because a wide variety of factors can be Popular because a wide variety of factors can be

included in the analysisincluded in the analysis Six steps in the methodSix steps in the method

1.1. Develop a list of relevant factors called critical Develop a list of relevant factors called critical success factorssuccess factors

2.2. Assign a weight to each factorAssign a weight to each factor3.3. Develop a scale for each factorDevelop a scale for each factor4.4. Score each location for each factorScore each location for each factor5.5. Multiply score by weights for each factor for each Multiply score by weights for each factor for each

locationlocation6.6. Recommend the location with the highest point scoreRecommend the location with the highest point score

Factor-Rating ExampleFactor-Rating ExampleCriticalCritical ScoresScoresSuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor WeightWeight SanandSanand SingurSingur SanandSanand SingurSingur

Labor Labor availability availability and attitude and attitude .25.25 7070 6060 (.25)(70) = 17.5(.25)(70) = 17.5 (.25)(60) = 15.0(.25)(60) = 15.0People-toPeople-to car ratiocar ratio .05.05 5050 6060 (.05)(50) = 2.5(.05)(50) = 2.5 (.05)(60) = 3.0(.05)(60) = 3.0Per capitaPer capita incomeincome .10.10 8585 8080 (.10)(85) = 8.5(.10)(85) = 8.5 (.10)(80) = 8.0(.10)(80) = 8.0Tax structureTax structure .39.39 7575 7070 (.39)(75) = 29.3(.39)(75) = 29.3 (.39)(70) = 27.3(.39)(70) = 27.3EducationEducation and healthand health .21.21 6060 7070 (.21)(60) = 12.6(.21)(60) = 12.6 (.21)(70) = 14.7(.21)(70) = 14.7

TotalsTotals 1.001.00 70.470.4 68.068.0

Location Location Break-Even AnalysisBreak-Even Analysis

Method of cost-volume analysis used for Method of cost-volume analysis used for industrial locationsindustrial locations

Three steps in the methodThree steps in the method1.1. Determine fixed and variable costs for each Determine fixed and variable costs for each

locationlocation

2.2. Plot the cost for each location Plot the cost for each location

3.3. Select location with lowest total cost for Select location with lowest total cost for expected production volumeexpected production volume

Location Break-Even Analysis Location Break-Even Analysis ExampleExample

Three locations:Three locations:

RajkotRajkot $30,000$30,000 $75$75 $180,000$180,000AhmadabadAhmadabad $60,000$60,000 $45$45 $150,000$150,000Jamnagar Jamnagar $110,000$110,000 $25$25 $160,000$160,000Selling price = $120Selling price = $120Expected volume = 2,000 unitsExpected volume = 2,000 units

FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost

Total Cost = Fixed Cost + Variable Cost x VolumeTotal Cost = Fixed Cost + Variable Cost x Volume

Location Break-Even Analysis Location Break-Even Analysis ExampleExample

–$180,000 $180,000 –

–$160,000 $160,000 –$150,000 $150,000 –

–$130,000 $130,000 –

–$110,000 $110,000 –

––

$80,000 $80,000 ––

$60,000 $60,000 –––

$30,000 $30,000 ––

$10,000 $10,000 ––

Annu

al c

ost

Annu

al c

ost

| | | | | | |

00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000VolumeVolume

Rajkot Rajkot lowest lowest

costcostAhmadabad lowest Ahmadabad lowest

costcostJamnagar Jamnagar

lowest costlowest cost

Jamnagar cost curve

Jamnagar cost curve

Rajkot c

ost

Rajkot c

ost

curve

curve

Ahmadabad cost

Ahmadabad cost

curvecurve

Figure 8.2Figure 8.2

Center-of-Gravity MethodCenter-of-Gravity Method

Finds location of distribution center that Finds location of distribution center that minimizes distribution costsminimizes distribution costs

ConsidersConsiders Location of marketsLocation of markets Volume of goods shipped to those Volume of goods shipped to those

marketsmarkets Shipping cost (or distance)Shipping cost (or distance)


Place existing locations on a coordinate Place existing locations on a coordinate gridgrid Grid origin and scale is arbitrary Grid origin and scale is arbitrary

Maintain relative distancesMaintain relative distances Calculate X and Y coordinates for ‘center Calculate X and Y coordinates for ‘center

of gravity’of gravity’ Assumes cost is directly proportional to Assumes cost is directly proportional to

distance and volume shippeddistance and volume shipped


x - coordinate =x - coordinate =∑∑ddixixQQii

∑∑QQii

ii

ii

∑∑ddiyiyQQii

∑∑QQii

ii

ii

y - coordinate =y - coordinate =

wherewhere ddixix == x-coordinate of location x-coordinate of location ii

ddiyiy == y-coordinate of location y-coordinate of location ii

QQii == Quantity of goods Quantity of goods moved to or from location imoved to or from location i

Center-of-Gravity MethodCenter-of-Gravity MethodNorth-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago (30, 120)Chicago (30, 120)New York (130, 130)New York (130, 130)

Pittsburgh (90, 110)Pittsburgh (90, 110)

Atlanta (60, 40)Atlanta (60, 40)

Center-of-Gravity MethodCenter-of-Gravity MethodNumber of ContainersNumber of Containers

Store LocationStore Location Shipped per MonthShipped per Month

Chicago (30, 120)Chicago (30, 120) 2,0002,000Pittsburgh (90, 110)Pittsburgh (90, 110) 1,0001,000New York (130, 130)New York (130, 130) 1,0001,000Atlanta (60, 40)Atlanta (60, 40) 2,0002,000

x-coordinate =x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 66.7= 66.7

y-coordinate =y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= 93.3= 93.3

Center-of-Gravity MethodCenter-of-Gravity MethodNorth-SouthNorth-South

East-WestEast-West

120 120 –

90 90 –

60 60 –

30 30 –

–| | | | | |

3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin

Chicago (30, 120)Chicago (30, 120)New York (130, 130)New York (130, 130)

Pittsburgh (90, 110)Pittsburgh (90, 110)

Atlanta (60, 40)Atlanta (60, 40)

Center of gravity (66.7, 93.3)Center of gravity (66.7, 93.3)+

Transportation ModelTransportation Model

Finds amount to be shipped from several Finds amount to be shipped from several points of supply to several points of points of supply to several points of demanddemand

Solution will minimize total production Solution will minimize total production and shipping costsand shipping costs

A special class of linear programming A special class of linear programming problemsproblems

Worldwide Distribution of Worldwide Distribution of Volkswagens and PartsVolkswagens and Parts

Service Location StrategyService Location Strategy

1. Purchasing power of customer-drawing area2. Service and image compatibility with demographics of the

customer-drawing area3. Competition in the area4. Quality of the competition5. Uniqueness of the firm’s and competitors’ locations6. Physical qualities of facilities and neighboring businesses7. Operating policies of the firm8. Quality of management

Location StrategiesLocation StrategiesService/Retail/Professional LocationService/Retail/Professional Location Goods-Producing Location Goods-Producing Location

Revenue FocusRevenue Focus Cost Focus Cost Focus

Volume/revenueVolume/revenueDrawing area; purchasing powerDrawing area; purchasing powerCompetition; advertising/pricingCompetition; advertising/pricing

Physical qualityPhysical qualityParking/access; security/lighting; Parking/access; security/lighting; appearance/imageappearance/image

Cost determinantsCost determinantsRentRentManagement caliberManagement caliberOperations policies (hours, wage Operations policies (hours, wage rates)rates)

Tangible costsTangible costsTransportation cost of raw materialTransportation cost of raw materialShipment cost of finished goodsShipment cost of finished goodsEnergy and utility cost; labor; raw Energy and utility cost; labor; raw material; taxes, and so onmaterial; taxes, and so on

Intangible and future costsIntangible and future costsAttitude toward unionAttitude toward unionQuality of lifeQuality of lifeEducation expenditures by stateEducation expenditures by stateQuality of state and local Quality of state and local governmentgovernment

Table 8.4Table 8.4


TechniquesTechniques Techniques Techniques

Regression models to determine Regression models to determine importance of various factorsimportance of various factors

Factor-rating methodFactor-rating methodTraffic countsTraffic countsDemographic analysis of drawing areaDemographic analysis of drawing areaPurchasing power analysis of areaPurchasing power analysis of areaCenter-of-gravity methodCenter-of-gravity methodGeographic information systemsGeographic information systems

Transportation methodsTransportation methodsFactor-rating methodFactor-rating methodLocational break-even analysisLocational break-even analysisCrossover chartsCrossover charts

Table 8.4Table 8.4


AssumptionsAssumptions Assumptions Assumptions

Location is a major determinant of Location is a major determinant of revenuerevenue

High customer-contact issues are High customer-contact issues are criticalcritical

Costs are relatively constant for a given Costs are relatively constant for a given area; therefore, the revenue function area; therefore, the revenue function is criticalis critical

Location is a major determinant of costLocation is a major determinant of costMost major costs can be identified Most major costs can be identified

explicitly for each siteexplicitly for each siteLow customer contact allows focus on Low customer contact allows focus on

the identifiable coststhe identifiable costsIntangible costs can be evaluatedIntangible costs can be evaluated

Table 8.4Table 8.4

How Hotel Chains Select SitesHow Hotel Chains Select Sites

Location is a strategically important decision in Location is a strategically important decision in the hospitality industrythe hospitality industry

La Quinta started with 35 independent La Quinta started with 35 independent variables and worked to refine a regression variables and worked to refine a regression model to predict profitabilitymodel to predict profitability

The final model had only four variablesThe final model had only four variables Price of the innPrice of the inn Median income levelsMedian income levels State population per innState population per inn Location of nearby collegesLocation of nearby colleges

Telemarketing/Internet Telemarketing/Internet IndustriesIndustries

Require neither face-to-face contact nor Require neither face-to-face contact nor movement of materialsmovement of materials

Have very broad location optionsHave very broad location options Traditional variables are no longer Traditional variables are no longer

relevantrelevant Cost and availability of labor may drive Cost and availability of labor may drive

location decisionslocation decisions

Geographic Information Systems Geographic Information Systems (GIS)(GIS)

New tool to help in location analysisNew tool to help in location analysis Enables more complex demographic analysisEnables more complex demographic analysis Available data bases includeAvailable data bases include

Detailed census dataDetailed census data Detailed mapsDetailed maps UtilitiesUtilities Geographic featuresGeographic features Locations of major servicesLocations of major services

Geographic Information Systems Geographic Information Systems (GIS)(GIS)

AnswersAnswers

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Plant Location Decision

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