LOCATION PLANNING AND ANALYSIS
Lecture Objectives

By studying location planning and analysis, an operations management student should be able to understand the

  • Importance of Location Planning and Analysis
  • Criteria for Manufacturing and Service Location selection considerations
  • Transportation Model
production and operations management  LOCATION PLANNING AND ANALYSIS

Importance of Location

Location decisions are not limited to one time strategic planning decisions for building a new manufacturing or service facility rather most of the organizations face the challenge of increasing their capacity through selection of new locations or extension of existing locations.
As an operations management student, we can focus on the importance of location for any organization through various departments of the organization.

  • Accounting which prepares cost estimates for changing locations as well as operating at new locations.
  • Distribution which seeks warehouse layouts that make material handling easier and customer response shorter.
  • Importance of Location
  • Engineering which considers the impact of product /service location choices.
  • Finance which performs the financial analysis for investments in new locations.
  • Human Resources, which hires and trains employees to support new locations or relocations of operations.
  • Management Information Systems which provide information technologies that link operations at different locations.
  • Importance of Location
  • Marketing which assesses new locations and revised locations that are popular with the customers.
  • Operations Management which seeks and finalizes locations that create, sustains, protect and project the best performance criteria for the whole organization.

Location plays an important role for every business whether new or existing. We can refer to the same airport example we discussed in our earlier lectures before. The airport is not only crowded but fails to separate the different services it provides to different categories of individuals present at the airport.
The airport may need to explain its existing facility. In Pakistan too, we have seen new airports set up at Karachi, Lahore and Islamabad which cater to greater traffic of the aero planes and more passengers. Location decisions play an integral part of the strategic planning process of every organization. It is important to learn about the need and nature of location decisions. As a part of his routine responsibilities a senior Operations Manager often carries out the evaluation of different available locations.

Globalization and Geographic Dispersion of Operations

Globalization has affected Pakistan tremendously. A number of Multi National Corporations are operating and functioning in Pakistan. It is important to spend some time in understanding how globalization makes it necessary and pertinent for a MNC to disperse and spread its scope and function of Operation. It would be more correct if try to understand the philosophy of MNC’s not operating in certain regions or certain particular countries. The western worlds call these the disadvantages of Globalization, if an organization decides to pack up its business and leave a host company.

Disadvantages to Globalization

The common disadvantages which lead to a MNC forgoing globalization includes.

  • Handing over proprietary Technology to host countries.
  • Political risks.
  • Poor Employee (Managers and worker) skills.
  • Slow customer response time.
  • Effective communication between interfaces difficult

Managing Global Operations
When organizations become global they often end up paying a heavy price in terms of managing complex managerial issues and challenges.

  • Host country languages
  • Host Country Norms and Customs.
  • Workforce management
  • Unfamiliar laws and regulations.
  • Unexpected Cost mix.

Need for Location Decisions

Quite often MNC’s move to a host country with a lot of hype and propaganda of bringing jobs to the local labour but the reality is its own need to increase its revenue and profits. Most of the time the need for location decision focuses on

  • Marketing Strategy
  • Cost of Doing Business
  • Growth
  • Depletion of Resources

Nature of Location Decisions

Location Decisions are primarily strategic in nature and have certain objectives and options attached

• Strategic Importance

1.  Long term commitment/costs

2.  Impact on investments, revenues, and operations

3.  Supply chains

  • Objectives

1.  Profit potential

2.  No single location may be better than others

3.  Identify several locations from which to choose

  • Options

1.  Expand existing facilities

2.  Add new facilities

3.  Move

Making Location Decisions

1.  Decide on the criteria

2.  Identify the important factors

3.  Develop location alternatives

4.  Evaluate the alternatives

5. Make selection Location Decision Factors

Regional Factors

  • Location of raw materials
  • Location of markets
  • Labor factors
  • Climate and taxes

Community Considerations

  • Quality of life
  • Services
  • Attitudes
  • Taxes
  • Environmental regulations
  • Utilities
  • Developer support

Site Related Factors

  • Land
  • Transportation
  • Environmental
  • Legal

Multiple Plant Strategies

1.  Product plant strategy

2.  Market area plant strategy

3. Process plant strategy Mostly mix of all three

Factors Affecting Location Decisions

The process of determining a geographic site for firms operations takes into account both manufacturing and marketing aspects. We just focus on the manufacturing aspects as its more closely related to Operations Management

Manufacturing

  • Favorable Labor Climate
  • Proximity to markets.
  • Quality of Life
  • Proximity of Suppliers and Resources.
  • Proximity to the Parent Company’s facilities.
  • Utilities, Taxes and Real estate costs.
  • Other factors ( expansion, construction costs, and location near the highway or main railways)

Dominant Factors in Services

Look for concept check information provided by our expert. We also present the following dominant factors in selection of locations for services.

  • Proximity to Customers.
  • Transportation costs and proximity to markets.
  • Location of competitors.
  • Site specific factors.

Trends in Locations

Foreign producers locating in different host countries even Pakistan

  • Currency fluctuations
  • Just-in-time manufacturing techniques
  • Micro-factories
  • Information Technology

Evaluating Locations

Cost-Profit-Volume Analysis

  • Determine fixed and variable costs
  • Plot total costs
  • Determine lowest total costs

Location Cost-Volume Analysis

Assumptions

  • Fixed costs are constant
  • Variable costs are linear
  • Output can be closely estimated
  • Only one product involved

Example 1: Cost-Volume Analysis

The quantity is 10,000 and the Fixed and variable costs for four potential locations

production and operations management  LOCATION PLANNING AND ANALYSIS

Example 1: Solution

Fixed Variable Total
Costs Costs Costs
A Rs250,000 Rs11(10,000) Rs360,000
B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000

Example 1: Solution

  • We calculate the variable costs by multiplying the unit cost with the given quantity and calculate total costs for all four locations
  • We also graph them to decide effectively, the total costs are graphed and we see that for 10,000 units clearly location c has an advantage, beyond 10,000 units, diseconomies of scales set in and makes Location C look less lucrative.
  • We select the Location for which the total cost is the lowest.
  • Our Location C, shows the lowest total cost for an equal quantity of 10,000 units.

Rs(000)

800 700 600 500 400 300 200 100

0

production and operations management  LOCATION PLANNING AND ANALYSIS

Evaluating Locations

Operations Manager can evaluate business site locations by making use of the following three techniques

1.  Transportation Model Decision based on movement costs of raw materials or finished goods

2.  Factor Rating Decision based on quantitative and qualitative inputs

3.  Center of Gravity Method Decision based on minimum distribution costs

Transportation Method

Transportation Method is a quantitative approach that can help solve multiple facility location problems. It is used to determine the allocation pattern that can be used to minimize the cost of shipping products from two or more plants or sources of supply to two or more warehouses or destinations.

  • Based on Linear Programming.
  • It does not solve all the problems of the multiple facility location.
  • It only finds the best shipping pattern between plants and warehouses for a particular set of plant locations with a given capacity.
  • The Operations manager or logistics analyst must try a variety of location-capacity combinations and use this to find the optimal distribution for each alternative.
  • Distribution costs (variable shipping and possible variable production costs) are important inputs in evaluating a particular location allocation combination.
  • Investments costs and other fixed costs are also considered.
  • Qualitative factors (like land and construction cost against annual profits) are also included in the analysis for each location capacity combination.

Transportation Method

  • Step I
  • Set up the initial matrix/tableau. The basic steps include
  • Create a row for each plant (existing or new) being considered and a column for each warehouse.
  • Add a column for plant capacities and a row for warehouse demands and then insert specific numerical values.

Transportation Method

  • Step II
    • Each cell not in the requirement row or capacity column represents a shipping route from a plant to warehouse. Insert the unit costs in the upper right hand corner of each of these cells.

Example

Pakistan Cellular Mobile Company plans to build a 5000 unit production plant at Islamabad because demand for mobile phones in Pakistan has gone up. The tableau on the next slide shows the unit cost of shipping one truck/loader of mobiles from the existing plant at Lahore and the possible location at Islamabad.

Transportation Met hod
Plant WAREHOUSE Capacity
1 2 3
Lahore 500.0 600.0 5500 5000
Islamabad 700.0 4500 6000 5000
REQUIREMENTS 2500 4500 3000 10000 10000

Matrix/Tableau

  • In transportation method, the sum of the shipments in a row must equal the corresponding plants capacity.
  • Similarly the sum of the shipments to a column must add to corresponding warehouses demand requirements. Thus shipments to Warehouse 1 from Lahore and Islamabad must equal 2500 mobiles.
  • Dummy Plants or Warehouses
  • The prime requirement of transportation model is that the sum of capacities must equal the sum of demands, which happens to be 10,000 units of mobile phones.
  • IN reality the total capacity may exceed total requirements or vice versa.

Dummy Plants or Warehouses

  • If capacity exceeds requirements by say M units, we add extra column ( a dummy warehouse) with a demand of M units and make the shipping costs in the new created cell equal to Rs. 0.
  • Since no shipments are made to the dummy warehouse so it represents an unused plant capacity.
  • Dummy Plants or Warehouses
  • If requirements exceed capacity by say M units, we add extra row ( a dummy plant) with a supply of M units and make the shipping costs ( stock out costs) in the new created cell equal to Rs. 0.
  • Since no shipments are made to the dummy warehouse or plants so this step is automatically taken care of in software used for such issues.
  • Optimal Solution
  • We try to find the least allocation cost process.
  • And we keep on repeating with various options till a new solution with least costs are obtained and we call it the optimal solution.

Transportation Method

Plant WAREHOUSE Capacity
1 2 3 Dummy
Lahore 1.0 2500 6.0 1.0 2500 0 5000
Islamabad 7.0 2.00 4500 6.00 500 0 5000
Dummy 0 0 0 0
REQUIREMENTS 2500 4500 3000 0 10000 10000

• The total transportation cost would be Sum of all Units time X the Unit Cost = 2500(1.0)+4500(2.0)+2500(1.0)+500(6.0) =2500+9000+2500+3000=Rs 17,000. The operations manager needs to be judicious in his approach and may decide to expand the plant at Lahore and build a small plant in Islamabad.

Summary

The lecture focused primarily on the importance of location. Various aspects relating to Location Planning and Analysis were focused. MNC’s reasons for not selecting various countries under the garb of disadvantages in Global Operations were also examined. Site locations for both manufacturing and services were considered. Last but not the least a detailed study of the Transportation Model was also carried out. Students should also know how to make use of cost volume analysis and transportation model to carry out practical investigation of real life time Operations Management problems.

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