LOCATION PLANNING AND ANALYSIS:MANAGING GLOBAL OPERATIONS, Regional Factors

<< DESIGN OF WORK SYSTEMS:Job Design, Specialization, Methods Analysis

MANAGEMENT OF QUALITY:Dimensions of Quality, Examples of Service Quality >>

Production and Operations Management MGT613

Lesson 22

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

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.

Production and Operations Management MGT613

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

Decide on the criteria

Identify the important factors

Develop location alternatives

Evaluate the alternatives

Production and Operations Management MGT613

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

Production and Operations Management MGT613

·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

Location

Fixed

Variable

Cost

Rs 11

Rs 250,000

100,000

150,000

200,000

Example 1: Solution

Fixed

Variable

Total

Costs

A Rs250,000 Rs11(10,000) Rs360,000

100,000

30(10,000)

400,000

150,000

20(10,000)

350,000

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

Production and Operations Management MGT613

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

Annual Output (000)

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.

Production and Operations Management MGT613

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 Method Ma

Plant

Capacity

WAREHOUSE

Lahore

500.0

600.0

5500

5000

Islamabad

700.0

4500

6000

5000

REQUIREMENTS 2500

4500

3000

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 verca.

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 Softwares 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 is obtained

and we call it the optimal solution.

Transportation Method

Plant

Capacity

WAREHOUSE

Dummy

Lahore

1.0

6.0

1.0

5000

2500

Islamabad

7.0

2.00

6.00

5000

4500

500

Dummy

REQUIREMENTS 2500

4500

3000

10000

100

Production and Operations Management MGT613

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.

101

Table of Contents: