Information and Operations Management BMG316

1
Information and Operations ManagementBMG316

• Location
• Analysis Methods
• Capacity Options
• Linear Programming Method
• Ruch, Fearon and Weiters. Chapter 3

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Importance of Location

• An improper location for a manufacturing firm
  usually results in increased production and
  distribution costs, placing an otherwise
  efficiently managed company at a competitive
  disadvantage.
• The location of service facilities is critical
  because proximity to the customer and a
  convenient location may be the major factor in
  determining the success of the enterprise.
• (Ruch et al 1992)

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Location Decisions

• Key Factors (1 - 12)
• 1. Proximity to product markets
• Manufacturing firms Distance to the customer
  influences transport time, costs, ability to
  service customer needs.
• Service firms Must locate where customers are.
• eg. Restaurants, Shops, Banks, Petrol Stations
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 2. Relationship to other facilities
• A multilocational company may choose a location
  for another facility to provide the best coverage
  of the market which it serves. In other
  instances, it may be advantageous to group
  several facilities in the one area.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 3. Access to materials and suppliers
• If the raw materials a firm depends on are bulky
  or heavy and costly to transport, a location near
  the source would be cost effective.
• If suppliers of components, equipment and
  materials are concentrated in one area, it may
  make sense to locate near those firms.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 4. Transportation and communications access
• Regular, dependable, low-cost transportation and
  communication facilities are essential for many
  companies. Easy access to major airports, rail,
  communication, motorways etc may be essential.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 5. Labour market concentration
• Objective is to develop and maintain an effective
  work force with a minimum of recruiting and
  training costs. Favourable regional wage rates
  are beneficial where labour cost represents a
  major part of the total operating cost. Firms
  requiring high levels of technical personnel must
  choose locations attractive to these mobile
  employees.
• 
  
  (Ruch et al
  1992)

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Location Decisions

• Key Factors
• 6. Relationship to competition
• The impact of competitors is a complication when
  trying to estimate the sales potential of
  different locations. In some industries,
  locating as far from competitors as possible is
  the best strategy, while in other industries,
  similar firms tend to cluster in one area for
  mutual advantage.

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Location Decisions

• Key Factors
• 7. Climate
• Climate may be a major factor in some production
  processes such as testing facilities or
  technologies that must operate with strict
  controls on temperature, dust, and other
  environmental features
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 8. Quality of life
• Factors which are important in recruiting and
  maintaining an adequate work force are
• Community facilities and living conditions i.e..
• Schools, Churches, Medical facilities,
  Recreational and cultural opportunities,
  available and affordable housing etc.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 9. Laws, regulations, services and taxes
• Local laws and regulations may favour some
  industries and discourage others i.e. pollution
  controls. The firm must judge the value of
  services provided relative to fees.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 10. Facilities cost
• Whether remodeling an existing facility or
  constructing a new one, the firm must consider
  the costs of land and construction as well as the
  availability of suitable sites.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 11. Inducements
• Many communities make financial or tax
  inducements to attract a type of industry or a
  specific firm.
• (Ruch et al 1992)

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Location Decisions

• Key Factors
• 12. Special requirements
• The technologies of some industries impose
  special demands on the location decision.
• (Ruch et al 1996)

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Companies that make location decisions
oftenExamples

• Companies that make location decisions
  infrequently
• Examples

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Analysis Methods

• 1. Weighted Factor Method
• 2. Break-even Analysis
• 3. Simulation

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Weighted Factor Method

• The first method used to select a location is
  the Weighted factor method (also called the
  factor rating method.
• Here critical success factors are chosen by
  management , they are then weighted according to
  their potential to influence the location
  decision

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Weighted Factor Method

• Examples
• Labour Costs(including wages,union
  activity,productivity)
• Labour availability(attitudes,age,distribution
  ,skills)
• Proximity to RM and suppliers

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Weighted Factor Method

• Proximity to markets
• Government attitudes(regulations,policies grants
  and tax breaks)
• Environmental regulations.

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Weighted Factor Method

• Utility availability.(gas,electricity,water and
  their costs)
• Site costs, (land,expansion potential,
  parking,drainage).
• Transportation availability,(rail,air,water,roads)

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Weighted Factor Method

• Quality of life issues(available educational
  opportunities, cost of living, BUPA,sports and
  cultural activities, housing etc).
• Foreign exchange rates( rate and stability of
  rates).
• Quality of Government(stability,honesty,attitudes
  towards business whether new or local)

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Weighted Factor Method

• Each location is given a score against the
  factor
• This score is then multiplied by the rating to
  give a weighted score.
• The weighted score for each factor is then added
  together to give a cumulative score.
• The higher score wins.

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Weighted Factor Method

• A theme park company has two locations in mind
  for its expansion into Europe, Dijon in France
  and Copenhagen in Denmark.
• It has chosen five criteria to select a location
• Labour availability and attitude.
• People to car ratio
• Per capita income
• Tax structure
• Site Costs.

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Weighted Factor Method

• The following have been chosen as the weightings
  based on importance
• Labour availability and attitude. .21
• People to car ratio
  .05
• Per capita income .10
• Tax structure
  .39
• Site Costs.
  .25
• 
  -----------
• 
  1.0

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Weighted Factor Method

• Dijon has been marked as follows (out of 100)
• Labour -----------70
• People to car---- 50
• Per capita Inc----85
• Tax--------------- 75
• Site cost--------- 60

• Copenhagen as follows.(out of 100)
• ----------60
• ----------60
• ----------80
• ----------70
• ----------70

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Weighted Factor Method

• Weighting by factor shows
• Labour (70.21) 14.7
• People (50.05) 2.5
• Income (85.1) 8.5
• Tax (75.39) 29.25
• Site cost(60.25) 15
• -------
• Total Dijon 69.95

• Weighting by factor shows
• (60 .21) 12.6
• (60.05) 3
• (80 .1) 8
• (70 .39) 27.3
• (70.25) 17.5
• --------
• 68.4

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Weighted Factor Method

• Based on this method Dijon is the preferred
  choice , but a change in the law, labour
  practises or incomes could change the parameters
  significantly enough to make the choice an
  uneconomic one.

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Location Break- Even Analysis

• Location Break even analysis is the term given to
  the use of a cost volume analysis model to make
  an economic comparison of location alternatives.
• By identifying the fixed and variable costs and
  graphing them for each location,we can determine
  which location provides the lowest cost for a set
  of circumstances

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Location Break- Even Analysis

• There are three steps to location Break even
  analysis,
• 1) Determine the fixed and variable costs for
  each location.
• 2) Plot the costs for each location.
• 3) select the location with the lowest cost for
  the expected production volume.
• (The graphic representation clearly shows the
  range of volume over which each location is
  preferable.)

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Location Break- Even Analysis

• Example a car carburettors manufacturer is
  considering three locations for a plant, Akron
  Ohio, Bowling Green Kentucky or Chicago ,Illinois
  costs are as follows.

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Location Break- Even Analysis

• Akron FC 30,000 VC 75
• Bowling Green FC 60,000 VC 45
• Chicago FC 110,000 VC 25
• Selling Price
  120
• Expected quantity 2000
• The task is to find the most economical location
  for the expected quantity of 2000 units per year

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Location Break- Even Analysis

• For each of the three locations we can plot the
  fixed cost and the total cost for 2000 units.
• Akron Fixed cost 30000, total cost 30,000
  (2000 75) 180,000
• Bowling Green 60,000 (2000 45) 150,000.
• Chicago 110,000 (2000 25)160,000

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Location Break- Even Analysis
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Location Break- Even Analysis

• To find the crossover points for each location
  some maths has to be performed.
• Consider the crossover point as point X
• The crossover point from Akron to Bowling Green
  is as follows.

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Location Break- Even Analysis

• (Akron)FC VC (X) (Bowling Green) FC VC (X)
  
• 30,000 75X 60,000 45X
• Rearrange as follows, 75X-45X 60,000-30,000
• 30 X 30,000
• X 1,000

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Location Break- Even Analysis

• The crossover point from Bowling Green to Chicago
  is as follows
• (Bowling Green)FC VC (X) (Chicago) FC VC (X)
  
• 60,000 45X 110,000 25 X
• Rearrange as follows, 45X-25X 110,000-60000
• 20 X 50,000
• X 2,500.

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Location Break- Even Analysis

• What this shows is that for volumes less than
  1000 Akron would be the choice, for volumes
  greater than 2500 Chicago is the preferred
  location.
• Volumes between 1001 and 2500 would be best
  produced in Bowling Green.

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Other Capacity Options

• Overtime
• Shifts
• Sub-contracting
• Extension to existing premises
• New premises

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Linear Programming

• Shambles Ltd. Executive Toys expanding range.
• Options
• Move to new premises
• Sub-contract
• Extend existing premises
• Associated costs.
• New premises f/c 250,000, v/c 500 per toy.
• Sub-contracting v/c 1,250 per toy.
• Extension f/c 50,000, v/c 750 per toy.
• For what range of output would each alternative
  give the lowest cost?

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Linear Programming

• FC Vol.(X) (subcontract) FC Vol.(X)
  Extension.
• 0 1250 X 50,000 750 X
• 1250X-750X 50,000.
• 500X 50,000
• X 100

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Linear Programming

• FC Vol.(X) (Extension) FC Vol.(X) (Move
  premises).
• 50,000 750 X 250,000 500 X
• 750X-500X250,000 - 50,000.
• 250X 200,000
• X 800.

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Linear Programming

• Therefore for volumes under 100 subcontracting is
  the lowest cost option.
• For volumes from 101 to 800 the extension is the
  lowest option
• For over 801,the new premises is the best option.