Production and Operations Management
(MGT 320)
Location Decision Making
Prepared by: Dr. Heba Adel
8-1
Location Strategy
The objective of location strategy is
to maximize the benefit of location
to the firm
8-2
Location Strategy
One of the most important decisions a
firm makes
Decisions made relatively infrequently
The objective is to maximize the benefit
of location to the firm
8-3
Location and Costs
Location decisions based on low cost
require careful consideration
Once in place, location-related costs are
fixed in place and difficult to reduce
Determining optimal facility location is a
good investment
8-4
Location Decisions
Long-term decisions
Decisions made infrequently
Decision greatly affects both fixed
and variable costs
Once committed to a location,
many resource and cost issues
are difficult to change
8-5
Location Decisions
Country Decision Key Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
Figure 8.1 currency risks
8-6
Factors That Affect
Location Decisions
Proximity to markets
Very important to services
JIT systems or high transportation costs
may make it important to manufacturers
Proximity to suppliers
Perishable goods, high transportation
costs
8-7
Factors That Affect
Location Decisions
Proximity to competitors
Called clustering
Often driven by resources such as natural,
information, capital, talent
Found in both manufacturing and service
industries
8-8
A) Factor-Rating Method
Popular because a wide variety of factors
can be included in the analysis
Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score
8-9
Factor-Rating Problem 1
Key Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
People-to-
car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita
income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education
and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
Totals 1.00 70.4 68.0
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Problem 2
8 - 11
Problem 2
8 - 12
B) Center-of-Gravity Method
Finds location of distribution
center that minimizes distribution
costs
Considers
Location of markets
Volume of goods shipped to those
markets
Shipping cost (or distance)
8 - 13
B) Center-of-Gravity Method
Place existing locations on a coordinate
grid
Calculate X and Y coordinates for ‘center of
gravity’
8 - 14
Center-of-Gravity Method
∑dixQi
i
x - coordinate =
∑Qi
i
∑diyQi
i
y - coordinate =
∑Qi
i
where dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved to
or from location i
8 - 15
Center-of-Gravity Method
North-South
Ramtha (130, 130)
Amman (30, 120)
120 –
Zarqa (90, 110)
90 –
60 –
30 –
Aqaba (60, 40)
–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
8 - 16
Center-of-Gravity Method
Problem 3
Number of Containers
Store Location Shipped per Month
Amman (30, 120) 2,000
Zarqa (90, 110) 1,000
Ramtha (130, 130) 1,000
Aqaba (60, 40) 2,000
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
8 - 17
Center-of-Gravity Method
Problem 3
North-South
Ramtha(130, 130)
Amman (30, 120)
120 –
Zarqa (90, 110)
90 – + Center of gravity (66.7, 93.3)
60 –
30 –
Aqaba (60, 40)
–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Figure 8.3
8 - 18
Center-of-Gravity Method
Problem 4
8 - 19
Center-of-Gravity Method
Problem 4
8 - 20
Center-of-Gravity Method
Problem 4
8 - 21
Center-of-Gravity Method
Problem 4
8 - 22
Center-of-Gravity Method
Problem 4
8 - 23
8 - 24
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