Production and Operations
Management
Unit 5
Unit 5-Location Strategies
• Introduction, Location Planning Process
Concept of facility location
Facility location may be defined as a place where the facility will be set up
for producing goods or services. The need for location selection may arise
under any of the following conditions:
When a business is newly started.
When the existing business unit has outgrown its original facilities and
expansion is not possible; hence a new location has to be found.
When the volume of business or the extent of market necessitates
Establishment of branches.
When the lease expires and the landlord does not renew the lease.
Other social or economic reasons.
Need for Facility Location Planning
• Facility location planning is also required for providing a cost benefit to
the organization.
• The location planning should help in reducing the transportation cost
for the organization. This ultimately helps in decreasing the cost of
production and generating cost advantage for the organization.
• It is also needed to identify proximity to the sources of raw materials
and transportation facilities.
• A facility should ideally be located at a place where raw materials are
available.
• This is necessary for maintaining continuity in the production process.
Procedures and Techniques for Selecting
Facility Location
• An organization follows certain steps to make a correct location
choice. These steps are:
Decide on the criteria for evaluating location alternatives
Identify important factors
Develop location alternatives
Evaluate the alternatives
Make a decision and select the location
Location Strategy
One of the most important decisions a firm makes
Increasingly global in nature
Significant impact on fixed and variable costs
Decisions made relatively infrequently
The objective is to maximize the benefit of location to the firm
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
Location Strategy
• Cost is not always the most important aspect of a strategic decision
• Four key attributes when strategy is based on innovation
• High-quality and specialized inputs
• An environment that encourages investment and local rivalry
• A sophisticated local market
• Local presence of related and supporting industries
Location Strategy
• 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
What determines a country to locate your
business
• Political risks, government rules, attitudes, incentives
• Cultural and economic issues
• Location of markets
• Labor talent, attitudes, productivity, costs
• Availability of supplies, communications, energy
• Exchange rates and currency risks
Considerations for which region to locate
your business
• Corporate desires
• Attractiveness of region
• Labor availability, costs, attitudes towards unions
• Costs and availability of utilities
• Environmental regulations
• Government incentives and fiscal policies
• Proximity to raw materials and customers
• Land/construction costs
Considerations for site decisions
• Site size and cost
• Air, rail, highway, and waterway systems
• Zoning restrictions
• Proximity of services/ supplies needed
• Environmental impact issues
Factors That Affect Location Decisions
• Labor productivity
• Exchange rates and currency risks
Can have a significant impact on cost structure
Rates change over time
• Costs
Tangible - easily measured costs such as utilities, labor, materials,
taxes
Intangible - less easy to quantify and include education, public
transportation, community, quality-of-life
Factors That Affect Location Decisions
• Political risk, values, and culture
National, state, local governments attitudes toward private and
intellectual property, zoning, pollution, employment stability may be
in flux
Worker attitudes towards turnover, unions, absenteeism
Globally cultures have different attitudes towards punctuality, legal,
and ethical issues
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, bulky products
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
Service Location strategies
• Purchasing power of the customers in the area.
• Service and image compatibility with the demographics
• Competition in the area
• Quality of the competition
• Uniqueness of the firm’s and competitor’s locations
Cont’d
• Bank
• Hospital
• Hotels
• Telemarketing industry
• School
