Chapter 8 - Location Planning & Analysis

Location choice I has monthly fixed costs of $100,000 and per-unit variable costs of $10. Location choice J has monthly fixed costs of $150,000 and per-unit variable costs of $9. At what volume would these locations have equal total costs? 1. 50,000 units 2. 25,000 units 3. 60,000 units 4. 40,000 units 5. 30,000 units

1. 50,000 units Divide the difference in fixed costs by the difference in variable costs. Or: 9 * 50,000 + 150,000 = 600,000 10 * 50,000 + 100,000 = 600,000

The general procedure for making location decisions usually consists of the following steps:

1. Decide on the criteria to use for evaluating location alternatives, such as increased revenues or community service. 2. Identify important factors, such as location of markets or raw materials. 3.Develop location alternatives: a. Identify a country or countries for location. b. Identify the general region for a location. c. Identify a small number of community alternatives. d. Identify site alternatives among the community alternatives. 4. Evaluate the alternatives and make a selection. Step 1 is simply a matter of managerial preference.

The following procedure is used to develop a factor rating:

1. Determine which factors are relevant (e.g., location of market, water supply, parking facilities, revenue potential). 2. Assign a weight to each factor that indicates its relative importance compared with all other factors. 3. Decide on a common scale for all factors (e.g., 1 to 100), and set a minimum acceptable score if necessary. 4. Score each location alternative. 5. Multiply the factor weight by the score for each factor, and sum the results for each location alternative. 6. Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score.

Benefits of globalization:

1. Markets 2. Cost savings 3. Legal and regulatory 4. Financial 5. Other

Risks of globalization:

1. Political 2. Terrorism 3. Economic 4. Legal 5. Ethical 6. Cultural

Disadvantages of globaliztion:

1. Transportation costs 2. Security costs 3. Unskilled labor 4. Import restrictions 5. Criticisms

Which of the following is least important as a consideration for a firm at the beginning of a supply chain? 1. Access to transportation infrastructure 2. Access to productive labor 3. Access to end consumers 4. Proximity to customers 5. Access to resources

3. Access to end consumers Firms at the beginning of the supply chain are far-removed from final consumers.

Some communities offer financial and other incentives to ______ new businesses. 1. Incorporate 2. Tax 3. Marginalize 4. Attract 5. Zone

4. Attract Businesses often weigh such incentives in their location decision processes.

Which one is not usually listed as a regional factor in location decisions? A) taxes B) nearness to raw materials. C) labor costs. D) nearness to markets. Taxes are often state/community factors.

A) taxes Taxes are often state/community factors.

The first step in location planning and analysis is: A) Develop a reasonable set of alternatives. B) Determine the criteria upon which the decision will be made. C) Identify factors that are important.

B) Determine the criteria upon which the decision will be made. Every step in the process must relate to the decision criteria.

Which statement about location decisions is not true? A) Mistakes can be difficult to overcome. B) The goal is to find the optimal location. C) Both fixed and variable costs can be affected. D) Decisions are often long term.

B) The goal is to find the optimal location. The goal is to identify a good location; with so many variables, unknowns, and choices, the ability to identify an optimal location is minimal.

The tool that is provides demographic information for location analysis is: A) factor rating method B) geographic information system C) center of gravity method D) transportation model

B) geographic information system

Which reason would not generally be cited for locating in a third world country? A) nearness to raw materials. B) lower labor costs. C) increased output quality. D) nearness to markets.

C) increased output quality. Third world countries tend to be less sophisticated in the area of quality.

Location planning for secondary schools would most likely focus on factors of a A) region B) community C) site

C) site Region and community are predetermined.

Multiple plant manufacturing strategies include all of these except: A) product plant B) process plant C) market area plant. D) core plant

D) core plant

Centralized distribution generally yields scale economies as well as tighter control than decentralized distribution, but it sometimes incurs higher transportation costs.

Decentralized distribution tends to be more responsive to local needs.

Total Cost =

FC + V * Q FC = Fixed cost V = variable cost per unit Q = Quantity of volume of output

The center of gravity method is a location planning technique that determines a composite score from weighted factor evaluation.

False Factor scoring determines a composite score from weighted factor evaluation.

You can't make a mistake by locating where labor costs are low.

False Labor costs are only occasionally a primary consideration in location decisions.

Location decisions are basically one-time decisions usually made by new organizations.

False Most organizations face location decisions over time.

The linear programming model of a transportation problem has one goal - the maximization of its objective function.

False Typically it's the minimization of the objective function.

Technology has made communication with global operations as easy as local communication.

False While technology has made some facets of global operations easier, other facets are still difficult.

The benefits of having global locations generally outweigh the disadvantages.

False. Each case is different and must be analyzed.

The transportation model is used to decide which form of transportation will minimize costs.

False. It is used to determine optimal shipping/receiving routes.

Factors used in location analysis for services and manufacturing are often quite similar.

False. The factors are usually quite different.

In the factor rating system, the most important factor is given a rating of 10, and less important factors are given lower ratings.

False. The sum of all weights is 1.00.

Companies may seek global locations to overcome miscommunication and cultural differences.

False. These are two risks that can be associated with global locations.

Zoning and land costs can be key regional considerations in location analysis.

False. They are site factors.

Climate and taxes are often key site considerations in location planning.

False. They are typically regional factors.

A breakeven point in location analysis is where location alternatives have the same total cost.

False. It is the output at which total costs are met.

Software systems known as GIS help in location analysis. The initials GIS stand for _______.

Geographic Information System

In manufacturing, the potentially dominating factors usually include availability of an abundant energy and water supply and proximity to raw materials.

In service organizations, possible dominating factors are market related and include traffic patterns, convenience, and competitors' locations, as well as proximity to the market.

The center of gravity method: Method for locating a distribution center that minimizes distribution cost.

It is a method to determine the location of a facility that will minimize shipping costs or travel time to various destinations.

Decision makers must not let the attractiveness of a few factors cloud the decision-making process. There are many factors to take into account when selecting a location.

It is essential to identify the key factors and their relative importance, and then to use that information to evaluate location alternatives.

The primary considerations related to sites are:

Land, transportation, and zoning or other restrictions.

Firms locate near or at the source of raw materials for three primary reasons:

Necessity, perishability, and transportation costs.

Multiple Plant Manufacturing Strategies

Product Plant Strategy, Market Area Plant Strategy, Process Plant Strategy, General-Purpose Plant Strategy

The primary regional factors involve:

Raw materials, markets, and labor considerations.

microfactories

Small factory with a narrow product focus, located near major markets.

Process Plant Strategy

Strategy in which different plants concentrate on different aspects of a process. Each component of the product is made at a different plant. Processes in different locations, for products with lots of components, highly informed & centralized admin, highly specialized.

Product Plan Strategy

Strategy in which entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market. Products in different locations, decentralized admin, specialization, economies of scale, lower operating costs.

Market Area Plant Strategy

Strategy in which individual plants produce most if not all of a company's products and only supply a limited geographical area. Close to customers, high operating costs, low shipping costs, centralized admin.

General Purpose Plant Strategy

Strategy in which plants are flexible and capable of handling a range of products. This allows for quick response to product or market changes, although it can be less productive than a more focused approach. Flexible, increased learning opportunities,

Locational cost-profit-volume analysis:

Technique for evaluating location choices in economic terms. 1. Determine the fixed and variable costs associated with each location alternative. 2. Plot the total-cost lines for all location alternatives on the same graph. 3. Determine which location will have the lowest total cost for the expected level of output. Alternatively, determine which location will have the highest profit.

The economic comparison of location alternatives is facilitated by the use of cost-profit-volume analysis.

The analysis can be done numerically or graphically.

Location decisions are strategic:

They can have a significant impact on the success or failure of a business.

The locational cost-profit-volume analysis method assumes the following:

This method assumes the following: 1. Fixed costs are constant for the range of probable output. 2. Variable costs are linear for the range of probable output. 3. The required level of output can be closely estimated. 4. Only one product is involved.

Two key factors that have made globalization attractive and feasible for business organizations.

Trade agreements and technological advances.

As a result of the factor rating analysis, a manager may sometimes reject all of the alternatives under consideration when the composite scores are below the minimum threshold value.

True

Regional factors can include location of markets or location of raw materials.

True

The location of many businesses is often a function of where the originator was located at the time the business was started.

True

As a result of the factor rating analysis, a manager may sometimes reject all of the alternatives under consideration when the composite scores are below the minimum threshold value.

True If a minimum score is necessary, no alternative may be suitable.

A microfactory is a small factory that has a narrow product focus and is located near major markets.

True.

Factor rating includes both qualitative and quantitative inputs.

True.

In location analysis, service organizations tend to be revenue focused, whereas manufacturers tend to be cost focused.

True.

The center of gravity method is used to minimize travel distances.

True.

The center of gravity method treats shipping cost as a linear function of the shipping distance.

True.

When businesses of the same type locate near similar businesses, that is referred to as clustering.

True.

The owner of Genuine Subs, Inc., hopes to expand the present operation by adding one new outlet. She has studied three locations. Each would have the same labor and materials costs (food, serving containers, napkins, etc.) of $1.60 cents per sandwich. Sandwiches sell for $2.56 each in all locations. Rent and equipment costs would be $5,070 per month for location A, $5,580 per month for location B, and $5,710 per month for location C. a. Determine the volume necessary at each location to realize a monthly profit of $9,500. b-1. If expected sales at A, B, and C are 20,200 per month, 22,500 per month, and 23,400 per month, respectively, calculate the profit of the each locations? b-2. Which location would yield the greatest profits?

a. 9,500 = $2.56 * X - $1.60 * X + 5,070 2.56X - 1.6X + 5,070 = 9,500 .96X + 5,070 = 9,500 .96X = 4430 X = 4,614.58 X = 4,615 (Location A) Location B = 4,083 Location C = 3,948 b-1. A. (20,200 * 2.56) - (20,200 * 1.60) + 5,070 = $14,322 B. (22,500 * 2.56) - (22,500 * 1.60) + 5,580 = $16,020 C. (23,400 * 2.56) - (23,400 * 1.60) + 5,710 = $16,754 b-2. C at $16,754

When businesses locate near similar businesses it is referred to as:

clustering.

Location Options:

do nothing relocate from one location to another add a new location expand an existing facility All of these should or might be considered.

A geographic information system (GIS)

is a computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps.

Factor rating

is a general approach that is useful for evaluating a given alternative and comparing alternatives. General approach to evaluating locations that includes quantitative and qualitative inputs.

Very often, location decisions are long term and involve substantial cost...

so it is important to devote an appropriate amount of effort to selecting a location.

It is important to also factor in the impact that location choices will have on the:

supply chain.

The top three factors in determining where to locate international manufacturing facilities are:

talent, labor costs, and energy costs.

Primary labor considerations are:

the cost and availability of labor, wage rates in an area, labor productivity and attitudes toward work, and whether unions are a serious potential problem.

The method for evaluating location alternatives which minimizes shipping costs between multiple sending and receiving locations is: MODI analysis factor rating analysis linear regression analysis transportation model analysis cost-volume analysis

transportation model analysis Transportation model analysis minimizes shipping costs between multiple sending and receiving locations.