Every firm must use location planning techniques. There are many options for location planning. Corporations choose from expanding an existing location, shutting down one location and moving to another, adding new locations while retaining existing facilities, or doing nothing. There are a variety of methods used to decide the best location or alternatives for the corporation. Methods such as identifying the country, general region, small number of community alternatives, and site alternatives.
Several factors that influence location positioning include the location of raw materials, proximity to the market, climate, and culture. Models for evaluating whether a location is best for an organization consist of cost-profit analysis for locations, the center of gravity model, the transportation model, and factor rating.
This chapter discusses the decision to relocate a facility by considering costs and benefits. If you are planning on moving or acquiring a new facility, there are many factors to consider: the size, the geographic area, culture, transportation costs and others. After a location or locations have been chosen a cost-profit-volume analysis is done.
The main factors that affect location decisions include regional factors, community considerations, and site-related factors. Community factors consist of quality of life, services, attitudes, taxes, environmental regulations, utilities, and development support.
EVALUATING LOCATION ALTERNATIVES (Page 385)
– There are three specific analytical techniques available to aid in evaluating location alternatives:
1. Location Cost-Volume-Profit Analysis:
1. The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or graphically. It involves three steps: 1) For each location alternative, determine the fixed and variable costs, 2) For all locations, plot the total-cost lines on the same graph, and 3) Use the lines to determine which alternatives will have the highest and lowest total costs for expected levels of output. Additionally, there are four assumptions one must keep in mind when using this method:
1. Fixed costs are constant.
2. Variable costs are linear.
3. Required level of output can be closely estimated.
4. There is only one product involved.
2. Total cost = FC = v(Q) where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown below but not in the same format) 1. Factor Rating
1. This method involves qualitative and quantitative inputs, and evaluates alternatives based on comparison after establishing a composite value for each alternative. Factor Rating consists of six steps: 1. Determine relevant and important factors. 2. Assign a weight to each factor, with all weights totaling 1.00. 3. Determine common scale for all factors, usually 0 to 100. 4. Score each alternative. 5. Adjust score using weights (multiply factor weight by score factor); add up scores for each alternative. 6. The alternative with the highest score is considered the best option. 2. Minimum scores may be established to set a particular standard, though this is not necessary. 2. Center of Gravity Method:
1. This technique is used in determining the location of a facility which will either reduce travel time or lower shipping costs. Distribution cost is seen as a linear function of the distance and quantity shipped. The Center of Gravity Method involves the use of a visual map and a coordinate system; the coordinate points being treated as the set of numerical values when calculating averages. If the quantities shipped to each location are equal , the center of gravity is found by taking the averages of the x and ycoordinates; if the quantities shipped to each location are different , a weighted average must be applied (the weights being the quantities shipped). Company Relocating
There are many factors that contribute to a company relocating. Some of the reasons include expanding the market and diminishing resources. For an existing company to relocate, they must weigh their options when planning to relocate elsewhere. They can expand their existing facility, add new ones and keep their existing facilities open, move to another location and shut down one location, or keep things the way they are and not do anything. Globalization has led many companies to set up operations in other countries. Two factors that make relocation appealing are advances in technology and trade agreements. By going global, companies will expand their markets and be able to cut costs in labor, transportation, and taxes. They also have gained ideas for new products and services.
IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE (Page 376)
· factors that influence location decisions are:
o Availability of energy and water
o Proximity to raw materials
o Transportation cost
o Traffic patterns
o Proximity to markets
o Location of competitors
·Once important factors have been determined, an organization will narrow down alternatives to a specific geographic region. These factors that influence location selection are often different depending on whether the firm is a manufacturing or service firm. When deciding on a location, mangers must take into account the culture shock employees might face after a location move. Culture shock can have a big impact on employees which might affect workers productivity, so it is important that mangers look at this.
v IDENTIFYING A COUNTRY
o A decision maker must understand the benefits and risks as well as the probabilities of them occurring
v IDENTIFYING A REGION- 4 major considerations
o Location to Raw Materials: The three most important reasons for a firm to locate in a particular region includes raw materials, perishability, and transportation cost. This often depends on what business the firm is in. o Location to Markets: Profit maximizing firms locate near markets that they want to serve as part of their competitive strategy. A Geographic information system(GIS) is a computer based tools for collecting, storing, retrieving, and displaying demographic data on maps. o Labor Factors : Primary considerations include labor availability, wage rates, productivity, attitudes towards work, and the impact unions may have. o Other : Climate is sometimes a consideration because bad weather can disrupt operations. Taxes are also an important factor due to the fact that taxes affect the bottom line in some financial statements.
v IDENTIFYING A COMMUNITY
o There are many important factors for deciding upon the community in which move a business. They include facilities for education, shopping, recreation and transportation among many others. From a business standpoint these factors include utilities, taxes, and environmental regulation.
v IDENTIFYING A SITE
o The main considerations in choosing a site are land, transportation, zoning and many others. When identifying a site I]it is important to consider to see if the company plans on growing at this location. If so, the firm must consider whether or not location is suitable for expansion. There are many decisions that go into choosing exactly where a firm will establish its operations. First, a company must determine the driving factors that will influence which areas are suitable locations.
After these factors have been determined, the company will identify potential countries and examine the pros and cons of establishing operations in these countries. After looking at pro and cons of the different countries and deciding on a country, then decision makers will identify a region within the country. When identifying a region, decision makers must take the four major factors explained above into consideration. The last two stages of the search include choosing a community and a site.
Note: The above part is way too lengthy for this assignment. Summary below..
Summary : There are several ways that are very helpful in evaluating location alternatives, such as locational cost-profit-volume analysis, factor rating, and the center of gravity method. First, let’s take a look at Location Cost-Profit-Volume Analysis.
This analysis can be done numerically or graphically. The procedure for locational cost-profit-volume analysis involves these steps:
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.
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.
Here’re a couple of important formulas to remember:
Total cost = Fixed cost + Variable cost per unit * Quantity or volume of output Total profit = Quantity(Revenue per unit – Variable cost per unit) – Fixed cost
In most situations, other factors besides cost must also be considered. We
will now consider another kind of cost often considered in location decisions: transportation costs.
Transportation costs sometimes play an important role in location decisions. The company can include the transportation costs in a locational cost-volume analysis by incorporating the transportation cost per unit being shipped into the variable cost per unit if a facility will be the sole source or destination of shipments. When there is a problem with shipment of goods from multiple sending points to multiple receiving points, and a new location is to be added to the system, the company should undertake a separate analysis of transportation. In this case, transportation model of linear programming is very helpful. The model is used to analyze each of the configurations considered, and it reveals the minumum costs each would provide. Then the information can be included in the evaluation of location alternatives.
Multiple Plant Manufacturing Strategies (page 381-382)
-When comapnies have several manufacturing facilities t here are several different ways for a company to organize their operations. These ways include: assigning different product lines to different plants, assigning different market areas to different plants, or assigning different processes to different plants. These strategies carry their own cost and managerial implications, but they also carry a certain competitive advantage. There are four different types of plant strategies:
1. Product Plant Strategy
* Products or product lines are produced in separate plants, and each plant is usually responsible for supplying the entire domestic market. * It is a decentralized approach as each plant focuses on a narrow set of requirements that includes specialization of labor, materials, and equipment along product lines. * Specialization involved in this strategy usually results in economies of scale and, compared to multipurpose plants, lower operating costs. * The plant locations may either be widely scattered or placed relatively close to one another.
2. Market Area Plant Strategy
* Here, plants are designed to serve a particular geographic segment of a market. * The individual plants can produce either most, or all of the company’s products and supply a limited geographical area. * The operating costs of this strategy are often times higher than those of product plants, but savings on shipping costs for comparable products can be made. * This strategy is useful when shipping costs are high due to volume, weight, or other factors. * It can also bring the added benefits of faster delivery and response times to local needs. * It requires a centralized coordination of decisions to add or delete plants, or to expand or downsize current plants because of changing market conditions.
3. Process Plant Strategy
* Here, different plants concentrate on different aspects of a process. * This strategy is most useful when products have numerous components; separating the production of components results in less confusion than if all the production were done in the same location. * A major issue with this strategy is the coordination of production throughout the system, and it requires a highly informed, centralized administration in order to be an effective operation. * It can bring about additional shipping costs, but a key benefit is that individual plants are highly specialized and generate volumes that brings economies of scale.
4. General-Purpose Plant Strategy
Plants are flexible and have the ability to handle a range of products * It allows for a quick response to products and market changes, but can be less productive than a more focused approach. * A benefit to this approach is the increase in learning opportunities that happens when similar operations are being done in different plants. Solutions to problems as well as improvements made at one plant can be shared with the other plants
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