Ch 8 Location Strategy Lecture Notes

Ch 8 Location Strategy Lecture Notes - Chapter 8 Location...

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Unformatted text preview: Chapter 8 Location Strategy 1. Strategic Importance of Location Decisions 1. Long-term decisions 2. Difficult to reverse 3. Affect fixed & variable costs- Transportation costs as much as 25% of product price- Other costs: 2. How do industrial and service location decisions differ? • Industrial location decisions focus on - affects transportation and labor costs • Service location decisions focus on - affects amount of customer contact, volume of business. 3. Factors That Affect Location Decisions • Labor Productivity • Exchange Rates and Currency Risks • Costs • Political Risk, Values, and Culture • Proximity to Markets • Proximity to Suppliers • Proximity to Competitors (Clustering) 1 Location Evaluation Methods What are the main location evaluation methods? 1. Factor Rating Method 0.Most widely used location technique 1.Useful for service & industrial locations 2.Rates locations using factors 0. Intangible ( ) factors 0. Example: Education quality, labor skills 1. Tangible ( ) factors 2. Example: Short-run & long-run costs Example 1. Use factor rating method to select a Ski Resort Location Scores Weighted Scores Factors Importanc e Weight CA CO New England CA CO New England Average snow fall/year 8 5 4 3 Topography 9 4 5 4 Size of nearest market 7 3 2 5 21 14 35 Transportation to ski resort 5 4 4 5 20 20 25 Government incentives 3 3 4 4 9 12 12 Number and size of competitors 3 2 5 5 6 15 15 Total 2 2. Locational Break-Even Analysis- Method of cost-volume analysis used for industrial locations- Steps: 0.Determine fixed & variable costs for each location 1.Plot total cost for each location 2.Select location with lowest total cost for expected production volume Example. Target is planning a new warehouse to serve the west. Denver, Santa Fe, and Salt Lake City are under consideration. For each location, annual fixed costs (rent, equipment, and insurance) are $30k, $60k, and $110k respectively. The average variable costs per shipment (labor, transportation, and utilities) are $75, $45, $25 respectively. Plot the total cost lines for all the locations on a single graph. Determine the range over which each community provides the lowest cost . 3 3. Center-of-Gravity Method: 1. Finds location of distribution center serving several destinations 2. Used primarily for services 3. Considers 3. Location of existing destinations 4. Volume to be shipped 5. Constant shipping distance or cost • Center of Gravity Method Steps 3. Place existing locations on a coordinate grid- Grid has arbitrary origin & scale - Maintains relative distances 4. Calculate X & Y coordinates for ‘center of gravity’- Gives location of distribution center- Minimizes transportation cost • Formula: 4 ∑ ∑ = i i i i ix x W W d C ∑ ∑ = i i i i iy y W W d C d ix = x coordinate of location i...
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This note was uploaded on 10/16/2009 for the course BUSQOM 1070 taught by Professor Shang during the Fall '09 term at Pittsburgh.

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Ch 8 Location Strategy Lecture Notes - Chapter 8 Location...

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