Operations Management

Location and Layout Strategies

OM - location and layout strategy

Objective of Location Strategy

Maximize the benefit of location to the firm

OM - location and layout strategy

Industrial Location Decisions

Cost focus

Revenue varies little between locations

Location is a major cost factor

Affects shipping & production costs (e.g., labor) Costs vary greatly between locations

OM - location and layout strategy

Service Location Decisions

Revenue focus

Costs vary little between market areas

Location is a major revenue factor

Affects amount of customer contact Affects volume of business

OM - location and layout strategy

In General - Location Decisions

Long-term decisions Difficult to reverse Affect fixed & variable costs

Transportation cost

As much as 25% of product price

Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location to firm

OM - location and layout strategy

Location Decision Sequence

Country Region/Community

Site
1995 Corel Corp. 1995 Corel Corp.

1995 Corel Corp.

OM - location and layout strategy

Factors That Affect Location Decisions

OM - location and layout strategy

Location Decision Example

BMW decided to build its first major manufacturing plant outside Germany in Spartanburg, South Carolina.
1995 Corel Corp.

OM - location and layout strategy

Country Decision Factors

Market location

Other

U.S. is worlds largest luxury car market Growing

Lower shipping cost ($2,500/car less)

New plant & equipment would increase productivity (lower cost/car $2,000-3000)

Labor

Lower manufacturing labor costs $17/hr. (U.S.) vs. $27 (Germany) Higher labor productivity 11 holidays (U.S.) vs. OM - location and layout strategy 31 (Germany)

Region/Community Decision Factors

Labor

Lower wages in South Carolina (SC)

Government incentives

$135 million in state & local tax breaks Free-trade zone from airport to plant

No duties on imported components or on exported cars

OM - location and layout strategy

Location Evaluation Methods

Factor-rating method

Locational break-even
analysis

Center of gravity method

Transportation model

OM - location and layout strategy

Factor-Rating Method

Most widely used location technique Useful for service & industrial locations Rates locations using factors

Tangible (quantitative) factors

Example: Short-run & long-run costs

Intangible (qualitative) factors

Example: Education quality, labor skills

OM - location and layout strategy

Steps in Factor Rating Method

List relevant factors Assign importance weight to each factor (such as 0 1) Develop scale for each factor (such as 1 100) Score each location using factor scale Multiply scores by weights for each factor & total for each location Select location with maximum total score

OM - location and layout strategy

Locational Break-Even Analysis

Method of cost-volume analysis used for industrial locations Steps

Determine fixed & variable costs for each location Plot total cost for each location (Cost on vertical axis, Annual Volume on horizontal axis) Select location with lowest total cost for expected production volume

Must be above break-even

OM - location and layout strategy

Location break Even Analysis example

Three locations: Selling price = $120 Expected volume = 2,000 units Fixed Cost Variable Cost Total Cost

City Akron Bowling Green Chicago

$30,000 $60,000 $110,000

$75 $180,000 $45 $150,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

Locational Break-Even Analysis Example

$180,000 $160,000 $150,000 | 0

Annual cost

$130,000 $110,000

$80,000 $60,000

$30,000 $10,000

Akron lowest cost

| |

Bowling Green lowest cost

| | |

Chicago lowest cost

|

500

1,000

1,500

2,000

2,500

3,000

Volume

Center-of-Gravity Method
Place existing locations on a coordinate grid
Grid origin and scale is arbitrary Maintain relative distances

Calculate X and Y coordinates for center of gravity

Assumes cost is directly proportional to distance and volume shipped

Center-of-Gravity Method
North-South

New York (130, 130) Chicago (30, 120)

120

Pittsburgh (90, 110)

90 60 30
|

Atlanta (60, 40)

| | | | |

30 Arbitrary origin

60

90

120

150

East-West Figure 8.3

Center-of-Gravity Method
Number of Containers Shipped per Month 2,000 1,000 1,000 2,000

Store Location Chicago (30, 120) Pittsburgh (90, 110) New York (130, 130) Atlanta (60, 40)

(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

Center-of-Gravity Method
North-South

New York (130, 130) Chicago (30, 120)

120

Pittsburgh (90, 110)

90 60 30
|

Center of gravity (66.7, 93.3)

Atlanta (60, 40)

| | | | |

30 Arbitrary origin

60

90

120

150

East-West Figure 8.3

What is Facility Layout

Location or arrangement of everything within & around buildings

Determines long-run efficiency of operations

Helps achieve a strategy that supports differentiation, low cost or quick response

OM - location and layout strategy

Strategic Importance of Layout

Proper layout enables:

Higher utilization of space, equipment,and people Improved flow of information, materials, or

people

Improved employee morale and safer working conditions Improved customer/client interaction Flexibility to change cross train; use small,

OM - location and layout strategy

Office Layout

Design positions people, equipment, & offices for maximum information flow, comfort and safety Arranged by process or product

Example: Payroll dept. is by process

Relationship chart used Examples

Banks (process) Software company (Pdt)

OM - location and layout strategy

Office Layout Floor Plan

Finance Manager

Accounting
Fin. Acct.

Brand X

OM - location and layout strategy

Retail/Service Layout

Design maximizes product exposure to customers Decision variables

Store flow pattern Allocation of (shelf) space to products

Video

OM - location and layout strategy

Retail Layouts Some Rules of Thumb

Locate high-draw items around the periphery of the store Use prominent locations such as the first or last aisle for high-impulse and high margin items Distribute power items (items that may dominate a shopping trip) to both sides of an aisle, and disperse them to increase the viewing of other items Use end aisle locations because they have a very high exposure rate Convey mission of store by positioning of primary items up front
OM - location and layout strategy

Environmental Dimensions of Servicescapes

Ambient Conditions: background characteristics such as noise level, music, lighting, temperature, and scent. Spatial Layout and Functionality: arrangement of furnishings and equipment creating a visual and functional landscape Signs, Symbols, and Artifacts: selection, orientation, location, and size of objects; serve as explicit or implicit signals
OM - location and layout strategy

Warehouse Layout

Design balances space (cube) utilization & handling cost Similar to process layout

Items moved between dock & various storage areas

Optimum layout depends on

Variety of items stored

Number of items picked

OM - location and layout strategy

Warehouse Layout Floor Plan

Conveyor
Truck

Zones
OM - location and layout strategy

Order Picker

Cross Docking

Transferring goods

from incoming trucks at receiving docks to outgoing trucks at shipping docks

Incoming

Outgoing

Avoids placing goods into storage Requires suppliers provide effective addressing (bar codes) and packaging that provides for rapid transhipment
OM - location and layout strategy

1984-1994 T/Maker Co. 1995 Corel Corp.

Random Stocking

Includes tasks like

Maintain a list of open locations

Maintain accurate records of existing inventory and its locations Sequence items on orders to minimize travel time required to pick orders Combine orders to reduce picking time Assign certain items or classes of items, such as high usage items, to particular warehouse areas so that distance traveled is minimized

OM - location and layout strategy

Fixed-Position Layout

Design is for stationary project Workers and equipment come to site Complicating factors

Limited space at site Changing material needs

Volume of materials needed is dynamic

OM - location and layout strategy

Process-Oriented Layout

Design places departments with large

flows of material or people together Department areas having similar processes located in close proximity

e.g., All x-ray machines in same area

Supports process-focused strategy i.e. product differentiation stategy

OM - location and layout strategy

Emergency Room Layout

E.R.Triage room
Patient A broken leg Patient B - erratic pacemaker

Labs

E.R. beds

Pharmacy

Billing/exit

OM - location and layout strategy

Product-Oriented Layout

Facility organized around product Design minimizes line imbalance

Delay between work stations

Types: Fabrication line; assembly line

OM - location and layout strategy