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CHAPTER 10

Facility Location in a Global Environment
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1. Discuss location as a strategic decision.
2. Discuss the quantitative and qualitative factors
   influencing the location decision.
3. Integrate the qualitative factors with the
   quantitative factors in order to make effective
   location decisions.
4. Describe how the location decision influences
   other operating decisions.
5. Explain the international ramifications of the
   location decision

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Introduction

• Facility location is the placement of a facility
  with respect to customers, suppliers, and other
  facilities with which it interacts.
• Location should be viewed as a long-term,
  strategic decision because it has a major impact
  on the organization's ability to compete.
• 1. Long-term commitment
• 2. Linked to customer base
• 3. Regional facility supplies specific area
• 4. Product facility supplies globally
• 5. Combination of regional and product
  facilities

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Factors Affecting the Location Decision

• Quantitative factors for manufacturers include
• Labor costs
• Material costs
• Transportation into and out of the facility
• Utilities, taxes, real estate costs, and
  construction costs
• Government incentives

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Factors Affecting the Location Decision--
Continued

• Manufacturing firms often examine qualitative
  factors such as
• Labor climate
• Quality of life
• Proximity to customers and market
• Proximity to suppliers and resources

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Factors Affecting Service Operations

• Many of the factors identified with manufacturing
  are still relevant.
• Service provides would consider labor cost,
  taxes, real estate costs, construction costs, and
  government incentives as important elements in a
  location decision.
• Location of competitors may also be an important
  factor for service operations.

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Data for Site inIndianapolis, Indiana
Variable Production Costs
Type Rate
Projected usage
Labor Material Utilities Transportation
Welding Electrical General assembly Sheet
metal Threaded fasteners Electrical wire Natural
gas Electricity In rail Motor carrier Motor
carrier Out motor carrier
10.00/hr. 12.00/hr. 9.00/hr .40/lb. 2.00/100
.06/lineal ft. 4.00/1,000 cu. ft. .06/kilowatt
hr. .03/lb. (sheet metal) .04/lb.
(fasteners) .04/lb (wire) 20/unit (finished)
0.5 hrs./unit 0.3 hrs./unit 1.1 hrs./unit 100
lbs./unit 20/unit 70 lineal ft./unit 500 cu.
ft./unit 200 kilowatt hrs./unit 100lbs./unit 5
lbs./unit 4 lbs./unit 1
(Exhibit 10.1)
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Data for Site inIndianapolis, Indiana-- Continued
Variable Production Costs
Type Rate
Projected usage
2,100,000 175,000,000 25,000,000
Facility Overhead Initial Investment Special
Considerations
Land acquisition costs Building
construction Plant start-up costs Initial
employee training Tax abatement Low-interest
loans Supplementary training expenses
Rates are given from a specific origin to a
specific destination, so distance has been
accounted for.
(Exhibit 10.1)
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Pro Forma Operating Budgetfor One Year
Labor Welding Electric Assembly
Total labor costs Material Sheet metal
Fasteners Wire Total material
costs Utilities Natural gas Electricity
Total utility costs
(10.00/hr.)(.5 hrs./unit)(45,000
units) (12.00/hr.)(.3 hrs./unit)(45,000
units) (9.00/hr.)(1.1 hrs./unit)(45,000
units) (.40/lb.)(100 lbs./unit)(45,000
units) (2.00/100)(20/unit)(45,000
units) (.06/lin.ft.)(70 lin.ft.)(45,000
units) (4.00/1,000 cu./ft.)(500
cu./ft/unit)(45,000 units) (.06/kwh)(200
kwh/unit)(45,000 units)
225,000 162,000 445,500
832,500 1,800,000 18,000 189,000 2,007,000
90,000 540,000 630,000
(Exhibit 10.2)
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Pro Forma Operating Budgetfor One Year --
Continued
Transportation Sheet metal Fasteners
Wire Finished product Total
transportation costs Variable costs Facility
overhead Grand total
(.03/lb.)(100 lb./unit)(45,000
units) (.04/lb.)(5lb./unit)(45,000
units) (.04/lb.)(4lb./unit)(45,000
units) (20.00/unit)(45,000)
135,000 9,000 7,200 900,000 1,051,200 4,520,
700 2,100,000 6,620,700
Some overhead costs can be variable, but to
simplify the discussion in this case, we will
assume all overhead costs are fixed.
(Exhibit 10.2)
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The Impact of Location on Costs

• TC (VC)X FC
• where
• TC total cost
• VC variable cost per unit
• X the number of units produced
• FC fixed costs

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The Rising Importance of Government Incentives

• Reduction in property taxes
• Low-interest loans
• Subsidized wages

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Evaluating theQualitative Factors

• Integrate qualitative factors
• Determine which factors are relevant to the
  problem
• Weigh each factor
• Rate each site for each factor

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Examples of Indianapolis and Lexington
Indianapolis Lexington
Weight
Raw Score Raw Score Recreational
activities 20 8
7 University research
facilities 40
8 8 Union
activities 40
4 7 Banking services
80 7
6 Available labor pool
60 7
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Examples of Indianapolis and Lexington --
Continued
Indianapolis Lexington

Weighted score Weighted
score Recreational activities
160 140
University research
facilities
320 320 Union
activities
160 280 Banking services
560
480 Available labor pool
420
300 Total
1,620 1,520
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The Location Decision's Effect on Other Operating
Factors

• It can influence costs, selling price, demand,
  educational opportunities for employees and their
  families, and access to financial services.
• Staying at the same site often postpones the
  introduction of new product and process
  technologies.
• Future product innovation, productivity
  increases, quality improvements, and cost
  reductions can be negatively affected

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International Dimensions of Location Decisions

• Why Locate in a Foreign Country?
• Comparative advantage in the quantitative aspects
  of producing goods or services
• Closeness to a market that it serves
• Improved political relationship
• Resources that are scarce in the home country

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Ethical Considerations in the Location Decision

• The decision to locate operations in another
  country brings special ethical problems
• Organizations must monitor the companies they
  subcontract with to make sure that they are
  engaged in legal and ethical practices

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Location Analysis for Service Operations

• The strategic issue of getting close to your
  customers is an integral part of location for
  service operations.
• In many service operations, product does not
  move to customers customers move to the product.
• Cost-benefit analysis is used to make the
  location decision and other decisions for public
  institutions.
• The number and placement of facilities required
  to provide minimum coverage can be determined by
  grouping customers

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The Location Decision Provides the Opportunity to
Be Socially Responsible

• The company should make the investment in the
  best interests not only of the firms
  stockholders but also of its stakeholders.
• The company can develop facilities that
  recapture and recycle their own waste.
• Designing these features into the facility when
  it is built generally provides a much better
  solution than trying to retrofit facilities.