Operations
Management
Lecture 31
- Location Strategies
- Layout Strategies
© 2008 Prentice Hall, Inc.
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
8–1
Recap
 Reasons to be globalized
 Issues in operations strategy
 Elements of operations management strategy
 Four international operations strategies
 HR strategy
 Labor Planning
 Work Schedules
 Job design
 Job characteristics
 Benefits of teamwork
 Ethical issues
© 2008 Prentice Hall, Inc.
8–2
Outline
 Location Strategy-Cost and
Innovation
 Factors That Affect Location
Decisions
 Location Decisions
 Methods of Evaluating Location
Alternatives
© 2008 Prentice Hall, Inc.
8–3
Outline
 The Strategic Importance of Layout
Decisions
 Layout Design Considerations
 Types of Layout
 Office Layout
 Retail Layout
 Warehouse and Storage Layout
 Fixed Position Layout
 Process Oriented Layout
 Work Cells
 Repetitive and Product Oriented Layout
© 2008 Prentice Hall, Inc.
8–4
Location Strategy
 One of the most important decisions a
firm makes
 Increasingly global in nature
 Significant impact on fixed and
variable costs
 Decisions made relatively infrequently
 The objective is to maximize the
benefit of location to the firm
© 2008 Prentice Hall, Inc.
8–5
Location and Costs
 Location decisions based on low
cost require careful consideration
 Once in place, location-related
costs are fixed in place and
difficult to reduce
 Determining optimal facility
location is a good investment
© 2008 Prentice Hall, Inc.
8–6
Location and Innovation
 Cost is not always the most important
aspect of a strategic decision
 Four key attributes when strategy is
based on innovation
 High-quality and specialized inputs
 An environment that encourages
investment and local rivalry
 A sophisticated local market
 Local presence of related and
supporting industries
© 2008 Prentice Hall, Inc.
8–7
Location Decisions
 Long-term decisions
 Decisions made infrequently
 Decision greatly affects both fixed
and variable costs
 Once committed to a location,
many resource and cost issues are
difficult to change
© 2008 Prentice Hall, Inc.
8–8
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
© 2008 Prentice Hall, Inc.
8–9
Factor-Rating Method
 Popular because a wide variety of factors
can be included in the analysis
 Six steps in the method
1. Develop a list of relevant factors called
critical success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score
© 2008 Prentice Hall, Inc.
8 – 10
Factor-Rating Example
Critical
Success
Factor
Labor
availability
and attitude
People-tocar ratio
Per capita
income
Tax structure
Education
and health
Totals
Scores
(out of 100)
Weight France Denmark
Weighted Scores
France
Denmark
.25
70
60
.05
50
60
.10
.39
85
75
80
70
(.10)(85) = 8.5 (.10)(80) = 8.0
(.39)(75) = 29.3 (.39)(70) = 27.3
.21
60
70
(.21)(60) = 12.6 (.21)(70) = 14.7
1.00
(.25)(70) = 17.5 (.25)(60) = 15.0
(.05)(50) = 2.5
70.4
(.05)(60) = 3.0
68.0
Table 8.4
© 2008 Prentice Hall, Inc.
8 – 11
Locational
Break-Even Analysis
 Method of cost-volume analysis used for
industrial locations
 Three steps in the method
1. Determine fixed and variable costs for
each location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume
© 2008 Prentice Hall, Inc.
8 – 12
Locational Break-Even Analysis
Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
City
Akron
Bowling Green
Chicago
Fixed Variable
Cost
Cost
$30,000
$75
$60,000
$45
$110,000
$25
Total
Cost
$180,000
$150,000
$160,000
Total Cost = Fixed Cost + (Variable Cost x Volume)
© 2008 Prentice Hall, Inc.
8 – 13
Annual cost
Locational Break-Even Analysis
Example
Figure 8.2
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
|
–
0
Akron
lowest
cost
Chicago
lowest
cost
Bowling Green
lowest cost
|
|
|
|
|
|
500
1,000
1,500
2,000
2,500
3,000
Volume
© 2008 Prentice Hall, Inc.
8 – 14
Center-of-Gravity Method
 Finds location of distribution
center that minimizes distribution
costs
 Considers
 Location of markets
 Volume of goods shipped to those
markets
 Shipping cost (or distance)
© 2008 Prentice Hall, Inc.
8 – 15
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
© 2008 Prentice Hall, Inc.
8 – 16
Center-of-Gravity Method
∑dixQi
x - coordinate =
i
∑Qi
i
∑diyQi
y - coordinate =
i
∑Qi
i
where
© 2008 Prentice Hall, Inc.
dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved to
or from location i
8 – 17
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
© 2008 Prentice Hall, Inc.
|
|
|
|
60
90
120
150
East-West
Figure 8.3
8 – 18
Center-of-Gravity Method
Number of Containers
Store Location
Shipped per Month
Chicago (30, 120)
2,000
Pittsburgh (90, 110)
1,000
New York (130, 130)
1,000
Atlanta (60, 40)
2,000
(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
© 2008 Prentice Hall, Inc.
8 – 19
Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
+
90 –
Center of gravity (66.7, 93.3)
60 –
30 –
|
–
Atlanta (60, 40)
|
30
Arbitrary
origin
© 2008 Prentice Hall, Inc.
|
|
|
|
60
90
120
150
East-West
Figure 8.3
8 – 20
Strategic Importance of Layout
Decisions
The objective of layout strategy
is to develop a cost-effective
layout that will meet a firm’s
competitive needs
© 2008 Prentice Hall, Inc.
8 – 21
Layout Design Considerations
 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
© 2008 Prentice Hall, Inc.
8 – 22
Types of Layout
1. Office layout
2. Retail layout
3. Warehouse layout
4. Fixed-position layout
5. Process-oriented layout
6. Work-cell layout
7. Product-oriented layout
© 2008 Prentice Hall, Inc.
8 – 23
Office Layout
 Grouping of workers, their equipment,
and spaces to provide comfort, safety,
and movement of information
 Movement of
information is main
distinction
 Typically in state of
flux due to frequent
technological
changes
© 2008 Prentice Hall, Inc.
8 – 24
Retail Layout
 Objective is to maximize
profitability per square foot of
floor space
 Sales and profitability vary
directly with customer exposure
© 2008 Prentice Hall, Inc.
8 – 25
Five Helpful Ideas for
Supermarket Layout
1. Locate high-draw items around the
periphery of the store
2. Use prominent locations for high-impulse
and high-margin items
3. Distribute power items to both sides of
an aisle and disperse them to increase
viewing of other items
4. Use end-aisle locations
5. Convey mission of store through careful
positioning of lead-off department
© 2008 Prentice Hall, Inc.
8 – 26
Store Layout
Figure 9.2
© 2008 Prentice Hall, Inc.
8 – 27
Retail Slotting
 Manufacturers pay fees to retailers
to get the retailers to display (slot)
their product
 Contributing factors
 Limited shelf space
 An increasing number of new
products
 Closer control of inventory
© 2008 Prentice Hall, Inc.
8 – 28
Warehousing and Storage Layouts
 Objective is to optimize trade-offs
between handling costs and costs
associated with warehouse space
 Maximize the total “cube” of the
warehouse – utilize its full volume
while maintaining low material
handling costs
© 2008 Prentice Hall, Inc.
8 – 29
Warehousing and Storage Layouts
Material Handling Costs
 All costs associated with the transaction
 Incoming transport
 Storage
 Finding and moving material
 Outgoing transport
 Equipment, people, material, supervision,
insurance, depreciation
 Minimize damage and spoilage
© 2008 Prentice Hall, Inc.
8 – 30
Warehouse Layout
Traditional Layout
Customization
Storage racks
Conveyor
Staging
Office
Shipping and receiving docks
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8 – 31
Fixed-Position Layout
 Product remains in one place
 Workers and equipment come to site
 Complicating factors
 Limited space at site
 Different materials
required at different
stages of the project
 Volume of materials
needed is dynamic
© 2008 Prentice Hall, Inc.
8 – 32
Process-Oriented Layout
 Like machines and equipment are
grouped together
 Flexible and capable of handling a
wide variety of products or
services
 Scheduling can be difficult and
setup, material handling, and labor
costs can be high
© 2008 Prentice Hall, Inc.
8 – 33
Process-Oriented Layout
Patient A - broken leg
ER
triage
room
Emergency room admissions
Patient B - erratic heart
pacemaker
Surgery
Laboratories
Radiology
ER Beds
Pharmacy
Billing/exit
Figure 9.3
© 2008 Prentice Hall, Inc.
8 – 34
Process-Oriented Layout
 Arrange work centers so as to
minimize the costs of material
handling
 Basic cost elements are
 Number of loads (or people) moving
between centers
 Distance loads (or people) move
between centers
© 2008 Prentice Hall, Inc.
8 – 35
Work Cells
 Reorganizes people and machines
into groups to focus on single
products or product groups
 Group technology identifies
products that have similar
characteristics for particular cells
 Volume must justify cells
 Cells can be reconfigured as
designs or volume changes
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8 – 36
Improving Layouts Using Work Cells
Current layout - workers
in small closed areas.
Cannot increase output
without a third worker and
third set of equipment.
Improved layout - cross-trained
workers can assist each other.
May be able to add a third worker
as additional output is needed.
Figure 9.10 (a)
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8 – 37
Repetitive and Product-Oriented
Layout
Organized around products or families of
similar high-volume, low-variety products
1. Volume is adequate for high equipment
utilization
2. Product demand is stable enough to justify high
investment in specialized equipment
3. Product is standardized or approaching a phase
of life cycle that justifies investment
4. Supplies of raw materials and components are
adequate and of uniform quality
© 2008 Prentice Hall, Inc.
8 – 38
Product-Oriented Layouts
 Fabrication line
 Builds components on a series of machines
 Machine-paced
 Require mechanical or engineering changes
to balance
 Assembly line
 Puts fabricated parts together at a series of
workstations
 Paced by work tasks
 Balanced by moving tasks
Both types of lines must be balanced so that the
time to perform the work at each station is the same
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8 – 39