Chapter 4
Location and Layout strategies
Dr Selvi @ Kausiliha Vijayan
The Strategic Importance of Location
(1 of 3)
• One of the most important decisions a firm makes
• Increasingly global in nature
• Significant impact on fixed and variable costs
• Decisions made relatively infrequently
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The Strategic Importance of Location
(2 of 3)
• Long-term decisions
• Once committed to a location, many resource and cost
issues are difficult to change
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The Strategic Importance of Location
(3 of 3)
The objective of location strategy is to maximize the
benefit of location to the firm
Options include
1. Expand existing facilities
2. Maintain existing and add sites
3. Close existing and relocating
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Location and Costs
• Location decisions require careful consideration
• Once in place, location-related costs are fixed in place and
difficult to reduce
• Effort spent determining optimal facility location is a good
investment
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Factors That Affect Location
Decisions (1 of 7)
• Globalization adds to complexity
• Drivers of globalization
– Market economics
– Communication
– Rapid, reliable transportation
– Ease of capital flow
– Differing labor costs
• Identify key success factors (KSFs)
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Location Decisions (1 of 3)
Figure 8.1a Key Success Factors
1. Political risks, government rules,
attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
risks
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Location Decisions (2 of 3)
Figure 8.1b Key Success Factors
1. Corporate desires
2. Attractiveness of region
3. Labor availability and costs
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives and fiscal
policies
7. Proximity to raw materials and
customers
8. Land/construction costs
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Location Decisions (3 of 3)
Figure 8.1c Key Success Factors
1. Site size and cost
2. Air, rail, highway, and waterway
systems
3. Zoning restrictions
4. Proximity of services/supplies
needed
5. Environmental impact issues
6. Customer density and
demographics
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Ranking Corruption
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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 key 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 and total the
score for each location
6. Make a recommendation based on the highest point
score
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Factor-Rating Example
Table 8.4 Weights, Scores, and Solution
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Locational Cost-Volume Analysis
• An economic comparison of location alternatives
• Three steps in the method
1. Determine fixed and variable costs for each location
2. Plot the costs for each location
3. Select location with lowest total cost for expected
production volume
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Transportation Model
• Finds amount to be shipped from several points of supply
to several points of demand
• Solution will minimize total production and shipping costs
• A special class of linear programming problems
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Worldwide Distribution of
Volkswagens and Parts
Figure 8.4
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Service Location Strategy
Major Determinants of Volume and Revenue
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics of
the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management
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Location Strategies (1 of 2)
Table 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
REVENUE FOCUS COST FOCUS
Volume/revenue Tangible costs
Drawing area; purchasing Transportation cost of raw material
power Shipment cost of finished goods
Competition; advertising/pricing Energy and utility cost; labor; raw
material; taxes, and so on
Physical quality
Parking/access; Intangible and future costs
security/lighting Attitude toward union
Appearance/image Quality of life
Education expenditures by state
Cost determinants Quality of state and local government
Rent
Management caliber
Operation policies (hours, wage
rates)
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Location Strategies (2 of 2)
Table 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
TECHNIQUES TECHNIQUES
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Locational cost–volume analysis
Traffic counts Crossover charts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
ASSUMPTIONS ASSUMPTIONS
Location is a major determinant of revenue Location is a major determinant of cost
High customer-contact issues are critical Most major costs can be identified explicitly for each site
Costs are relatively constant for a given Low customer contact allows focus on the identifiable
area; therefore, the revenue function costs
is critical Intangible costs can be evaluated
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How Hotel Chains Select Sites (1 of 2)
• Location is a strategically important decision in the
hospitality industry
• La Quinta started with 35 independent variables and
worked to refine a regression model to predict profitability
• The final model had only four variables
– Price of the inn
– Median income levels
– State population per inn
– Location of nearby colleges
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How Hotel Chains Select Sites (2 of 2)
R2 = .51
51% of the profitability is predicted by just these four
variables!
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Geographic Information Systems
(GIS) (1 of 2)
• Important tool to help in location analysis
• Enables more complex demographic analysis
• Available databases include
– Detailed census data
– Detailed maps
– Utilities
– Geographic features
– Locations of major services
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Geographic Information Systems
(GIS) (2 of 2)
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Strategic Importance of Layout
Decisions
The objective of layout strategy is to develop an
effective and efficient layout that will meet the firm’s
competitive requirements
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Layout Design Considerations
• Higher utilization of space, equipment, and people
• Improved flow of information, materials, and people
• Improved employee morale and safer working conditions
• Improved customer/client interaction
• Flexibility
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Types of Layout (1 of 4)
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
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Types of Layout (2 of 4)
1. Office layout: Positions workers, their equipment, and
spaces/offices to provide for movement of information
2. Retail layout: Allocates display space and responds to
customer behavior
3. Warehouse layout: Addresses trade-offs between space
and material handling
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Types of Layout (3 of 4)
4. Fixed-position layout: Addresses the layout requirements
of large, bulky projects such as ships and buildings
5. Process-oriented layout: Deals with low-volume, high-
variety production (also called job shop or intermittent
production)
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Types of Layout (4 of 4)
6. Work-cell layout: Arranges machinery and equipment to
focus on production of a single product or group of
related products
7. Product-oriented layout: Seeks the best personnel and
machine utilizations in repetitive or continuous production
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Layout Strategies (1 of 2)
Table 9.1 Layout Strategies
Blank OBJECTIVES EXAMPLES
Office Locate workers requiring Allstate Insurance
frequent contact close to one Microsoft Corp.
another
Retail Expose customer to high-margin Kroger’s Supermarket
items Walgreen’s
Bloomingdale’s
Warehouse (storage) Balance low-cost storage with Federal-Mogul’s
low-cost material handling warehouse
The Gap’s distribution
center
Project (fixed position) Move material to the limited Ingall Ship Building
storage areas around the site Corp.
Trump Plaza
Pittsburgh Airport
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Layout Strategies (2 of 2)
Table 9.1 Layout Strategies
Blank OBJECTIVES EXAMPLES
Job Shop (process Manage varied material flow Arnold Palmer
oriented) for each product Hospital
Hard Rock Cafe
Olive Garden
Work Cell (product Identify a product family, Hallmark Cards
families) build teams, cross-train team Wheeled Coach
members Ambulances
Repetitive/ Equalize the task time at Sony’s TV assembly
Continuous (product each workstation line
oriented) Toyota Scion
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Good Layouts Consider
• Material handling equipment
• Capacity and space requirements
• Environment and aesthetics
• Flows of information
• Cost of moving between various work areas
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Office Layout (1 of 2)
• 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
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Relationship Chart
Figure 9.1
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Office Layout (2 of 2)
• Three physical and social
aspects
– Proximity
– Privacy
– Permission
• Two major trends
– Information technology
increases flexibility in layout
and employee location
– Dynamic needs for space
and services
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Retail Layout
• Objective is to maximize profitability per square foot of
floor space
• Sales and profitability vary directly with customer exposure
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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
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Store Layout
Figure 9.2
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Retail Layout Objective
• Maximize profitability per square foot of floor space
– Category Management – analysis of profitability of
merchandising plans for hundreds of categories
– Slotting – manufacturers pay slotting fees to retailers
to get the retailers to display (slot) their product
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Slotting
• Contributing factors
– Limited shelf space
– An increasing number of new products
– Better information about sales through POS data
collection
– Closer control of inventory
• Ethical issues
– Stifle new products
– Limit expansion
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Servicescapes
1. Ambient conditions - background characteristics such as lighting,
sound, smell, and temperature
2. Spatial layout and functionality - which involve customer circulation
path planning, aisle characteristics, and product grouping
3. Signs, symbols, and artifacts - characteristics of building design that
carry social significance
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Warehouse and Storage Layouts
• Objective is to find the optimum 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
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Warehousing and Storage Layouts
(1 of 2)
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
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Warehousing and Storage Layouts
(2 of 2)
• Warehouse density tends to vary
inversely with the number of
different items stored
• Automated Storage and Retrieval
Systems (ASRSs) can
significantly improve warehouse
productivity
• Dock location is a key design
element
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Cross-Docking
• Materials are moved directly
from receiving to shipping
and are not placed in
storage in the warehouse
• Requires tight scheduling
and accurate shipments, bar
code or RFID identification
used for advanced shipment
notification as materials are
unloaded
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Random Stocking
• Typically requires automatic identification systems (AISs)
and effective information systems
• Allows more efficient use of space
• Key tasks
1. Maintain list of “open” locations
2. Maintain accurate records
3. Sequence items to minimize travel, “pick” time
4. Combine picking orders
5. Assign classes of items to particular areas
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Customizing
• Value-added activities performed at the warehouse
• Enables low cost and rapid response strategies
– Assembly of components
– Loading software
– Repairs
– Customized labeling and packaging
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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
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Alternative Strategy
• As much of the project as
possible is completed off-
site in a product-oriented
facility
• This can significantly
improve efficiency but is
only possible when
multiple similar units need
to be created
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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 design or volume changes
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Requirements of Work Cells
• Identification of families of products
• A high level of training, flexibility, and empowerment of
employees
• Self-contained, with its own equipment and resources
• Testing (poka-yoke) at each station in the cell
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Advantages of Work Cells
1. Reduced work-in-process inventory
2. Less floor space required
3. Reduced raw material and finished goods inventories
4. Reduced direct labor cost
5. Heightened sense of employee participation
6. Increased equipment and machinery utilization
7. Reduced investment in machinery and equipment
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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
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Product-Oriented Layouts (1 of 3)
• 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
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Product-Oriented Layouts (2 of 3)
• 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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Product-Oriented Layouts (3 of 3)
Advantages
1. Low variable cost per unit
2. Low material handling costs
3. Reduced work-in-process inventories
4. Easier training and supervision
5. Rapid throughput
Disadvantages
1. High volume is required
2. Work stoppage at any point ties up the whole operation
3. Lack of flexibility in product or production rates
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McDonald's Assembly Line
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Assembly-Line Balancing
• Objective is to minimize the
imbalance between
machines or personnel while
meeting required output
• Starts with the precedence
relationships
– Determine cycle time
– Calculate theoretical
minimum number of
workstations
– Balance the line by
assigning specific tasks
to workstations
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