Operations Management Chap 8 Location Strategies – Flashcards

D) factor-rating method

B) The focus in service is revenue maximization, while the focus in manufacturing is cost minimization.

C) revenue focus

D) cost focus.

B) zoning restrictions

D) cultural issues

C) center-of-gravity

D) determines the best pattern of shipments from several points of supply to several points of demand.

D) Virginia Beach

C) (5,2)

B) utility and labor costs

A) traffic counts

C) proximity to competitors.

C) El Paso

True

False

True

True

True

True

False

False

True

True

False

The center-of-gravity method is a mathematical technique used for finding the location of a distribution center or central collection point that will minimize transportation costs to and/or from multiple existing sites. The method takes into account the location of the markets, the volume of goods shipped to those markets, and the shipping costs. The center-of-gravity method assumes that cost is directly proportional to both the distance and volume shipped. These two values are multiplied for each site to provide a measure of the magnitude of each site's contribution in determining the location of the central point. While this has some intuitive appeal, it should be noted that transportation costs may vary dramatically as distances and volumes change. Smaller volumes might be transported by an independent carrier as a partial load in a truck. Larger volumes may be moved via waterway, railcar, or by a fleet of trucks. Depending on infrastructure, different transportation costs per ton per mile may apply; this is a reality that the basic center-of-gravity model does not address. The model also finds the geometric center or balancing point of all sites without regard to actual transportation route. One analogy for the center-of-gravity model is the balancing point for a serving tray at a restaurant. In reality, transportation is rarely accomplished on a straight line, instead conforming to the realities of a grid system of streets or availability of access to the desired carriers. The model is well suited where all volumes are reasonably static from shipment to shipment and there is one transportation method available to all sites. On a small scale, this might be a method of locating a photocopy machine in an office and, on a larger scale, might be the location of a fire department in an urban setting. The model does not work well when volumes are dramatically different from period to period or where there are significant disparities in the costs between available transportation modes, such as might exist when two port cities might use ocean liners but cities further inland must cross a mountain range and spend time breaking bulk and then trucking materials to their destination.

Tangible costs are those readily identifiable and precisely measured. These costs include utilities, labor, material, taxes and depreciation, transportation of inputs and outputs, and site acquisition and construction. Intangible costs are those that are less easily quantified, such as quality of life, education level of the area, availability of public transportation, and community attitudes towards the company. Productivity is calculated as output divided by input, so the calculation at its most basic level considers quantity or value of outputs compared with the quantity or value of the input or inputs. These inputs are the tangible costs that are explicitly identified in the formula. However, your authors make clear that intangible costs play a role in productivity. The quality and attitude of employees is an intangible cost, but it cannot be denied that low morale, perhaps fueled by poor management or by poor community attitudes towards the company, can adversely impact productivity. It cannot be said with any certainty which set of factors has the greatest impact on productivity, but it is reasonable to assume that both tangible and intangible costs factor into the firm's productivity.

Your authors identify eight major components of volume and revenue for service firms that weight heavily on the selection of the service site. These eight factors are: purchasing power of the customer drawing area; service and image compatibility with demographics of the customer drawing area; competition in the area; quality of the competition; uniqueness of the firm's and competitors' locations; physical qualities of facilities and neighboring businesses; operating policies of the firm; and quality of management. These factors are distinct from the concerns of a typical manufacturer because they are more focused on customers and the potential revenue derived from them. A manufacturer focuses more on costs since the price of the manufactured good, with few exceptions, is more stable from region to region.

The fewest factors are considered by the center-of-gravity method (or transportation model, although this is examined more thoroughly in Module C). This model considers only the transportation costs associated with moving items from a set of sites to one central point. The greatest number of factors is weighed by the factor-rating method, which can consider all tangible and intangible costs that a firm faces. Both of these models require assumptions in their application. The center-of-gravity method requires the modeler to assume that costs per volume-distance are the same for all sites and that there is equal accessibility to all sites. The costs, distances, and volumes could be determined by the firm without too much difficulty. The factor-rating method requires the modeler to select a set of factors that are most important and then to assign degree of importance to the factors. Each site under consideration must be scored for each factor so that a site's overall score can be determined. The greatest difficulty arises in the assignment of the scores and weights for the factors; it is likely that a slight change in either would yield a different choice as a best location. The subjectivity quotient of the factor-rating method leaves it open to greater skepticism than the center-of-gravity method.