Ch.

8 Location Planning and Analysis

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Summary

Location Planning
Every firm must use location planning techniques. There are many options for location planning.
Corporations choose from expanding an existing location, shutting down one location and moving to
another, adding new locations while retaining existing facilities, or doing nothing. There are a variety of
methods used to decide the best location or alternatives for the corporation. Methods such as identifying
the country, general region, small number of community alternatives, and site alternatives.

Several factors that influence location positioning include the location of raw materials, proximity to the
market, climate, and culture. Models for evaluating whether a location is best for an organization consist
of cost-profit analysis for locations, the center of gravity model, the transportation model, and factor
rating.

This chapter discusses the decision to relocate a facility by considering costs and benefits. If you are
planning on moving or acquiring a new facility, there are many factors to consider: the size, the
geographic area, culture, transportation costs and others. After a location or locations have been chosen
a cost-profit-volume analysis is done.

The main factors that affect location decisions include regional factors, community considerations, and site-related
factors. Community factors consist of quality of life, services, attitudes, taxes, environmental regulations, utilities,
and development support.

EVALUATING LOCATION ALTERNATIVES (Page 385)

There are three specific analytical techniques available to aid in evaluating location alternatives:

1. Location Cost-Volume-Profit Analysis:

1. The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or graphically. It
involves three steps: 1) For each location alternative, determine the fixed and variable costs, 2) For all
locations, plot the total-cost lines on the same graph, and 3) Use the lines to determine which alternatives
will have the highest and lowest total costs for expected levels of output. Additionally, there are four
assumptions one must keep in mind when using this method:
1. Fixed costs are constant.
2. Variable costs are linear.
3. Required level of output can be closely estimated.
4. There is only one product involved.
5.
2. Total cost = FC = v(Q)

where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown below but not in the
same format)

1. Factor Rating
1. This method involves qualitative and quantitative inputs, and evaluates alternatives based on comparison
after establishing a composite value for each alternative. Factor Rating consists of six steps:
1. Determine relevant and important factors.
2. Assign a weight to each factor, with all weights totaling 1.00.
3. Determine common scale for all factors, usually 0 to 100.
4. Score each alternative.
5. Adjust score using weights (multiply factor weight by score factor); add up scores for each alternative.
6. The alternative with the highest score is considered the best option.
2. Minimum scores may be established to set a particular standard, though this is not necessary.
2. Center of Gravity Method:
o This technique is used in determining the location of a facility which will either reduce travel time or lower
shipping costs. Distribution cost is seen as a linear function of the distance and quantity shipped. The
Center of Gravity Method involves the use of a visual map and a coordinate system; the coordinate points
being treated as the set of numerical values when calculating averages. If the quantities shipped to each
location are equal , the center of gravity is found by taking the averages of the x and y coordinates; if the
quantities shipped to each location are different , a weighted average must be applied (the weights being
the quantities shipped).

Company Relocating
There are many factors that contribute to a company relocating. Some of the reasons include expanding
the market and diminishing resources. For an existing company to relocate, they must weigh their options
when planning to relocate elsewhere. They can expand their existing facility, add new ones and keep
their existing facilities open, move to another location and shut down one location, or keep things the way
they are and not do anything. Globalization has led many companies to set up operations in other
countries. Two factors that make relocation appealing are advances in technology and trade agreements.
By going global, companies will expand their markets and be able to cut costs in labor, transportation,
and taxes. They also have gained ideas for new products and services.

IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE (Page 376)

factors that influence location decisions are:
Manufacturing :
o Availability of energy and water
o Proximity to raw materials
o Transportation cost
Service:
o Traffic patterns
o Proximity to markets
o Location of competitors
important factors have been determined, an organization will narrow down alternatives to a specific
geographic region. These factors that influence location selection are often different depending on whether the firm
is a manufacturing or service firm. When deciding on a location, mangers must take into account the culture shock
employees might face after a location move. Culture shock can have a big impact on employees which might affect
workers productivity, so it is important that mangers look at this.

v IDENTIFYING A COUNTRY
o A decision maker must understand the benefits and risks as well as the probabilities of them occurring

v IDENTIFYING A REGION- 4 major considerations

o Location to Raw Materials: The three most important reasons for a firm to locate in a particular region
includes raw materials, perishability, and transportation cost. This often depends on what business the firm is in.
o Location to Markets: Profit maximizing firms locate near markets that they want to serve as part of their
competitive strategy. A Geographic information system(GIS) is a computer based tools for collecting, storing,
retrieving, and displaying demographic data on maps.
o Labor Factors : Primary considerations include labor availability, wage rates, productivity, attitudes towards
work, and the impact unions may have.
o Other : Climate is sometimes a consideration because bad weather can disrupt operations. Taxes are also an
important factor due to the fact that taxes affect the bottom line in some financial statements.

v IDENTIFYING A COMMUNITY
o There are many important factors for deciding upon the community in which move a business. They include
facilities for education, shopping, recreation and transportation among many others. From a business standpoint
these factors include utilities, taxes, and environmental regulation.

v IDENTIFYING A SITE
o The main considerations in choosing a site are land, transportation, zoning and many others. When identifying a
site I]it is important to consider to see if the company plans on growing at this location. If so, the firm must consider
whether or not location is suitable for expansion. There are many decisions that go into choosing exactly
where a firm will establish its operations. First, a company must determine the driving factors that will
influence which areas are suitable locations. After these factors have been determined, the company will
identify potential countries and examine the pros and cons of establishing operations in these countries.
After looking at pro and cons of the different countries and deciding on a country, then decision makers
will identify a region within the country. When identifying a region, decision makers must take the four
major factors explained above into consideration. The last two stages of the search include choosing a
community and a site.

Note: The above part is way too lengthy for this assignment.
Summary below..

Summary : There are several ways that are very helpful in evaluating location alternatives, such as
locational cost-profit-volume analysis, factor rating, and the center of gravity method. First, let's take a
look at Location Cost-Profit-Volume Analysis.

This analysis can be done numerically or graphically. The procedure for locational cost-profit-volume
analysis involves these steps:

1. Determine the fixed and variable costs associated with each location alternative.
2. Plot the total-cost lines for all location alternatives on the same graph.
3. Determine which location will have the lowest total cost for the expected level of output. Alternatively,
determine which location will have the highest profit.

This method assumes the following:

1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.

Here're a couple of important formulas to remember:

Total cost = Fixed cost + Variable cost per unit * Quantity or volume of output
Total profit = Quantity(Revenue per unit - Variable cost per unit) - Fixed cost

In most situations, other factors besides cost must also be considered. We will now consider another kind
of cost often considered in location decisions: transportation costs.

Transportation costs sometimes play an important role in location decisions. The company can include
the transportation costs in a locational cost-volume analysis by incorporating the transportation cost per
unit being shipped into the variable cost per unit if a facility will be the sole source or destination of
 shipments. When there is a problem with shipment of goods from multiple sending points to multiple
receiving points, and a new location is to be added to the system, the company should undertake a
separate analysis of transportation. In this case, transportation model of linear programming is very
helpful. The model is used to analyze each of the configurations considered, and it reveals the minumum
costs each would provide. Then the information can be included in the evaluation of location alternatives.

Multiple Plant Manufacturing Strategies (page 381-382)

-When comapnies have several manufacturing facilities t here are several different ways for a company to
organize their operations. These ways include: assigning different product lines to different plants,
assigning different market areas to different plants, or assigning different processes to different plants.
These strategies carry their own cost and managerial implications, but they also carry a certain
competitive advantage. There are four different types of plant strategies:

1. Product Plant Strategy

 Products or product lines are produced in separate plants, and each plant is usually responsible for
supplying the entire domestic market.
 It is a decentralized approach as each plant focuses on a narrow set of requirements that includes
specialization of labor, materials, and equipment along product lines.
 Specialization involved in this strategy usually results in economies of scale and, compared to
multipurpose plants, lower operating costs.
 The plant locations may either be widely scattered or placed relatively close to one another.

2. Market Area Plant Strategy

 Here, plants are designed to serve a particular geographic segment of a market.

 The individual plants can produce either most, or all of the company's products and supply a limited
geographical area.
 The operating costs of this strategy are often times higher than those of product plants, but savings on
shipping costs for comparable products can be made.
 This strategy is useful when shipping costs are high due to volume, weight, or other factors.
 It can also bring the added benefits of faster delivery and response times to local needs.
 It requires a centralized coordination of decisions to add or delete plants, or to expand or downsize
current plants because of changing market conditions.

3. Process Plant Strategy

 Here, different plants concentrate on different aspects of a process.

 This strategy is most useful when products have numerous components; separating the production of
components results in less confusion than if all the production were done in the same location.
 A major issue with this strategy is the coordination of production throughout the system, and it requires a
highly informed, centralized administration in order to be an effective operation.
 It can bring about additional shipping costs, but a key benefit is that individual plants are highly
specialized and generate volumes that brings economies of scale.
 4. General-Purpose Plant Strategy

Plants are flexible and have the ability to handle a range of products

 It allows for a quick response to products and market changes, but can be less productive than a more
focused approach.
 A benefit to this approach is the increase in learning opportunities that happens when similar operations
are being done in different plants. Solutions to problems as well as improvements made at one plant can
be shared with the other plants

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Ch. 9 Management of Quality

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Chapter 9: Management of Quality

Chapter 9 focuses on the importance of quality. It discusses various concepts and tools that can be used
to achieve high quality and continuous improvement. Broadly defined, quality refers to the ability of a
product or service to consistently meet or exceed customer requirements or expectations. Different
customers will have different expectations, so a working definition of quality is customer-dependent.
When discussing quality one must consider design, production, and service. In a culmination of efforts, it
begins with careful assessment of what the customers want, then translating this information into
technical specifications to which goods or services must conform. The specifications guide product and
service design, process design, production of goods and delivery of services, and service after the sale or
delivery.
Some of these consequences of poor quality include loss of business, liability, decreased productivity,
and increased costs. However, good quality has its own costs, including prevention, appraisal, and
failure. A recent and more effective approach is discovering ways to prevent problems, instead of trying to
fix them once they occur.This will ultimately decrease the cost of good quality in the long run.

There are several costs associated with quality:

Appraisal costs - costs of activities designed to ensure quality or uncover defects
Prevention costs - costs of prevention defects from occurring
Failure costs - Costs caused by defective parts or products or by faulty services
Internal failures - failures discovered during production
External failures - failures discovered after delivery to the customer
Return on quality (ROQ) - an approach that evaluates the financial return of investments in quality

Chapter 9 discusses key contributors of quality management and several awards for companies who
possess traits of excellent quality management. This chapter defines total quality management (TQM) as
a philosophy that involves everyone in the organization in a continual effort to improve quality and
achieve customer satisfaction. This philosophy concentrates on continuous improvement and quality at
the source. Six sigma is a concept that stresses improving quality, reducing costs, and increasing
customer satisfaction. Lastly, this chapter gives several examples of quality tools, which include
flowcharts, check sheets, histograms, pareto analysis, scatter diagrams, controls charts, and cause-and-
effect diagrams.

Successful management of quality requires that managers have insights on various aspects of quality.
These include defining quality in operational terms, understanding the costs and benefits of quality,
 recognizing the consequences of poor quality and recognizing the need for ethical behavior.
Understanding dimensions that customers use to judge the quality of a product or service helps
organizations meet customer expectations.

Dimensions of Product Quality

• Performance– main characteristics of the product
• Aesthetics– appearance, feel, smell, taste
• Special features– extra characteristics
• Conformance– how well the product conforms to design specifications
• Reliability– consistency of performance
• Durability– the useful life of the product
• Perceived quality– indirect evaluation of quality
• Service-ability– handling of complaints or repairs

Dimensions of Service Quality

• Convenience– the availability and accessibility of the service
• Reliability– ability to perform a service dependably, consistently, and accurately
• Responsiveness– willingness to help customers in unusual situations and to deal with problems
• Time– the speed with which the service is delivered
• Assurance– knowledge exhibited by personnel and their ability to convey trust and confidence
• Courtesy– the way customers are treated by employees
• Tangibles– the physical appearance of facilities, equipment, personnel, and communication materials
• Consistency– the ability to provide the same level of good quality repeatedly

The Determinants of Quality

Quality of Design – intention of designers to include or exclude features in a product or
service. The starting point of producing quality in products begins in the “design phase”. Designing
decisions may involve product or service size, shape and location. When making designs, designers must
keep in mind customer wants, production or service capabilities, safety and liability, costs, and other
similar considerations.
Quality of conformance- refers to the degree to which goods and services conform to the intent of
the designer. Quality of conformance can easily be affected by factors like: capability of equipment used,
skills, training, and motivation of workers, extent to which the design lends itself to production, the
monitoring process to assess conformance, and the taking of corrective action.
Ease of use - refers to the ease of usage of the product or services for the customers. The term
“ease of use” refers to user instructions. Designing a product with “ease of use” increases the chances
that the product will be used in its intended design and it will continue to function properly and safely.
Without ease of use, companies may lose customers, face sales returns, or legal problems from product
injuries. Ease of use also applies to services. Manufacturers must make sure that directions for
unpacking, assembling, using, maintaining, and adjusting the product are included. Directions for “What
to do when something goes wrong” should also be included. Ease of use makes a consumer very happy
and can help retain customers.
Services offered to the customer after delivery. There will be times when products may fail or
problems with usage may occur. This is when “Service after delivery” is important through recall and
repairs of the product, adjustment, replacement or buys back, or reevaluation of a service.

Having good quality is a competitive advantage against others who offer similar products or services in
the marketplace.
In addition, good quality can:

 Raise Company's Reputation

 Rationalize Premium Prices
 Decrease Liability Costs
 Increase Productivity
 Increase Customer Loyalty
 Increase Customer Satisfaction

Consequence's include:

 loss of business and existing market share

 legal liability
 lack of productivity
 increased costs

Failure to meet quality standards can damage a company's image, reputation or lead to external
criticism. In the manufacturing field, the quality of raw materials or equipment can affect the whole
manufacturing process. If defects or poor quality are not detected on time, companies may face
various costs to solve problems. Discovering and fixing problems on time reduces costs. Quality
costs include prevention (prevent defects from occurring by planning system, training and control
procedures), appraisal (ensure quality or uncover defects by inspections, testings and audits),
and failure (caused by defective parts, products or by faulty services discovered during the
production process - internal or after delivery to the customer - external).
Three well- known awards given annually to recognize quality are:
1. Baldrige Award (given by the U.S. government)
2. European Quality Award
3. Deming Prize (established by the Japanese).

There are also worldwide known quality certifications like ISO 9000 (which is a set of international
standards on quality management and quality assurance, critical to international business) and ISO
14000 (a set of international standards for assessing a company's environmental performance).

Total quality management (TQM) is a constant pursuit of quality that involves everyone in an
organization. The driving force is customer satisfaction; a key philosophy is continuous
improvement. The Japanese use the term kaizen to refer to continuous improvement. Training of
managers and workers in quality concepts, tools, and procedures is an important aspect of TQM.
Teams are an integral part of TQM. Two major aspects of the TQM approach are problem
solving and process improvement.Six-sigma programs are a form of TQM. A six-
sigma improvement project typically has one or more objectives such as: reducing delivery time,
increasing productivity, or improving customer satisfaction. They emphasize the use of statistical and
management science tools on selected projects to achieve business results. There are seven basic
quality tools that an organization can use for problem solving and process improvements.
A flowchart is a visual representation of a process. As a problem-solving tool, a flowchart can help
investigators in identifying possible points in a process where problems occur. The diamond shapes
in the flowchart represent decision points in the process, and the rectangular shapes represent

procedures. They show the direction of “flow” of the steps in the process.arrows
A check sheet is a simple tool frequently used for problem identification. Check sheets provide a
format that enables users to record and organize data in a way that facilitates collection and

analysis.
A histogram can be useful in getting a sense of the distribution of observed values. It is a chart of
an empirical frequency distribution.
Pareto analysis is a technique for focusing attention on the most important problem areas. The idea
is to classify the cases according to degree of importance, and focus on resolving the most

important, leaving the less important. A scatter diagram can be useful in deciding if there is a
correlation between the values of two variables. It is a graph that shows the degree and direction of

relationship between two variables. A correlation may point to a cause of a problem. A control
chart can be used to monitor a process to see if the process output is random. It can help detect the
presence of correctable causes of variation. It is a statistical chart of time-ordered values of sample

statistic. A cause-and-effect diagramoffers a structured approach to the search for the

possible cause(s) of a problem. It is also known as a fishbone diagram because of its shape, or an
Ishikawa diagram, after the Japanese professor who developed the approach to aid workers
overwhelmed by the number of possible sources of problems when problem solving. This helps to
organize problem-solving efforts by identifying categories of factors that might be causing

problems. A run chart can be used to track the values of a variable over time. This can aid in

identifying trends or other patterns that may be occurring.

Important People in Quality

• Walter Shewart
– “father of statistical quality control”
– Control charts
– Variance reduction
• W. Edwards Deming
– Special vs. common cause variation
– The 14 points
-- Deming Prize- Prize estabolished by the Japanese and awarded annually to firms that distinguish themselves with
quality management programs.
• Joseph Juran
– Quality Control Handbook, 1951
– Viewed quality as fitness-for-use
– Quality trilogy– quality planning, quality control, quality improvement
• Armand Feigenbaum
– Quality is a “total field”
– The customer defines quality
• Philip B. Crosby
– Zero defects
– Quality is Free, 1979
• Kaoru Ishikawa
– Cause-and-effect diagram
– Quality circles
– Recognized the internal customer
• Genichi Taguchi
– Taguchi loss function
• Taiichi Ohno and Shigeo Shingo
– Developed philosophy and methods of kaizen
Contributor Key Contributions

Shewhart Control Charts; variance reduction

Deming 14 points; special versus common causes of variation

Juran Quality is fitness-for-use;quality trilogy

Feigenbaum Quality is a total field; the customer defines quality

Crosby Quality is free; zero defects

Ishikawa Cause-and-effect diagrams; quality circles

Taguchi Taguchi loss function

Ohno and Shingo Continuous improvement

DIMENSIONS OF QUALITY
Dimension Example

Performance Everything works: fit and finish, ride, handling, acceleration

Aesthetics Exterior and interior design

Features Convenience: placement of gauges

High tech: GPS system
Safety: anti-skid, airbags

Conformance Car Matches manufacturer's specifications

Reliability Infrequent need for repairs

Durability Useful life in miles, resistance to rust

Perceived quality Top-rated

Serviceability Ease of repair

An emphasis on quality control heightened during WWII. Quality control then evolved to quality
assurance and is now better known as a Strategic Approach, a tool for improving not only
products but also processes and services. Quality can be thought of as the degree to which
performance of a product or service meets or exceeds expectations. Quality should be measured
differently for products and services, and therefore product and service quality are judged on
their own set of dimensions. Responsibility for overall quality lies with top management. Top
management must establish strategies, institute programs for quality, and motivate managers and
workers. Most times managers are on a quest for the quality of an organization as a whole; this is
referred to as Total Quality Management (TQM). TQM involves a continual effort for quality
improvement by everyone in an organization. So in essence, for an organization to meet and
exceed goals of quality control the entire supply chain needs to be involved.
 Consequences of poor quality
There are numerous consequences with poor quality products which can affect a business and a
customer in many different ways. Whether it is a small or large problem, the magnitude of the problem
always affects someone at some point. When a product is designed poorly or lacks in quality, customers
recognize that very quickly, and it can quickly lead to a problem for the business. It does not matter
whether the company is a product or a service oriented company because poor quality will always, most
likely, create negative affects for the firm. Eventaully, the low cost input in the R&D department and the
using cheaper materials will lead to loss of business . Therefore, due to the cost associated with
satisfying the customer, it is best to fix problems in the design phase rather than dealing with it after it's in
the hands of a customer. The sooner the problem with a product or service is identified and remedied, the
better!

Methods for Generating Ideas

Additional tools that are useful for problem solving and process control include:

 Brainstorming
 Affinity diagram
 Quality circles
 Interviewing
 Benchmarking
 5W2H approach
o Who
o What
o When
o Where
o Why
o How
o How much

Brainstorming is used to communicate thoughts and ideas without any criticism. Everyone has equal input
and ideas are shared in order to facilitate problem solving.
Affinity Diagram is used to arrange data into categories that may be analyzed. One of its uses is to group
many responses to similar ideas. It uses the right side of the brain (generates ideas) and the left side of
brain (analyze and organize).
Quality Circles are usually informal meetings between employees to exchange ideas and concerns about
processes.
Interviewing is a tool used by managers to find information from employees through Q & A sessions.
Benchmarking is tool for companies to set standards. It attempts to compare itself to the best in the
industry in order to meet or exceed the standard set. Usually uses these steps: 1. Identify process for
improvement. 2. Identify organization that is the best at that process. 3. Study that organization. 4.
Analyze data. 5. Improve process at your organization.
5W2H approach asks the questions what, why, where, when, who, how, and how much (5 W words and 2
H words). Its purpose is to ask the questions that will lead to improving processes.

Responsibility for Quality

Top Management- has the ultimate responsibility for quality. While they establish strategies for quality,
they also institute programs to improve quality; guide, direct, and motivate managers and workers; and
set an example by being involved in quality initiatives.
Design- Quality products and services begin with design.
 Sales can be lost when the products are not designed well and do not function correctly. Customers get
turned off when that happens and may not want to risk buying the same brand again. Liability is an
important area because there is the potential for damages or injures that could reflect badly on the
company and then damage control will need to be done to repair the company image and reputation.
Productivity can be slowed when there are defects and poor quality because time must be spent to redo
and fix these issues. Costs can be reduced by up to five times if problems are caught early on in the
process, compared to later in the production stages.

Ch. 8s Transportation Model

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Supplement 8
Summary:
Transportation model
The transportation model uses the principle of 'transplanting' something, like taking a hole from one place
and inserting it in another without change. First it assumes that to disturb or change the idea being
transported in any way will damage and reduce it somehow. It also assumes that it is possible to take an
idea from one person's mind into another person's so that the two people will then understand in exactly
the same way.
The transportation model is a valuable tool in analyzing and modifying existing transportation systems or
the implementation of new ones. In addition, the model is effective in determining resource allocation in
existing business structures.

The model requires a few keys pieces of information, which include the following:

 Origin of the supply

 Destination of the supply

 Unit cost to ship

The transportation model can also be used as a comparative tool providing business decision makers
with the information they need to properly balance cost and supply. The use of this model for capacity
planning is similar to the models used by engineers in the planning of waterways and highways.

This model will help decide what the optimal shipping plan is by determining a minimum cost for shipping
from numerous sources to numerous destinations.This will help for comparison when identifying
alternatives in terms of their impact on the final cost for a system. The main applications of the
transportation model mention in the chapter are location decisions, production planning, capacity planning
and transshipment. Nonetheless,the major assumptions of the transportation model are the following :

1. Items are homogeneous

2. Shipping cost per unit is the same no matter how many units are shipped
3. Only one route is used from place of shipment to the destination

The transportation problem involves determining a minimum-cost plan for shipping from multiple sources
to multiple destinations. A transportation model is used to determine how to distribute supplies to various
destinations while minimizing total shipping cost. In this case, a shipping plan is produced and is not
changed unless factors such as supply, demand, or unit shipping costs change. The variables in this
model have a linear relationship and therefore, can be put into a transportation table. The table will have
a list of origins and each one's capacity or supply quantity period. It will also show a list of destinations
and their respective demands per period. Also, it will show the unit cost of shipping goods from each
origin to each destination.

Transportation costs play an important role in location decision. The transportation problem involves finding
the lowest-cost plan for distributing stocks of goods or supplies from multiple origins to multiple destinations
that demand the goods. The transportation model can be used to compare location alternatives in terms of their
impact on the total distribution costs for a system. It is subject to demand satisfaction at markets supply
constraints. It also determines how to allocate the supplies available form the various factories to the
warehouses that stock or demand those goods, in such a way that total shipping cost is minimized.