Operations Management 101: Location Strategy - Factors in Location, Decisions Labor Proximity to Customers Suppliers Infrastructure Taxes

What This Is

Location decisions are crucial in operations management as they significantly impact a company's efficiency, productivity, and customer satisfaction. A well-located facility can reduce transportation costs, improve delivery times, and increase customer loyalty. For instance, Amazon's decision to locate its fulfillment centers near major highways and population centers has enabled it to deliver packages quickly and efficiently, contributing to its success.

Key Formulas & Frameworks

• Location Quotient (LQ) = (Number of employees in industry / Total number of employees in region) x (Total number of employees in region / Total number of employees in country): This formula helps evaluate the relative importance of a location by comparing the number of employees in a specific industry to the total number of employees in the region and country.
• Gravity Model: Attraction = (Population of city 1 x Population of city 2) / (Distance between cities)^2: This framework estimates the attractiveness of a location based on the population of the city and the distance between cities.
• Transportation Cost = (Distance x Weight x Freight Rate): This formula calculates the cost of transporting goods from one location to another.
• Break-Even Point (BEP) = (Fixed Costs / (Selling Price - Variable Costs)): This formula determines the point at which the total revenue equals the total fixed and variable costs.
• Hirschman-Herfindahl Index (HHI) =? (Market Share of each firm)^2: This framework measures the level of competition in a market by calculating the sum of the squared market shares of each firm.
• Location Suitability Index (LSI) = (Accessibility x Availability x Affordability x Amenities): This framework evaluates the suitability of a location based on its accessibility, availability, affordability, and amenities.
• Distance Decay: Attraction = e^(-Distance / Decay Rate): This framework estimates the decline in attractiveness of a location as the distance increases.
• Isochrone Map: Distance = Time x Speed: This framework represents the area within a certain time or distance from a location.
• Accessibility Index (AI) = (Population within a certain distance / Total population): This formula calculates the accessibility of a location based on the population within a certain distance.
• Proximity Index (PI) = (Distance to suppliers / Distance to customers): This formula evaluates the proximity of a location to suppliers and customers.

Step-by-Step Application

1. Conduct a location analysis: Evaluate the location's accessibility, availability, affordability, and amenities using the Location Suitability Index (LSI).
2. Calculate transportation costs: Use the Transportation Cost formula to estimate the cost of transporting goods from one location to another.
3. Determine the break-even point: Use the Break-Even Point (BEP) formula to determine the point at which the total revenue equals the total fixed and variable costs.
4. Evaluate market competition: Use the Hirschman-Herfindahl Index (HHI) to measure the level of competition in a market.
5. Assess location suitability: Use the Location Suitability Index (LSI) to evaluate the suitability of a location based on its accessibility, availability, affordability, and amenities.

Common Mistakes

• Mistake: Confusing the Location Quotient (LQ) with the Location Suitability Index (LSI).
• Correction: The LQ evaluates the relative importance of a location, while the LSI assesses the suitability of a location based on its accessibility, availability, affordability, and amenities.
• Mistake: Ignoring the impact of transportation costs on location decisions.
• Correction: Transportation costs can significantly impact a company's efficiency and productivity, making it essential to consider them when making location decisions.
• Mistake: Failing to evaluate market competition when making location decisions.
• Correction: Market competition can significantly impact a company's success, making it essential to evaluate it when making location decisions.

Exam / Certification Tips

• Common question patterns: Be prepared to answer questions that require you to apply the formulas and frameworks to real-world scenarios.
• Tricky distinctions: Be aware of the differences between the Location Quotient (LQ) and the Location Suitability Index (LSI).
• APICS / Six Sigma terminology traps: Be familiar with the terminology used in APICS and Six Sigma certifications, such as the Hirschman-Herfindahl Index (HHI) and the Location Suitability Index (LSI).

Quick Practice Problem

A company is considering locating a new facility near a major highway. The facility will have a production rate of 120 units per hour and a daily demand of 100 units. What is the takt time?

Answer: 0.83 hours (or approximately 50 minutes) Explanation: The takt time is calculated by dividing the daily demand by the production rate.

Last-Minute Cram Sheet

• Location Quotient (LQ) = (Number of employees in industry / Total number of employees in region) x (Total number of employees in region / Total number of employees in country): Evaluates the relative importance of a location.
• Gravity Model: Attraction = (Population of city 1 x Population of city 2) / (Distance between cities)^2: Estimates the attractiveness of a location.
• Transportation Cost = (Distance x Weight x Freight Rate): Calculates the cost of transporting goods from one location to another.
• Break-Even Point (BEP) = (Fixed Costs / (Selling Price - Variable Costs)): Determines the point at which the total revenue equals the total fixed and variable costs.
• Hirschman-Herfindahl Index (HHI) =? (Market Share of each firm)^2: Measures the level of competition in a market.
• Location Suitability Index (LSI) = (Accessibility x Availability x Affordability x Amenities): Evaluates the suitability of a location.
• Distance Decay: Attraction = e^(-Distance / Decay Rate): Estimates the decline in attractiveness of a location as the distance increases.
• Isochrone Map: Distance = Time x Speed: Represents the area within a certain time or distance from a location.
• Accessibility Index (AI) = (Population within a certain distance / Total population): Calculates the accessibility of a location.
• Proximity Index (PI) = (Distance to suppliers / Distance to customers): Evaluates the proximity of a location to suppliers and customers.
• 'Efficiency' is actual output / effective capacity; 'Utilization' is actual output / design capacity – don't confuse them.