Achieving World-Class Operations Management

84 Location, Location, Location: Where Do We Make It?

  1. How do organizations decide where to put their production facilities? What choices must be made in designing the facility?

A big decision that managers must make early in production and operations planning is where to put the facility, be it a factory or a service office. The facility’s location affects operating and shipping costs and, ultimately, the price of the product or service and the company’s ability to compete. Mistakes made at this stage can be expensive, because moving a factory or service facility once production begins is difficult and costly. Firms must weigh a number of factors to make the right decision.

Facing stiff competition from rival automobile companies and sagging demand among German consumers, Germany’s BMW (Bavarian Motor Works) opened a factory in Spartansburg, South Carolina. Opened in 1994, the U.S. plant recently produced it four millionth vehicle and now employs 9,000 employees in its six million square foot plant. What factors determine where auto companies locate their operations? (Credit: Daniel Chou/ Flickr/ Attribution-NoDerivs 2.0 Generic (CC BY-ND 2.0))


A photograph shows a highway with large signs that signal Spartanburg is on Interstate 26 west, and Charlotte in on Interstate 77.

Availability of Production Inputs

As we discussed earlier, organizations need certain resources to produce products and services for sale. Access to these resources, or inputs, is a huge consideration in site selection. Executives must assess the availability of raw materials, parts, equipment, and available manpower for each site under consideration. The cost of shipping raw materials and finished goods can be as much as 25 percent of a manufacturer’s total cost, so locating a factory where these and other costs are as low as possible can make a major contribution to a firm’s success.

Companies that use heavy or bulky raw materials, for example, may choose to be located close to their suppliers. Mining companies want to be near ore deposits, oil refiners near oil fields, paper mills near forests, and food processors near farms. Bottlers are discovering that rural western communities in need of an economic boost make rich water sources. In Los Lunas, New Mexico, it made sense for Niagara Purified Drinking Water to produce purified bottled water in a 166,000 square foot building that was vacant. The business helps diversify the town’s economy and created 40 new, much-needed jobs.

Soyoung Kim, “New Water Bottling Plant in Los Lunas Brings Jobs, But Also Concerns,” KRQE News, http://krqe.com, November 17, 2016.

The availability and cost of labor are also critical to both manufacturing and service businesses, and the unionization of local labor is another point to consider in many industries. Payroll costs can vary widely from one location to another due to differences in the cost of living; the number of jobs available; and the size, skills, and productivity of the local workforce. In the case of the water-bottling company, a ready pool of relatively inexpensive labor was available due to high unemployment in the areas.

Marketing Factors

Businesses must evaluate how their facility location will affect their ability to serve their customers. For some firms it may not be necessary to be located near customers. Instead, the firm will need to assess the difficulty and costs of distributing its goods to customers from its chosen location. Other firms may find that locating near customers can provide marketing advantages. When a factory or service center is close to customers, the firm can often offer better service at a lower cost. Other firms may gain a competitive advantage by locating their facilities so that customers can easily buy their products or services. The location of competitors may also be a consideration. And businesses with more than one facility may need to consider how far to spread their locations in order to maximize market coverage.

Manufacturing Environment

Another factor to consider is the manufacturing environment in a potential location. Some localities have a strong existing manufacturing base. When a large number of manufacturers in a certain industry are already located in an area, that area is likely to offer greater availability of resources, such as manufacturing workers, better accessibility to suppliers and transportation, and other factors that can increase a plant’s operating efficiency.

Nestlé is proposing to open a new bottled water plant in the desert city of Phoenix. The plants have provided much-needed employment to replace jobs lost in the recession of 2008. The city of Phoenix faced opposition to the plant because some locals thought that diverting water from tap water to a for-profit entity was not a sound idea. Phoenix officials contend that the source of water is adequate for decades to come.

Brandon Loomis, “What drought? Nestle Plans $35 million plant to bottle water in Phoenix,” The Republic, https://www.azcentral.com, May 19, 2016.

Local Incentives

Incentives offered by countries, states, or cities may also influence site selection. Tax breaks are a common incentive. A locality may reduce the amount of taxes a firm must pay on income, real estate, utilities, or payroll. Local governments may offer financial assistance and/or exemptions from certain regulations to attract or keep production facilities in their area. For example, many U.S. cities are competing to attract a second Amazon headquarters and, in addition to touting local attractions and a strong workforce, most of them are offering a host of tax incentives.

Lydia DePillis, “Cities Try to Lure Amazon, But Want to Keep the Details Secret,” CNN, http://money.cnn.com, October 19, 2017.

International Location Considerations

There are often sound financial reasons for considering a foreign location. Labor costs are considerably lower in countries such as Singapore, China, India, and Mexico. Foreign countries may also have fewer regulations governing how factories operate. A foreign location may also move production closer to new markets. Automobile manufacturers such as Toyota, BMW, and Hyundai are among many that build plants in the United States to reduce shipping costs.

Designing the Facility

After the site location decision has been made, the next focus in production planning is the facility’s layout. The goal is to determine the most efficient and effective design for the particular production process. A manufacturer might opt for a U-shaped production line, for example, rather than a long, straight one, to allow products and workers to move more quickly from one area to another.

Service organizations must also consider layout, but they are more concerned with how it affects customer behavior. It may be more convenient for a hospital to place its freight elevators in the center of the building, for example, but doing so may block the flow of patients, visitors, and medical personnel between floors and departments.

There are three main types of facility layouts: process, product, and fixed-position. All three layouts are illustrated in (Figure). Cellular manufacturing is another type of facility layout.

Types of Facility Layouts
Source: Adapted from Operations Management, 9th edition, by Gaither/Frazier.


Process layout, production of kitchen cabinets shows job x, and job y. For job x, the product or material flow goes as follows. 1, receiving and raw material storage. 2, foundry. 3 rough machine. 4 shear and punch. 5 Debur. 6 fabrication. 7 assembly. 8 packaging and shipping. For job y, the product or material flow goes as follows. 1, receiving and raw material storage. 2, shear and punch. 3 finish machine. 4, debur. 5, assembly. 6 painting. 7 packaging and shipping. The next diagram is product, or assembly line, layout. Assembly of flat screen televisions. The process is as follows. Assemble chassis; install circuit board; install flat screen; install speakers; final assembly; and inspected by, shown as a number. The last diagram is fixed position layout, construction of a stadium. The inputs to building the stadium are as follows. Architect; general contractor; mechanical contractor; electrical contractor; plumbing contractor; general labor; materials, such as steel, glass, and cement; and equipment, such as bulldozers, and cranes.

Process Layout: All Welders Stand Here

The process layout arranges workflow around the production process. All workers performing similar tasks are grouped together. Products pass from one workstation to another (but not necessarily to every workstation). For example, all grinding would be done in one area, all assembling in another, and all inspection in yet another. The process layout is best for firms that produce small numbers of a wide variety of products, typically using general-purpose machines that can be changed rapidly to new operations for different product designs. For example, a manufacturer of custom machinery would use a process layout.

Product Layout: Moving Down the Line

Products that require a continuous or repetitive production process use the product (or assembly-line) layout. When large quantities of a product must be processed on an ongoing basis, the workstations or departments are arranged in a line with products moving along the line. Automobile and appliance manufacturers, as well as food-processing plants, usually use a product layout. Service companies may also use a product layout for routine processing operations.

Fixed-Position Layout: Staying Put

Some products cannot be put on an assembly line or moved about in a plant. A fixed-position layout lets the product stay in one place while workers and machinery move to it as needed. Products that are impossible to move—ships, airplanes, and construction projects—are typically produced using a fixed-position layout. Limited space at the project site often means that parts of the product must be assembled at other sites, transported to the fixed site, and then assembled. The fixed-position layout is also common for on-site services such as housecleaning services, pest control, and landscaping.

Cellular Manufacturing: A Start-to-Finish Focus

Cellular manufacturing combines some aspects of both product and fixed-position layouts. Work cells are small, self-contained production units that include several machines and workers arranged in a compact, sequential order. Each work cell performs all or most of the tasks necessary to complete a manufacturing order. There are usually five to 10 workers in a cell, and they are trained to be able to do any of the steps in the production process. The goal is to create a team environment wherein team members are involved in production from beginning to end.

  1. What factors does a firm consider when making a site-selection decision?
  2. What should be considered when deciding on a production approach?

Summary of Learning Outcomes

  1. How do organizations decide where to put their production facilities? What choices must be made in designing the facility?

Site selection affects operating costs, the price of the product or service, and the company’s ability to compete. In choosing a production site, firms must weigh the availability of resources—raw materials, manpower, and even capital—needed for production, as well as the ability to serve customers and take advantage of marketing opportunities. Other factors include the availability of local incentives and the manufacturing environment. Once a site is selected, the firm must choose an appropriate design for the facility. The three main production facility designs are process, product, and fixed-position layouts. Cellular manufacturing is another type of facility layout.

Glossary

cellular manufacturing
Production technique that uses small, self-contained production units, each performing all or most of the tasks necessary to complete a manufacturing order.
fixed-position layout
A facility arrangement in which the product stays in one place and workers and machinery move to it as needed.
process layout
A facility arrangement in which work flows according to the production process. All workers performing similar tasks are grouped together, and products pass from one workstation to another.
product (or assembly-line) layout
A facility arrangement in which workstations or departments are arranged in a line with products moving along the line.

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Location, Location, Location: Where Do We Make It? by Rice University is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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