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Tuesday, May 24, 2011

Center of Gravity, Location Strategy in Operations Management from

Center of Gravity, Location Strategy in Operations Management

Location Strategy in Operations Management is an important factor to be considered. It is important because it helps in determining the place of manufacture. The place of manufacture needs to have certain qualities of features where manufacturing process takes place hassle-free.

Center of Gravity is one such method or strategy which can determine the effectiveness of a location.

Firms throughout the world are using the concepts and techniques in Operations Management to address the location decision because location greatly affects both fixed and variable costs. Location has a major impact on the overall risk and profit of the company. For instance, depending on the product and type of production or service taking place, transportation costs alone can total as much as 25% of the product’s selling price. That is, one-fourth of a firm’s total revenue may be needed just to cover freight expenses of the raw materials coming in and finished products going out. Other costs that may be influenced by location include taxes, wages, raw material costs and rents.

Companies make location decisions relatively infrequently, usually because demand has out-grown the current plant’s capacity or because of changes in labor productivity, exchange rates, costs or local attitudes. Companies may also relocate their manufacturing or service facilities because of shifts in demographics and customer demand.

Location options include

  • Expanding an existing facility instead of moving
  • Maintaining current sites while adding another facility elsewhere and
  • Closing the existing facility and moving to another location.

The location decision often depends on the type of business. For industrial location decisions, the strategy is usually minimizing costs, although innovation and creativity may also be critical. For retail and professional service organizations, the strategy focuses on maximizing revenue. Warehouse location strategy, however, may be driven by a combination of cost and speed of delivery. The objective of location strategy is to maximize the benefit of location to the firm.

Location and costs: because location is such a significant cost and revenue driver, location often has the power to make or break a company’s business strategy. Key multinationals in every major industry, from automobiles to mobile phones, now have or are planning a presence in each of their major markets. Location decisions to support a low cost strategy require particularly careful considerations.

Once management is committed to a specific location, many costs are firmly in place and difficult to reduce. For instance, if a new factory location is in a region with high energy costs, even a good management with an outstanding energy strategy is starting at a disadvantage. Management is in similar bind with its human resource strategy if labor in the selected location is expensive, ill-trained or has a poor work ethic. Consequently, hard work to determine an optimal facility location is a good investment.

Location and Innovation: When creativity, innovation and research and development investments are critical to the operations strategy, the location criteria may change from a focus on costs. When innovation is the focus, four attributes seem to affect overall competitiveness as well as innovation.

  • The presence of high-quality and specialized inputs such as scientific and technical talent
  • As environment that encourages investment and intense local rivalry.
  • Pressure and insight gained from a sophisticated local market.
  • Local presence of related and supporting industries.

Center of Gravity Method:

The Center of Gravity Method is a mathematical technique used for finding the location of a distribution centre that will minimize distribution costs. The method takes into account the location of markets, the volume of goods shipped to those markets and shipping costs in finding the best location for a distribution center.

The first step in the centre of gravity method is to place the locations on a coordinate system. The origin of the coordinate system and the scale used are arbitrary, just as long as the relative distances are correctly represented. This can be done easily by placing a grid over an ordinary map. The centre of Gravity is determined using equations

x-coordinate of the centre of gravity = ∑i dix Qi/∑I Qi

y-coordinate of the center of gravity = ∑i diy Qi/∑I Qi

where dix = x-coordinate of location i

diy = y-coordinate of location i

Qi = Quantity of goods moved to or from location i

Since the number of containers shipped each month affects costs, distance alone should not be the principal criterion. The centre of gravity method assumes that cost is directly proportional to both distance and volume shipped. The ideal location is that which minimizes the weighted distance between the warehouse and its retail outlets, where the distance is weighted by the number of containers shipped.

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This article is in continuation with our previous articles on Operations Management which such as Decision Tree, Demand Chase, Deterministic Inventory Model, Discrete Manufacturing

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