PART II
ANSWERS TO END-OF-CHAPTER QUESTIONS
CHAPTER 9: FACILITY LOCATION
9-1. Explain how the location decision process involves several layers of screening or focus.
The initial focus is on the region, the delineation of which can vary on whether a company has a
multinational or domestic focus. The next focus is more precise; it usually involves a selection of the
9-2. How have cost considerations influenced facility location decisions?
Today’s cost considerations arise because many consumers are sensitized to buy products only when
prices are low. This low-price/low-cost framework has caused many companies to manufacture in
countries characterized by plentiful and low-cost labor. In recent years, some organizations are
9-3. In what way is the location of customer markets a strategic consideration in facility location?
Improvements in transportation and technology have allowed consumers to migrate relatively easily
from one region or country to another and this migration requires a change in distribution patterns—
hence, facility location. Economic growth is another variable that influences the location of customer
9-4. Discuss the factors that influence the number of facilities that a firm chooses to operate.
Rather than asking, “Where should a new facility be located?” organizations should be thinking about
the optimal number of facilities in the system. The need for additional facilities often arises when an
organization’s service performance from existing facilities drops below “acceptable” levels. Most
9-5. How does a raw material’s status as pure, weight-losing, or weight-gaining influence the facility
location decision?
A pure raw material is one that loses no weight in manufacturing and, because of this, the processing
point can be anywhere near the raw material source and the market. Weight-losing products lose weight
during processing; the processing point should be near their source in order to avoid payment of
9-6. Discuss how population can be viewed as both a market for goods and a source of labor.
With respect to a market for goods, attributes of current and potential customers are important. Things
such as changes in population size as well as changes in population characteristics are important. With
There are myriad concerns associated with population as a source of labor, including the size of the
workforce, the unemployment rate, the age profile, its skills and education, prevailing wage rates, and
union status.
9-7. What are maquiladoras? Why do maquiladoras continue to be popular?
Maquiladoras are facilities that are located just south of the U.S.–Mexican border. These plants allow
for low-cost, duty-free production so long as all the goods are exported from Mexico. Maquiladoras
9-8. Discuss the advantages and disadvantages to locating manufacturing, assembly, or distribution
facilities in countries with relatively low wages.
Labor wage rates appear to be a key locational determinant as supply chains become more global in
nature. Although absolute wage comparisons are important, relative comparisons can be quite
insightful. For example, at prevailing wage rates, a company could have approximately similar
9-9. What are right-to-work laws? How do they influence locational decisions?
Right-to-work laws refer to situations in which an individual cannot be compelled to join a union as a
potential employers.
9-10. What are expatriate workers? What challenges do they face?
Expatriate workers are those employees who are sent to other countries to work for extended periods of
time. One challenge is that expatriate assignments can be costly, ranging up to $1 million per
assignment.
9-11. How can taxes and incentives impact facility location decisions?
Inventory taxes, which are often based on the value of inventory that is held on a particular date, can
inhibit facility investment as well as discourage facility expansion within a state that levies inventory
9-12. How do transportation considerations influence facility location decisions?
Transportation considerations in the form of transportation availability and costs are a key aspect of
facility location decisions because transportation decisions represent such a large portion of total
logistics costs. Transportation availability refers to the number of transportation modes as well as the
9-13. What are industry clusters, and what are some of their potential advantages?
Industry clusters refer to the net advantage which can be gained by a sharing of common locations by
various enterprises. Silicon Valley is a well-known industry cluster of high technology firms. With
respect to advantages, the relative proximity of manufacturers in a particular cluster could allow for
9-14. Discuss how multicountry trade agreements have influenced the location of production or
distribution facilities.
The North American Free Trade Agreement (NAFTA) has seen Mexico become the third largest
trading partner for the United States. NAFTA has resulted in increased north–south movement of
The virtual elimination of trade barriers among members of the European Union (EU) has allowed
many companies to reduce the number of relevant distribution facilities. When the EU consisted of 15
9-15. Explain why quality-of-life issues should be considered in the facility location decision.
For one, employees who are able to live a reasonable lifestyle tend to be happier and more loyal; happy
and loyal employees are less likely to leave their jobs and less likely to offend prospective customers.
9-16. Beyond the general factors discussed in this chapter, what additional considerations are important
when a firm is thinking of locating a facility (facilities) in other countries?
The considerations include the relevant legal system, political stability, bureaucratic red tape,
trade agreements.
9-17. Briefly describe specialized, or site-specific, considerations that should be taken into account in
the facility location decision.
One consideration is that land may be zoned, which means that there are limits on how the land is used.
Union locals have areas of jurisdiction, and a firm’s labor relations manager may have distinct
preferences regarding the locals with which he or she is willing to deal. Other issues include a title
9-18. What is a free trade zone? What functions might be performed in it?
Free trade zones refer to highly specialized sites where nondomestic merchandise may be stored,
9-19. Discuss advantages and disadvantages to grid systems, such as the center-of-gravity and weighted
center-of-gravity approaches.
As a general rule, grid systems can be used for locating a single facility so that the distance to existing
facilities is minimized—and by extension, transportation costs are minimized as well. In addition, grid
systems are relatively simple to apply, and calculations can be done relatively quickly. However, the
9-20. Distinguish between facility relocation and facility closing. How should companies deal with
their human resources (workers) in both situations?
Facility relocation occurs when a firm decides that it can no longer continue operations in its present
facility and must move operations to another facility in order to better serve suppliers and customers.
Regardless of whether the issue is relocation or closing, current employees should be kept informed—
by their employer—about relevant issues. Information from other sources could cause confusion,
anger, and lower morale which could easily offset the productivity of the existing facility. Additional
information is generally required for facility closings, in the sense that the Worker Adjustment and
Retraining Notification (WARN) Act mandates that employers give 60 days notice about closings and
mass layoffs.PART III
CASE SOLUTIONS
CASE 9-1: ALL-INDIAN LOGISTICS SERVICES
Note: Because this case requires extensive research and information may be difficult to come by, one
suggestion is to assign individual questions to groups of students.
One of the first things to establish is the approximate distance between Lucknow and Mumbai
(approximately 850 miles) as well as between Patna and Mumbai (approximately 1,100 miles).
Question 1: With respect to the natural resources needed to make wickable shirts, is Patna or Lucknow
the preferred location? Why?
It does not appear that either Patna or Lucknow has an advantage with respect to the natural resources
needed to make wickable shirts.
Question 2: With respect to transportation considerations, is Patna or Lucknow the preferred location?
Why?
As of 2016, a highway trip between Lucknow and Mumbai is estimated to take 22 hours whereas a
highway trip between Patna and Mumbai is estimated to take 30 hours. In addition, Lucknow appears
Question 3: With respect to labor characteristics, is Patna or Lucknow the preferred location? Why?
As of 2016, a common minimum wage for skilled labor in Patna was approximately 250 rupees per
day, compared to approximately 295 rupees per day in Lucknow. Moreover, Patna has a higher
Question 4: With respect to quality-of-life considerations, is Patna or Lucknow the preferred location?
Why?
As of 2016, the cost of living is similar in Patna and Lucknow, and both cities are home to a number of
colleges and universities. Patna has much higher levels of reported crime than Lucknow. Indian census
data also indicate that the male-to-female ratio is more unbalanced in Patna (885 females for every
Question 5: Should AILS recommend that the manufacturing plant be located in Patna or Lucknow?
Why?
Based on the responses to Questions 1–4, Lucknow appears to be preferable to Patna.
Question 6: Would you answer to Question 5 change if the shirts are exported through the Port of
Kolkata? Why or why not?
The distance from Lucknow to Kolkata is approximately 615 miles, and the corresponding highway
trip is estimated to take 17 hours. The distance from Patna to Kolkata is approximately 360 miles, and
the corresponding highway trip is estimated to take 11 hours. Both Patna and Lucknow offer direct rail
Question 7: Suppose that AAA decides to nearsource production to Latin America. Keeping in mind
the key stipulation presented in the case, where might AAA locate its production plant in Latin
America? Why?
As of 2016, there are approximately 40 Latin American cities that meet the population stipulation
presented in the case. Two of these, Juarez and Tijuana, are Mexican cities located in close proximity
to the United States. Juarez, located just south of El Paso, Texas, provides four separate points of entry