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Operations Management, 11e (Heizer/Render)

Section 1 The Strategic Importance of Location

1) FedEx chose Memphis, Tennessee, for its central location, or "hub," primarily because of the incentives offered by the city of Memphis and the state of Tennessee.

Answer: FALSE

2) FedEx chose Memphis, Tennessee, as its U.S. hub because:

A) the city is in the center of the United States, geographically.

B) the airport has relatively few hours of bad weather closures.

C) it needed a means to reach cities to which it did not have direct flights.

D) the firm believed that a hub system was superior to traditional city-to-city flight scheduling.

E) All of the above are true.

Answer: E

3) Which of the following statements regarding FedEx is TRUE?

A) Its hub in Memphis, Tennessee, was selected because of its low cost.

B) Memphis, Tennessee, is the only hub in the company's global flight network.

C) FedEx believes the hub system helps reduce mishandling and delays due to better controls.

D) FedEx uses a hub system in the United States, but a city-to-city network in other countries.

E) Memphis is FedEx's only hub airport in the United States.

Answer: C

Key Term: Global company profile

4) Industrial location analysis typically attempts to:

A) minimize costs.

B) maximize sales.

C) focus more on human resources.

D) avoid countries with strict environmental regulations.

E) ignore exchange rates and currency risks.

Answer: A

5) A location decision for an appliance manufacturer would tend to have what type of focus?

A) cost focus

B) focus on finding very highly skilled technicians

C) revenue focus

D) environmental focus

E) education focus

Answer: A

6) A location decision for a traditional department store (e.g., Macy's) would tend to have what type of focus?

A) cost focus

B) labor focus

C) revenue focus

D) environmental focus

E) education focus

Answer: C

7) As described in the book Aerotropolis, nowadays location decisions worldwide are often being based on what?

A) rivers

B) rail hubs

C) interstate highways

D) ports

E) airports

Answer: E

8) FedEx schedules its aircraft using a(n) ________ system, which it credits with reducing package mishandling and delay in transit.

Answer: central hub

9) Why does FedEx use a central hub airline network, rather than a "point-to-point" network? Describe FedEx's approach to choosing its superhub.

Answer: The hub system is more centralized, and allows for greater control; greater control reduces package mishandling and transit delays. Also, the hub permits service to a far greater number of points with fewer aircraft than a point-to-point network would. Their U.S. hub in Memphis reflects a need to be geographically centralized, and in a location where schedules can more reliably be kept because weather delays are minimized.

10) State the fundamental objective of a firm's location strategy. How is this basic objective carried out by industrial or goods-producing firms; how does that differ for service firms?

Answer: The fundamental objective is to maximize the benefit of location to the firm. For industrial location decisions, the focus is frequently on minimizing cost, because cost often varies dramatically from one location to another. Service location decisions often focus on maximizing revenues.

Section 2 Factors That Affect Location Decisions

1) Lists have been developed that rank countries on issues such as "competitiveness" and "corruption."

Answer: TRUE

2) The ratio of labor cost per day to productivity, in units per day, is the labor cost per unit.

Answer: TRUE

3) For a location decision, labor productivity may be important in isolation, but low wage rates are a more important criterion.

Answer: FALSE

4) Unfavorable exchange rates can offset other savings in a location decision.

Answer: TRUE

5) An example of an intangible cost, as it relates to location decisions, is the quality of education.

Answer: TRUE

Key Term: Intangible costs

6) In location decisions, intangible costs are easier to measure than tangible costs.

Answer: FALSE

Key Term: Intangible costs

7) Location decisions are based on many things, including costs, revenues, incentives, attitudes, and intangibles, but not on ethical considerations.

Answer: FALSE

8) Manufacturers may want to locate close to their customers if the transportation of finished goods is expensive or difficult.

Answer: TRUE

9) One reason for a firm locating near its competitors is the presence of a major resource it needs.

Answer: TRUE

Key Term: Clustering

10) Why is Northern Mexico used as a cluster for electronics firms?

A) high traffic flows

B) venture capitalists located nearby

C) natural resources of land and climate

D) NAFTA

E) high per capita GDP

Answer: D

Key Term: Clustering

11) Among the following choices, an operations manager might best evaluate political risk of a country by looking at which type of country ranking?

A) based on competitiveness

B) based on cost of doing business

C) based on corruption

D) based on magnitude of government social programs

E) based on average duration between presidential/prime minister elections

Answer: C

12) ________ and ________ are to key country success factors as ________ and ________ are to key region success factors.

A) Cultural issues, location of markets; site size and cost, zoning restrictions

B) Exchange rates, labor availability; site size and cost, environmental impact

C) Labor cost, currency risk; land costs, proximity to customers

D) Land costs, proximity to customers; labor cost, air and rail systems

E) All of the above are accurate relationships.

Answer: C

13) Which of the following workers is the most productive?

A) $50 wages, 10 parts produced

B) $10 wages, 1 part produced

C) $30 wages, 5 parts produced

D) $100 wages, 21 parts produced

E) $500 wages, 100 parts produced

Answer: D

14) A employee produces 15 parts during a shift in which he made $90. What is the labor content of the product?

A) $90

B) $5

C) $6

D) $0.167

E) $1,350

Answer: C

15) The reason fast food restaurants often are found in close proximity to each other is:

A) they enjoy competition.

B) location clustering near high traffic flows.

C) low cost.

D) availability of skilled labor.

E) all of the above.

Answer: B

Key Term: Clustering

16) Currency risk is based on what assumption?

A) Firms that do not continuously innovate will lose market share.

B) Values of foreign currencies continually rise and fall in most countries.

C) Changing product lines by reacting to every current trend may alienate the customer base.

D) The value of one dollar today is greater than the value of one dollar to be received one year from now.

E) The U.S. stock market fluctuates daily.

Answer: B

17) Governmental attitudes toward issues such as private property, intellectual property, zoning, pollution, and employment stability may change over time. What is the term associated with this phenomenon?

A) bureaucratic risk

B) political risk

C) legislative risk

D) judicial risk

E) democratic risk

Answer: B

18) Globalization of the location decision is the result of all EXCEPT which of the following?

A) market economics

B) higher quality of labor overseas

C) ease of capital flow between countries

D) high differences in labor costs

E) more rapid, reliable travel and shipping

Answer: B

19) In location planning, environmental regulations, cost and availability of utilities, and taxes are:

A) global factors.

B) country factors.

C) regional/community factors.

D) site-related factors.

E) none of the above.

Answer: C

20) Which of the following is usually NOT one of the top considerations in choosing a country for a facility location?

A) availability of labor and labor productivity

B) exchange rates

C) attitude of governmental units

D) zoning regulations

E) location of markets

Answer: D

21) When making a location decision at the country level, which of these would be considered?

A) corporate desires

B) land/construction costs

C) air, rail, highway, waterway systems

D) zoning restrictions

E) location of markets

Answer: E

22) Which of these factors would be considered when making a location decision at the region/community level?

A) government rules, attitudes, stability, incentives

B) cultural and economic issues

C) zoning restrictions

D) environmental impact issues

E) proximity to raw materials and customers

Answer: E

23) When making a location decision at the region/community level, which of these would be considered?

A) government rules, attitudes, stability, incentives

B) cultural and economic issues

C) cost and availability of utilities

D) zoning restrictions

E) air, rail, highway, waterway systems

Answer: C

24) Which of these factors would be considered when making a location decision at the site level?

A) government rules, attitudes, stability, incentives

B) cultural and economic issues

C) zoning regulations

D) cost and availability of utilities

E) proximity to raw materials and customers

Answer: C

25) Tangible costs include which of the following?

A) climatic conditions

B) availability of public transportation

C) taxes

D) quality and attitude of prospective employees

E) zoning regulations

Answer: C

Key Term: Tangible costs

26) Intangible costs include which of the following?

A) quality of prospective employees

B) quality of education

C) availability of public transportation

D) all of the above

E) none of the above

Answer: D

Key Term: Intangible costs

27) Which of the following statements regarding "proximity" in the location decision is FALSE?

A) Service organizations find that proximity to market is the most critical primary location factor.

B) Manufacturers want to be near customers when their product is bulky, heavy, or fragile.

C) Perishability of raw materials is a good reason for manufacturers to locate near the supplier, not the customer.

D) Reduction in bulk is a good reason for a manufacturer to locate near the supplier.

E) Clustering among fast food chains occurs because they need to be near their labor supply.

Answer: E

Key Term: Clustering

28) Which of the following is the best example of the proximity rule that, for service firms, proximity to market is the most important location factor?

A) Soft drinks are bottled in many local plants, where carbonated water is added to proprietary syrups that may have been shipped long distances.

B) Few people will travel out-of state for a haircut.

C) Patients will travel very long distances to have their hernia surgeries performed at ShouldiceHospital.

D) Furniture makers choose to locate near the source of good hardwoods, even though it means locating near other furniture manufacturers.

E) Metal refiners (smelters) locate near mines to accomplish significant weight reduction near the metal's source.

Answer: B

29) ________ costs are readily identifiable and can be measured with precision.

Answer: Tangible

Key Term: Tangible costs

30) Political risk, cultural issues, and exchange rates are among those ________ that affect which country will be selected for a location decision.

Answer: key success factors

31) Labor cost per unit is also referred to as ________.

Answer: labor content

32) ________ occurs when competing companies locate near each other because of a critical mass of information, talent, venture capital, or natural resources.

Answer: Clustering

Key Term: Clustering

33) Identify five factors that have fostered globalization.

Answer: Globalization has taken place because of the development of: (1) market economics; (2) better international communications; (3) more rapid, reliable travel and shipping; (4) ease of capital flow between countries; and (5) high differences in labor costs.

34) Identify five factors that affect location decisions at the site level.

Answer: Factors that affect location decisions at the site level include site size and cost; air, rail, highway, waterway systems; zoning restrictions; nearness of services/supplies needed; and environmental impact issues.

35) What is the role of labor productivity in location decisions?

Answer: Labor productivity is the number of units output per hour of labor input. For location decisions, this is more often displayed in the form of "labor content," which is the dollar labor cost per unit. Labor content provides a useful comparison in cases where wage rates and productivities vary greatly from country to country. In short, low productivity can negate low wages.

36) What is the impact of exchange rates on location decisions?

Answer: Exchange rates fluctuate, and they can negate savings from low wage rates.

37) Why is "quality of life" an element of intangible costs associated with location decisions? Provide an example as part of your discussion.

Answer: Quality of life affects location decisions in at least one indirect way. Consider a firm that has narrowed its location to two cities. One city has an abundance of educational and recreational facilities, good hospitals and parks. The other has very little of these elements. If you were a prospective employee, in which city would you rather live? Low quality of life can drive up labor costs, and it might also have an impact on training costs and health care costs.

Key Term: Intangible costs

38) "Proximity" or closeness implies that a firm should locate "close" to something. What are the three kinds of proximity described in the text? What are the basic conditions under which each is appropriate? What kinds of firms are likely to use each of these?

Answer: The three are proximity to markets, proximity to suppliers, and proximity to competitors. Proximity to markets is appropriate when customers will not travel far to get the good or service, or when delivering the product to the customer is costly or difficult. Many services must be close to their markets, as must home construction. Proximity to suppliers is appropriate when raw materials are perishable, or when supplies are costly or bulky to transport. Seafood processors need to be near the docks, and smelters need to be near the mines. Proximity to competitors reflects a kind of synergyretailers find that volume is higher when there are more competitors nearby, because this clustering brings higher traffic counts.

39) What is it called when competing companies locate next to each other? Why do they do this?

Answer: It is called clustering. In many cases, this occurs because of a critical mass of information, talent, venture capital, or natural resources. Alternately, clustering occurs because several firms close together create a larger total market than the same firms separated.

Key Term: Clustering

Section 3 Methods of Evaluating Location Alternatives

1) The graphic approach to locational cost-volume analysis displays the range of volume over which each location is preferable.

Answer: TRUE

Key Term: Locational cost-volume analysis

2) The factor-rating method can consider both tangible and intangible costs.

Answer: TRUE

Key Term: Factor-rating method

3) The center-of-gravity method finds the location of a centralized facility, such as a distribution center, that will maximize the organization's revenue.

Answer: FALSE

Key Term: Center-of-gravity method

4) The transportation model calculates an optimal shipping system between a central facility and several outlying customers.

Answer: FALSE

Key Term: Transportation model

5) Which of the following statements regarding the center-of-gravity method is FALSE?

A) It is designed to minimize the maximum possible travel distance to any of the locations.

B) The optimal x- and y-coordinates are calculated separately.

C) The optimal solution is unconstrained, so it could suggest a location in the middle of a body of water.

D) The weights used are the quantity of goods moved to or from each location.

E) The origin of the coordinate system and the scale used are arbitrary, just as long as the relative distances are correctly represented.

Answer: A

Key Term: Center-of-gravity method

6) Community attitudes, zoning restrictions, and quality of labor force are likely to be considered in which of the following location decision methods?

A) transportation method

B) locational cost-volume analysis

C) center-of-gravity method

D) simulation

E) factor-rating method

Answer: E

Key Term: Factor-rating method

7) Which of the following methods best considers intangible costs related to a location decision?

A) crossover methods

B) locational cost-volume analysis

C) factor-rating method

D) the transportation method

E) center-of-gravity method

Answer: C

Key Term: Factor-rating method

8) Evaluating location alternatives by comparing their composite (weighted-average) scores involves which of the following?

A) factor-rating analysis

B) cost-volume analysis

C) transportation model analysis

D) linear regression analysis

E) crossover analysis

Answer: A

Key Term: Factor-rating method

9) A clothing chain is considering two different locations for a new retail outlet. They have identified the four factors listed in the following table as the basis for evaluation, and have assigned weights as shown. The manager has rated each location on each factor, on a 100-point basis, as shown under the respective columns for Barclay and Chester.

What is the score for Chester?

A) 10.00

B) 24.50

C) 25.75

D) 27.00

E) 100.00

Answer: B

Key Term: Factor-rating method

10) What is an approach to location analysis that includes both qualitative and quantitative considerations?

A) locational cost-volume analysis

B) factor-rating method

C) transportation model

D) center-of-gravity method

E) make-or-buy analysis

Answer: B

Key Term: Factor-rating method

11) On the crossover chart where the costs of two or more location alternatives have been plotted, the quantity at which two cost curves cross is the quantity at which:

A) fixed costs are equal for two alternative locations.

B) variable costs are equal for two alternative locations.

C) total costs are equal for all alternative locations.

D) fixed costs equal variable costs for one location.

E) total costs are equal for two alternative locations.

Answer: E

Key Term: Locational cost-volume analysis

12) A full-service restaurant is considering opening a new facility in a specific city. The table below shows its ratings of four factors at each of two potential sites.

The score for GaryMall is ________ and the score for Belt Line is ________.

A) 120; 120

B) 22; 24

C) 18; 120

D) 34; 28

E) none of the above

Answer: D

Key Term: Factor-rating method

13) A firm is considering two location alternatives. At location A, fixed costs would be $4,000,000 per year, and variable costs $0.30 per unit. At alternative B, fixed costs would be $3,600,000 per year, with variable costs of $0.35 per unit. If annual demand is expected to be 10 million units, which plant offers the lowest total cost?

A) Plant A, because it is cheaper than Plant B for all volumes over 8,000,000 units.

B) Plant B, because it is cheaper than Plant A for all volumes over 8,000,000 units.

C) Plant A, because it is cheaper than Plant B for all volumes.

D) Plant B, because it has the lower variable cost per unit.

E) Neither Plant A nor Plant B, because the crossover point is at 10 million units.

Answer: A

Key Term: Locational cost-volume analysis

14) The center-of-gravity method is used primarily to determine what type of locations?

A) service locations

B) manufacturing locations

C) distribution center locations

D) supplier locations

E) call center locations

Answer: C

Key Term: Center-of-gravity method

15) A regional bookstore chain wants to build a distribution center that is centrally located for its eight retail outlets. It will most likely employ which of the following tools of analysis?

A) assembly line balancing

B) load-distance analysis

C) center-of-gravity method

D) linear programming

E) locational cost-volume analysis

Answer: C

Key Term: Center-of-gravity method

16) East Texas Seasonings is preparing to build one processing center to serve its four sources of seasonings. The four source locations are at coordinates shown below. Also, the volume from each source is provided. What is the center of gravity?

A) X = 28.125; Y = 31.25

B) X = 22000; Y = 24000

C) X = 27.5; Y = 40

D) center of gravity = 28

E) X = 25; Y = 40

Answer: A

Key Term: Center-of-gravity method

17) A county wants to build one centrally-located processing facility to serve the county's four recycling drop-off locations. The four drop-offs have characteristics as given in the table below. What is the approximate center of gravity of these four locations?

A) (4.75, 6.04)

B) (17, 24)

C) (33.5, 135.4)

D) (6, 4.25)

E) (570, 725)

Answer: A

Key Term: Center-of-gravity method

18) Production and transportation costs are always considered in which of the following location decision methods?

A) traffic counts

B) transportation model

C) purchasing power

D) proximity of markets

E) clustering

Answer: B

Key Term: Transportation model

19) The transportation model, when applied to location analysis:

A) minimizes total fixed costs.

B) minimizes total production and transportation costs.

C) minimizes total transportation costs.

D) maximizes revenues.

E) minimizes the movement of goods.

Answer: B

Key Term: Transportation model

20) The ________ method is popular because a wide variety of factors, from education to recreation to labor skills, can be objectively included.

Answer: factor-rating

Key Term: Factor-rating method

21) The ________ is a mathematical technique used for finding the best location for a single distribution point that services several stores or areas.

Answer: center-of-gravity method

Key Term: Center-of-gravity method

22) The ________ is used to determine the best pattern of shipments from several points of supply to several points of demand.

Answer: transportation model

Key Term: Transportation model

23) Identify the four major quantitative methods for solving location problems.

Answer: Factor-rating method, locational cost-volume analysis, center-of-gravity method, and transportation model.

24) What are the advantages and disadvantages of the use of the factor-rating method?

Answer: Factor rating can handle a mix of quantitative and qualitative variables; its calculations are simple and straightforward. Factor rating is subject to sensitivity to small swings in weights and scores, and is subject to subjectivity (different judges see different scores for same site).

Key Term: Factor-rating method

25) What kinds of location decisions are appropriate for the use of locational cost-volume analysis? Write a brief paragraph explaining how the method can assist an operations manager in choosing among alternative sites in making a location decision.

Answer: Crossover analysis is appropriate when the primary focus of a location decision is cost. For each alternative site, crossover analysis constructs a total cost curve composed of a fixed cost and a variable cost that depends upon volume. Where these cost curves intersect (or cross over) is the point at which two alternatives have the same cost. The graph of the cost curves of all alternative sites will display the range of volumes over which each site has the lowest cost of all alternatives.

Key Term: Locational cost-volume analysis

26) What kinds of location decisions are appropriate for the use of center-of-gravity analysis? What variable is being optimized in this analysis?

Answer: The center-of-gravity technique is appropriate when the location decision must find a single centrally-located site to serve any number of outlying points; locating a distribution center to serve a dozen retail stores is an example. The analysis leads to a location that (approximately) minimizes the distribution cost (or total distance traveled) between all outlying points and the center or hub.

Key Term: Center-of-gravity method

27) A manufacturing company preparing to build a new plant is considering three potential locations for it. The fixed and variable costs for the three alternative locations are presented below.

a. Complete a numeric locational cost-volume analysis.

b. Indicate over what range each of the alternatives A, B, C is the low-cost choice.

c. Is any alternative never preferred? Explain.

Answer: B is cheapest up to 125,000 units; C is cheapest after 166,667 units. A is cheapest in between. The B-C crossover is not relevant. Thus each alternative has an attractive range.

Key Term: Locational cost-volume analysis

28) A farmers' cooperative association plans to build a new sugar mill in Southwestern Louisiana. The primary objective of the mill is to provide the farmers with a place to take their crop for processing that will reduce their transportation costs. The members of the co-op believe that the center-of-gravity method is appropriate for this objective. While there are over 200 sugar cane farms in the region, they are tightly clustered around six villages. Using the data below, use the center-of-gravity method to calculate the coordinates of the best location for this mill. All mileage references use the city of Lake Charles as (0,0).

Answer: The center of gravity, weighted by the tonnage at each village cluster, is about 66.8 miles east of Lake Charles and 58.0 miles north of Lake Charles.