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This case addresses biodiesel production plant location considerations. Bruce Nave had been using biodiesel in his own construction operation for over a year. With the advent of petroleum oil prices breaking seventy dollars per barrel, he saw an opportunity to start producing biodiesel on a commercial scale. Bruce knew that the success of his planned enterprise would depend in part on location, as each location would have different start up cost, cost of living, local laws, cost of doing business, availability and cost of inputs, and cost of shipping raw materials and finished product. Differences in these costs could quickly erode the slim contribution margins that commodity items generate. The case ends with Bruce wondering where he should locate his biodiesel production facility. The purpose of this case is to provide a decision scenario to students that will be managing supply chains, logistic functions of a firm, and/or are otherwise involved in strategic decisions relative to location of capacity.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

With petroleum based diesel continuing to erode profits, Bruce Nave, president of Western Industrial Resources Corporation (WIRC), started using biodiesel in 2005 to help fuel the company's diesel engines. These engines provided power to 65 trucks and an assortment of welders, compressors, and earth moving equipment. Based on the successful use of biodiesel and the rising cost of petroleum diesel, he decided that producing biodiesel on a commercial scale was a viable business. Bruce decided to start a commercial bio-diesel operation named Wi BioFuels, Inc. Once Bruce made the decision to construct a bio-diesel production facility he had to decide where to locate that facility.

Location decisions significantly affect the profit margins and eventual success of a firm due to many variables. These variables may include availability and proximity of raw materials, appropriate labor, regulations and tax structure, proximity of customers, governmental incentives, proximity of competition, quality of life, proximity to information, cost and availability of utilities, real estate costs and availability, and construction costs (Stevenson, 2007).

Presented in the case that accompanies this teaching note is information that enables students to mimic the location decision making process that Bruce performed to make his decision. The case ends with Bruce wondering where he should locate the bio-diesel plant.

The purpose of this case is to facilitate discussion of location decisions and the impact that such decisions can have on firm profitability. Following are teaching objectives this case was designed to fulfill.

* To provide a situation that demonstrates the intractable nature of location decisions

* To provide information such that students can delineate significant factors that shape location decisions

* To provide the opportunity for students to model cost parameters of location factors to determine a quantitative location solution.

* To provide the opportunity to incorporate qualitative factors with the quantitative solution to determine the final location solution

Following are the corresponding learning objectives that students should be able to demonstrate.

* Explain and/or demonstrate the intractable nature of location decisions

* Delineate significant factors of a location scenario

* Analyze the quantitative and qualitative parameters of a location scenario

* Utilize the information from the data analyses to reach a location decision

* Communicate the location decision with all supporting evidence in a professional format

The material in this case is appropriate for upper division undergraduate or MBA level courses in Supply Chain Management, Logistics, Strategy, Channels and Distribution, and/or Operations Management that includes discussions dealing with plant location.

The information and situation detailed in the case reflects actual information encountered in an actual situation by actual people. The information and characteristics of the situation were obtained through interviews with the president of WIRC and Wi-BioFuels, Inc. and through secondary research concerning the possible locations, cost parameters, and the location decision literature.

Discussion of this case should incorporate a qualitative and quantitative location framework such as the frameworks presented by Vonderembse and White (2004) (Appendix 1). Students should carefully read the case to determine the important factors influencing the location decision. Then they should systematically perform a cost benefit analysis of each site. This analysis will produce a quantitative solution to the location decision that then needs to be tempered by the qualitative analysis that the students must also perform. The following are possible discussion questions.

1. What makes location decisions intractable?

2. What criteria should be used to determine the location of the facility?

3. What qualitative criteria should be used for this case and what weight should be given to these different criteria?

4. What tool/s should be used to inform the location decision and what is the outcome of using this/these tools?

5. Where should Bruce locate his plant and why?

Triangulation between several production and operations management books such as Stevenson (2007), Slack (2007), and Vonderembse (2004) can provide basic decision frameworks and a list of possible variables that affect location decisions. The framework and variables chosen, weight placed on each variable, and decision made by each student may and probably will differ. Following suggestions by Slack (2007), the following decision placed a high weight on the supply chain network possibilities associated with a given location. To determine levels of some qualitative variables for each site, students can utilize web sites and/or contact appropriate organizations such as port authorities. Following are possible answers to the discussion questions listed above.

1. What makes location decisions intractable?

Location decisions can be very intractable due to the different factors (see answer number 2) that affect the degree of current and future profitability that a given site can provide. These factors simultaneously affect different goals a company may be trying to achieve; some positively and some negatively. These effects may actually show that there are several locations equally desirable, even though for different reasons (Stevenson, 2007). For example, to minimize freight costs a company may want to locate their distribution warehouse in a central location relative to their weighted markets. An example of how different factors can offset each other is that a firm might find the ideal location relative to freight costs in an isolated area with no available infrastructure and/or cultural life. In trying to minimize total costs by locating in that place, the location may actually raise costs due to employee related qualitative issues such as general dissatisfaction resulting in high turnover, shirking, and/or sabotage. Therefore, it is possible that a quantitative analysis between location possibilities can be misleading and qualitative information needs to be used to differentiate between locations.

2. What factors/variables should decision makers use to determine the location of a facility?

Analyzing different locations and how well they will help the company reach their objectives is important because there generally is not going to be one simple perfect location, but there are usually several nearly equally acceptable options. As suggested by Stevenson (2007) in this case the availability and proximity of raw materials, appropriate labor, regulations and tax structure, proximity of customers and competition, governmental incentives, proximity of competition, quality of life, proximity to industry related information, cost and availability of utilities, real estate costs and availability, and construction costs are some different criteria that should be considered while going through the location decision process. Slack (2007) further explored supply chain effects that a location may have on firm results such as the network relationships within a supply chain.

Some examples presented by Stevenson (2007) include the importance of looking at the availability and proximity of raw materials, customers, and transportation costs. Locating in an area with available labor with the correct skill set will also help in recruiting human resources. If the correct labor is not available cost may be affected adversely, as the firm may have to pay overqualified people to do a job someone else can do for minimum wage or pay overqualified people minimum wage and have a discontented work force causing low productivity. Regulations and tax structure are going to have an effect on whether you can even have your plant in the area, how much extra taxes and fees will cost you, and if you can possibly receive incentives or be exempt from some fee structures.

In addition to factors that can be quantified, qualitative factors should also be explored when considering location. Stevenson (2007) suggests that education opportunity, shopping, recreation, transportation, religious worship options, available entertainment, quality of police, fire, and medical services, and size of a community make a community desirable for its workers. Satisfied workers can increase high quality production of a facility and these factors can affect employee satisfaction Stevenson (2007). Thus, these factors should also be analyzed for this case.

3. Relative to this case, what criteria (factors/variables) should be used for this case and what weight should be given to these different criteria?

Students should start with a complete list of factors important to location decisions developed through sources such as Slack et al (2007), Stevenson (2007), and Vonderembse and White (2004). Then, as they read through the case, they will find information to support key factors from their list of general factors found in their research. The weight that is placed on each factor should be first determined from the case; secondly, if the weight cannot be determined from the case, it should be determined and supported from each student's perspective. It should be noted that the answer supplied put the heaviest weight on the access to the farmers ' network, as a production facility with no or relatively expensive raw material will quickly go out of business. The total annual cost of production should be calculated and compared across sites. However, the most expensive site may be selected because of qualitative factors. Factors that students should be able to see as important from reading the case and conducting research are presented below. Students should be encouraged to carefully reduce the list to only the more relevant factors to make the analysis more manageable.

Quantitative

Market availability and cost of transportation

Raw input availability and cost of transportation and contracting

Variable costs, including permits, utilities, bonds, waste disposal, and property rent

Local tax rates

Qualitative

Employee Satisfaction

Real estate availability and cost

Hospital availability *

K-12 school rating

University education availability

Culture availability

Airport availability

Ethnic diversity*

Local tax rates

Plant functionality

Labor availability

Labor skill level*

Proximity to a university with biodiesel experts

Hospital availability*

Chemical treatment center*

Site availability*

Ethnic diversity*

Production growth possibilities *

Feedstock growth possibilities *

Local demand growth*

Airport availability

Local tax rates

Supplier network to ensure feedstock supply

* not included in this comparison

A danger of having too many qualitative criteria is that the importance weight of each variable becomes meaningless. A good rule to use when selecting both qualitative and quantitative variables for the final analysis is to make sure the variables are relevant to the specific decision and actually vary across the sites. If there is no variation between prospective sites for a given variable, state that it does not and do not include it in the weighted analysis between sites. In addition, students should use the 80/20 rule to minimize their list of qualitative variables that are weighted and used to help make a location decision. A student would start with a complete list and then eliminate when possible, communicating their assumptions and reasons for keeping or eliminating the various variables. For this case, availability of health care, facility site availability, and growth possibilities with respect to facility and feedstock did not vary across sites. Labor skill level was also discounted, as 4/5s of the required work force was blue collar. In addition, ethnic diversity was not included, as, historically, it has not been a factor in firm success in the northwest. Although local demand growth differed, it did not vary by much and if the percent of biodiesel in a petroleum and biodiesel mix were increased beyond 20%, there would be ample increased demand at all sites to justify growth.

As stated before, scores and weights for each qualitative factor will vary by student. However, it is important that each student supports the scores and weights they assign. The method used to create Table 7 of Appendix 1 was to assess the standing of each site for a given variable and give the site with the best rating for a given factor a ten, then adjust the others down from there. Weights for the factors were determined by logic. The highest weights were given to factors that directly affected the functionality of the facility with lesser weights given to the employee satisfaction factors, as these variables indirectly affect the success of a facility. The factor with the highest weight was having an established network with local farmers because when there is no raw material, there is no chance of success. This decision was based on the Slack et. al. (2007) suggestion that a well developed supply chain is an important strategic advantage. Table 6 shows that Richland is the lowest cost location. However, information presented in Table 7 shows that Clarkston is the best site. The information in Table 6 shows that the costs of operating in Clarkston would be 16% greater than operating in Richland. Analysis shows that the major cause of the difference is the established supplier network. Bruce's long term connections in the Palouse area assure a sufficient number of farmers can be convinced to adjust their traditional rotation crops to supply sufficient oil seed feedstock for Wi-BioFuels' plant. To determine the actual importance of such a network, the cost of shipping all inputs for the feedstock from the Palouse area to Richland was included in the cost analysis for the Richland site. Under that scenario, the Richland site is nearly 20% more expensive than Clarkston. This information would suggest that Clarkston is the most favorable site.

Supply chain management literature such as that found in Slack et. al. (2007) emphasizes the importance of supplier networks. However, the case only briefly mentions Bruce's connection to such a network. Thus, an instructor of this case may want to emphasize this point during case discussion.

4. What tool/s should be used to inform the location decision and what is the outcome of using this/these tools?

A major tool that could be used for the cost variables is linear programming, but with only three locations to decide from it is not necessary. A simple table can be constructed in excel that shows factor costs and total costs for each location. An additional table can display the results of weighting the qualitative factors after first scoring each qualitative factor for each possible site (see Appendix 1). In the following analysis, a 10 point scale was used with 1 being low and 10 high to score the different qualitative variables.

5. Where should Bruce locate his plant and why?

According to the following analysis with the given weights, Bruce should build his plant in Clarkston at the Port of Wilma. The total costs per year are lower than for Portland, but 16% higher than Richland. However, the qualitative weighting is much higher for Clarkston than for Richland. The difference in costs only amounts to $169,942.81 per year, favoring Richland over Clarkston. However, the major factor influencing the difference in the qualitative assessment is access to the farmers' network that will ensure feedstock availability. Such access is critical to maintaining the costs as depicted. Thus, the recommendation is that Clarkston be the site of the new biodiesel production facility.

[Reference]  »   View reference page with links

REFERENCES

Slack, Nigel, Stuart Chambers, & Robert Johnston. (2007). Chapter 6: Supply Network Design. Operations Management 4th E. Pearson Education, Inc. Retrieved on June 20, 2007, from http://wps.pearsoned.co.uk/ema_uk_he_slack_opsman_4/0,8757,1144898,00.html.

Stevenson, W. J. (2007). Operations Management (9th Ed.) Boston: McGraw-Hill.

Vonderembse, M. A. & White, G. (2004). Operations Management: Concepts, Methods, and Strategies. NJ: Wiley & Sons for Leyh Press LLC.

[Author Affiliation]

Scott Metlen, University of Idaho

Doug Haines, University of Idaho

Amanda McAlexander, University of Idaho

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