Operations Management

FACILITY LOCATION

KRISHNA MURARI

FACILITY LOCATION
The location where firms setup their operations is called as facility location. Retailers and shopping center developers have earn the secret of success which is non other than location. Need for Selection of facility locations ; 1) To start new business 2) to expand the business and present location is not sufficient 3) to have new branches 4) When place to be changes due to completion of lease period 5) Due to social, political and economical reasons

IMPORTANCE OF LOCATION
1) Location of facility decides the production technology and cost structure. Like location in under developed country will have labour intensive technology. 2) Location depends on size and nature of business. A large scale industry needs huge investment and option for extension and can not be shifted in future. 3) Location affects the firms ability to serve the customers quickly and efficiently. 4) Location affects the competitive advantage. 5) Optimum location reduces transportation cost, labour cost, taxes etc.

FACTORS AFFECTING THE LOCATION DECISION

1. Market proximity very important for service industry 2. Integration with other parts of the organisation in case organisation has some other plants 3. Availability of labour and skill software company in Bangalore 4. Site cost 5. availability of amenities hospital, house , shops etc. 6. Availability of transportation facilities 7. Availability of inputs nearness to suppliers like composite materials for Germanys aviation firms from France.

FACTORS AFFECTING THE LOCATION DECISION

8. Availability of services- Electricity, water, gas, drainage, disposal of waste 9. suitability of Land and climate Surat for cotton industry 10. Regional Regulations- recruitment of employees in Bangalore 11. Room for expansion 12. Safety requirements location of nuclear power station away from population. 13. Political, cultural and Economical situation 14. Regional taxes, special grants and import/export barriers Land allotment by Karnataka Government to Boing, EADS

Steps in Location And Location Decision Process It is very difficult to find an optimal location. Satisfying decisions are developed by approximation. There is no standard procedure. Following steps may be taken as guidelines: 1. Define the location objectives and associated constraints. basis promoters, owners, employees, suppliers, customers 2. Identify the relevant decision criteria includes economical factors like labour, material cost, non-economical factors environment

Steps in Location & Location Decision Process 3. Relate the objectives to the criteria using appropriate models Break even analysis, linear programming, qualitative factor analysis etc are used for decision making. 4. Do field research to relevant data and use the models to evaluate the alternative locations secondary data from Center For Monitoring Indian Economy (CMIE),, Journals of Indian Federation of Commerce and Industry (FICCI), central Statistical Organsiations (CSO) and primary data by survey are used. 5. Select the location that best satisfies the criteria

Location Evaluation Methods 1. Cost Profit-Volume or Break Even Analysis It is a graphical and algebraic representation of the relationship among volume of output, costs and revenues. Cost has two factors- fixed and variable. Fixed- building rent, administrative cost etc. variable- labour, raw material etc. Total cost is sum of fixed and variable cost at a specific volume of production. Cost for each location is find out and subtracted from revenue, the location where profit is more is selected.

Location Evaluation Methods 1. Cost Profit-Volume or Break Even Analysis

REVENUE

TCA TCB

COST

FCB FCA

VOLUME OF SALES
TCA- TOTAL COST AT LOCATION A TCB- TOTAL COST AT LOCATION B FCA- FIXED COST AT LOCATION A FCB- FIXED COST AT LOCATION B

Location Evaluation Methods 1. Cost Profit-Volume or Break Even Analysis

Lowest cost location may not always give maximum profit. It depends on the volume of sales Problem

Location

Fixed cost/yr

Variable cost

Bangalore Delhi

Rs. 16,00,000 Rs 400/ unit Rs. 20,00,000 Rs.150/unit

Price 1500/unit

Sales 2000 unit /yr

Cost Profit-Volume or Break Even Analysis

REVENUE TCA 30,00,000 24,00,000 23,00,000 20,00,000 15,00,000

COST

TCB FCB FCA

1000

2000

VOLUME OF SALES
TCA- Total cost at Bangalore = Rs.24,00,000 FCA- Fixed cost at Bangalore=Rs. 16,00,000 TCB- Total cost at Delhi = Rs 23,00,000 FCB- Fixed Cost at Delhi= Rs. 20,00,000 Total Revenue= Rs. 30,00,000

Location Evaluation Methods 2. Factor Rating Technique

This is based on the ranking of various weighted factors that influence the choice of the location. Factor rating is used to evaluate alternative locations. Method : i) Relevant factors are identified like production cost, supply of raw materials, labour availability, proximity to customer, availability of facilities, tax advantage etc. ii) Weights are assigned to the factors based on their importance. (Most important -5 , least important -1)

Location Evaluation Methods 2. Factor Rating Technique

Method : i) Location is also rated based on merit of the factor. iv) Product of ratings is computed by multiplying location rating with factor ratings. v) Location of highest score is considered preferable. But implementation requires careful judgment. Advantages 1. It helps in deciding one location over the other. 2. It brings diverse locations into consideration. 3. It has consistency in evaluation.

2. Factor Rating Technique

Problem

Factor Product cost Labour availability Supply of Raw material Proximity to customer Tax Advantage

Factor Location A Location B rating 5 7 8 4 5 4 2 6 8 5 6 5 7 4 7

2. Factor Rating Technique

Solution Factor
Factor Locati Locati Produ Produ rating on A on B ct of ct of rating rating sA s A 5 7 8 35 40 4 5 4 2 6 8 5 6 5 7 4 7 total 24 40 20 12 131 20 35 16 14 125

Product cost Labour availability Supply of Raw material Proximity to customer Tax Advantage

Location Evaluation Methods 3. Point Rating Method

A firm selects location based on many objectives and their importance and weightage for different objectives are different. In this method, the intangible factors related to location are assigned points and compared with tangible factors. Evaluation is done to know whether difference between the intangible factors is worth between tangible factors of the competing locations. Drawback of this method is that a high score in any factor can overcome a low score in any other factor.

Location Evaluation Methods

3. Point Rating Method Problem :

Factor rated
Transportation facility Water supply Living condition Availability of fuel

Maximum Location A Location possible no. B 600 400 500

200 400 150 300 100 350

500
Total

200
1050

300
1250

Location Evaluation Methods 4. Transportation Method

When network of supply point to potential location are available, this method is used. In this methods best match of capacity and demand for each potential location is carried out using linear programming and cost & profit are compared. Matching of the capacity and demand of the firm and minimizing the total transportation cost are carried out and right location is selected based on minimum total transportation cost.

Location Evaluation Methods

Transportation Method (contd) It is a special type of linear programming problem. Method: Xij = quantity transported from the plant Pi to a warehouse Wj Cij = the unit transportation cost from Pi to Wj Objective function is to minimize the total cost i.e. Minimize Zij = CijXij Subjected to supply constraints n Xij =Si where i = 1,2,.,m Si = supply available at ith origin j=1

m Xij =Dj where j = 1,2,.,m i=1

Di = quantity demanded at jth destination

And Xij > or = 0 for all I and j

Transportation Method
Procedure : 1. Define the objective function that is to be minimized
2. 3. 4. Develop a transportation table with row representing the origin and column the destination Determine the initial feasible solution to the problem Examine whether initial solution is feasible or not. If solution is feasible if number of cells occupied are m+n-1 where m= no. of origins and n= no. of destinations Test the solution for optimality by computing opportunity cost associated with unoccupied cells If solution is not optimal, modify the location to reduce the transportation cost further.

5.
6.

Transportation Method
Origin D1 O1 X11
C11 C21

Destination D2 X12
C12 C22

Supply Dn X1n
C1n C2n

-----

S1

O2
: Om

X21
:

X22
:

-----

X2n
: Xmn

S2
:

Xm1 Cm1 Xm2 Cm2 ---

Cmn

Sm

Demand

D1

D2

---

Dn

Si Dn

Transportation Method
Developing Initial Feasible solution : i) North west corner method ii) Least cost method iii)Vogels approximation method

Transportation Method
Developing Initial Feasible solution : i) North west corner method
Step 1: Assign maximum possible quantity of products to the top left corner (north west corner) Step 2 : After allocation adjust the supply and demand number Step 3 : If supply in the first row is exhausted, move down to the corresponding cell in second row and assign the possible quantity to the cell, if demand in column is first satisfied, then move horizontally to the next cell in second column and assign the quantity of product. Step 4: continue the same procedure till entire requirement is met Step 5 : check the feasibility of the solution

Transportation Method
Developing Initial Feasible solution : i) North west corner method
Problem: Distance between factory and its warehouses and demand at each warehouse are given in the table below. Find solution by using north west corner method. Warehouse W1 16(cost) 18 8 175 W2 22 14 14 125 W3 14 18 16 150 Supply 200 150 100

Factory F1
F2 F3 Demand

Transportation Method
Developing Initial Feasible solution : i) North west corner method
Warehouse Factory F1 F2
F3
m+n-1 = 5

W1

W2

W3

Supply

175

16

25 100

22

14

200 150
100

18

14

50
100

18

14

16

Demand

175

125

150

Transportation Method
Developing Initial Feasible solution : ii) Least Cost method
Step 1: First we consider the cell where the unit cost of transportation is the least Step 2 : possible number of goods that can be assigned to the cell is assigned. Step 3 : Next we move to that cell where the next higher unit cost of transportation exist and assign the possible number of goods Step 4 : The process is continued till the entire goods are assigned Step 5 : check the feasibility of solution i.e. m+n-1 = no. of occupied cells

Transportation Method
Developing Initial Feasible solution : ii) Least Cost method
Warehouse Factory F1 F2
F3
m+n-1 = 5

W1

W2

W3

Supply

50 25
100

16

22

150

14

200 150
100

18

125

14

18

14

16

Demand

175

125

150

Transportation Method
Developing Initial Feasible solution : iii) Vogels Approximation Method :
It is most preferred method as it usually gives an optimal or a near optimal solution. Step1 : Calculate penalty for each row and column which is difference between the least cost and next least cost. Step2 : Identify the row or column with the largest penalty value and assign the possible quantity of product to that cell having the least unit cost in that row or column. Step 3: Adjust the supply and requirements after the allocation is made. Step 4: Delete that row or column where the supply or requirement is zero.

Transportation Method
iii) Vogels Approximation method
Step 5 : calculate the value of penalty of reduced transportation problem and repeat the procedure.

Warehous W1 e Factory F1
F2 F3 Demand Penalty 175 8

W2

W3

Supply

Penalty

16 18 8

22 14 14

14 18 16

200 150 100

2 4 6

125 0

150 2

Transportation Method
iii) Vogels Approximation method
Largest penalty column is first column and cell with least cost is F3W1, assign maximum product 100.

Warehous W1 e Factory F1
F2 F3 Demand Penalty 100 175 8

W2

W3

Supply

Penalty

16 18 8

22 14 14

14 18 16

200 150 100

2 4 6

125 0

150 2

Delete Row F3 as it has zero requirements and adjust demand to 75 (175-100)

Transportation Method
iii) Vogels Approximation method Recalculate penalty. Column 2 has highest penalty 8 hence assign maximum product 125 to minimum cost cell F2W2
Warehous W1 e Factory F1 F2 Demand Penalty 75 2
16 18

W2

W3

Supply

Penalty

22

14 18

200 150

2 4

125 125 8

14

150 4

Now delete second column as demand is met and adjust the supply to 25 (150-125)

Transportation Method
iii) Vogels Approximation method Recalculate penalty. Column 2 has highest penalty 8 hence assign maximum product 150 to minimum cost cell F2W2
Warehous W1 e Factory F1 F2 Demand Penalty 75 2
16 18

W3

Supply

Penalty

150

14 18

200 25

2 0

150 4

Now assign left out difference of 50 in first row and 25 in second row to first column

Transportation Method
iii) Vogels Approximation method
Solution is given below :

Warehous W1 e Factory F1 50
F2 F3 Demand Penalty 25 100 175 8

W2

W3

Supply

Penalty

16 18 8

22 14

150

14 18 16

200 150 100

125 125 0

14

150 2

Solution is a feasible solution as number of occupied cells are 5 = m+n-1

Transportation Method
Stepping stone method : it is used to test whether solution is optimal and to find out the optimal solution. Consider the solution in last exercise
Warehouse W1 Factory F1 F2 F3 50 25 100
16 18 8

W2 UOC 125 UOC

22 14 14

W3 150 UOC UOC

14 18 16

Supply 200 150 100 UOC= UnOccupied Cell

Demand

175

125

150

Transportation Method
Stepping stone method :
Step 1: Select the unoccupied cell and trace the closed path starting from that cell using the most direct route through at least three occupied cells. Step2 : Starting from selected cell, assign + or alternatively to the corner cells of the closed cell. Step3: calculate the net cost change of the selected cell by adding the unit cost value with the sign assigned along the closed path. Step4: If the net cost change is positive for all the unoccupied cell, we can conclude that optimum solution is obtained. Step5 : if the net cost change of an unoccupied cell is negative, then reassign the product to that cell the quantity equal to minimum quantity of negative signed cells. Step 6: Repeat the procedure till optimum solution is reached.

Transportation Method
Stepping stone method :
Consider unoccupied cell (F1,W2) The closed path for the cell is (F1,W2)-(F2,W2)-(F2,W1)-(F1,W1) The net cost change is +22-14+18-16 = 10(+ve) Therefore nothing can be assigned to this cell.

Consider unoccupied cell (F2,W3) The closed path for the cell is (F2,W3)-(F2,W2)-(F1,W2)-(F1,W3) The net cost change is +18-18+16-14 = 2(+ve) Therefore nothing can be assigned to this cell.

Transportation Method
Stepping stone method :
Consider unoccupied cell (F3,W3) The closed path for the cell is (F3,W3)-(F3,W1)-(F1,W1)-(F1,W3) The net cost change is +16-8+16-14= 10(+ve) Therefore nothing can be assigned to this cell.

Therefore, we can conclude that the solution obtained in above problem is an optimum solution and it can not be further improved.

Location Evaluation Methods 5. Center of Gravity Method for Plant Location

This method focuses on minimizing the transportation cost/ shipping cost from a distribution centre to different shipping points. This method takes into account the factors like markets, cost of goods and cost of transportation. The center of gravity is identified by calculating X and Y co-ordinates of the location that minimizes transportation cost. Quantities shipped are taken as weights for the locations and multiplied with x and Y coordinates to find out center of gravity.

Location Evaluation Methods 5. Center of Gravity Method for Plant Location

The co-ordinates of the center of gravity are find out as follows : Xc = (XiVi) / (Vi) Yc = (YiVi) / (Vi) Where Xc = X coordinate of center of gravity Yc = Y coordinate of center of gravity Vi = Volume of items transported to and from location i Xi = X coordinate of location i Yi = Y coordinate of location i

5. Center of Gravity Method for Plant Location

Problem:
The X and Y coordinates of several retail locations of a retail chain is given below. The quantity to be shipped is given in table. Identify the optimum location of warehouse.
16 B Y location , Km

12
A 8 C 4 4 8 F

D
12 16

X coordinates , Km

5. Center of Gravity Method for Plant Location Problem: RETAIL OUTLET A B X Y VOLUME

4 3.5

10 15

80 100

C
D E F G

4
10 16 8 14

6
2 6 5 13

120
130 100 150 90

5. Center of Gravity Method for Plant Location Problem:

RETAIL OUTLET XiVi YiVi VOLUME

A
B C D E F

4x80=320
3.5x100=350 4x120=480 10x130=1300 16x100=1600 8x150=1200

10x80=800
15x100=1500 6x120=720 2x130=260 6x100=600 5x150=750

80
100 120 130 100 150

G
Total

14x90=1260
(XiVi)= 6510

13x90=1170
(YiVi)=5800

90
(Vi)=770

5. Center of Gravity Method for Plant Location Problem:

Xc = (XiVi) / (Vi) = 6510/770 =8.455 km Yc = (YiVi) / (Vi) = 5800/770= 7.532 km

Location Evaluation Methods 6. Analytic Delphi Method Decision on multiple location with different objectives considering many intangible issues is taken by this qualitative method. This method requires participation of coordinating panel, a forecasting panel and strategic panel of experts. Forecasting panel considers the future trend and strategic panel identifies strategic goals and objectives. Coordinating panel consists of external consultants, company employees and it develops the questionnaire and coordinate Delphi process.

Location Evaluation Methods 6. Analytic Delphi Method

Steps are: i) Forming two Delphi panels forecasting and strategic to participate in Delphi inquiry ii) identify trend and opportunities by first Delphi inquiry from forecasting panel by questionnaires prepared by coordinating panel. This is carried out many times till consensus arrived. iii) Determine directions and strategic goals of the organisation- The information collected from first Delphi inquiry is given to strategic panel to identify organisation's directions and goals in second Delphi inquiry

Location Evaluation Methods

6. Analytic Delphi Method

iv) Develop alternatives strategic panel identifies alternatives after identifying the goals and objectives. v) Prioritize the alternatives all the alternative are presented to the members of the strategic panel. They give subjective value judgments. Based on this the location is decided. It can also be used to identify the trends, developments and opportunities.

Location Service Facilities Less investment is required in service facilities which has resulted in high growth of services. Services can not be stored hence the decision of location is taken based on the target markets.

Behavioral impact in facility location

1. Cultural difference In new Location, employees are hired from within the new place. Organisation has to establish appropriate community relations. At international level, it is very important aspect of the business. 2. Job satisfaction Job satisfaction is reflected by i) Labour absenteeism ii) labour turnover iii) Tardiness iv) Grievances

Case Ellora times Manufacturing Woes

Ellora times Pvt. Ltd based in Morbi, Rajkot, Gujarat, India In 2001, it was the worlds largest manufacturer of clocks. It produces calculators, telephones, timepieces and educational toys. Ajanta and Orpet (combined companies) had investment Rs. 2 billion in 2001. It had 70% market shares in timepiece and calculator business and 20% in telephone. It exported its products to 60 countries It had 25000 dealers and 180 service stations. In early 2001, Ellora decided to shift its manufacturing activities to China

Case Ellora times Manufacturing Woes

Manufacturing base was 15,00,000 sq.ft and carpet area 10,00,000 sq.ft. It had essential machineries such as Wafer saw machine, automatic coil winding machine, ultrasonic ware bonders, CNC plastic injection molding machines, a full fledge workshop for mould manufacturing. In 2001, it produced 15,000 calculators, 20,000 time pieces and 8,000 telephones per day. 1800 workers, 45 trucks It gave prime importance to R&D and quality. ISO9002 company

Case Ellora times Manufacturing Woes

It got many awards for excellence in Export Initially raw materials were imported from Japan, Korea and Taiwan. From1998, it started import of raw materials from China In1999, Indian govt. removed restriction on import from China. The same range of product from China was much cheaper. Demand of calculator increased from 20 million to 40 million in mid 1990s but company was forced to reduced its production from 6-7million to 2-2.5million.

Case Ellora times Manufacturing Woes

It market share came down from 70% to 5% as 90% calculator used in India were imported. Under invoiced goods from China evaded the customs and excise duty and import through Nepal was at low tax. Spare parts has duty 5% while raw material has duty 25%. Hence Ellora began to import parts from China A few years ago, Ellora has 15,000 workers, in 2001 it came down to 5000. It leased 300,000 sq.ft. in Shenzhen and started shifting machinery.

Case Ellora times Manufacturing Woes

Question for Discussion: 1. Why do you think Ellora was forced to decide in favour of setting up a factory in China despite the fact that it had been doing rather well both in the domestic and export market. Do you think the company can maintain its success rate in the future with the new international manufacturing initiatives.

Case Ellora times Manufacturing Woes

Question for Discussion: 2. Evaluate the differences between the manufacturing environments and regulatory frame works of India and China. What are the reasons behind the huge cost difference between the products of the two countries?
3. What is the likely impact of the China threat on the Indian manufacturing industry? Discuss the options available to the government and the industry.

Case Ellora times Manufacturing Woes

Difference Between Business environment and regulatory framework of India and China Chinese policy framework encourages export promotion by subsidizing. China has cheaper power, low labour costs, highly regimented labour poll, less no. of public holidays and low cost of finance. Tax structure and infrastructure facilities are better in china. More availability of raw materials, spare parts and components Zero inventory possible in china Corruption level is low in China

Case Ellora times Manufacturing Woes

Less legal hassles with customs, excise and sale tax Export subsidy in China is 19-27% and there are free trade zones. Easy availability of finance at low interest arte of 5.5% in comparison to 14-15% in India. Labour laws are not restrictive in China No minimum wages, no extra overtime No trade Union Reliable supply chain in comparison to India Fast clearance at customs and ports Low taxes Good infrastructure in china (good roads)