Production & Operations

Management
Dr. Akshay G Khanzode

Session - 05
 Content of Presentation
• Facility Location Planning Decisions
• Factor Rating Method
• Center of Gravity Method

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 The Need for Location Decisions
• Location decisions arise for a variety of reasons:
• Addition of new facilities
• As part of a marketing strategy to expand markets
• Growth in demand that cannot be satisfied by expanding existing facilities
• Depletion of basic inputs requires relocation
• Shift in markets
• Cost of doing business at a particular location makes relocation attractive

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location Decisions: Strategically Important
• Location decisions:
• Are closely tied to an organization’s strategies
• Low-cost
• Convenience to attract market share
• Effect capacity and flexibility
• Represent a long-term commitment of resources
• Effect investment requirements, operating costs, revenues, and operations
• Impact competitive advantage
• Importance to supply chains

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location Decisions: Objectives
• Location decisions are based on:
• Profit potential or cost and customer service
• Finding a number of acceptable locations from which to choose
• Position in the supply chain
• End: accessibility, consumer demographics, traffic patterns, and local customs are
important
• Middle: locate near suppliers or markets
• Beginning: locate near the source of raw materials
• Web-based retail organizations are effectively location independent

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Supply Chain Considerations
• Supply chain management must address supply chain configuration:
• Number and location of suppliers, production facilities, warehouses and
distribution centers
• Centralized vs. decentralized distribution
• The importance of such decisions is underscored by their reflection of
the basic strategy for accessing customer markets

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Options
• Existing companies generally have four options available in location
planning:
1. Expand an existing facility
2. Add new locations while retaining existing facilities
3. Shut down one location and move to another
4. Do nothing

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Global Location: Facilitating Factors
• Two key factors have contributed to the attractiveness of globalization:
• Trade Agreements such as
• North American Free Trade Agreement (NAFTA)
• General Agreement on Tariffs and Trade (GATT)
• U.S.-China Trade Relations Act
• EU and WTO efforts to facilitate trade
• Technology
• Advances in communication and information technology

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Global Location: Benefits
• A wide range of benefits have accrued to organizations that have
globalized operations:
• Markets
• Cost savings
• Legal and regulatory
• Financial
• Other

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Global Location: Disadvantages
• There are a number of disadvantages that may arise when locating
globally:
• Transportation costs
• Security costs
• Unskilled labor
• Import restrictions
• Criticism for locating out-of-country

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Global Location: Risks
• Organizations locating globally should be aware of potential risk
factors related to:
• Political instability and unrest
• Terrorism
• Economic instability
• Legal regulation
• Ethical considerations
• Cultural differences

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Managing Global Operations
• Managerial implications for global operations:
• Language and cultural differences
• Risk of miscommunication
• Development of trust
• Different management styles
• Corruption and bribery
• Increased travel (and related) costs
• Challenges associated with managing far-flung operations
• Level of technology and resistance to technological change
• Domestic personnel may resist locating, even temporarily

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location Decision: General Procedure
Steps:
1. Decide on the criteria to use for evaluating location alternatives
2. Identify important factors, such as location of markets or raw materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives
4. Evaluate the alternatives and make a decision

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Identifying a Country

Factors relating to Foreign locations

Government a. Policies on foreign ownership of production facilities
Local content requirements
Import restrictions
Currency restrictions
Environment regulations
Local product standards
Liability laws
a. Stability issues
Cultural differences Living circumstances for foreign workers and their
dependents
Ways of doing business
Religious holidays/traditions
Customer preferences Possible “buy locally” sentiment

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Identifying a Country
Labor Level of training and education of workers
Work ethic
Wage rates
Possible regulations limiting the number of foreign
employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation infrastructure
Financial Financial incentives, tax rates, inflation rates, interest
rates
Technological Rate of technological change, rate of innovations

Market Market potential, competition

Safety Crime, terrorism threat

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Identifying a Region
• Primary regional factors:
• Location of raw materials
• Necessity
• Perishability
• Transportation costs
• Location of markets
• As part of a profit-oriented company’s competitive strategy
• So not-for-profits can meet the needs of their service users
• Distribution costs and perishability

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Identifying a Region (contd.)
• Labor factors
• Cost of labor
• Availability of suitably skilled workers
• Wage rates in the area
• Labor productivity
• Attitudes toward work
• Whether unions pose a serious potential problem
• Other factors
• Climate and taxes may play an important role in location decisions

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Identifying a Community
• Many communities actively attempt to attract new businesses they
perceive to be a good fit for the community
• Businesses also actively seek attractive communities based on such
factors such as:
• Quality of life
• Services
• Attitudes
• Taxes
• Environmental regulations
• Utilities
• Development support

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Location: Identifying a Site
• Primary site location considerations are
• Land
• Transportation
• Zoning
• Other restrictions

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Multiple Plant Manufacturing Strategies
• Organizing operations
• Product plant strategy
• Entire products or product lines are produced in separate plants, and each
plant usually supplies the entire domestic market
• Market area plant strategy
• Plants are designated to serve a particular geographic segment of the
market
• Plants produce most, if not all, of a company’s products

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Multiple Plant Manufacturing Strategies
• Organizing operations
• Process plant strategy
• Different plants focus on different aspects of a process
• automobile manufacturers – engine plant, body stamping plant, etc.
• Coordination across the system becomes a significant issue
• General-purpose plant strategy
• Plants are flexible and capable of handling a range of products

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Geographic Information System (GIS)
• A computer-based tool for collecting, storing, retrieving, and
displaying demographic data on maps
• Aids decision makers in
• Targeting market segments
• Identifying locations relative to their market potential
• Planning distribution networks
• Portraying relevant information on a map makes it easier for
decision makers to understand

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Service and Retail Locations
• Considerations:
• Nearness to raw materials is not usually a consideration
• Customer access is a
• Prime consideration for some: restaurants, hotels, etc.
• Not an important consideration for others: service call centers, etc.
• Tend to be profit or revenue driven, and so are
• Concerned with demographics, competition, traffic volume patterns, and convenience
• Clustering
• Similar types of businesses locate near one another

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Evaluating Location Alternatives
• Common techniques:
• Locational cost-volume-profit analysis
• Factor rating
• Transportation model
• Center of gravity method

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Locational Cost-Profit-Volume Analysis
• Locational Cost-Profit-Volume Analysis
• Technique for evaluating location choices in economic terms
• Steps:
1. Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or highest
profit) for the expected level of output

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Locational Cost-Profit-Volume Analysis
Assumptions
1. Fixed costs are constant for the range of probable output
2. Variable costs are linear for the range of probable output
3. The required level of output can be closely estimated
4. Only one product is involved

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Locational Cost-Profit-Volume Analysis
For a cost analysis, compute the total cost for each alternative location:

Total Cost = FC + v  Q
where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity or volume of output

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Cost-Profit-Volume Analysis
• Fixed and variable costs for four potential plant locations are shown below:

Fixed Cost Variable Cost

Location per Year per Unit

A $250,000 $11
B $100,000 $30
C $150,000 $20
D $200,000 $35

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Cost-Profit-Volume Analysis

Plot of Location Total Costs

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Cost-Profit-Volume Analysis
• Range approximations
• B Superior (up to 4,999 units) Total Cost of C = Total Cost of B
150,000 + 20Q = 100,000 + 30Q
50,000 = 10Q
Q = 5,000

• C Superior (>5,000 to 11,111 units)

Total Cost of A = Total Cost of C
250,000 + 11Q = 150,000 + 20Q
100,000 = 9Q
• A superior (11,112 units and up) Q = 11,111.11

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Factor Rating
General approach to evaluating locations that includes quantitative and
qualitative inputs
Procedure:
1. Determine which factors are relevant
2. Assign a weight to each factor that indicates its relative importance compared
with all other factors.
3. Weights typically sum to 1.00
4. Decide on a common scale for all factors, and set a minimum acceptable
score if necessary
5. Score each location alternative
6. Multiply the factor weight by the score for each factor, and sum the results for
each location alternative
7. Choose the alternative that has the highest composite score, unless it fails to
meet the minimum acceptable score

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Factor Rating
A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations. Which
is better?
Scores
(Out of 100)
Factor Weight Alt 1 Alt 2
Proximity to
existing source
.10 100 60
Traffic volume .05 80 80
Rental costs .40 70 90
Size .10 86 92
Layout .20 40 70
Operating Cost .15 80 90
1.00

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Factor Rating
• A photo-processing company intends to open a new branch store. The
following table contains information on two potential locations.
Which is better?
Scores
(Out of 100) Weighted Scores
Factor Weight Alt 1 Alt 2 Alt 1 Alt 2
Proximity to
.10 100 60 .10(100) = 10.0 .10(60) = 6.0
existing source
Traffic volume .05 80 80 .05(80) = 4.0 .05(80) = 4.0
Rental costs .40 70 90 .40(70) = 28.0 .40(90) = 36.0
Size .10 86 92 .10(86) = 8.6 .10(92) = 9.2
Layout .20 40 70 .20(40) = 8.0 .20(70) = 14.0
Operating Cost .15 80 90 .15(80) = 12.0 .15(90) = 13.5
1.00 70.6 82.7

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Center of Gravity Method
• Center of Gravity Method
• Method for locating a distribution center that minimizes distribution costs
• Treats distribution costs as a linear function of the distance and the
quantity shipped
• The quantity to be shipped to each destination is assumed to be fixed
• The method includes the use of a map that shows the locations of
destinations
• The map must be accurate and drawn to scale
• A coordinate system is overlaid on the map to determine relative locations

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Center of Gravity Method

Figure 8.1

a) Map showing destinations b) Coordinate system added c) Center of gravity

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Center of Gravity Method
• If quantities to be shipped to every location are equal, you can obtain
the coordinates of the center of gravity by finding the average of the x-
coordinates and the average of the y-coordinates

x=
 x i

y=
 y i

n
where
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
n = Number of destinatio ns

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Center of Gravity Method
• Suppose you are attempting to find the center of gravity for the problem depicted
in Figure 8.1c.


Destination x y
x 18
D1 2 2 x= i
= = 4.5
D2 3 5
n 4
D3 5 4
D4 8 5
y=
 y i
=
16
=4
18 16 n 4

Here, the center of gravity is (4.5,4). This is slightly west of D3

from Figure 8.1

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Center of Gravity Method
• When the quantities to be shipped to every location are unequal, you
can obtain the coordinates of the center of gravity by finding the
weighted average of the x-coordinates and the average of the y-
coordinates

x=
 xQ i i

Q i

y=
 yQ i i

Q i

where
Qi = Quantity t o be shipped to destinatio n i
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Center of Gravity
• Suppose the shipments for the problem depicted in Figure 8.1a are not all equal.
Determine the center of gravity based on the following information.

Weekly
Destination x y Quantity
D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100
18 16 2,000

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Center of Gravity

x=
 xQ i i
=
2(800) + 3(900) + 5(200) + 8(100) 6,100
= = 3.05
Q i 2,000 2,000

y=
 yQ
i=
i 2(800) + 5(900) + 4(200) + 5(100) 7,400
i
= = 3.7
Q i 2,000 2,000

• The coordinates for the center of gravity are (3.05, 3.7). You may round the x-
coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7).
This is south of destination D2 (3, 5).

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai
 Example: Center of Gravity

Production & Operations Management, Dr. A.G. Khanzode, SBM, NMIMS Mumbai