Chapter Three

Part Two

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 Process Selection
3.2

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 3.2.1. Introduction
• A process is a group of related tasks with specific inputs and outputs.
• Processes exist to create value for the customer, the shareholder, or society.
• Process design defines what tasks need to be done and how they are
to be coordinated among functions, people, and organizations.
• Planning, analyzing, and improving processes is the essence of operations
management.
• Process selection refers to deciding on the way production of goods
or services will be organized.
• It has major implications for:
capacity planning,
layout of facilities,
equipment, and
design of work systems.

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• Process selection occurs as a matter of course when
new products or services are being planned.
periodically due to technological changes in products or
equipment,
competitive pressures
• Process strategy: an organization’s overall approach for physically
producing goods and services.
• Process planning: determines how a product will be produced or a
service provided.
• It decides which components will be made in-house and which
will be purchased from a supplier, selects processes, and
develops and documents the specifications for manufacture and
delivery.

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Process selection and capacity planning influence system
design

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Forecasts, product and service design, and technological
considerations all influence capacity planning and process
selection.
Moreover, capacity and process selection are interrelated,
and are often done in concert.
They, in turn, affect facility and equipment choices, layout,
and work design

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How an organization approaches process selection is
determined by the organization’s process strategy.
Key aspects include:
Capital intensity: the mix of equipment and labor that
will be used by the organization.
Process flexibility: the degree to which the system can
be adjusted to changes in processing requirements due
to such factors as changes in product or service design,
changes in volume processed, and changes in
technology.

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3.2..2. PROCESS SELECTION
• Process choice is demand driven. The two key questions
in process selection are:
1. How much variety will the process need to be able to
handle?
2. How much volume will the process need to be able to
handle?
• Volume and variety are inversely related; a higher level of
one means a lower level of the other; however, the need
for flexibility of personnel and equipment is directly
related to the level of variety the process will need to
handle: the lower the variety, the less the need for flexibility,
while the higher the variety, the greater the need for flexibility

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 Types of Process

A. Based on the type of product flow

• Continuous Production Process/Line Flow
• Mass production
• Intermittent/Batch/Job Shop Production Process
• Project Production Process
B. Based on Type of Customer Order
• Make-to-Stock (Push System)
• Make-to-Order (Pull System)

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 Process Types
• There are five basic process types:
• Job shop
• Small scale
• Batch
• Moderate volume
• Repetitive/assembly line
• High volumes of standardized goods or services
• Continuous
• Very high volumes of non-discrete goods
• project

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 a. Job Shop
(low volume, high variety)

A job shop usually operates on a relatively small scale.

It is used when a low volume of high-variety goods or services
will be needed.
Processing is intermittent; work includes small jobs, each with
somewhat different processing requirements.
Intermittent processes : products are produced only when the
customer requires or orders the product
High flexibility using general-purpose equipment and skilled
workers are important characteristics of a job shop.

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• Such facilities are organized around specific activities or
processes.
• In a factory, these processes might be departments
devoted to welding, grinding, and painting.
• In a restaurant, they might be bar, grill, and bakery. Such
facilities are process focused in terms of equipment,
layout, and supervision.

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 b. batch process
(moderate Volume, moderate variety)
• Batch processing is used when a moderate volume of goods or
services is desired, and it can handle a moderate variety in products
or services.
• The equipment need not be as flexible as in a job shop, but
processing is still intermittent.
• The skill level of workers doesn’t need to be as high as in a job shop
because there is less variety in the jobs being processed.
• Examples:
 bakeries, which make bread, cakes, or cookies in batches;
 movie theaters, which show movies to groups (batches) of people; and
 airlines, which carry planeloads (batches) of people from airport to airport.
 Other examples of products that lend themselves to batch production are
paint, ice cream, soft drinks, beer, magazines, and books.
 examples of services include plays, concerts, music videos, radio and
television programs, and public address announcements
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 c. Repetitive/line/mass customization
(High Volume, standardized products)
Used when higher volumes of more standardized goods or services
are needed.
The standardized output means only slight flexibility of equipment is
needed.
Skill of workers is generally low.
 In fact, this type of process is sometimes referred to as assembly.
Examples of this type of system include,
• Familiar products made by these systems include automobiles,
television sets, pencils, computers, shoes, candy bars, even food
items.
• An example of a service system is an automatic carwash. Other
examples of service include cafeteria lines and ticket collectors at
sports events and concerts.

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 d. Continuous process
(High Volume, Highly Standardized)
Used when a very high volume of non-discrete, highly standardized
output is desired.
These systems have almost no variety in output and, hence, no need
for equipment flexibility.
Workers’ skill requirements can range from low to high, depending
on the complexity of the system and the expertise workers need.
Generally, if equipment is highly specialized, worker skills can be
lower.
The products produced by continuous processes are usually in
continual rather than discrete units, such as liquid or gas.
• They usually have a single input and a limited number of outputs.
• Also, these facilities are usually highly capital intensive and
automated
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Examples,
• oil refineries, water treatment plants, petroleum
products, steel, sugar, flour, and salt and certain paint
facilities.
• Continuous services include air monitoring, supplying
electricity to homes and businesses, and the Internet.

• The ideal is to have process capabilities match product or

service requirements. Failure to do so can result in
inefficiencies and higher costs than are necessary,
perhaps creating a competitive disadvantage

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Table 3.2.1 Types of processing

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Volume and variety influence process choice

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• All of these process types (job shop, batch,
repetitive, and continuous) are typically ongoing
operations. However, some situations are not
ongoing but instead are of limited duration. In such
instances, the work is often organized as a project.

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 e. Project
• Project is a non-repetitive set of activities directed toward a unique
goal within a limited time frame.
• A project is used for work that is non-routine, with a unique set of
objectives to be accomplished in a limited time frame.
• Project processes are used to make one-of-a-kind products exactly
to customer specifications.
• These processes are used when there is high customization and low
product volume, because each product is different.
• Examples:
• consulting, making a motion picture, launching a new product or
service, publishing a book, building a dam, and building a bridge.
• construction, shipbuilding, creation of artwork, custom
tailoring, and interior design.
• Equipment flexibility and worker skills can range from low to high.
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• With project processes the customer is usually
involved in deciding on the design of the product.
The artistic baker you hired to bake a wedding cake
to your specifications uses a project process

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Process choice affects numerous activities/functions

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Types of Processes

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 Make-to-Stock vs. Make-to-Order
Another useful way to characterize a process is whether the
process makes to stock or makes to order.
• Make-to-order(Pull Sytem)
the product is built directly from raw materials
and components in response to a specific
customer order
Products are produced after customer demand
is known
Make-to-order strategy Produces products to
customer specifications after an order has been
received.
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 Make-to-stock(Push System)
the customer is served "on-demand" from finished goods
inventory.
make standardized product for stock based on forecast
Customer demand is fulfilled from stock
Produces standard products and services for immediate sale
or delivery.
• Hybrid:
Combines the features of both make-to-order and make-to-
stock.

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Make –to-stock process map

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Flowcharts for different product strategies for Pizzeria

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 Process Performance Metrics

An important way of ensuring that a process is

functioning properly is to regularly measure its
performance.
Process performance metrics are measurements
of different process characteristics that tell us how
a process is performing.
There are many process performance metrics that
focus on different aspects of the process.

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Throughput time:
Average amount of time it takes a product to move
through the system.
This includes the time someone is working on the
product as well as the waiting time.
A lower throughput time means that more products
can move through the system.
One goal of process improvement is to reduce
throughput time.
• For example, think about the time spent at your last doctor’s
appointment. The total amount of time you spent at the
facility, regardless of whether you were waiting, talking with
the physician, or having lab work performed, is throughput
time.
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An important metric that measures how much
wasted time exists in a processes is a process
velocity.
Process velocity is computed as a ratio of
throughput time to value-added time:
𝐭𝐡𝐫𝐨𝐮𝐠𝐡𝐩𝐮𝐭 𝐭𝐢𝐦𝐞
Process velocity =
𝐯𝐚𝐥𝐮𝐞−𝐚𝐝𝐝𝐞𝐝 𝐭𝐢𝐦𝐞
where value-added time is the time spent
actually working on the product.
Notice that the closer this ratio is to 1.00, the
lower the amount of time the product spends on
non-value-adding activities (e.g., waiting).
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• productivity
Another important metric , which is the ratio of outputs over
inputs is productivity.
 Productivity measures how well a company converts its inputs to
outputs.
• utilization,
the ratio of the time a resource is actually used versus the time it
is available for use.
Unlike productivity, which tends to focus on financial measures
(e.g., dollars of output), utilization measures the actual time that
a resource (e.g., equipment or labor) is being used.
• Efficiency
is a metric that measures actual output relative to some standard
of output. It tells us whether we are performing at, above, or
below standard
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 Example 1: Measuring Process Performance
• XYZ Company is analyzing its operation in an effort to improve
performance. The following data have been collected: It takes an
average of 4 hours to process and close a title, with value-added
time estimated at 30 minutes per title. Each title officer is on payroll
for 8 hours per day, though working 6 hours per day on average,
accounting for lunches and breaks. The company closes on 8 titles
per day, with an industry standard of 10 titles per day for a
comparable facility. Determine process velocity, labor utilization, and
efficiency for the company. Can you draw any conclusions?

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• Example 2: it takes six weeks to produce and make ready
a given product, and the actual value added time to
complete the product is four hours. Assuming there is
five working days in a week and eight working hours in
a day, the process velocity of this product is:
6 weeks X 5 days per week X 8 hours per day
Process velocity = 4 hours
= 60
• A process velocity of 60, in this case, means that it takes
60 times as long to complete the product as it does to
do the actual work on, the product itself.

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Example 3:
• AAU Press, the largest publisher of dissertations in the Ethiopia took
150 days to process a manuscript, although only two hours were
actually spent adding value to the manuscript. For the press, the
process velocity for a manuscript was therefore:
150 days/manuscript X 8 hours per day
Process velocity = 2 hours
= 600
• If the unit was able to reduce the throughput time to 60 days,
thereby lowering its process velocity to 240 (hour)
60 X 8 = 480 = 240
2hrs 2hrs

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3.3.Strategic Capacity Planning

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 Strategic Capacity Planning
Capacity planning
 determination of both long and short term capacity
requirements and
 deciding how these needs can be met.
• Capacity:
Definition- the amount of output that a system is capable of
achieving over a specified period of time or
an upper limit or maximum ceiling on the load that an
operating unit can handle.
The operating unit might be a plant, department, a machine,
a store or a worker.
Capacity questions: (it is related with the determination of):
 How much should a plant be able to produce?
 How many customers should a service facility should be able
to serve?
 What kinds of problems arise as the production system
expands?
When do we need to determine productive capacity requirements?
 When we are designing a new system
 Expanding an existing one
 For the shorter operating periods during which the plant size
cannot be changed.
Importance of capacity decisions
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Impacts long range planning

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 Measuring Capacity

In selecting a measure of capacity,

It is important to choose one that does not require revision;
• Birr is a poor measure of capacity since price change
necessitates continual updating of that measure.
 Where only one product or service is involved, the capacity of
the productive unit is measured in terms of that item.

• Eg. Producing 45 casting per hour

• When multiple products are involved and when it is
impractical to list capacity in terms of all products,
especially if there are frequent changes in mix of output,
• availability of resources can be used as measure of
capacity.
• Example:
 In hospitals, number of beds;
 In manufacturing organizations, machine hrs. Etc.
 In schools the number of chairs/class rooms
Note: No measure of capacity will be appropriate in every
situation. Rather measure of capacity must be somewhat
tailored to the situation at hand.
Measures of capacity: examples

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 Types of Capacity:
• Design or Theoretical Capacity (DC): The maximum output under
ideal conditions as designed by engineers.
 maximum output rate or service capacity an operation,
process, or facility is designed for.
• Effective or System Capacity (EC): The maximum output under
operating restrictions such as schedules.
 Design capacity minus allowances such as personal time,
maintenance, and scrap
• Actual or operating capacity (AC): This is the rate of output
actually achieved-cannot exceed effective capacity.
 Measures of Capacity
i) Design capacity(DC)
The maximum output rate or service capacity an
operation, process or facility designed for under
normal, or ideal conditions
is the maximum theoretical engineered or planned
output of a system
 output rate under full scale operations with no
fluctuations allowed
Care must be taken not to make inadequate capacity
because it may result in inferior service and
dissatisfied or lost customers

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 Measures of Capacity
ii) System (Effective) Capacity (SC)
• The maximum output rate given some variations in
operating conditions such as:
Changing product mix
The need for maintenance
Lunch and coffee breaks
Problems in scheduling and imbalance of
operations
Tight quality specifications, scraps
• System Capacity = Design capacity less allowances for
the above operating conditions

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 Measures of Capacity

iii) Actual Output Capacity (AC)

• The rate of output accomplished in a particular point
in time
• Usually less than system capacity because of such
factors as:
• Machine breakdown
• Absenteeism
• Shortage of materials
• Quality problems

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•Accordingly, AC is less than EC and
EC is less than DC.

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 There are two measures of system’s effectiveness:
 Efficiency and
 Utilization
 Efficiency- is the ratio of actual output to effective capacity.
Actual output
Efficiency =
Effective capacity
 Utilization – the ratio of actual output to designed capacity.
Actual out put
Utilization =
Design capacity
Example 1: A plastic firm has four work centers ( A, B, C, and D in
series with individual capacities( units/day) and actual output as
shown.
306 actual
450 390 360 400
out put/day

• What is:
i. the system capacity? (effective capacity)
ii.The system efficiency?
Solution,
a) system capacity = capacity of most limited component in the line
= 360 units/day
b) system efficiency = SE= actual output/ system capacity
= 306/360
= 85%
Example 2:

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72%
Design capacity 50 units/day
 Economies of Scale
 As plant gets larger and volume increases, the average cost per
unit of output drops.
 production or operating costs do not increase linearly with output
levels.
Minimum cost and optimal operating rate are functions of
size of a production unit

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 Economies of scale: If the output rate is
less than the optimal level, increasing the
output rate results in decreasing average
unit costs.
 Diseconomies of scale: If the output rate is
more than the optimal level, increasing the
output rate results in increasing average
unit costs.

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Reasons for economies of scale include the following

a. fixed costs can be spread over a larger number

of units
b. quantity discounts are available for material
purchases
c. operating efficiency increases as workers gain
experience

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 Diseconomies of Scale
• Diseconomies of scale occur at a point
beyond the best operating level, when the
cost of each additional unit made an
increases on the total cost occur above a
certain level of output.
• Diseconomies of Distribution
• Diseconomies of Bureaucracy
• Diseconomies of Confusion
• Diseconomies of Vulnerability/weakness
3.4. Facility Layout
 3.4.1. Facilities layout
 Layout is the configuration of all the machines, employee
workstations, storage areas, internal walls, and so forth that
constitute the facility used to create a firm’s product or
service.
Layout planning is determining the best physical
arrangement of resources within a facility
Facility resource arrangement can significantly affect
productivity
 Objectives of Facility Layout
• The objective of layout strategy is to develop an effective and
efficient layout that will meet the firm’s competitive requirements
• layout design must consider how to achieve the following:
o Higher utilization of space, equipment, and people
o Improved flow of information, materials, and people
o Improved employee morale and safer working conditions
o Improved customer/client interaction
o Flexibility (whatever the layout is now, it will need to change)
A good layout requires determining the following:

• Material handling equipment

• Capacity and space requirements
• Environment and aesthetics
• Flows of information
• Cost of moving between various work areas
Types of Layouts
1. Process layouts
• also known as functional layouts, group similar activities
together in departments or work centers according to the
process or function they perform.
• group resources based on similar processes or functions.
• seen in companies with intermittent processing systems.
• is characteristic of intermittent operations, service shops, job
shops, or batch production, which serve different customers
with different needs.
• The volume of each customer’s order is low, and the sequence
of operations required to complete a customer’s order can vary
considerably.
• You would see a process layout in environments in which a large
variety of items are produced in a low volume.
• Since many different items are produced, each with unique
processing requirements, it is not possible to dedicate an entire
facility to each item.
• It is more efficient to group resources based on their function.
• The products are then moved from one resource to another,
based on their unique needs.
 For example,
• A hospital is an example of process layout. Departments are
grouped based on their function, such as cardiology, radiology,
laboratory, oncology, and pediatrics.
• The patient, the product in this case, is moved between departments based
on his or her individual needs.
• A university is another example. Colleges and departments are
grouped based on their function.
• You, the student, move between departments based on the unique program
you have chosen.
• a metalworking shop, where resources such as drills, welding,
grinding, and painting are each grouped based on the function they
perform.
• a department store, women’s clothes, men’s clothes, children’s
clothes, cosmetics, and shoes are located in separate departments.
• Other examples include a printing facility that prints books,
magazines, and newspapers, or a bakery that makes many different
baked goods.
Process layouts arrange items by type as
seen in this grocery store.
Unique characteristics of a process layout
1. Resources used are general purpose. The resources in a process layout
need to be capable of producing many different products.
2. Facilities are less capital intensive. Process layouts have less automation,
which is typically devoted to the production of one product.
3. Facilities are more labor intensive. Process layouts typically rely on
higher-skilled workers who can perform different functions.
4. Resources have greater flexibility. Process layouts need to have the
ability to easily add or delete products from their existing product line,
depending on market demands.
5. Processing rates are slower. Process layouts produce many different
products, and there is greater movement between workstations.
Consequently, it takes longer to produce a product.
6. Material handling costs are higher. It costs more to move goods from
one process to another.
7. Scheduling resources is more challenging. Scheduling equipment and
machines is particularly important in this environment. If it is not done
properly, long waiting lines can form in front of some work centers while
others remain idle.
8. Space requirements are higher. This type of layout needs more space
due to higher inventory storage needs
 2. Product layouts
Also known as assembly lines, arrange activities in a
line according to the sequence of operations that need
to be performed to assemble a particular product
arrange resources in a straight-line fashion to promote
efficient production.
They are called product layouts because all resources
are arranged to meet the production needs of the
product.
This type of layout is used by companies that have
repetitive processing systems and produce one or a few
standardized products in large volume.
Each product has its own “line” specifically
designed to meet its requirements.
The flow of work is orderly and efficient, moving from one
workstation to another down the assembly line until a finished
product comes off the end of the line.
A production system design in which every item to be produced
follows the same sequence of operations from beginning to end,
such as an assembly line.
The challenge in designing product layouts is to arrange workstations
in sequence and designate the jobs that will be performed by each
station in order to produce the product in the most efficient way
possible.
Operations managers must decide exactly what tasks will be
performed by every workstation in the sequence. They need
to consider the logical order in which jobs should be done.
 For example, at a car wash you cannot perform drying before
you have performed washing.
Managers also need to consider how fast production occurs
and how many units can be processed through the system.
The faster production occurs, the more units that can be
processed through the system
Examples of product layouts are seen on assembly lines, in
cafeterias, or even at a car wash.
Product layouts have the following
characteristics
Remember that product layouts are designed to produce one type or
just a few types of products in high volume.
1. Resources are specialized. Product layouts use specialized resources
designed to produce large quantities of a product.
2. Facilities are capital intensive. Product layouts make heavy use of
automation, which is specifically designed to increase production.
3. Processing rates are faster. Processing rates are fast, as all resources are
arranged in sequence for efficient production.
4. Material handling costs are lower. Due to the arrangement of work
centers in close proximity to one another, material handling costs are
significantly lower than for process layouts
5. Space requirements for inventory storage are lower. Product layouts
have much faster processing rates and less need for inventory storage.
6. Flexibility is low relative to the market. Because all facilities and
resources are specialized, product layouts are locked into producing one
type of product. They cannot easily add or delete products from the
existing product line.
A Product Layout
This photo shows a product layout where car bodies are moving down a
paced assembly line with workers following along completing their tasks.
Notice the workstations alongside the assembly line with tools, materials,
signage, instructions, and on lights (for signaling line slow down or
stoppage). Today's factories are clean and orderly; inspectors even wear
white gloves!
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 3. Fixed-position layouts
• are typical of projects in which the product produced is
too fragile, bulky, or heavy to move.
• Ships, houses, and aircraft are examples.
• In this layout, the product remains stationary for the
entire manufacturing cycle.
• Equipment, workers, materials, and other resources are
brought to the production site.
• Equipment utilization is low because it is often less costly
to leave equipment idle at a location where it will be
needed again in a few days, than to move it back and
forth.
• Frequently, the equipment is leased or subcontracted
because it is used for limited periods of time.
Aircraft production generally takes place in a fixed position layout due to
the size and complexity of assembly. Shown here is a Boeing 787
Dreamliner being outfitted
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SPECIAL CASES OF PROCESS LAYOUT
• A number of unique cases of process layout require special
attention.
• In this section we look at two special cases: warehouse
layouts and office layouts.
• Office layout: Positions workers, their equipment,
and spaces/offices to provide for movement of
information.
• Retail layout: Allocates display space and responds
to customer behavior.
• Warehouse layout: Addresses trade-offs between
space and material handling.
Warehouse Layouts
Warehouse layouts have the key characteristics of process
layouts: products are stored based on their function, and
there is movement of goods.
The main difference is that movement within a warehouse is
primarily between the loading/unloading dock and the areas
where goods are stored.
Typically, there is no movement between the storage areas
themselves; the primary function of a warehouse is to provide
storage space, so the only movement is inbound or outbound.
Example :
Think about a warehouse that stores computer equipment
and supplies. Printers might be stored in one area, keyboards
in another, and ink cartridges in a third. Certainly there would
be no movement between the keyboard storage area and the
area where ink cartridges are stored. The movement would
consist of bringing items either in or out of the warehouse.
Office Layouts
• Office layouts are another special case of process layouts.
• Merely looking at the number of trips between departments
or the movement of goods is not sufficient to design a good
office layout because human interaction and communication
are the primary factors that need to be considered when
designing office layouts.
Proximity versus Privacy
• One of the key trade-offs that has to be made in an office
layout is between proximity and privacy.
• The ability of workers to communicate and interact with one
another is highly important in an office environment.
• As companies increasingly embrace team approaches, open
office environments are valued because they provide visibility
and allow workers to interact easily.
• Studies have shown that workers who are in close proximity to
one another have greater understanding, tolerance, and trust
for one another.
• However, office layouts that enhance team interactions do not
allow privacy. Often, employees need privacy to think and
work quietly without being interrupted.
• Also, it may be difficult to have confidential conversations with
coworkers and clients in an open office environment. When
designing an office layout, these considerations must be
addressed in order to enhance productivity
A properly designed office layout can significantly
improve productivity.
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Hospital layout, examples
Hospital Reception
No one expects a stay in a hospital room to be unsafe or having to endure disruptions in
their care, although today, there is need for improvement in hospital room safety and
patient care. The following are suggestions for an improved hospital room of the future
Retail service Layouts

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 Warehouse and Storage Layouts
• The objective of warehouse layout is to find optimal trade-off
between handling cost and warehouse space and minimize the
damage and spoilage of materials within the warehouse.
• Materials handling costs related to
• the incoming transport,
• storage, and
• outgoing transport of the materials to be warehoused.
• The costs include
• equipment,
• people,
• material,
• supervision,
• insurance, and
• depreciation
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Layout Strategies Summary
3.5. Location Planning
and Analysis

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 3.5.1 Introduction:
What is facility Location?
 Facility Location…?
• Facility location is determining the best geographic location for a
company’s facility.
• Facility location decisions are particularly important for two
reasons:
First, they require long-term commitments in buildings and
facilities, which means that mistakes can be difficult to correct.
Second, these decisions require sizable financial investment and
can have a large impact on operating costs and revenues.
• Poor location can result in high transportation costs, inadequate
supplies of raw materials and labor, loss of competitive advantage,
and financial loss.
 Introduction…?
Decisions regarding where to locate a business facility or plant are
not made frequently, but they tend to be crucial in terms of a firm’s
profitability and long-term survival.
A mistake in location is not easily overcome. Business success often
is being “in the right place at the right time.”
For a service operation such as a restaurant, hotel, or retail store,
being in the right place usually means in a location that is
convenient and easily accessible to customers.
Location decisions for services tend to be an important part of the
overall market strategy for the delivery of their products or services
to customers
• Location decisions are usually made more frequently for service
operations than manufacturing facilities because facilities for
service-related businesses tend to be smaller and less costly,
• Services depend on a certain degree of market saturation; the
location is actually part of their product.
• Where to locate a manufacturing facility is important for reasons
like the very high expense of building a plant or factory.
• Although the primary location criteria for a service-related business
is usually access to customers, a different set of criteria is important
for a manufacturing facility including:
the nature of the labor force, and labor costs,
proximity to suppliers and markets,
distribution and transportation costs,
energy availability and cost,
the community infrastructure of roads, sewers, and utilities,
quality of life in a community, and
government regulations and taxes
The location decision often depends on the type of business.
For industrial location decisions, the strategy is usually minimizing
costs, although locations that foster innovation and creativity may
also be critical.
For retail and professional service organizations, the strategy focuses
on maximizing revenue.
Warehouse location strategy, however, may be driven by a
combination of cost and speed of delivery.
However, in general, the objective of location strategy is to maximize
the benefit of location to the firm.
3.5.2. The Need for Location
Decisions
 The Need for Location Decisions …?
Some of the reasons companies make a location decision include:
Marketing Strategy
This happens when companies look for locations that will help them to
expand their markets.
the location decisions in those cases reflect the addition of new locations to
an existing system.
Example: banks, supermarkets, fast food chains, retail stores
Cost of Doing Business
When a shift in markets or the costs of doing business at a particular
location reach a point where other locations begin to look more attractive.
The cost of labor, materials, utilities, energy, transportation, etc
Growth
Situations when an organization experiences a growth in demand
for its products or services that cannot be satisfied by expansion at
an existing location. Hence, the addition of a new location to
complement an existing system often becomes a realistic
alternative
Depletion of Resources
• Some firms face location decisions through depletion of basic
inputs which forces to relocate due to the temporary exhaustion of
the inputs
3.5.3. The Nature Of Location Decisions
Strategic Importance of Location Decisions
1) Location decisions are closely tied to an organization’s strategies.
• For example,
a strategy of being a low-cost producer might result in locating
where labor or material costs are low, or locating near markets or
raw materials to reduce transportation costs.
A strategy of increasing profits by increasing market share might
result in locating in high-traffic/highly populated areas, and
a strategy that emphasizes convenience for the customer might
result in having many locations where customers can transact
their business or make purchases (e.g., branch banks, ATMs,
service stations, fast-food outlets).
2) Location choices can impact capacity and flexibility.
Certain locations may be subject to space constraints that limit future
expansion options.
Moreover, local restrictions may restrict the types of products or
services that can be offered, thus limiting future options for new
products or services
3) Location decisions are strategically important for other reasons as well.
a) location decisions entail a long-term commitment, which makes
mistakes difficult to overcome.
b) location decisions often have an impact on investment
requirements, operating costs and revenues, and operations.
A poor choice of location might result in excessive
transportation costs, a shortage of qualified labor, loss of
competitive advantage, inadequate supplies of raw materials, or
some similar condition that is detrimental to operations.
For services, a poor location could result in lack of customers
and/or high operating costs. For both manufacturing and
services, location decisions can have a significant impact on
competitive advantage.
c)location decisions are strategically important to supply chains.
 Objectives of Location Decisions
Profit-oriented organizations base their decisions on profit
potential,
Nonprofit organizations strive to achieve a balance between cost
and the level of customer service they provide.
Finding a number of acceptable locations from which to
choose is the objective.
It would seem to follow that all organizations attempt to identify
the “best” location available. However, this is not necessarily the
case.
 Location decision Options

Managers of existing companies generally consider four options in

location planning.
• Expand an existing facility. This option can be attractive if there is
adequate room for expansion, especially if the location has
desirable features that are not readily available elsewhere.
• Add new locations while retaining existing ones. This is done in
many retail operations.
Location options...

• Shut down at one location and move to another. A shift in markets,

exhaustion of raw materials, and the cost of operations often cause
firms to consider this option seriously.
• Do nothing. If a detailed analysis of potential locations fails to
uncover benefits that make one of the previous three alternatives
attractive, a firm may decide to maintain the status quo, at least for
the time being.
3.5.4. Factors Affecting Location Decisions
Proximity to Sources of Supply
• Firms need to locate close to sources of supply for the following
reasons :
the firm has no choice, where proximity to natural resources
is necessary
the perishable nature of goods, and
to avoid high transportation costs
  Proximity to Customers
• Locating near the market they serve is often critical for service
organizations as they have to be accessible to their customers to
capture their share of the business. For this reason, service firms
typically locate in high-population areas that offer convenient access.
• Other reasons for locating close to customers may include the
perishable nature of the company’s products or high costs of
transportation to the customer site.
Examples include retail stores, fast-food restaurants, gas
stations, grocery stores, dry cleaners, and flower shops.
Proximity to Source of Labor
• The company needs to consider the availability of a particular type
of labor, whether special skills are required, local wage rates, the
presence of local unions, and attitudes of local workers.
• Work ethics and attitudes toward work like absenteeism, tardiness,
and turnover can greatly vary from area to area an affect a
company’s productivity.
  Community Considerations
• The success of a company at a particular location can be affected by
the extent to which it is accepted by the local community.
• Many communities welcome new businesses, viewing them as
providing sources of tax revenues and opportunities for jobs, and as
contributing to the overall well-being of the community.
• However, communities do not want businesses that bring pollution,
noise, and traffic and that lower the quality of life.
• Extreme examples are a nuclear facility, a trash dump
site, and an airport.
Site Considerations
• Site considerations include factors such as utility costs, taxes, zoning
restrictions, soil conditions, access roads for trucks, and even climate.
Quality-of-Life Issues
• The quality of life a particular location offers the company’s
employees is important considerations. Quality of life includes factors
such as climate, a desirable lifestyle, good schools, and a low crime
rate.
General Procedure For Making
Location Decisions
• The general procedure for making location decisions usually
consists of the following steps:
1. Decide on the criteria to use for evaluating location
alternatives, such as increased revenues, decreased cost, or
community service.
2. Identify important/dominant factors, such as the location of
markets or raw materials. The factors will differ depending on
the type of facility.
• For example, retail, manufacturing, distribution, health
care, and transportation all have differing factors that guide
their location decisions.
3. Develop location alternatives:
a) Identify a country or countries for a location.
b) Identify the general region for a location.
c) Identify a small number of community alternatives.
d) Identify site alternatives among the community
alternatives.
4. Evaluate the alternatives and make a selection
Evaluating Location Alternatives

The methods/techniques
Four major methods are used for solving location problems:
The Factor-rating Method,
Locational Cost–volume Analysis,
The Center-of-gravity Method, And
The Load-distance Method.
 1) Factor Rating Method
• An approach for selecting a facility location by combining a diverse set of
factors. Point scales are developed for each criterion. Each potential site is then
evaluated on each criterion and the points are combined to calculate a rating
for the site.
• Factor rating is a general approach that is useful for evaluating a given
alternative and comparing alternatives. The value of factor rating is that it
provides a rational basis for evaluation and facilitates comparison among
alternatives by establishing a composite value for each alternative that
summarizes all related factors.
• Factor rating enables decision makers to incorporate their personal opinions
and quantitative information in the decision process. The following procedure
is used to develop a factor rating:
 The procedure to develop a factor rating:
1. Determine which factors are relevant (e.g., location of market, water supply,
parking facilities, revenue potential).
2. Assign a weight to each factor that indicates its relative importance compared
with all other factors.
3. Decide on a common scale for all factors (e.g., 1 to 100), and set a minimum
acceptable score if necessary. Note that an undesirable factor such as a high
crime rate could be assigned a negative score. Conversely, lack of crime could
be assigned a high score while a high crime rate could be assigned a low score.
4. Have management score each location for each factor, using the scale in Step 3
5. Multiply the factor weight by the score for each factor, and sum the results for
each location alternative.
6. Choose the alternative that has the highest composite score, unless it fails to
meet the minimum acceptable score.
 Example 1:
• Consider XYZ park has decided to expand overseas by opening its first park
in Europe. It wishes to select between France and Denmark. The ratings sheet
in Table below lists key success factors that management has decided are
important; their weightings and their rating for two possible sites—Dijon,
France, and Copenhagen, Denmark—are shown:
 Solution to example 1

• Given the option of 100 points assigned to each factor, the French location
is preferable.
 Example 2:
• A coffee shop owner wants to add a new location. A photo-processing
company intends to open a new branch store. The following table
contains information on two potential locations. Which is the better
alternative?
 Solution to example 2

• Alternative 2 is better because it has the higher composite score.

• In some cases, managers may prefer to establish minimum thresholds for
composite scores. If an alternative fails to meet that minimum, they can reject it
without further consideration. If none of the alternatives meets the minimum,
this means that either additional alternatives must be identified and evaluated
or the minimum threshold must be reevaluated.
 Example 3:
• The Dynamo Manufacturing Company is going to build a new plant to
manufacture ring bearings (used in automobiles and trucks). The site-selection
team is evaluating three sites, and they have scored the important factors for
each as follows. They want to use these ratings to compare the locations.
 Solution to example 3:
• The weighted scores for each site are computed by multiplying the factor weights by the
score for that factor. For example, the weighted score for “labor pool and climate” for site 1
is: (0.30)(80) = 24 points. The weighted scores for each factor for each site and the total
scores are summarized as follows:
 Example 4
• Abebe is evaluating three different locations for his new restaurant. Costs are
comparable at all three locations. He has identified seven factors that he
considers important and has decided to use factor rating to evaluate his three
location alternatives based on a five-point scale, with 1 being poor and 5
excellent. The following table shows Abebe’s factors, the weights he has assigned
to each factor, as well as the factor score for each factor at each location.
• From the above table it is clear that Abebe considers facility
appearance and proximity to market the two most important factors,
because he has rated each of these with a 20. Other factors are
slightly less important.
• Note that Abebe selected the factors first. Then he decided to weight
them based on his perception of their importance. He then
computed a factor score for each factor at each location. Looking at
the factor scores he selected, it appears that location 1 is excellent
based on appearance, parking, and access, but poor based on
closeness to the market. Location 3 is just the opposite, being
excellent based on closeness to the market but poor based on facility
appearance. Location 2 appears to be somewhere in the middle.
Solution to example 4
2) Locational Cost-Profit-Volume Analysis
The economic comparison of location alternatives is facilitated by
the use of cost-profit-volume analysis. The analysis can be done
numerically or graphically. The graphic approach has the
advantage of providing the range of volume over which each
location is preferable.
Locational cost–volume analysis is a technique for making an
economic comparison of location alternatives.
By identifying fixed and variable costs and graphing them for each
location, we can determine which one provides the lowest cost.
The three steps to locational cost–volume analysis are as follows:
1. Determine the fixed and variable cost for each location.
2. Plot the costs for each location, with costs on the vertical axis of the
graph and annual volume on the horizontal axis.
3. Select the location that has the lowest total cost for the expected
production volume. Alternatively, determine which location will have
the highest profit.
This method assumes the following:
Fixed costs are constant for the range of probable output.
Variable costs are linear for the range of probable output.
The required level of output can be closely estimated.
Only one product is involved
 Case one : For a cost analysis:
Compute the total cost for each location:
Total cost = FC + v × Q
where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity or volume of output
Example 1 (cost Analysis)
 Example 2: Cost analysis.
• A farm implements dealer is seeking a fourth warehouse location to
complement three existing warehouses. There are three potential locations:
Charlotte, NC; Atlanta, GA; and Columbia, SC. Charlotte would involve a
fixed cost of $4,000 per month and a variable cost of $4 per unit; Atlanta
would involve a fixed cost of $3,500 per month and a variable cost of $5 per
unit; and Columbia would involve a fixed cost of $5,000 per month and a
variable cost of $6 per unit. Use of the Charlotte location would increase
system transportation costs by $19,000 per month, Atlanta by $22,000 per
month, and Columbia by $18,000 per month. Which location would result in
the lowest total cost to handle 800 units per month?
• Given: Volume = 800 units per month
Solution to example 2
 Case 2: For a profit analysis
compute the total profit for each location:
Total profit = Q(R − v)−FC
where
R = Revenue per unit
Example 3: Profit analysis.
• A manufacturer of staplers is about to lose its lease, so it must move
to another location. Two sites are currently under consideration.
Fixed costs would be $8,000 per month at site A and $9,400 per
month at site B. Variable costs are expected to be $5 per unit at site
A and $4 per unit at site B. Monthly demand has been steady at
8,800 units for the last several years and is not expected to deviate
from that amount in the foreseeable future. Assume staplers sell for
$6 per unit. Determine which location would yield the higher profit
under these conditions.
Solution
 Example 4
• Esmail Mohebbi, owner of Ignitions Manufacturing, needs to
expand his capacity. He is considering three locations—Athens,
Brussels, and Lisbon—for a new plant. The company wishes to
find the most economical location for an expected volume of 2,000
units per year.
• Mohebbi conducts locational cost–volume analysis. To do so, he
determines that fixed costs per year at the sites are $30,000,
$60,000, and $110,000, respectively; and variable costs are $75 per
unit, $45 per unit, and $25 per unit, respectively. The expected
selling price of each ignition system produced is $120.
 Solution
• For each of the three locations, Mohebbi can plot the fixed costs (those at a
volume of zero units) and the total cost (fixed costs + variable costs) at the
expected volume of output.
• As with every other OM model, locational cost–volume
analysis can be sensitive to input data. For example, for a
volume of less than 1,000, Athens would be preferred. For a
volume greater than 2,500, Lisbon would yield the greatest
profit
 3) The Center-of-Gravity/Centroid Method
This is a mathematical technique used for finding the location of a
distribution center that will minimize distribution costs.
The method takes into account the location of markets, the volume of goods
shipped to those markets, and shipping costs in finding the best location for
a distribution center.
The center-of-gravity or weight-center technique is a quantitative method for
locating a facility such as a warehouse at the center of movement in a
geographic area based on weight and distance.
It is a method to determine the location of a facility that will minimize
shipping costs or travel time to various destinations.
The centroid method is a technique for locating single facilities that
considers the existing facilities, the distances between them, and the
volumes of goods to be shipped.
The technique is often used to locate intermediate or distribution
warehouses. In its simplest form, this method assumes that inbound
and outbound transportation costs are equal, and it does not include
special shipping costs for less than full loads
The method treats distribution cost as a linear function of the
distance and the quantity shipped. The quantity to be shipped to each
destination is assumed to be fixed (i.e., will not change over time).
Some areas of application:
community planners use the method to determine the location of fire and
public safety centers, schools, community centers, and such, taking into
consideration locations of hospitals, senior living centers, population
density, highways, airports, and retail businesses.
planning for distribution centers, where the goal is typically to minimize
distribution costs.
the location of communication towers in urban areas.
Examples include radio, TV, and cell phone towers. In this application,
the goal is to find sites that are near clusters of customers, thus
ensuring clear radio signals. The centroid method finds a simple
mathematical point. Once it is found, the problem should consider
qualitative factors such as geography, roads, and utilities to find an
exact location.
The centroid is found by calculating the X and Y coordinates that result
in the minimal transportation cost. We use the formulas
 Example 1.
• Determine the coordinates of the center of gravity for the problem depicted in
the following Figure . Assume that the shipments from the center of gravity to
each of the four destinations will be equal quantities.
Hence, the center of gravity is at (4.5,4), which places it
just west of destination D3
Example 2
• Given the following:
Hence, the coordinates of the center of gravity are approximately
(3,3.7).
Example 3
 Example 4
• The Burger Doodle restaurant chain purchases ingredients from four different food
suppliers. The company wants to construct a new central distribution center to process and
package the ingredients before shipping them to its various restaurants. The suppliers
transport ingredient items in 40-foot truck trailers, each with a capacity of 38,000 lbs. The
locations of the four suppliers, A, B, C, and D, and the annual number of trailer loads that
will be transported to the distribution center, are shown in the following figure:

Using the center-of-gravity method, determine a possible location for the

distribution center.
Thus, the suggested coordinates for the new distribution center location are x = 238 and y = 444.
However, it should be kept in mind that these coordinates are based on straight-line distances,
and in a real situation actual roads might follow more circuitous routes.
 Example 5
A company is going to construct a new warehouse served by suppliers A, B, and C.
The locations of the three suppliers and the annual number of truck carriers that
will serve the warehouse are shown in the following figure:

Determine the best site for

the warehouse using the
center-of-gravity
technique.
 4. Load-Distance Technique
• A variation of the center-of-gravity method for determining the
coordinates of a facility location is the load-distance technique.
• In this method, a single set of location coordinates is not identified.
Instead, various locations are evaluated using a load-distance value
that is a measure of weight and distance.
• For a single potential location, a load-distance value is computed as
follows:
The distance di in this formula can be the travel distance, if that value is
known or can be determined from a map. It can also be computed using the
following formula for the straight-line distance between two points, which is
also the hypotenuse of a right triangle:
• The load-distance technique is applied by computing a load-distance
value for each potential facility location.
• The implication is that the location with the lowest value would result in
the minimum transportation cost and thus would be preferable.
 Example 1
• Burger Doodle wants to evaluate three different sites it has
identified for its new distribution center relative to the four
suppliers as shown below. The coordinates of the three sites under
consideration are as follows:
Site 1: x1 = 360, y1 = 180
Site 2: x2 = 420, y2 = 450
 Site 3: x3 = 250, y3 = 400
 Solution:
• First, the distances between the proposed sites (1, 2, and 3) and each existing
facility (A, B, C, and D), are computed using the straight-line formula for di :
Since site 3 has the lowest load-distance value, it would be assumed that this
location would also minimize transportation costs. Notice that site 3 is very close
to the location determined using the center-of-gravity method in example 4
above.
Exercise one:
Solution
Exercise two
Solution