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 Germany’s 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
 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 FCA- FIXED COST AT LOCATION A

TCB- TOTAL COST AT LOCATION B 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 Rs. 16,00,000 Rs 400/ unit
Delhi Rs. 20,00,000 Rs.150/unit
Sales – 2000 unit /yr Price – 1500/unit
Cost –Profit-Volume or Break – Even Analysis

REVENUE 30,00,000

TCA 24,00,000
TCB 23,00,000
COST

FCB
20,00,000
FCA
15,00,000

1000 2000
VOLUME OF SALES
TCA- Total cost at Bangalore = Rs.24,00,000
FCA- Fixed cost at Bangalore=Rs. 16,00,000
Total
TCB- Total cost at Delhi = Rs 23,00,000 Revenue=
FCB- Fixed Cost at Delhi= Rs. 20,00,000 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 :
iv) Relevant factors are identified – like
production cost, supply of raw materials,
labour availability, proximity to customer,
availability of facilities, tax advantage etc.
v) Weights are assigned to the factors based
on their importance. (Most important -5 ,
least important -1)
 Location Evaluation Methods
2. Factor Rating Technique
Method :
• 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
7. It helps in deciding one location over the other.
8. It brings diverse locations into consideration.
9. It has consistency in evaluation.
2. Factor Rating Technique
Problem

Factor Factor Location A Location B

rating
Product cost 5 7 8
Labour 4 6 5
availability
Supply of Raw 5 8 7
material
Proximity to 4 5 4
customer
Tax Advantage 2 6 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
Product cost 5 7 8 35 40
Labour 4 6 5 24 20
availability
Supply of Raw 5 8 7 40 35
material
Proximity to 4 5 4 20 16
customer
Tax Advantage 2 6 7 12 14
total 131 125
 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 Maximum Location A Location
possible no. B
Transportation 600 400 500
facility
Water supply 200 150 100
Living 400 300 350
condition
Availability of 500 200 300
fuel
Total 1050 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 Di = quantity demanded at jth destination
i=1

And ∑ Xij > or = 0 for all I and j

 Transportation Method
Procedure :
• Define the objective function that is to be
minimized
• 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.
 Transportation Method

Origin Destination Supply

D1 D2 --- Dn
O1 X11 C11 X12 C12 --- X1n C1n S1
O2 X21 C21 X22 C22 --- X2n C2n S2
: : : --- : :
Om Xm1 Cm1 Xm2 Cm2 --- Xmn Cmn Sm
Demand D1 D2 --- Dn ∑Si
∑Dn
 Transportation Method

Developing Initial Feasible solution :

ii) North –west corner method
iii)Least cost method
iv)Vogel’s approximation method
 Transportation Method
Developing Initial Feasible solution :
ii) 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 :
ii) 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 W2 W3 Supply
Factory
F1 16(cost) 22 14 200
F2 18 14 18 150
F3 8 14 16 100
Demand 175 125 150
 Transportation Method
Developing Initial Feasible solution :
ii) North –west corner method m+n-1 = 5

Warehouse W1 W2 W3 Supply
Factory

F1 175 16 25 22 14 200

F2 18 100 14 50 18 150

F3 8 14 100 16 100

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 m+n-1 = 5

Warehouse W1 W2 W3 Supply
Factory

F1 50 16 22 150 14 200

F2 25 18 125 14 18 150

F3 100 8 14 16 100

Demand 175 125 150

 Transportation Method
Developing Initial Feasible solution :
iii) Vogel’s 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) Vogel’s Approximation method
Step 5 : calculate the value of penalty of reduced
transportation problem and repeat the procedure.
Warehous W1 W2 W3 Supply Penalty
e
Factory
F1 16 22 14 200 2

F2 18 14 18 150 4

F3 8 14 16 100 6

Demand 175 125 150

Penalty 8 0 2
 Transportation Method
iii) Vogel’s Approximation method
Largest penalty column is first column and cell with least
cost is F3W1, assign maximum product 100.
Warehous W1 W2 W3 Supply Penalty
e
Factory
F1 16 22 14 200 2

F2 18 14 18 150 4

F3 100 8 14 16 100 6

Demand 175 125 150

Penalty 8 0 2

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

 Transportation Method
iii) Vogel’s Approximation method
Recalculate penalty. Column 2 has highest penalty
8 hence assign maximum product 125 to minimum
cost cell F2W2
Warehous W1 W2 W3 Supply Penalty
e
Factory
F1 16 22 14 200 2

F2 18 125 14 18 150 4

Demand 75 125 150

Penalty 2 8 4
Now delete second column as demand is met and adjust the supply to 25 (150-125)
 Transportation Method
iii) Vogel’s Approximation method
Recalculate penalty. Column 2 has highest penalty
8 hence assign maximum product 150 to minimum
cost cell F2W2
Warehous W1 W3 Supply Penalty
e
Factory
F1 16 150 14 200 2

F2 18 18 25 0

Demand 75 150
Penalty 2 4
Now assign left out difference of 50 in first row and 25 in second row to first column
 Transportation Method
iii) Vogel’s Approximation method
Solution is given below :

Warehous W1 W2 W3 Supply Penalty

e
Factory
F1 50 16 22 150 14 200

F2 25 18 14 18 150

F3 100 8 125 14 16 100

Demand 175 125 150

Penalty 8 0 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 W2 W3 Supply
Factory
F1 50 16 UOC 22 150 14 200 UOC=
Un-
F2 25 18 125 14 UOC 18 150
Occupied
F3 100 8 UOC 14 UOC 16 100 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
12 G
Y location , Km

A
8
E
C F
4
D

4 8 12 16

X coordinates , Km
5. Center of Gravity Method for Plant Location
Problem:
RETAIL X Y VOLUME
OUTLET

A 4 10 80
B 3.5 15 100
C 4 6 120
D 10 2 130
E 16 6 100
F 8 5 150
G 14 13 90
5. Center of Gravity Method for Plant Location
Problem:
RETAIL XiVi YiVi VOLUME
OUTLET
A 4x80=320 10x80=800 80
B 3.5x100=350 15x100=1500 100
C 4x120=480 6x120=720 120
D 10x130=1300 2x130=260 130
E 16x100=1600 6x100=600 100
F 8x150=1200 5x150=750 150
G 14x90=1260 13x90=1170 90
Total ∑(XiVi)= 6510 ∑(YiVi)=5800 ∑(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 time’s Manufacturing Woes
• Ellora times Pvt. Ltd based in Morbi, Rajkot,
Gujarat, India
• In 2001, it was the world’s 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 time’s 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 time’s 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 time’s 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 time’s Manufacturing Woes
Question for Discussion:
2. 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 time’s 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 time’s 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 time’s 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)