Need for Locating a Plant

• It arises when:
– The business in newly started
Locating a Plant – The expansion to the existing plant is not possible
– A firm wants to establish new branches
Presented By: – The landlord does not renew the existing lease
Anupam Kumar – Economic or social reasons like:
Reader
SMS Varanasi • Inadequate power supply
E mail: anupamkr@gmail.com • Government regulations, etc.

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Importance of the Right Location Importance of the Right Location

• Location Decision is a long term decision
• Location Decision is difficult to revise or
reverse
• The location of plant fixes the production
technology.
– Options between labour intensive or capital /
machine intensive production technologies.
• The location of plant fixes the cost structure.
– It affects the fixed and variable costs.
– At times transportation costs are almost 25% of
the price of product.
• Location of a facility affects the company’s
ability to serve its customers quickly and
conveniently.
• Location determines the nature and size of the
business

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Factors Affecting Location Decisions Factors Affecting Plant Location

• Market Proximity
• Integration with other
parts of the organization
• Availability of Labour and
Skills
• Site Cost
• Availability of Amenities
• Availability of Transport
Facilities
• Availability of Inputs
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• Availability of Services
• Suitability of Land and
Climate
• Regional Regulations
• Room for Expansion
• Safety Requirements
• Political Cultural and
Economic Situations
• Regional Taxes, Special
Grants and Import /
Export Barriers.
5 © Copyright 2013 Anupam Kumar
• Controllable Factors • Uncontrollable Factors
– Market – Government Policy
– Supply of Raw Material – Climatic Conditions
– Transport – Supporting Industries
– Infrastructure – Community
Availability – Social Network
– Labour and Wages
6

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 Need for Locating a Plant Location Evaluation Methods
• The need for locating a plant can broadly be divided • There are various methods for evaluating the
into 2 types. ideal Location for a Plant.
– Location Choice for Existing Organization
• Plants Manufacturing Distinct Products
• Some of them are:
• Plants Supplying to a Specific Market Area – Factor Rating Method
• Plants Based on the Process or Stage of Manufacturing
– Point Rating Method
• Plant Emphasizing Flexibility (Increase in Operations)
– Location Choice for New Organizations – Locational Break-Even Analysis
• Identification of Region – Center of Gravity Method
• Choice of Site with a region
– Transportation Model
• Selecting a Site

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Factor Rating Method Factor Rating – Selection Criteria

• Labor costs; including • State and local government
• Most widely used location technique – wages, fiscal policies; including
– unionization, – incentives,
• Useful for service & industrial locations – productivity – taxes,
• Rates locations using factors • Labor availability; including – unemployment compensation
– attitudes, • Utilities; including
– Intangible (qualitative) factors – age, – fuel,
• Example: Education quality, labor skills – distribution and – electricity,
– skills – Water costs
– Tangible (quantitative) factors • Proximity to raw materials • Site costs; including
and suppliers – land,
• Example: Short-run & long-run costs – expansion,
• Proximity to markets – parking,
– drainage

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Factor Rating – Selection Criteria Factor Rating Method

• Quality-of-life issues; • Transportation availability; • List relevant factors
including including
– all levels of education, – rail, • Assign importance weight to each factor (0 - 5)
– cost of living, – air,
– health care, – water and • Develop scale for each factor (1 - 10)
– sports, – interstate roads
– cultural activities, • Quality of government;
• Score each location using factor scale
– transportation, including • Multiply scores by weights for each factor &
– housing, – stability,
– entertainment, – honesty, total
– religious facilities – attitudes toward new
business - whether overseas
• Select location with maximum total score
• Foreign exchange; including
or local
– rates and stability

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 Factor Rating Method - Illustration Point Rating Method
Factor Factor Location Location • While selecting a location, companies have several
Rating A B objectives,
Tax Advantage 4 8 6 – But not all are of equal importance
Suitability of labour Skill 3 2 3 • To overcome this issue, in Factor Rating Method,
Proximity to customers 3 6 5 – each objective is given a Factor Rating depending upon
– the mutual importance of the various objectives.
Adequacy of Water 1 3 3
• The Point Rating Method takes into consideration a
Receptivity of community 5 4 3 hypothetical ideal location and tries to fix the
Quality of Education System 4 1 6 maximum points for each of the objectives.
Access to rail and Air transport 3 10 8 • Now all the available locations are given points after
considering the maximum possible points as per the
Suitability of climate 2 7 9 ideal site.
Availability of Power 2 6 4
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Point Rating Method - Illustration Point Rating Method

Factor Rated Maximum Location Location
Possible Points X Y
• The drawback of this method is that
Future Availability of Fuel 300 200 290 – high score in any factor can overcome a low score
Transportation, Flexibility & 250 200 95 in other factor.
Growth • To overcome such extreme deviations,
Adequacy of Water Supply 150 100 140
– any site which does not have at least a specified
Labour Availability 250 210 200 number of points for those essential factors are
Pollution Regulations 300 250 280
– excluded from further consideration.
Site Topography 50 40 30
Living Conditions 150 100 135

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Point Rating Method - Illustration Point Rating Method

Factor Rated Maximum Location Location • Point Rating Method helps in comparing the
Possible Points X Y
tangible factors with the intangible factors.
Future Availability of Fuel 300 200 290
Transportation, Flexibility & 250 200 95 • Points are assigned only to the intangible
Growth factors.
Adequacy of Water Supply 150 100 140 • Evaluation is made to determine whether
Labour Availability 250 210 200 – the difference between the intangible scores is
Pollution Regulations 300 250 280 worth
Site Topography 50 40 30 – the difference between the tangible costs (if any)
Living Conditions 150 100 135 of the competing locations.

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 Point Rating Method Locational Break-Even Analysis
• If two alternative locations are found to be • Method of cost-volume analysis used for
equally attractive by comparing costs based industrial locations
on tangible factors then • Steps
• These two alternative potential locations may – Determine fixed & variable costs for each location
further be evaluated, based on the intangible – Plot total cost for each location
factors using the Point Rating Method. – Select location with lowest total cost for expected
production volume
• Must be above break-even

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Locational Break-Even Analysis -

Locational Break-Even Analysis
Illustration
• You’re an analyst for ACC Cement. Sr. Place Fixed Cost Variable Total Cost Variable Cost
No. (in INR) Cost (at 0 Unit ( at 2 Lac unit
• You’re considering a new manufacturing plant in Aurangabad, ‘000s (in INR) production) production)
Bhubaneswar, or Coimbatore. Fixed costs per year are Rs. ‘000s ‘000 s
11Cr., Rs. 6Cr., & Rs.3Cr. respectively. 1. Aurangabad 110000 250 110000 50000
2. Bhubaneswar 60000 450 60000 90000
• Variable costs per case are Rs. 250, Rs.450, & Rs.750
3. Coimbatore 30000 750 30000 150000
respectively.
• The price per bag is Rs. 1200. Sr. Place Fixed Cost Variable Variable Cost Variable Cost
No. (in INR) Cost (at 1 Lac Unit ( at 5 Lac unit
• What is the best location for an expected volume of 200,000 ‘000s (in INR) production) production)
bags per year? Back to Question ‘000s ‘000 s
• Would your decision change if the expected volume is more 4. Aurangabad 110000 250 25000 125000
than 5 Lakh bags or less than 1 Lakh bags? 5. Bhubaneswar 60000 450 45000 225000
6. Coimbatore 30000 750 75000 375000
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Locational Break-Even Analysis –

Locational Break-Even Analysis
Illustration Chart
• Godavari Electricals Ltd. Wanted to set up its new plant for manufacturing
2000 of heaters. The management of Godavari identified three potential areas
whose fixed and variable costs are as below.
1500
Annual Cost

• The product is expected to be sold at Rs. 1050 per unit and the existing
(in ‘00)

demand in the market is likely to be 600 units per year.

1000 • Calculate the most profitable location for Godavari under the current
conditions.
500 C lowest B lowest A • What is the minimum quantity that Godavari should target to break even
cost cost lowest its costs in Hyderabad?
cost
0
Location Fixed Cost / Year Variable Cost / Unit
0 5 10 15 20 25 30 Kakinada Rs. 2,00,000.00 325
Volume Vijayawada Rs. 2,50,000.00 285
(in ‘00) Hyderabad Rs. 3,00,000.00 265
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 Center of Gravity Method
• Finds location of single distribution center
serving several destinations
• Used primarily for services
• Considers
– Location of existing destinations
• Example: Markets, retailers etc.
– Volume to be shipped
– Shipping distance (or cost)
• Shipping cost/unit/mile is constant
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Center of Gravity Method
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For further details …
Contact
Anupam Kumar
Reader
School of Management Sciences, Varanasi.
Email: anupamkr@gmail.com
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© Copyright 2013 Anupam Kumar
Center of Gravity Method Steps
• Place existing locations on a coordinate grid
– Grid has arbitrary origin & scale
– Maintains relative distances
• Calculate X & Y coordinates for ‘center of
gravity’
– Gives location of distribution center
– Minimizes transportation cost
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Transportation Model
• Finds amount to be shipped from several
sources to several destinations
• Used primarily for industrial locations
• Type of linear programming model
– Objective: Minimize total production
& shipping costs
– Constraints
• Production capacity at source (factory)
• Demand requirement at destination
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Bibliography
• Buffa, E.S. and Sarin, R.K., “Modern Production/Operations Management,” Eighth Edition. Singapore: John
Wiley & Sons (Asia). 1994.
• Martinich, J.S., “Production and Operations Management: An Applied Approach”, Singapore: John Wiley &
Sons (Asia), 2003.
• Monks, J.G., “Theory and Problems of Operations Management”, Second Edition, New Delhi: Tata McGraw
•
Hill, 2004.
Chary, S.N., “Productions and Operations Management,” Third Edition, New Delhi: Tata McGraw Hill, 2004
• Kumar, S.A., and Suresh, N., “Production and Operations Management”, Second Edition, New Delhi: New
Age, 2008.
• Goel, B.S., “Production Operations Management”, Twenty Second Edition, Meerut, U.P.: Pragati Prakashan,
2010.
• Kachru, U. “Production and Operations Management: Text and Cases,” New Delhi: Excel Books, 2007.
• Rama Murthy, P., “Production and Operations Management,” New Delhi: New Age International, 2012.
• Chunawalla, S.A., and Patel, D.R., “Production and Operations Management,” Mumbai: Himalaya
Publishing House, 2006.
• Jauhari, V. and Dutta, K., “Services: Marketing Operations and Management,” New Delhi: Oxford University
Press, 2010.
• Verma, H.V., “Services Marketing: Text and Cases,” New Delhi: Dorling Kindersley, Pearson Education, 2009
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