Module 3:

Facility Location and Layout

INTRODUCTION AND MEANING
Plant location or the facilities location problem is an important
strategic level decision making for an organization. One of the
key features of a conversion process (manufacturing system) is the
efficiency with which the products (services) are transferred to the
customers.
This fact will include the determination of where to place the
plant or facility. The plant location should be based on the
company’s expansion plan and policy, diversification plan for the
products, changing market conditions, the changing sources of
raw materials and many other factors that influence the choice of
the location decision.
The purpose of the location study is to find an optimum location
one that will result in the greatest advantage to the organization.
CONCEPT OF FACILITY LOCATION
 Facility location may be defined as a place where the facility
will be set up for producing goods or services. The need for location
selection may arise under any of the following conditions:

a) When a business is newly started.

b) When the existing business unit has outgrown its original
facilities and expansion is not possible; hence a new location has
to be found.
c) When the volume of business or the extent of market
necessitates the establishment of branches.

d) When the lease expires and the landlord does not renew the
lease.
e) Other social or economic reasons.
 NEED FOR FACILITY LOCATION
PLANNING
i. Facility location planning is also required for providing a cost
benefit to the organization.
ii. The location planning should help in reducing the
transportation cost for the organization. This ultimately helps
in decreasing the cost of production and generating cost
advantage for the organization.
iii. It is also needed to identify proximity to the sources of raw
materials and transportation facilities.
iv. A facility should ideally be located at a place where raw
materials are available. This is necessary for maintaining
continuity in the production process.
FACTORS AFFECTING FACILITY LOCATION
DECISIONS
• Availability of power

• Transportation

• Suitability of climate

• Government policy

• Competition between states

• Availability of labor

• Civic amenities for workers

• Existence of complementary and competing industries

• Finance and research amenities

• Availability of water and fire-fighting facilities

 PROCEDURES AND TECHNIQUES
FOR SELECTING FACILITY
LOCATION

An organization follows certain steps to make a correct

location choice. These steps are:

i. Decide on the criteria for evaluating location alternatives

ii. Identify important factors
iii. Develop location alternatives
iv. Evaluate the alternatives.
v. Make a decision and select the location
CONCEPT OF FACILITY LOCATION
Procedures and Techniques for Selecting Facility Location
Following are some main techniques used in making location decisions:

➢ Location rating factor technique: In this technique, first of all an

organization needs to identify the factors that influence its location
decision. Next, each factor is provided a weight between ‘0’ to ‘1’
according to the level of importance, where ‘0’ denotes least important
and ‘1’ denotes most important.

➢ Centre-of-gravity technique: This technique emphasizes on transportation

cost in the determination of facility location. Transportation cost

mainly depends on distance, weight of merchandise and the time
required for transportation. Centre-of-gravity maps various supplier
locations on a Cartesian plane and suggests a central facility location
with respect to the locations of suppliers.
 CONCEPT OF FACILITY LOCATION
Procedures and Techniques for Selecting Facility Location
➢Transportation technique: In simple words, the transportation technique
evaluates multiple transportation routes of shipping goods from multiple origins
to multiple destinations and finds or develops the least cost route. The technique is
often used in determining facility locations for evaluating transportation costs
of routes by selecting different facility locations. In the transportation technique,
multiple facility locations fits are identified and their relative transportation
costs are calculated. Finally, the location that is related to the lowest cost routes is
selected.
LOCATION MODELS
Various models are available which help to identify the ideal location.
Some of the popular models
are:
1. Factor rating method
2. Weighted factor rating method
3. Load-distance method
4. Centre of gravity method
5. Break even analysis
FACTOR RATING METHOD
The process of selecting a new facility location involves a series
of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e.,
higher the ratings is indicative of prominent factor.
3. Assign each location according to the merits of the location
for each factor.
4. Calculate the rating for each location by multiplying factor
assigned to each location with basic factors considered.
5. Find the sum of product calculated for each factor and
select best location having highest total score.
 ILLUSTRATION 1:
Let us assume that a new medical facility, Health-care, is to be located in
Delhi. The location factors, factor rating and scores for two potential sites
are shown in the following table. Which is the best location based on factor
rating method?
S. No. Location Factor Factor Rating Rating Rating
Location-1 Location-2
1 Facility utilization 8 3 5

2 Total patient per month 5 4 3

3 Average time per 6 4 5

emergency trip
4 Land and construction 3 1 2
costs
5 Employee preferences 5 5 3
S. No. Location Factor Total Location-1 Total Location-2
1 Facility utilization 24 40
2 Total patient per month 20 15
3 Average time per 24 30
emergency trip
4 Land and construction costs 3 6
5 Employee preferences 25 15
Total 96 106

The total score for location 2 is higher than that of location 1.

Hence location 2, is the best choice.
WEIGHTED FACTOR RATING METHOD
In this method to merge quantitative and qualitative factors, factors
are assigned weights based on relative importance and weightage
score for each site using a preference matrix is calculated.
The site with the highest weighted score is selected as the best
choice.
ILLUSTRATION 2: Let us assume that a new medical facility, Health-
care, is to be located in Delhi. The location factors, weights, and
scores (1 = poor, 5 = excellent) for two potential sites are shown in
the following table. What is the weighted score for these sites?
Which is the best location?
S. No. Location factor Weight Location-1 Location-2
Score Score
1 Facility utilization 25 3 5

2 Total patient km per month 25 4 3

3 Average time per 25 3 3

emergency trip
4 Land and construction costs 15 1 2

5 Employee preferences 10 5 3
SOLUTION: The weighted score for this particular site is calculated by
multiplying each
factor’s weight by its score and adding the results:
Weighed score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 +
10 × 5
= 75 + 100 + 75 + 15 + 50 = 315
Weighed score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15 × 2 +
10 × 3
= 125 + 75 + 75 + 30 + 30 = 335
Location 2 is the best site based on total weighted scores.
LOAD DISTANCE METHOD
The load-distance method is a mathematical model used to evaluate
locations based on proximity factors.
The objective is to select a location that minimizes the total weighted
loads moving into and out of the facility.
The distance between two points is expressed by assigning the points
to grid coordinates on a map.
An alternative approach is to use time rather than distance.
ILLUSTRATION 3:
The new Health-care facility is targeted to serve seven
census tracts in Delhi. The table given below shows the
coordinates for the center of each census tract, along
with the projected populations, measured in thousands.
Customers will travel from the seven census tract centers
to the new facility when they need health-care. Two
locations being considered for the new facility are at
(5.5, 4.5) and (7, 2), which are the centers of census
tracts C and F. Details of seven census tract centers, co-
ordinate distances along with the population for each
center are given below. If we use the population as the
loads and use rectilinear distance, which location is
better in terms of its total load distance score?
S. No. Census Tract (x,y) Population (l)

1 A (2.5, 4.5) 2

2 B (2.5, 2.5) 5

3 C (5.5, 4.5) 10

4 D (5, 2) 7

5 E (8, 5) 10

6 F (7, 2) 20

7 G (9, 2.5) 14
Summing the scores for all tracts gives a total load-distance score of
239 when the facility is located at (5.5, 4.5) versus a load-distance
score of 168 at location (7, 2). Therefore, the location in census tract F
is a better location.
 CENTRE OF GRAVITY METHOD

Centre of gravity is based primarily on cost considerations.

This method can be used to assist managers in balancing cost and
service objectives.
The center of gravity method takes into account the locations of
plants and markets, the volume of goods moved, and
transportation costs in arriving at the best location for a single
intermediate warehouse.
The center of gravity is defined to be the location that minimizes
the weighted distance between the warehouse and its supply and
distribution points, where the distance is weighted by the number
of tones supplied or consumed.
The first step in this procedure is to place the locations on a
coordinate system.
The origin of the coordinate system and scale used are arbitrary,
just as long as the relative distances are correctly represented.
ILLUSTRATION 4:

The new Health-care facility is targeted to serve seven census

tracts in Delhi. The table given below shows the coordinates
for the center of each census tract, along with the projected
populations, measured in thousands. Customers will travel
from the seven census tract centers to the new facility when
they need healthcare.
Two locations being considered for the new facility are at
(5.5, 4.5) and (7, 2), which are the centers of census tracts
C and F. Details of seven census tract centers, coordinate
distances along with the population for each center are
given below. Find the target area’s center of gravity for the
Health-care medical facility.
S. No. Census Tract (x,y) Population (l)

1 A (2.5, 4.5) 2

2 B (2.5, 2.5) 5

3 C (5.5, 4.5) 10

4 D (5, 2) 7

5 E (8, 5) 10

6 F (7, 2) 20

7 G (9, 2.5) 14
BREAK EVEN ANALYSIS
1. Break even analysis implies that at some point in the operations,
total revenue equals total cost.
2. Break even analysis is concerned with finding the point at which
revenues and costs agree exactly. It is called ‘Break-even Point’.
3. Break even point is the volume of output at which neither a profit is
made nor a loss is incurred.
QUES 1
A sports good manufacturing company intends to set up a facility to
produce badminton racquets. It is considering sites X, Y and Z for this
purpose. Cost data for the sites are given in the below table:
Site Fixed Cost Variable Cost
X Rs. 50,000 Rs. 135
Y Rs. 100,000 Rs. 110
Z Rs. 120,000 Rs. 120

It the selling price is Rs. 300 per racquet and the annual demand is
3000, which site would you recommend?
QUES-2
A company is planning to manufacture Webcams has to decide on the location
of the production facility. Three locations are being considered: Hyderabad,
Bangalore and Chennai. The fixed costs at the three locations are estimated
to be Rs. 30,00,000, Rs. 50,00,000 and Rs. 25,00,000 per annum
respectively. The variable costs are Rs. 300, Rs. 200 and Rs. 350 per unit.
Find out the following:
a) The range of annual sales/production volume for which each location is
the most suitable.
b) Which one of three is the best location at a production/sales volume of
17000 units.
ILLUSTRATION 5:
Potential locations X, Y and Z have the cost structures shown
below. The ABC company has a demand of 1,30,000 units of a new
product. Three potential
locations X, Y and Z having following cost structures shown are
available. Select which
location is to be selected and also identify the volume ranges where each
location is suited?
 Location X Location Y Location Z
Fixed Costs Rs. 1,50,000 Rs. 3,50,000 Rs. 9,50,000
Variable Costs Rs. 10 Rs. 8 Rs. 6
SOLUTION: Solve for the crossover between X and Y:
10X + 150,000 = 8X + 350,000
2X = 200,000
X = 100,000 units
Solve for the crossover between Y and Z:
8X + 350,000 = 6X + 950,000
2X = 600,000
X = 300,000 units
Therefore, at a volume of 1,30,000 units, Y is the appropriate
strategy.
From the graph we can interpret that location X is suitable up to
100,000 units, location Y is suitable up to between 100,000 to
300,000 units and location Z is suitable if the demand is more than
300,000 units.
 CONCEPT OF FACILITY LAYOUT
 Facility layout may be defined as the arrangement of
machinery, equipment, and other amenities in a
facility, which should ensure a smooth movement
of materials.
 According to Moore, facility layout is the plan of or
the act of planning an optimum arrangement of
facilities, including personnel, operating equipment,
storage space, material handling equipment, and all
other supporting services along with the design of the
best structure to contain these facilities.
 OBJECTIVE OF AN EFFECTIVE
FACILITY LAYOUT
1. Streamline the flow of materials through the plant.
2. Facilitate the manufacturing process.
3. Maintain high turnover of in-process inventory.
4. Minimize materials handling and cost.
5. Effective utilization of men, equipment and space.
6. Make effective utilization of cubic space.
7. Flexibility of manufacturing operations and arrangements.
8. Provide for employee convenience, safety and comfort.
9. Minimize investment in equipment.
10. Minimize overall production time.
11. Maintain flexibility of arrangement and operation.
12. Facilitate the organizational structure.
PRINCIPLES OF PLANT LAYOUT
1. Principle of integration: A good layout is one that integrates
men, materials, machines and supporting services and others in
order to get the optimum utilization of resources and maximum
effectiveness.
2. Principle of minimum distance: This principle is concerned
with the minimum travel (or movement) of man and materials.
The facilities should be arranged such that, the total distance
travelled by the men and materials should be minimum and as
far as possible straight line movement should be preferred.
3. Principle of cubic space utilization: The good layout is one
that utilize both horizontal and vertical space. It is not only
enough if only the floor space is utilized optimally but the third
dimension, i.e., the height is also to be utilized effectively.
4. Principle of flow: A good layout is one that makes the
materials to move in forward direction towards the completion
stage, i.e., there should not be any backtracking.
5. Principle of maximum flexibility: The good layout is one
that can be altered without much cost and time, i.e., future
requirements should be taken into account while designing the
present layout.
6. Principle of safety, security and satisfaction: A good layout
is one that gives due consideration to workers safety and
satisfaction and safeguards the plant and machinery against
fire, theft, etc.
7. Principle of minimum handling: A good layout is one that
reduces the material handling to the minimum.
 TYPES OF FACILITY LAYOUTS
1. Process Layout
2. Product Layout
3. Fixed Position Layout
4. Cellular Manufacturing Layout
5. Combination or Hybrid Layout
 TYPES OF FACILITY LAYOUT
Process layout: Process layout, also called
functional layout or batch production layout, is
characterized by the grouping together of similar
machines, based upon their operational characteristics.
Product layout: In product layout, also called
straight line layout, machinery is arranged in one
line as per the sequence of production operations.
Materials are fed into the first machine and finished
products come out of the last machine.
FIXED POSITION LAYOUT:

This type of facility layout is used to

assemble products that are too large,
heavy or fragile to move to a location
for completion. In the fixed position
layout, machinery, men, as well as other
pieces of material, are brought to the
location where the product is to be
assembled.
 CELLULAR MANUFACTURING LAYOUT:
In Cellular Manufacturing (CM) layout, machines are
grouped into cells, which function somewhat like a
product layout in a larger shop or a process layout. Each
cell in the CM layout is formed to produce a single part
family, that is, a few parts with common characteristics.
COMBINATION OR HYBRID LAYOUT:

It is difficult to use the principles of product

layout, process layout, or fixed location layout
in facilities that involve fabrication of parts and
assembly. Fabrication tends to employ the
process layout, while assembly areas often
employ the product layout.
 FACTORS AFFECTING A FACILITY LAYOUT

1. Materials

2. Product Machinery

3. Type of Industry Management Policies

 LET’S SUM UP
 A facility location may be defined as the place where a facility will be set up
for
producing goods or services.
 €Selection of a suitable facility location is important as it decides the fate of
a business. A good location may reduce the cost of production and distribution to a
considerable extent.

 Once established, a location cannot be changed frequently as it incurs huge costs.

 A facility layout is defined as the arrangement of machinery, equipment and other
amenities in a facility to ensure the smooth movement of materials.

 The objectives of service facility layouts differ from those of manufacturing facility
layouts. This is because a service operation aims to organise all activities
and processes to deliver services to customers.