Operations Management

BBA
Academic Year 2021-22

Dr. Hasanuzzaman
Assistant Professor
Operations & Information Technology
ICFAI Business School Hyderabad
 Plant or Facility Location – Meaning
■ Location refers to the choice of region and the
selection of a particular site for setting up a
business or factory.
■ It may be understood as the function of determining
where the plant should be located for maximum
operating economy and effectiveness.
■ It is a strategic decision that cannot be changed
once taken.
Plant or Facility Location – Why?
■ The selection of a place for locating a plant is one of
the problems, perhaps it is one of the task for the
entrepreneur while launching a new enterprise
■ The choice is made only after considering cost and
benefits of different alternative sites.
■ If all changed only at considerable loss, the location
should be selected as per its own requirements and
circumstances
■ Each individual plant is a case in itself
 Plant or Facility Location – Strategic Decision
■ Are closely tied to an organization’s strategies
– Low-cost
– Convenience to attract market share
■ Effect capacity and flexibility
■ Represent a long-term commitment of resources
■ Effect investment requirements, operating costs, revenues, and operations
■ Impact competitive advantage
■ Importance to supply chains
 Plant or Facility Location – Decision
■ Selection of a location is on pure economic
considerations
– Easy and regular supply of raw material
– Labour
– Efficient plant layout to reduce cost of
production
■ Once a mistake is made in locating a plant, it
becomes extremely difficult and costly to correct it.
 Plant or Facility Location – When Required?
■ When the business is newly started.
■ The existing business has outgrown its original
facilities and expansion not possible.
■ The volume of the business or the extent market
necessitates the establishment of branches.
■ A lease expires and the landlord does not renew the
lease.
■ Social and economic reasons
– Depletion of basic inputs requires relocation
– Shift in markets
– Cost of doing business at a particular location
makes relocation attractive
 Plant or Facility Location – Objective
■ Profit potential
■ No single location may be better than others
■ Identify several locations from which to choose
 Plant or Facility Location – Options
■ Existing companies generally have four options
available in location planning:
– Expand an existing facility
– Add new locations while retaining existing
facilities
– Shut down one location and move to another
– Do nothing
 Plant or Facility Location – Selection Steps
■ Decide on the criteria to use for evaluating location alternatives, such as increased
revenues or community service.
■ Identify important factors, such as location of markets or raw materials.
■ Develop location alternatives:
– Identify a country or countries for location.
– Identify the general region for a location.
– Identify a small number of community alternatives.
– Identify site alternatives among the community alternatives.
■ Evaluate the alternatives and make a selection.
 Domestic or International
■ The first step in locating a plant is to decide whether the plant is located domestically of
internationally.
■ Due to globalization the issue of home or foreign is gaining more relevance.
■ The choice of particular country depends on factors like
– Government Policy
■ Export & import duty imposed
■ Restrictions on granting licenses
– Political stability
– Riot and terrorism
– Currency
– Exchange rates
 Benefits of Global Location
■ A wide range of benefits have accrued to organizations that have globalized operations:
– Markets
– Cost savings
– Legal and regulatory
– Financial
– Other
 Disadvantages of Global Location
■ There are a number of disadvantages that may arise when locating globally:
– Transportation costs
– Security costs
– Unskilled labor
– Import restrictions
– Criticism for locating out-of-country
■ Risks
– Political
– Terrorism
– Economic
– Legal
– Ethical
– Cultural
 Plant or Facility Location – Factors
Regional Factors Community Considerations

Multiple Plant Strategies Site-related Factors

 Regional Factors
■ Availability of raw material
■ Nearness to the market
■ Availability of power
■ Transportation facilities
■ Suitability of climate
■ Government policy
■ Competition between states
 Availability of raw material
■ As a manufacturing unit is engaged in conversion of raw materials in to finished
products, it is very essential that it should be located in a place where the supply of raw
materials is maximum.
Advantages
■ Reduce in cost of transportation.
■ Regular and proper supply of raw material
■ Saving in the cost of storage of material
Example
■ Nizam sugar plant is located in Nizambad district where you find sugarcane is cultivated
more in this district.
■ Sugarcane is a raw material for sugar factory.
 Nearness to the market
■ Since goods are produced for sale, it is very essential that a plant should be located near
to the market.
Advantages
■ Reduction in cost of transportation of finished goods to the market
■ Availability of render prompt services to the consumer
■ The ability to adjust production program to suit the likes and dislikes of consumers.
Example
■ Auto-servicing and repairing units.
 Availability of power
■ Power is essential to move the wheels of an industry.
■ Industries using electricity have to be located where the supply of power is available
more
Example
■ Steel industries are located near to power industries
 Transportation facilities
■ Transport facilities are very important for bringing raw material to the factory.
■ Transport facilities are very important for carrying finished goods to the market.
■ A place which is well connected by rail, road, air and water transport facilities is suitable
for plant location.
Example
■ Mumbai is best suitable for transport facilities to locate industries.
 Suitability of climate
■ Natural or climatic conditions like temperature, humidity, rainfall etc.
■ It is important for two reasons:
– There are certain industries which mainly depends on nature of climate.
– Example
■ Humid climate for Cotton textiles and Jute.
– Based on climate which also affects the labour efficiency
 Government policy
■ Licensing policy
■ Freight rate policy
■ Establishing a unit in the public sector in remote areas
■ Institutional finance and government subsidies
Example
■ NANO car projected
 Competition between states
■ Various states offer investments, subsidies and sales tax exemptions to new units.
■ The incentives may not be big but help to large scale industries but not for small and
medium scale industries.
Example
■ POSCO steel company in Orissa
 Community Considerations
■ Selecting a particular community is the third step in the process of plant location.
■ The selection of a locality in a particular region influence following factors
– Availability of Labour
– Finance and research facility
– Civic amenities
– Availability of water & fire
– Local taxes and restrictions
– Environmental Regulations
 Availability of Labour
■ Labour is an important factor in the production of goods.
■ A sufficiency of labour supply at reasonable wages is very essential for smooth and
successful working of the industries.
■ Labour productivity and attitudes toward work, and
■ Whether unions are a serious potential problem.
■ Now a days the influence of skilled labour on plant has lost because of mobility.
 Finance and Research Facility
■ Adequate capital is essential for the successful working of any organisation
■ A place where facilities for raising capital are available attracts new industries.
■ Example :- Gujarat
■ The manufacturing unit has to be dynamic i.e., it should always be on the look out for
new technology.
 Civic Amenities
■ Besides of working conditions inside the factory, the employees need facilities outside it.
■ Recreation facilities such as clubs, parks, schools for children etc must be provided for
the employees.
■ Example: All facilities provided by BHEL to their employees
 Availability of Water & Fire
■ Some industries require plenty of water for there working.
– Example: NHPC power plant which uses water to produce power
■ Some industries require fire for there working.
– Example: NTPC power plant which makes fire from coal to produce power
 Local Taxes and Restrictions
■ Local authorities collect charges for the supply of water, electricity and other facilities.
■ They also collect various other taxes from industrial units.
■ The imposed restrictions on the location of new unit in the public interest.
 Site Related Factors
■ Soil, size and topography:
– For the industries based on agriculture require fertile soil to locate a plant.
■ The area of the land should be such as to accommodate not only the existing purpose
but offer for scope for future expansion also.
■ The topography of the place deserves consideration to some extent.
– A hilly rocky and ruff terrain is unsuitable for plant location.
■ Disposal of waste
– The problem of the disposal of waste is common to many industries, particularly
chemical, sugar, steel and leather industries.
– The site selected for location of the plant should have provision for the disposal of
waste.
– Example: NTPC use coal ash ( waste ) to construct bricks
 Multiple Plant Strategy
■ Product plant strategy
– Products or product line will be produced in separate plants and supplies to
domestic market
■ Market area plant strategy
– Plants are desired to serve a particular geographic segment of market
■ Process plant strategy
– Plants concentrate on different aspects of a process.
■ General-Purpose Plant Strategy
– Plants are flexible and capable of handling range of products
 Geographic Information System
■ A computer- based tool for collecting, storing, retrieving, and displaying demographic data
on maps.
■ Internet mapping programs used to obtain travel directions are an example of a GIS.
■ Local governments use a GIS to organize, analyze, plan, and communicate information
about community resources
 Facility Location – Issues
■ Proximity to Customers ■ Free Trade Zones
■ Business Climate ■ Political Risk
■ Total Costs ■ Government Barriers
■ Infrastructure ■ Trading Blocs
■ Quality of Labor ■ Environmental Regulation
■ Suppliers ■ Host Community
■ Competitive Advantage
 Evaluating Location Alternatives
■ Cost-Profit-Volume Analysis
– Technique for evaluating location choices in economic terms
■ Factor Rating Method
■ Centre of Gravity Method
■ Transportation Method
 Cost-Profit-Volume Analysis
■ Cost-Profit-Volume Analysis
– Technique for evaluating location choices in economic terms
– The analysis can be done numerically or graphically
■ Steps
– Determine the fixed and variable costs
– Plot the total-cost lines for all location alternatives
– Determine which location will have the lowest total cost or
– Alternatively, determine which location will have the highest profit.
■ Assumptions
– Fixed costs are constant
– Variable costs are linear
– Output can be closely estimated
– Only one product involved
 Cost-Profit-Volume Analysis - Example
■ Godavari Heaters Ltd. wants to set up a new plant for manufacturing industrial heaters.
The management has identified Kakinada, Vijayawada and Guntur as , potential areas to
set up the plant. The Fixed costs per year and the Variable costs per unit at each of the 3
locations are as follows

Location Fixed Cost per Year Variable Cost per

Unit
A Kakinada 200000 300
B Vijayawada 250000 250
C Guntur 300000 200

■ Calculate total costs if 1000 units of product will be produced

■ Which location would provide the lowest total cost?
■ If the product of Godavari Heaters Ltd. is expected to be sold at Rs. 1050 and the
company hopes to sell 1000 industrial heaters per year, calculate the likely profit at each
location and determine the most profitable location for the company.
 Cost-Profit-Volume Analysis - Example
■ Fixed and variable costs for four potential plant locations are shown below

Fixed Cost per Year Variable Cost per Unit ($)

A 200000 11
B 100000 30
C 150000 20
D 200000 35

■ Plot the total-cost lines for these locations on a single graph.

■ Identify the range of output for which each alternative is superior (i.e., has the lowest
total cost).
■ If expected output at the selected location is to be 8,000 units per year, which location
would provide the lowest total cost?
 Factor Rating Method
■ General approach to evaluating locations that includes quantitative and qualitative
inputs.
■ All important factors for plant location are considered and they are assigned with some
weight based on their importance.
■ The proposed locations are rated against the factors and finally weighted average rating
are calculated for those locations
■ The location having highest overall rating is selected for plant location
Factor Rating Method
 Factor Rating Method – Example
■ Two refineries sites (A and B) are assigned the following range of point values and
respective points, where the more points the better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
Power availability and reliability 0 to 200 150 100
Labor climate 0 to 100 54 63
Living conditions 0 to 100 24 96
Transportation 0 to 50 45 50
Water supply 0 to 10 4 5
Climate 0 to 50 8 4
Supplies 0 to 60 5 50
Tax policies and laws 0 to 20 5 20
Factor Rating Method – Example
 Center of Gravity
■ Generally used to locate warehouse or distribution
center so that maximum number of market can be
covered easily
■ Method for locating a distribution center that minimizes
distribution cost, travel time, distance.

∑#!"$! ∑#!#$!
𝐶! = ∑$!
, 𝐶% = ∑$!

■ Where:
– 𝐶! = 𝑋 coordinate of centroid
– 𝐶% = 𝑌 coordinate of centroid
– 𝑑&! = 𝑋 coordinate of the ith location
– 𝑑&% = 𝑌 coordinate of the ith location
– 𝑉& = volume of goods moved to or from ith location
 Center of Gravity
■ The shipments of item and corresponding x and y coordinates are given below

Destination X-coordinates Y-coordinates Quantity Shipped

D1 2 2 800
D2 3 5 900
D3 5 4 200
D4 8 5 100

■ Determine Center of Gravity

 Center of Gravity
■ ABC Manufacturing company plans to build a warehouse to serve its distribution centres
in Kolkata (West Bengal), Faridabad (Haryana), Nagpur (Maharashtra) and Raipur
(Chhattisgarh). The number of units to be shipped monthly from company’s warehouse to
the distribution centres are shown in table below.

Annual Shipping
Location X-coordinates (km) Y-coordinates (km)
Volumes
Kolkata 7500 280 170
Faridabad 12500 180 140
Nagpur 25000 130 100
Raipur 5000 120 60

■ Find the appropriate location of the warehouse

 Transportation
■ Transportation method of linear programming seeks to minimize costs of shipping n units
to m destinations or its seeks to maximize profit of shipping n units to m destinations.
■ Generally used for existing facilities i.e. from which source to which destination products
are to be supplied.