Operations Operations

Module 6

Facility Location & Capacity

Planning
Acknowledgement

 The concepts and ideas presented in the following

slides are based on concepts and ideas in the books
mentioned in your sessions plan and material freely
available on the internet, journals and other sources.
These have been put together for teaching, easy
understanding and study purposes only. The concepts
or ideas do not belong to the undersigned.

 Prof. Pintoo Shome

Learning Outcomes

After going through this module students shall be able to

do / answer questions such as,
Facilities Location
 List the factors and issues to be considered while
making strategic decisions on facilities location?
 Explain how globalisation makes this decision more
complex?
 Explain how can globalisation be used to increase
competitive advantage through facilities location?
 Solve qualitative and quantitative issues in facilities
location using the following models:
a) Location Factor Rating; b) Centre of Gravity
c) Load-distance; d) Linear Programming / Transportation
Model.
Facility Location

 Where to produce – Country, Region?

 How to supply – Rail, Road, Air, Sea?
 Where to locate distribution / service
facilities to serve customers best,
preferably at lowest cost?
 Determining the appropriate no. of facilities
 Determining each facility location
 Capacity / size of each facility
 Market and supply allocation for each
facility
Questions
 Why do some nations succeed and
others fail in international competition?

 Or,why do some nations prosper

through international trade?
More specific and relevant
Questions
 Why is,
 Germany successful in presses and luxury cars,
 Switzerland in Chocolates, Pharmaceuticals and
Banking,
 US in PC, Software, Credit cards, Movies,
 Italy in Ceramic Tiles, Ski boots, Packaging,
 Japan in Consumer electronics, cameras,
robotics
 India in offshore IT & IT enabled services

 ?
 International Trade
Theories
Many explanations and theories have been
forwarded to answer the first set of questions.

The second set of questions were posed and

attempted to be answered by Porter in his famous
Book – Competitive Advantage of Nations
 Determinants of
National Competitive Advantage

Chance
Company Strategy,
Structure,
and Rivalry

Two external
factors that Factor Demand
influence the Conditions Conditions
four
determinants.
Related
and Supporting
Industries
Government
Source: Michael Porter, The Competitive Advantage of Nations
 Issues in facility location
 Proximity to  Free Trade Zones
customers  Political risk
 Business climate  Government barriers
 Total costs  Trading blocks
 Infrastructure  Environmental
regulation
 Quality of labour
 Host community
 Suppliers  Competitive
 Other facilities advantage
 Factors Influencing
Network Design Decisions
Factors
 Strategic

 Technological

 Macroeconomic

 Political

 Infrastructure

 Competitive

 Response Time and Local presence

 Logistics and facility costs

5-10
 Strategic Roles of a Facility
 Offshore facility: Low cost facility for export
production
 Source Facility: Low cost facility for global
production
 Server Facility: Regional Production Facility
 Contributor Facility: Regional Production Facility
with Development Skills
 Outpost Facility: Regional Production Facility
built to gain local skills
 Lead Facility: Facility that leads in development
and process technologies
 Technological Factors
 Characteristics of available production
technologies have a significant impact on the
network design:
 If production technology provide significant
economies of scale, few high capacity locations are
the most effective
 If facilities have lower fixed costs, many local facilities
are preferred.
 Flexibility of the production technology impacts
the degree of consolidation in the network:
 If the production technology is inflexible, build many
local facilities
 Else, build few but large facilities
 Macroeconomic Factors
 Tariffs and tax incentives
 Tariffs: Any duties that must be paid when
product, equipment are moved across an
international, state or city boundry.
 Developing countries have free trade zones
 Exchange rate and demand risk
 Infrastructure Factors
 Availability of sites
 Availability of labor
 Proximity to transportation terminals,
railservice, airports, seaports,
 Highway access
 Congestion
 Local utilities
 Competitive Imperatives Impacting
Location
 The need to produce close to the
customer due to time-based competition,
trade agreements, and shipping costs

 The need to locate near the appropriate

labor pool to take advantage of low wage
costs and/or high technical skills
 Competitive Factors
 Positive externalities between firms
 Ex: Gas stations and retail shops
Auto Repair Districts
 Locating to Split the market
 When firms do not control price, but compete
on distance from the customer, they can
maximize market share by locating close to
each other and splitting the market
 A Framework for
Global Facility Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Business
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

5-17
 Location methods
 Location Factor Rating

 Centre of Gravity Method (Centroid Method)

 Load Distance Method

 Transportation Method of Linear Programming

 Location Factor – Rating System

Consider the major factors

Assign suitable ratings to them
Rate each site against each of these factors
Add and compare the sums
Select the site with the most points

Advantages
Diverse factors may be combined
Easy to understand format
Example:
Disadvantages
They do not account for the wide
Range of costs that can appear
within each factor
 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 Best Site
5 20 is B
Total pts. 418 544
 Centre of Gravity method
(Centroid method)

 The Centroid method is a technique that is

used for locating single facilities that considers
existing facilities, the distances between them,
and the volumes of goods to be shipped.
Applications
 Often used to locate intermediate warehouses

 Location of communication towers in urban

areas (Radio, TV, Cellphone towers)
 Steps to finding the location
 Place the existing locations on coordinate grid
system
 Choice of coordinates is entirely arbitrary, the
purpose is to establish relative distances
between centres
 The cetroid is found by calculating the X and
Y coordinates that result in minimal
transportation cost.
 We use the formulas to find the location

Example:
 Centroid Method

500 Thousand Oaks(25, 450)

Glendale (350, 400)
400

300 La Habra (450, 350)

Centroid ( 308, 217)
200
Anaheim ( 400, 150)
100
Long Beach(325, 75)
0 100 200 300 400 500

Plant Location Possible intermediate

Distributor Holding facility location
 Centroid Method Formulas

Cx =
d V ix i d V iy i

V i
Cy =
V i

Where:
Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
 Load Distance method
 Allows us to compare more than one site
at atime and compare them based on
distance and load travelled between points
 We may the choose the minimum or
optimum one
 L Dj = Σ Dij x Wi for i=1 to n
 Where n = no. of existing demand / supply points in the
grid map
 J = index used for candidates in the grid map (Xj, Yj);
for three candidates m=3
 Transportation Method of Linear
Programming

 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
 Optimization Models

 Allocating demand to production facilities

 Locating facilities and allocating capacity

Key Costs:

• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Which plants to establish? How to configure the network?

Plant Location with Multiple Sourcing
 yi = 1 if plant is located n n m
Min  f i y i    cij xij
at site i, 0 otherwise i 1 i 1 j 1
 xij = Quantity shipped s.t.
from plant site i to n
customer j  xij  D j
i 1
n
 xij  K i y i
j 1
m
 y i  k ; y i {0,1}
i 1
The capacitated plant location model (cont’d)

n n m
Min f i yi   cij xij
i 1 i 1 j 1

Subject to
n

x
i 1
ij  Dj , j  1,2,..., m
m

x
j 1
ij  K i yi , i  1,2,..., n

yi  {0,1} i  1,2,..., n
 Strategic Capacity Planning

 Capacity can be defined as the ability to hold,

receive, store, or accommodate

 Strategic capacity planning is an approach for

determining the overall capacity level of
capital intensive resources, including facilities,
equipment, and overall labor force size
 Capacity Utilization

Capacity used
Capacity utilization rate 
Best operating level

Where
 Capacity used
– rate of output actually achieved
 Best operating level
– capacity for which the process was designed
 Best Operating Level
Example: Engineers design engines and assembly lines to
operate at an ideal or “best operating level” to maximize
output and minimize ware

Average
unit cost
of output
Underutilization Overutilization

Best Operating
Level

Volume of Production
 Example of Capacity Utilization

 During one week of production, a plant produced

83 units of a product. Its historic highest or best
utilization recorded was 120 units per week.
What is this plant’s capacity utilization rate?

 Answer:
Capacity utilization rate = Capacity used .
Best operating level

= 83/120
=0.69 or 69%
 Economies & Diseconomies of
Scale

Economies of Scale and the Experience Curve working

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Diseconomies of Scale start working

Volume
 The
Experience As plants produce more products, they
Curve gain experience in the best production
methods and reduce their costs per unit

Yesterday

Cost or Today
price Tomorrow
per unit

Total accumulated production of units

 Capacity Planning
 Frequency of Capacity Additions / Augmentations

 How to augment capacity?

 External Sources of Capacity

 Determining Capacity
Requirements
 1.Forecast sales within each individual
product line

 2.Calculate equipment and labor

requirements to meet the forecasts

 3.Project equipment and labor availability

over the planning horizon
 Computing Capacity
Requirements
 System Availability – no. of working days etc.

 Resource Availability – no. of m/cs available

normally

 Labour Availability – always take efficiency

factor into consideration
 End of Module

 The concepts and ideas presented in the following slides are based on
concepts and ideas in the books mentioned in your sessions plan and
material freely available on the internet, journals and other sources.
These have been put together for teaching, easy understanding and study
purposes only. The concepts or ideas do not belong to the undersigned.
 Please read the book and practice problems.

Thank You.

 Prof. Pintoo Shome