ISM 101

Operations Management
LOCATION ANALYSIS & LAYOUTS LECTURE 13
Learning Objectives
1. List some of the main reasons organizations need to make
location decisions.
2. Explain why location decisions are important.
3. Discuss the options that are available for location decisions.
4. Describe some of the major factors that affect location decisions.
5. Outline the decision process for making these kinds of decisions.
6. Use the techniques presented to solve typical problems.
Need for Location Decisions
1. Marketing Strategy
2. Cost of Doing Business
3. Growth
4. Depletion of Resources
Making Location Decisions
1. Decide on the criteria
2. Identify the important factors
3. Develop location alternatives
4. Evaluate the alternatives
a) Identify general region
b) Identify a small number of community alternatives
c) Identify site alternatives

5. Evaluate and make selection

Location Decision Factors
Community
Regional Factors Considerations

Multiple Plant Site-related

Strategies Factors
Regional Factors
1. Location of raw materials
2. Location of markets
3. Labor factors
4. Climate and taxes
Community Considerations
1. Quality of life
2. Services
3. Attitudes
4. Taxes
5. Environmental regulations
6. Utilities
7. Developer support
Site Related Factors
1. Land
2. Transportation
3. Environmental
4. Legal
Multiple Plant Strategies
1. Product plant strategy
2. Market area plant strategy
3. Process plant strategy
Service and Retail Locations
1. Manufacturers – cost focused
2. Service and retail – revenue focused
◦ Traffic volume and convenience most important
◦ Demographics
◦ Age
◦ Income
◦ Education
◦ Good transportation
◦ Customer safety
 Facilitating Factors

• Trade agreements
• Technology

Globalization Benefits

• Markets
• Cost savings
• Legal and regulatory
• Financial
 Disadvantages

• Transportation costs
• Security
• Unskilled labor
• Import restrictions
• Criticisms
Globalization
Risks

• Political
• Terrorism
• Legal
• Cultural
Evaluating Location Alternatives
Common techniques:
◦ Locational cost-volume-profit analysis
◦ Factor rating
◦ Transportation model
◦ Center of gravity method
Qualitative Approach Factor Rating Method
1. Develop a checklist of relevant factors
2. Assign weight to each factor to indicate its relative importance (total =
100%)
3. Assign a common scale to each factor (e.g., 1-5, 5=best), and designate
any minimum
4. Score each potential location according to the designated scale, and
multiply the scores by the weights
5. Total the points for each location, and choose the location with the
maximum points
Locational Cost-Profit-Volume Analysis
Technique for evaluating location choices in economic terms
Steps:
1. Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or highest
profit) for the expected level of output
 Assumptions
Locational Cost- 1. Fixed costs are constant for the range of probable output
Profit-Volume 2. Variable costs are linear for the range of probable output
3. The required level of output can be closely estimated
Analysis 4. Only one product is involved

8-17
Locational Cost-Profit-Volume Analysis
F O R A C O S T A N A LY S I S , C O M P U T E T H E TO TA L C O S T F O R E A C H A LT E R N AT I V E L O C AT I O N :
Center of Gravity Method
1. Method for locating a distribution center that
minimizes distribution costs
2. Treats distribution costs as a linear function of the
distance and the quantity shipped
3. The quantity to be shipped to each destination is
assumed to be fixed
4. The method includes the use of a map that shows the
locations of destinations. The map must be accurate
and drawn to scale
5. A coordinate system is overlaid on the map to
determine relative locations
Center of gravity
Determine the coordinates
of the center of gravity for
the problem. Assume that
the shipments from the
center of gravity to each of
the four destinations will be
equal quantities.
Center of gravity
Suppose the shipments for
the problem are not all
equal, but instead are as
given. Determine the center
of gravity.
Transportation model
The Hottest Mexican Restaurant has restaurants in 5 Midwestern cities. They order their
tortillas from the Laredo Tortilla Factory, which has warehouses in 6 cities. The shipping
costs (in dollars per dozen tortillas) are given below:
Transportation model
The demand for each restaurant and the tortillas available at each
warehouse are:
Facility layout
Strategic Importance of Layout Decisions

The objective of layout strategy is to

develop an economic layout that will
meet the firm’s competitive
requirements
Layout Design Considerations
1. Higher utilization of space, equipment, and people
2. Improved flow of information, materials, or people
3. Improved employee morale and safer working conditions
4. Improved customer/client interaction
5. Flexibility
Types of Layout
1. Warehouse layout
2. Fixed-position layout
3. Process-oriented layout
4. Cellular layout
5. Product-oriented layout
Good Layouts Consider
1. Material handling equipment
2. Capacity and space requirements
3. Environment and aesthetics
4. Flows of information
5. Cost of moving between various work areas
Warehousing and Storage Layouts
1. Objective is to optimize trade-offs between handling
costs and costs associated with warehouse space
2. Maximize the total “cube” of the warehouse – utilize
its full volume while maintaining low material
handling costs
Warehouse Layout
Storage racks

Customization

Conveyor

Staging
Office
Shipping and receiving docks
Fixed-Position Layout
1. Product remains in one place
2. Workers and equipment come to site
3. Complicating factors
a) Limited space at site
b) Different materials required at different stages of the
project
c) Volume of materials needed is dynamic
Process-Oriented Layout
1. Like machines and equipment are grouped together
2. Flexible and capable of handling a wide variety of products or
services
3. Scheduling can be difficult, and setup, material handling, and labor
costs can be high
Process-Oriented Layout
Patient A - broken leg
ER
triage Emergency room admissions
room
Surgery Patient B - erratic heart
pacemaker

Laboratories

Radiology ER Beds Pharmacy Billing/exit

Cellular layout
1. Reorganizes people and machines into groups to focus on single
products or product groups
2. Group technology identifies products that have similar characteristics
for cells
3. Volume must justify cells
4. Cells can be reconfigured as designs or volume changes
Advantages of Work Cells
1. Reduced work-in-process inventory
2. Less floor space required
3. Reduced raw material and finished goods inventory
4. Reduced direct labor
5. Heightened sense of employee participation
6. Increased use of equipment and machinery
7. Reduced investment in machinery and equipment
Product-Oriented Layout
Organized around products or families of similar high-volume, low-
variety products
1. Volume is adequate for high equipment utilization
2. Product demand is stable enough to justify high investment in
specialized equipment
3. Product is standardized or approaching a phase of life cycle that
justifies investment
4. Supplies of raw materials and components are adequate and of
uniform quality
Product-Oriented Layouts
Advantages
1. Low variable cost per unit
2. Low material handling costs
3. Reduced work-in-process inventories
4. Easier training and supervision
5. Rapid throughput
Disadvantages
1. High volume is required
2. Work stoppage at any point ties up the whole operation
3. Lack of flexibility in product or production rates
End of Presentation