OPERATION MANAGEMENT

Course Leader: Dr. B Dayal

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Chapter Two
Part II
Location Of Production & Service Facilities

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GENERAL PROCEDURES FOR FACILITY LOCATION
PRELIMINARY SCREENING
● It consists of decision about:
a) Zone to which the plant should belong,
b) Region in which it should be placed, and
c) The exact site where the plant be erected.
● A preliminary screening to identify feasible sites begins the planning process.
For some kinds of facilities, particular environmental or labor considerations are
crucial. Breweries, for example, need an adequate supply of clear water. Aircraft
manufacturers must be located near a variety of subcontractors; and basic
aluminum producers need electrical power and aluminum ores.
o Sources of Information
o Detailed Analysis

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GENERAL PROCEDURES FOR FACILITY LOCATION
Sources of Information
● After identifying several key location requirements, management starts
looking for alternative locations that are consistent with these
requirements. The possible sources of information could be: local
chambers of commerce and industries, local communities, relevant
ministries, Government agencies, and trade journals. The data available
with these wings could be geographic breakdowns of labor availability,
population, transportation facilities, types of commerce, and similar
information.

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GENERAL PROCEDURES FOR FACILITY LOCATION
Detailed Analysis
● Once the preliminary screening narrows down the alternative sites to just
a few, more detailed analysis begins. At each potential site a labor survey
may be conducted to assess the local skills. Community response can be
obtained by survey. Community response is important, for example, in
deciding where to locate a nuclear reactor, recreation area, commercial
bank, state prison, or restaurant. Among the many considerations, each
company must identify which ones are most pertinent for their location
strategies.

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 QUESTION TIME
Preliminary screening consists of the decision about

A. Exact site where the plant is to be erected

B. Size and capacity of the plant
C. The labor requirement
D. TheCREDITS:
machineryThis transportation
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GENERAL PROCEDURES FOR FACILITY LOCATION
SELECTION OF EXACT SITE
● Drainage
● Will the area drain away all surface water so that the buildings or
work area will not be flooded?
● Parking space
● Is adequate space available to provide for employees and visitors’
vehicles parking?
● Space for expansion
● Is enough space available for future expansion of the plant?

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GENERAL PROCEDURES FOR FACILITY LOCATION
SELECTION OF EXACT SITE
● Accessibility by workers
● Can the sites be reached by public transport ?
● Is the road and street network suitable for speedy
entrance and exit of employees during rush hours or
emergency?
● Existing buildings
● Are the existing buildings suitable for company’s operation on
rent or final purchase basis?

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FACTORS RATINGS
Factor ratings are used to evaluate location alternatives because:
● Their simplicity helps decide why one site is better than another;
● They enable managers to bring diverse locational considerations into the
evaluation process; and
● They foster consistency of judgment about location alternatives.

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 QUESTION TIME
What is the major difference in focus between location
decisions in the service sector and in the manufacturing
sector?

A. There is no difference in focus.

B. The focus in manufacturing is revenue maximization, while the focus in
service is cost minimization.
CREDITS: This presentation template was created by
C. TheSlidesgo,
focus in including
service isicons
customer satisfaction,
by Flaticon, while
infographics & the focus in
manufacturing is cost images by Freepik
minimization.
D. The focus in manufacturing is on raw materials, while the focus in service is
on labor.
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FACTORS RATINGS
The following steps are involved in factor rating:
● Develop a list of relevant factors.
● Assign a weight to each factor to indicate its relative importance (weights
may total 1.00).
● Assign a common scale to each factor (e.g., 0 to 100 points), and designate
any minimums.
● Score each potential location according to the designated scale, and
multiply the scores by the weights.
● Total the points for each location, and choose the location
with the maximum points.

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FACTORS RATINGS
Example:
● A glass company is evaluating four locations A, B, C, and D for a new plant
and has weighted the relevant factors as shown in Table Scores have been
assigned with higher values indicative of preferred conditions. Using these
scores, develop a qualitative factor comparison for the four locations.

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 FACTORS RATINGS
A B C D

Relevant Assigned Score Weighted Score Weighted Score Weighted Score Weighted
Factor weight score score score score

Productio 0.33 50 16.5 40 13.2 35 11.55 30 9.9

n cost

Raw 0.25 70 17.5 80 20.0 75 18.75 80 20.0

material
supply

Labor 0.20 55 11.0 70 14.0 60 12.00 45 9.0

availabilit
y

Cost of 0.05 80 4.0 70 3.5 40 2.00 50 2.5

living

Environm 0.02 60 1.2 60 1.2 60 1.20 90 1.8

ent
Markets 0.15 80 12.0 90 13.5 85 12.75 50 7.5

Totals 1.00 62.2 65.4 58.25 50.7

On the basis of this data, B is the best location, and thus selected. 14
FACILITY LOCATION MODELS
Cost Analysis
● Estimates should also be made for all the costs entering into the operation of
the plant in each of the locations. This cost will include: initial cost, cost of raw
materials, cost of manufacturing, cost of distribution. Revenues and costs are
both affected by facility location. A technique called breakeven analysis can be
used to relate the costs and revenue to facility location.
SOME OTHER FACILITY LOCATION MODELS.
● Simple median model,
● Center of gravity model,
● Break even analysis, and
● Simulation.
● All these models focus on transportation costs, although
each considers a different version of the basic problem.

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 QUESTION TIME
Evaluating location alternatives by comparing their
composite (weighted-average) scores involves

A. Factor-rating analysis.
B. cost–volume analysis.
C. transportation
CREDITS: Thismodel analysis.
presentation template was created by
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D. linear including
regression icons by Flaticon, infographics &
analysis.
images by Freepik

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SIMPLE MEDIAN MODEL
● Suppose we want to locate a new plant that will annually receive
shipments of raw materials from two sources: F1 and F2. The plant will
create finished goods that must be shipped to two distribution
warehouses, F3 and F4. Given these four facilities, where should we locate
the new plant to minimize annual transportation costs for this network of
facilities?
● The simple median model (SMM) can help answer this question. This
model considers the volume of loads transported on rectangular paths. All
movements are made in east-west or north-south directions; diagonal
moves are not considered. The SMM provides an optimal solution.

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SIMPLE MEDIAN MODEL
Procedure.
● Step 1: Identify the median value of the loads Li moved.
● Step 2: Find the x-coordinate of the existing facility that sends (or receives)
the median load.
● Step 3: Find the y-coordinate value of the existing facility that sends or
receives) the median load

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SIMPLE MEDIAN MODEL
Example.
● Let Li = Loads to be shipped annually between each existing facility Fi, and
new plant
● Ci = Cost to move a load one distance unit to or from Fi.
● Di = Distance units between facility Fi and the new plant.
● Then, the total transit cost is the sum of the products CiLiDi for all i.
● Total cost of transportation = ΣCiLiDi

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Center Of Gravity Model
● This method assumes that the distribution cost is a function of the
volumes shipped and the rectilinear distances (i.e., X and Y coordinates).
The distances in each of the X and Y coordinates are averaged, using the
volumes as weights. The resultant coordinates then constitute the center
of gravity for that grid.

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Center Of Gravity Model
If Xc = X coordinate of the center of gravity
Yc = Y coordinate of the center of gravity
Vi = volume of goods transported to or from each of i destination
Xi = distances traveled by the goods in X direction
Yi = distances traveled by the goods in Y direction
Then, Xc = Σ Vi Xi / ΣVi and
Yc = Σ Vi Yi / ΣVi
● Once determined, the Xc, Yc coordinates constitute a
starting point for a new site. Locations in that vicinity may
then be evaluated, changes suggested, and perhaps some
recalculations done before the final choice is made.

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Center Of Gravity Model
● Example. Table below shows eight market locations to which a manufacturer of
wooden windows expects to ship its products. The shipment volumes, X and Y
coordinates of the locations are shown in Table. Using the center of gravity
method, (a) find the Xc and Yc coordinates, and (b) suggest a possible
warehouse location.
Market Area Vi (tonne) Xi (km) Yi (km)
A 8 2.5 10
B 20 3 5
C 12 6.5 8
D 10 11 10
E 30 11 8
F 20 10 4
G 40 13 3.5
H 30 12 2
Total 170
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Center Of Gravity Model
● Solution:
Marketing Vi Xi (km) Yi (km) Vi Xi Vi Yi Xc=EViXi/ Yc=EViYi/
Area (ton) (t-km) (t-km) Evi EVi
A 8 2.5 10 20 80 =1678/170 896/170
B 20 3.0 5 60 100 =9.87 km =5.3 km
C 12 6.5 8 78 96
D 10 11 10 110 100
E 30 11 8 330 240
F 20 10 4 200 80
G 40 13 3.5 520 140
H 30 12 2 360 60
170 1678 896

● (a) Thus, Xc = 9.87 kms and Yc = 5.3 kms

● (b) Looking at the various coordinates in Table, we feel that (Xc = 9.87 and Yc =
5.3 ) are very close to F, suggesting that it may be good to have the distribution
center located here.

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 BREAK EVEN ANALYSIS
● In break even charts, the total cost (fixed costs + variable costs), and revenue
are plotted against the output (either in units, dollar volume, or % of capacity).
Such a graphical portrayal of revenue and costs, as a function of the output is
called ‘break even chart’.
● Example. A businessman is thinking of opening a factory in one of these places
in Ethiopia: Nazereth, or on the outskirt of Addis Ababa (Kaliti) to produce high
quality electronic components for computer. He has gathered data on fixed
cost and variable cost as given in Table.
Fixed Variable costs per unit production
cost/year

Location Material labour Over head

Kaliti 200,000 0.20 0.40 0.40

Nazereth 170,000 1.0 1.0 1.0

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SIMULATION
● Although many quantitative models are available to deal with location
problems, many real world problems are more complex than our examples.
● Some systems have multiple sources shipping to numerous plants; they in turn
ship finished goods to warehouses from which further shipments are made to
retailers.
● Multi-echelon (multilevel) production distribution systems such as these pos
formidable problems. Even with the simplest revision of this system, adding or
deleting one network component, the combinatorial aspects
of the problem make it computationally difficult. More realistically,
we may want to consider more drastic changes, such as total
revision of the warehousing network.
● With problems of this complexity, no optimal solution is
possible. Instead, approximation techniques like computer
simulation are used.
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 QUESTION TIME
A regional bookstore chain is about to build a distribution
center that is centrally located for its eight retail outlets. It
will most likely employ which of the following tools of
analysis?

A. Assembly-line balancing
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B. This presentation
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C. Center-of-gravity model
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D. Linear programming

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DISCUSSION POINT
- Which model will give you the minimum cost, simple
median model or center of gravity model? Discuss

(Please discuss your thoughts on the LMS discussion board)

CREDITS: This presentation template was created by

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THANK YOU!

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