pom session iv facility location-final
TRANSCRIPT
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POM
SESSION IV
FACILITY LOCATION
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Facility Location
Various factors need to be considered
before selecting a facility location
Location Analysis Techniques are
used for selecting the location
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Facility LocationObjectives:
1.Describe the concept of Facility
Location
2.Describe the factors affecting location
analysis
3.Describe the location analysis
techniques
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Concept of Facility Location
Theres a structured process of
identifying the best geographical
location for a service/production facility
Location plays an important role
Long-term consequences need to be
considered
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Concept of Facility Location
Some problems that may arise due to
inappropriate location:
a. high production cost
b. marketing difficulties
c. dissatisfaction among employees
* Costs of shifting is PROHIBITIVE
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Factors Affecting Location Analysis
All factors can be categorised into :
Regionalproximity to markets, raw
material sources, transportation, govt.
policy
Communityavailability of labour,
behaviour of worker, social environment
Siteavailability of land, cost of land
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Factors Affecting Location Analysis
if distance from market is less
Timely delivery
Low cost of distribution (e.g. if product
is fragile OR transportation cost is high)
Easier to recover payment!
1. Location of market
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Factors Affecting Location Analysis
if distance from market is less
i.Smooth flow of raw material smooth
production
E.g. perishable raw material distance
MUST be lessii.Cost of sourcing is less/cost of
replacement of defective material
2. Location of raw material sources
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Factors Affecting Location Analysis
Two categories of raw material
Gross materials : they lose weight
with time until they are converted intooutput
E.g. Iron ore, lime stone, sugarcane, coal
Steel mills are close to iron ore &
coal deposits
Sugar industry is close to .
2. Location of raw material sources
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Factors Affecting Location Analysis
Two categories of raw material
Pure material : they gain weightduring conversion process
e.g.cotton textiles, silks, bakeries
*Factory should be close to raw material
to keep the transportation cost low
2. Location of raw material sources
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Factors Affecting Location Analysis
major factor
Power intensive industries MUST belocated close to power generation site
Increase in power cost or decrease in
power supply can seriously compromise
the survival of a company
3. Infrastructure
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Factors Affecting Location Analysis
Availability of Financial Institutions,
Strength of Financial InstitutionsEnvironmental regulations,
And finally, Competitors size, strength
and attitude in that region.
3. Infrastructure
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Factors Affecting Location Analysis
Industries should be established at
locations which provide cheap and apt
transportation service
4. Transportation
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Factors Affecting Location Analysis
Good location is where labour is easilyavailable
Importing labour from far is costly, also
creates administrative problems.
E.g. Facility location in a backward area
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Living costs/wage patterns should be
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5. Availability of labour
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Factors Affecting Location Analysis
related to licence, labour law & building
structure
Taxes/duties affect costs
Some states + central govt. offer
incentives e.g. excise duty exemption,
subsidised electricity, soft loans
6. Govt. policies
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Factors Affecting Location Analysis
Textile mills require high humidity
7. Climate factors
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Factors Affecting Location Analysis
People of a community may not be in
favour of a particular industry
8. Community attitude
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Factors Affecting Location Analysis
E.g. nuclear power plants radiation
leakage
E.g. airport accidents
9. Safety measures
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Factors Affecting Location Analysis
Accommodation easily available,
cheap
Communication connectivity,
transportation
Education schools, college, institute
Medical facilities
10. Social infrastructure
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Factors Affecting Location Analysis
Proximity to supporting units/ancillary
affects cost & delivery time
11. Supporting industry
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Factors Affecting Location Analysis
Soil should be capable to sustain the
load of plant foundation
E.g. Sandy soil X heavy manufacturing
12. Topography of land
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Factors Affecting Location Analysis
Site should have enough space for
current requirement + parking facility
Size of plant should be according to
future expansion plans
Normally, actual plant size is 5 times
the conceptual plant size
13. Availability of land
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Factors related to the market
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Location Analysis Techniques
identify the best AVAILABLE plant site in
accordance with tangible & intangible
production costs
Identify a region for the plant
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Location Analysis Techniques
Cost oriented location analysis
techniques can be used for deciding upon
plant from available set of sites:
1. Dimensional Analysis
2. Factor Rating Method
3. Point Rating Method
4. Cost-Profit-Volume analysis
5. Center of Gravity Method, and
6. Transportation and Simulation Models
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1. Dimensional Analysis
Relative merits of different costs
(transportation, cost) are considered
*its easy to select a plant site if all costare tangible & quantifiable
Plant with L1 is selected
In case of intangible costs, evaluation
in absolute terms is difficult. E.g.skill
level of labour
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However, we can measure relative
merit of labour skill among the 2 sites
To rank one plant over another, ratio of
EACH cost is taken each cost ratio is
given an appropriate weightage by using
an index to which it is raised
Weighted ratios are multiplied to
obtain the final figure on relative merit of
2 plant sites
1. Dimensional Analysis
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Site A costs are C1
A, C2
A, C3
A, .CN
A
Site B costs are C1B, C2
B C3B,.CN
B
Weights: W1, W2,W3,WN
Value of relative merit of plant sites A & B is
given by:
IF VALUE OF RELATIVE MERIT IS > 1,
SITE B IS SUPERIOR
(C1A
/C1B
)W1
X (C2A
/C2B
)W2
X (C3A
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..X (CNA
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1. Dimensional Analysis
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2. Factor Rating Method
Frequently used
Enables managers to consider
various locations in the evaluation
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Steps
list all favourable factors
rate each factor from high value to low(1 to 10 respectively) + rate the location
for each factor
multiply Factor Rating x Location Rating= Product Ratings
2. Factor Rating Method
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Factor Factor
rating
Location
rating
Productof ratings
Inter-company integration 4 8 32
Availability & cost of labour 3 2 6
Availability & cost of
services
3 6 18
Availability & cost of
materials
5 2 10
Availability of transport 1 3 3
Availability of car parking 5 4 20
Expansion potential 4 1 4
Zoning & legal regulations 3 10 30
Cost of land 2 7 14
2. Factor Rating Method
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3. Point Rating Method
Simple and practical approach forcalculating the factors
Inspect the importance of each factor
each location factor is assigned a relative weight out of a
maximum of 100 points
no. of points are assigned to each factor
location having highest score is rated as most suitable
location
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Location factor Unfavourable Average Favourable Total points
(0-33) (34-66) (67-100)A B A B A B A B
Inter-companyintegration
20 80 20 80
Availability & cost oflabour
30 50 30 50
Availability & cost ofservices
50 70 50 70
Availability & cost ofmaterials
60 40 60 40
Availability oftransport
20 40 40 20
Availability of car
parking
30 80 30 80
Expansion potential 30 40 40 30
Zoning & legalregulations
20 50 50 20
Cost of land 30 70 70 30
New developmentareas
40 50 40 50
Living conditions 20 50 20 50
3. Point Rating Method
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4. Cost-Profit-Volume Analysis
When the fixed and variable costs
for each site differ, Cost-profit-
volume analysis can be used to
identify the location with the
lowest cost.
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Foster Paper Ltd. is considering three alternative
sites for its new production facility.
The Annual Production Cost associated with each
alternative is a linear function of the production
volume. That is:
Example
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Total Production Cost = (Fixed Cost) +(variable unit cost) x (annual productionvolume)
Assume that the expected annualproduction volume is 250,000 units.
Example
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A. For Site A: Prod. Cost = 10.000.000 + 250 x
B. For Site B: Prod. Cost = 25.000.000 + 150 x
C. For Site C: Prod. Cost = 60.000.000 + 50 x
Based on these information, Which site has thelowest cost?
Example
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At a production volume of 250.000 units,site B has the lowest cost, because
A.For Site A: Prod. Cost = 10.000.000 + 250
(250.000) = 72.500.000
B.For Site B: Prod. Cost = 25.000.000 + 150
(250.000) = 62.500.000
C.For Site C: Prod. Cost = 60.000.000 + 50
(250.000) = 72.500.000
Example
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Example
100 400
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The graph shows that annual production cost changes with
different production volumes
-If the expected annual production volume is below 150k
units, then choose site A
-If the expected annual production volume is between 150k
and 350k units, then choose site B
-If the expected annual production volume is over 350k
units, then choose site C
Example
C f G i M h d
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This method is used to find a location that
Minimizes the Sum of Transportation Cost
in between new facility and old facilities
Assumption : Transportation cost is a
linear function of the Number of UnitsShippedANDtheTraveling Distance
5. Center of Gravity Method
5 C t f G it M th d
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The location of the firms existing facilities
are converted into x and y coordinates
The following center of gravity equations
are then used for calculating the x and y
coordinates for the new facility:
5. Center of Gravity Method
5 C t f G it M th d
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Cx=------------------ xiVi
Vi
n
i =1
i=1
n
Cy=------------------ yiVi
Vi
n
i =1
i=1
n
5. Center of Gravity Method
5 C t f G it M th d
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Here, Cx :x coordinate for new location
Cy :y coordinate for new location
i: index for existing locations
n: total number of existing locations
xi:x coordinate of existing ith location , and
yi:y coordinate of existing ith location
5. Center of Gravity Method
E l
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Aldrich Manufacturing Company plans to
build a Warehouse to serve its Distribution
Centers in Columbus (Ohio), Frankfort
(Kentucky), Nashville (Tennessee), and
Richmond (Virginia)
Example
E l
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Example
Columbus
Harrisburg
Richmond
Nashville
Frankfort
New facility
y
x
E l
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The number of units to be shipped monthly from
Harrisburg to the Distribution Centers are shown in
the following table:
(Weighted Coordinates are calculated as: (Annual
Shipping Volume) (x or y coordinate))
Example
E l
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Example
E l
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Using the equations of center of gravity:
Cx
= 2,040,000 / 10,000 = 204 (x
coordinate for new facility)
Cy= 1,185,000 / 10,000 = 118.5 (y
coordinate for new facility)
The nearest city to (204, 118.5) is
Charleston at West Virginia
Example
E l
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This method only considers the distancestraveled
ItDOES NOT consider the other factors
such as the availability of roads on the
selected location
Therefore, applying solely this methodmay not be applicable in every cases.
Example
5 Transportation Model
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Its a form of linear
programming
It can be used to compare
the total transportation
cost associated with each
alternative site
5. Transportation Model
5 Transportation Model
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Finally we determine how many units
should be shipped from each plant to
each warehouse to minimize total
transportation cost
5. Transportation Model
Example
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Straub Ltd. has 3 plants running at full capacity in Des
Moines, Racine, and Gary
These plants supply 4 Distribution centers in St.
Paul, Milwaukee, Chicago, and Detroit
Example
Example
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Straub plans to build a new plant. It has
narrowed down the choice of sites to two
possibilities: Kalamazoo and Duluth.
We will now determine which site results in the
lowest transportation cost by using the unit
transportation costs, warehouse demands, and
plant capacities shown in the following:
Example
Example
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Plant Annualproductioncapacity
(supply)
Warehouse
Demand(inunits)
DesMoines
500 St. Paul 225
Racine 300 Milwaukee 175
Gary 200 Chicago 325
Kalamazoo 225 Detroit 350
Duluth 225
Example
Example
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Distribution warehouse
Plant St. Paul Milwauk
ee
Chicago Detroit
Des Moines 15 20 20 30
Racine 20 3 5 20
Gary 25 8 3 13
Kalamazoo 28 11 6 6
Duluth 7 12 17 11
Shipment cost, $per unit
Example
Example
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We will approach this problem in the following
manner:
First, Kalamazoo plant is selected and total
transportation cost is calculated
Then, Duluth is selected & total transportation
cost is calculated
Finally, the transportation costs are compared
Example
Example
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Now, the first step is to find the Optimal
number of units to ship between each plant-
warehouse combination
This also gives the optimal transportation
cost for the problem
Example
Example
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We can use any of the computerized LP tools for
finding the optimum values for this problem.
Some of these include WINQSB, Lindo, OM Expert, and
Excel.
We use WINQSB to solve this transportation model. The
result is as follows:
Example
Example
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The total transportation cost comes to
$10,225 if the new plant is built in
Kalamazoo
Example
Example
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The optimal number of units to ship between each plant
and Duluth Warehouse
The total transportation cost comes to
$13,825 if the new plant is built in Duluth
Example
Simulation Models
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Firms often consider many variables and factors
when they choose a facility location
Simulation Models
Simulation Models
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These variables are often difficult to
estimate and they also change in time
In these kinds ofDynamic Situations,
Simulation may be the best modeling
technique
Simulation Models
Simulation Models
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Simulation models allow managers to examine a
range of Scenarios AND are well suited to open-
ended problems
However, determination of parameters in a
simulation is also a challenging task!
Also, developing a simulation model may take
considerable time and effort
Simulation Models
B k E A l i
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Break-Even Analysis
Q. What is Break-even?
A. A company breaks-even when its
revenues equal its costs
B k E A l i
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Break-Even Analysis
COSTS1.Fixed (rent, salary, insurance, etc.)
2.Variable (inventory carrying costs,
shipping & handling, labour cost, etc.)
*Break-even analysis specifies the level of
output that must be reached in order to
recover all the cost of operations through
revenues
B k l i
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Break-even analysis
FC
VC
TOTAL
REVENUE
TOTAL COST
Region of profit
Rs.
LOCATION A :