Facility Location

Operations Management

KRISHNA MURARIKRISHNA MURARI

FACILITY LOCATION

FACILITY LOCATION The location where firms setup their operations is called as facility location. Retailers and shopping center developers have earn the secret of success which is non other than location.

Need for Selection of facility locations ;1) To start new business2) to expand the business and present location

is not sufficient 3) to have new branches4) When place to be changes due to completion

of lease period5) Due to social, political and economical

reasons

IMPORTANCE OF LOCATION 1) Location of facility decides the production technology and cost structure. Like location in under developed country will have labour intensive technology. 2) Location depends on size and nature of business. A large scale industry needs huge investment and option for extension and can not be shifted in future.3) Location affects the firms ability to serve the customers quickly and efficiently.

4) Location affects the competitive advantage.5) Optimum location reduces transportation cost, labour cost, taxes etc.

FACTORS AFFECTING THE LOCATION DECISION

1. Market proximity – very important for service industry

2. Integration with other parts of the organisation – in case organisation has some other plants

3. Availability of labour and skill –software company in Bangalore

4. Site cost

5. availability of amenities – hospital, house , shops etc.

6. Availability of transportation facilities

7. Availability of inputs – nearness to suppliers – like composite materials for Germany’s aviation firms from France.

FACTORS AFFECTING THE LOCATION DECISION

8. Availability of services- Electricity, water, gas, drainage, disposal of waste

9. suitability of Land and climate – Surat for cotton industry

10. Regional Regulations- recruitment of employees in Bangalore

11. Room for expansion

12. Safety requirements – location of nuclear power station away from population.

13. Political, cultural and Economical situation

14. Regional taxes, special grants and import/export barriers – Land allotment by Karnataka Government to Boing, EADS

Steps in Location And Location Decision Process

It is very difficult to find an optimal location. Satisfying decisions are developed by approximation. There is no standard procedure. Following steps may be taken as guidelines:

1. Define the location objectives and associated constraints. – basis – promoters, owners, employees, suppliers, customers

2. Identify the relevant decision criteria – includes economical factors like labour, material cost, non-economical factors – environment

Steps in Location & Location Decision Process 3. Relate the objectives to the criteria using appropriate models

Break even analysis, linear programming, qualitative factor analysis etc are used for decision making.

4. Do field research to relevant data and use the models to evaluate the alternative locations – secondary data from Center For Monitoring Indian Economy (CMIE),, Journals of Indian Federation of Commerce and Industry (FICCI), central Statistical Organsiations (CSO) and primary data by survey are used.

5. Select the location that best satisfies the criteria

Location Evaluation Methods 1. Cost –Profit-Volume or Break – Even Analysis

It is a graphical and algebraic representation of the relationship among volume of output, costs and revenues.

Cost has two factors- fixed and variable.

Fixed- building rent, administrative cost etc.

variable- labour, raw material etc.

Total cost is sum of fixed and variable cost at a specific volume of production.

Cost for each location is find out and subtracted from revenue, the location where profit is more is selected.

Location Evaluation Methods 1. Cost –Profit-Volume or Break – Even Analysis

CO

ST

VOLUME OF SALES

FCA

FCB

TCB

TCAREVENUE

TCA- TOTAL COST AT LOCATION A FCA- FIXED COST AT LOCATION A

TCB- TOTAL COST AT LOCATION B FCB- FIXED COST AT LOCATION B

Location Evaluation Methods

1. Cost –Profit-Volume or Break – Even AnalysisLowest cost location may not always give maximum profit. It depends on the volume of sales Problem

Location Fixed cost/yr Variable cost

Bangalore Rs. 16,00,000 Rs 400/ unit

Delhi Rs. 20,00,000 Rs.150/unit

Sales – 2000 unit /yr Price – 1500/unit

Cost –Profit-Volume or Break – Even AnalysisC

OS

T

VOLUME OF SALES

FCA

FCB

TCB

TCA

REVENUE

TCA- Total cost at Bangalore = Rs.24,00,000

FCA- Fixed cost at Bangalore=Rs. 16,00,000

TCB- Total cost at Delhi = Rs 23,00,000

FCB- Fixed Cost at Delhi= Rs. 20,00,000

1000 2000

15,00,000

20,00,000

Total Revenue=

Rs. 30,00,000

23,00,000

24,00,000

30,00,000

Location Evaluation Methods 2. Factor Rating Technique

This is based on the ranking of various weighted factors that influence the choice of the location. Factor rating is used to evaluate alternative locations.

Method :

i) Relevant factors are identified – like production cost, supply of raw materials, labour availability, proximity to customer, availability of facilities, tax advantage etc.

ii) Weights are assigned to the factors based on their importance. (Most important -5 , least important -1)

Location Evaluation Methods 2. Factor Rating Technique

Method :i) Location is also rated based on merit of the

factor.iv) Product of ratings is computed by multiplying

location rating with factor ratings. v) Location of highest score is considered

preferable. But implementation requires careful judgment.

Advantages 1. It helps in deciding one location over the other.2. It brings diverse locations into consideration.3. It has consistency in evaluation.

2. Factor Rating Technique

Problem

Factor Factor rating

Location A Location B

Product cost 5 7 8

Labour availability

4 6 5

Supply of Raw material

5 8 7

Proximity to customer

4 5 4

Tax Advantage 2 6 7

2. Factor Rating Technique

Solution

Factor Factor rating

Location A

Location B

Product of rating s A

Product of ratings A

Product cost 5 7 8 35 40

Labour availability

4 6 5 24 20

Supply of Raw material

5 8 7 40 35

Proximity to customer

4 5 4 20 16

Tax Advantage 2 6 7 12 14

total 131 125


3. Point Rating Method

A firm selects location based on many objectives and their importance and weightage for different objectives are different.

In this method, the intangible factors related to location are assigned points and compared with tangible factors. Evaluation is done to know whether difference between the intangible factors is worth between tangible factors of the competing locations.

Drawback of this method is that a high score in any factor can overcome a low score in any other factor.


3. Point Rating Method

Problem :

Factor rated Maximum possible no.

Location A Location B

Transportation facility

600 400 500

Water supply 200 150 100

Living condition

400 300 350

Availability of fuel

500 200 300

Total 1050 1250


4. Transportation MethodWhen network of supply point to potential location are available, this method is used.

In this methods best match of capacity and demand for each potential location is carried out using linear programming and cost & profit are compared.

Matching of the capacity and demand of the firm and minimizing the total transportation cost are carried out and right location is selected based on minimum total transportation cost.


Transportation Method (contd)It is a special type of linear programming problem.Method:Xij = quantity transported from the plant Pi to a warehouse WjCij = the unit transportation cost from Pi to WjObjective function is to minimize the total cost i.e.Minimize Zij = ∑CijXijSubjected to supply constraints n∑ Xij =Si where i = 1,2,….,m Si = supply available at ith origin j=1

m∑ Xij =Dj where j = 1,2,….,m Di = quantity demanded at jth destinationi=1

And ∑ Xij > or = 0 for all I and j

Transportation Method

Procedure :

1. Define the objective function that is to be minimized

2. Develop a transportation table with row representing the origin and column the destination

3. Determine the initial feasible solution to the problem

4. Examine whether initial solution is feasible or not. If solution is feasible if number of cells occupied are m+n-1 where m= no. of origins and n= no. of destinations

5. Test the solution for optimality by computing opportunity cost associated with unoccupied cells

6. If solution is not optimal, modify the location to reduce the transportation cost further.


Origin Destination Supply

D1 D2 --- Dn

O1 X11 X12 --- X1n S1

O2 X21 X22 --- X2n S2

: : : --- : :

Om Xm1 Xm2 --- Xmn Sm

Demand D1 D2 --- Dn ∑Si

∑Dn

C11 C12

C21 C22 C2n

C1n

Cm1 Cm2 Cmn


Developing Initial Feasible solution :

i) North –west corner method

ii) Least cost method

iii)Vogel’s approximation method

Transportation MethodDeveloping Initial Feasible solution :


Step 1: Assign maximum possible quantity of products to the top left corner (north west corner)

Step 2 : After allocation adjust the supply and demand number

Step 3 : If supply in the first row is exhausted, move down to the corresponding cell in second row and assign the possible quantity to the cell, if demand in column is first satisfied, then move horizontally to the next cell in second column and assign the quantity of product.

Step 4: continue the same procedure till entire requirement is met

Step 5 : check the feasibility of the solution



Problem: Distance between factory and its warehouses and demand at each warehouse are given in the table below. Find solution by using north west corner method.

Warehouse W1 W2 W3 Supply

Factory

F1 16(cost) 22 14 200

F2 18 14 18 150

F3 8 14 16 100

Demand 175 125 150



Warehouse

Factory

W1 W2 W3 Supply

F1 175 25 200

F2 100 50 150

F3 100 100

Demand 175 125 150

16 22 14

18 14 18

8 14 16

m+n-1 = 5


ii) Least Cost method

Step 1: First we consider the cell where the unit cost of transportation is the least

Step 2 : possible number of goods that can be assigned to the cell is assigned.

Step 3 : Next we move to that cell where the next higher unit cost of transportation exist and assign the possible number of goods

Step 4 : The process is continued till the entire goods are assigned

Step 5 : check the feasibility of solution

i.e. m+n-1 = no. of occupied cells


ii) Least Cost method

Warehouse

Factory

W1 W2 W3 Supply

F1 50 150 200

F2 25 125 150

F3 100 100

Demand 175 125 150

16 22 14

18 14 18

8 14 16

m+n-1 = 5


iii) Vogel’s Approximation Method :

It is most preferred method as it usually gives an optimal or a near optimal solution.

Step1 : Calculate penalty for each row and column which is difference between the least cost and next least cost.

Step2 : Identify the row or column with the largest penalty value and assign the possible quantity of product to that cell having the least unit cost in that row or column.

Step 3: Adjust the supply and requirements after the allocation is made.

Step 4: Delete that row or column where the supply or requirement is zero.

Transportation Methodiii) Vogel’s Approximation method Step 5 : calculate the value of penalty of reduced

transportation problem and repeat the procedure.

Warehouse

Factory

W1 W2 W3 Supply Penalty

F1 200 2

F2 150 4

F3 100 6

Demand 175 125 150

Penalty 8 0 2

16 22 14

18 14 18

8 14 16

Transportation Methodiii) Vogel’s Approximation method Largest penalty column is first column and cell with least

cost is F3W1, assign maximum product 100.

Warehouse

Factory


F1 200 2

F2 150 4

F3 100 100 6

Demand 175 125 150

Penalty 8 0 2

16 22 14

18 14 18

8 14 16

Delete Row F3 as it has zero requirements and adjust demand to 75 (175-100)

Transportation Methodiii) Vogel’s Approximation method Recalculate penalty. Column 2 has highest penalty

8 hence assign maximum product 125 to minimum cost cell F2W2

Warehouse

Factory


F1 200 2

F2 125 150 4

Demand 75 125 150

Penalty 2 8 4

16 22 14

18 14 18

Now delete second column as demand is met and adjust the supply to 25 (150-125)

Transportation Methodiii) Vogel’s Approximation method Recalculate penalty. Column 2 has highest penalty

8 hence assign maximum product 150 to minimum cost cell F2W2

Warehouse

Factory

W1 W3 Supply Penalty

F1 150 200 2

F2 25 0

Demand 75 150

Penalty 2 4

16 14

18 18

Now assign left out difference of 50 in first row and 25 in second row to first column

Transportation Methodiii) Vogel’s Approximation method Solution is given below :

Warehouse

Factory


F1 50 150 200

F2 25 150

F3 100 125 100

Demand 175 125 150

Penalty 8 0 2

16 22 14

18 14 18

8 14 16

Solution is a feasible solution as number of occupied cells are 5 = m+n-1

Transportation MethodStepping stone method : it is used to test whether solution is optimal and

to find out the optimal solution. Consider the solution in last exercise

Warehouse

Factory

W1 W2 W3 Supply

F1 50 UOC 150 200 UOC=

Un-

Occupied

Cell

F2 25 125 UOC 150

F3 100 UOC UOC 100

Demand 175 125 150

16 22 14

18 14 18

8 14 16

Transportation MethodStepping stone method : Step 1: Select the unoccupied cell and trace the closed path

starting from that cell using the most direct route through at least three occupied cells.

Step2 : Starting from selected cell, assign + or – alternatively to the corner cells of the closed cell.

Step3: calculate the “net cost change” of the selected cell by adding the unit cost value with the sign assigned along the closed path.

Step4: If the “net cost change” is positive for all the unoccupied cell, we can conclude that optimum solution is obtained.

Step5 : if the “net cost change” of an unoccupied cell is negative, then reassign the product to that cell the quantity equal to minimum quantity of negative signed cells.

Step 6: Repeat the procedure till optimum solution is reached.

Transportation MethodStepping stone method : Consider unoccupied cell (F1,W2)The closed path for the cell is (F1,W2)-(F2,W2)-(F2,W1)-(F1,W1)The net cost change is +22-14+18-16 = 10(+ve)Therefore nothing can be assigned to this cell.

Consider unoccupied cell (F2,W3)The closed path for the cell is (F2,W3)-(F2,W2)-(F1,W2)-(F1,W3)The net cost change is +18-18+16-14 = 2(+ve)Therefore nothing can be assigned to this cell.

Transportation MethodStepping stone method : Consider unoccupied cell (F3,W3)The closed path for the cell is (F3,W3)-(F3,W1)-(F1,W1)-(F1,W3)The net cost change is +16-8+16-14= 10(+ve) Therefore nothing can be assigned to this cell.

Therefore, we can conclude that the solution obtained in above problem is an optimum solution and it can not be further improved.

Location Evaluation Methods5. Center of Gravity Method for Plant Location

This method focuses on minimizing the transportation cost/ shipping cost from a distribution centre to different shipping points. This method takes into account the factors like markets, cost of goods and cost of transportation.

The center of gravity is identified by calculating X and Y co-ordinates of the location that minimizes transportation cost. Quantities shipped are taken as weights for the locations and multiplied with x and Y coordinates to find out center of gravity.

Location Evaluation Methods5. Center of Gravity Method for Plant Location The co-ordinates of the center of gravity are find out as follows :

Xc = ∑(XiVi) / ∑(Vi)

Yc = ∑(YiVi) / ∑(Vi) Where

Xc = X coordinate of center of gravity

Yc = Y coordinate of center of gravity

Vi = Volume of items transported to and from location i

Xi = X coordinate of location i

Yi = Y coordinate of location i

5. Center of Gravity Method for Plant Location

Problem:

The X and Y coordinates of several retail locations of a retail chain is given below. The quantity to be shipped is given in table. Identify the optimum location of warehouse.

Y l

oca

tio

n ,

Km

X coordinates , Km

4 8 12 16

4

8

12

16

A

B

C

D

EF

G

5. Center of Gravity Method for Plant Location Problem:

RETAIL OUTLET

X Y VOLUME

A 4 10 80

B 3.5 15 100

C 4 6 120

D 10 2 130

E 16 6 100

F 8 5 150

G 14 13 90


RETAIL OUTLET

XiVi YiVi VOLUME

A 4x80=320 10x80=800 80

B 3.5x100=350 15x100=1500 100

C 4x120=480 6x120=720 120

D 10x130=1300 2x130=260 130

E 16x100=1600 6x100=600 100

F 8x150=1200 5x150=750 150

G 14x90=1260 13x90=1170 90

Total ∑(XiVi)= 6510 ∑(YiVi)=5800 ∑(Vi)=770


Xc = ∑(XiVi) / ∑(Vi) = 6510/770 =8.455 km

Yc = ∑(YiVi) / ∑(Vi) = 5800/770= 7.532 km

Location Evaluation Methods6. Analytic Delphi Method

Decision on multiple location with different objectives considering many intangible issues is taken by this qualitative method. This method requires participation of coordinating panel, a forecasting panel and strategic panel of experts. Forecasting panel considers the future trend and strategic panel identifies strategic goals and objectives. Coordinating panel consists of external consultants, company employees and it develops the questionnaire and coordinate Delphi process.

Location Evaluation Methods6. Analytic Delphi Method

Steps are:i) Forming two Delphi panels –forecasting and strategic to participate in Delphi inquiry ii) identify trend and opportunities by first Delphi inquiry from forecasting panel by questionnaires prepared by coordinating panel. This is carried out many times till consensus arrived. iii) Determine directions and strategic goals of the organisation- The information collected from first Delphi inquiry is given to strategic panel to identify organisation's directions and goals in second Delphi inquiry


6. Analytic Delphi Method iv) Develop alternatives – strategic panel identifies alternatives after identifying the goals and objectives.

v) Prioritize the alternatives

all the alternative are presented to the members of the strategic panel. They give subjective value judgments.

Based on this the location is decided. It can also be used to identify the trends, developments and opportunities.

Location Service Facilities

Less investment is required in service facilities which has resulted in high growth of services.

Services can not be stored hence the decision of location is taken based on the target markets.

Behavioral impact in facility location

1. Cultural difference

In new Location, employees are hired from within the new place. Organisation has to establish appropriate community relations. At international level, it is very important aspect of the business.

2. Job satisfaction

Job satisfaction is reflected by

i) Labour absenteeism

ii) labour turnover

iii) Tardiness

iv) Grievances

Case – Ellora time’s Manufacturing Woes

• Ellora times Pvt. Ltd based in Morbi, Rajkot, Gujarat, India

• In 2001, it was the world’s largest manufacturer of clocks.

• It produces calculators, telephones, timepieces and educational toys.

• Ajanta and Orpet (combined companies) had investment Rs. 2 billion in 2001. It had 70% market shares in timepiece and calculator business and 20% in telephone.

• It exported its products to 60 countries• It had 25000 dealers and 180 service stations.• In early 2001, Ellora decided to shift its

manufacturing activities to China


• Manufacturing base was 15,00,000 sq.ft and carpet area 10,00,000 sq.ft.

• It had essential machineries such as Wafer saw machine, automatic coil winding machine, ultrasonic ware bonders, CNC plastic injection molding machines, a full fledge workshop for mould manufacturing.

• In 2001, it produced 15,000 calculators, 20,000 time pieces and 8,000 telephones per day.

• 1800 workers, 45 trucks • It gave prime importance to R&D and quality.• ISO9002 company


• It got many awards for excellence in Export • Initially raw materials were imported from

Japan, Korea and Taiwan.• From1998, it started import of raw materials

from China• In1999, Indian govt. removed restriction on

import from China.• The same range of product from China was

much cheaper.• Demand of calculator increased from 20

million to 40 million in mid 1990s but company was forced to reduced its production from 6-7million to 2-2.5million.


• It market share came down from 70% to 5% as 90% calculator used in India were imported.

• Under invoiced goods from China evaded the customs and excise duty and import through Nepal was at low tax.

• Spare parts has duty 5% while raw material has duty 25%.

• Hence Ellora began to import parts from China

• A few years ago, Ellora has 15,000 workers, in 2001 it came down to 5000.

• It leased 300,000 sq.ft. in Shenzhen and started shifting machinery.


Question for Discussion:

1. Why do you think Ellora was forced to decide in favour of setting up a factory in China despite the fact that it had been doing rather well both in the domestic and export market. Do you think the company can maintain its success rate in the future with the new international manufacturing initiatives.


Question for Discussion:

2. Evaluate the differences between the manufacturing environments and regulatory frame works of India and China. What are the reasons behind the huge cost difference between the products of the two countries?

3. What is the likely impact of the “China threat” on the Indian manufacturing industry? Discuss the options available to the government and the industry.


Difference Between Business environment and regulatory framework of India and China

Chinese policy framework encourages export promotion by subsidizing.

China has cheaper power, low labour costs, highly regimented labour poll, less no. of public holidays and low cost of finance.

Tax structure and infrastructure facilities are better in china.

More availability of raw materials, spare parts and components

Zero inventory possible in china Corruption level is low in China


Less legal hassles with customs, excise and sale tax

Export subsidy in China is 19-27% and there are free trade zones.

Easy availability of finance at low interest arte of 5.5% in comparison to 14-15% in India.

Labour laws are not restrictive in China No minimum wages, no extra overtime No trade Union Reliable supply chain in comparison to India Fast clearance at customs and ports Low taxes Good infrastructure in china (good roads)

Facility Location

Documents

location objectives

optimum location

present location

optimal location

location evaluation

labour cost

availability of labour

transportation cost