Pom Module 2

8/8/2019 Pom Module 2

1/57

AMITY GLOBALBUSINESS SCHOOL Bangalore

1

MBA, Semester 2

Production and Operations Management

Ms. Aarti Mehta Sharma


2/57


2

Production And Operations

Management

Semester 2

Module 2


3/57


3

Location of FacilitiesOrganisations objectives, goals, priorities and strategies

location of facilities

long term commitment

very few qualitative and quantitative changes possible


4/57


4

Location Decisions

Overall Strategy

Any already existing site

Environmental Cost

Availability of Manpower

and Resources

Growth

Backward Areas and Industrial Policy


5/57


5

Evaluating Locations Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs


6/57


6

Location Cost-Volume Analysis

Assumptions

Fixed costs are constant Variable costs are linear

Output can be closely estimated

Only one product involved


7/57


7

Situations Location Choice for the first

time

Location choice for an

already established

organisation with one or

more facilities existing

Global Location


8/57


8

Location Choice for the first time Identification of Region

taking into consideration long term strategies

- Marketing

- Technology

- Internal Organisational Strengths & Weaknesses

- Availability of raw material

- Business Environment ( Govt. Policy)

- Availability of Power / Transport Facilities

- Suitability of Climate

- Geographical Environment ( Nearness to the market)


9/57


9

Civic amenities for workers

Existence of complementary and competing industries

Finance and research Facilities

Availability of water and Fire Fighting Facilities

Momentum of an Early Start

Personal Factors

Receptivity of Community


10/57


10

Methods

- Dimensional Analysis

- Factor Rating Method

- Point Rating Method

- Break Even Analysis

- Qualitative Factor Analysis

- Brown and Gibson Model for Site Location


11/57


11

Location Choice for the first time Choice of a site within a region

- evaluation of alternative sites for their tangible and

intangible costs

- cost economies

- Soil, Size and Topography

- Disposal of waste

- Scenic location


12/57


12

Dimensional Analysis When all the costs are quantifiable - choose the least cost site

When some costs are intangible

proximity to school, hospital etc

Consider two sites A and N

C1, C2,C3 .. are the different costs associated with site N

C1, C2,C3 .. are the different costs associated with site A

C1W1 C2

W2 C3W3 ..

C1 C2 C3

Where W1, W2 , W3 are the weightages given to these cost items

If > 1 then site A is superior to site B


13/57


13

Analyse

Costs

Site

Labour Power EducationalFacilities

Recreational

Facilities

M Rs.1,50,000

Rs40,00,000 2 2

N Rs.

1,00,000

Rs

25,00,000

6 4

Weightag

e1 1 2 2


14/57


14

= 0.0666

Site M is superior to site N


15/57


15

Factor Rating Method List the most relevant factors in the location decisions

Rate each from 1(very low) to 5 (very high)

Rate each location ( 1 to 10 ) according to its merits on each

factor

Compute the product of ratings

Add each

Choose the location with the highest points


16/57


16

IllustrationFactor Factor

Rating

Location Rating Product Rating

Location A Location B A B

TaxAdvantage

4 8 6 32 24

Suitability of

labor skill

3 2 3 6 9

Proximity tocustomers

3 6 5 18 15

Proximiy tosuppliers

5 2 4 10 20

Adequacy of

Water

1 3 3 3 3

ReceptivityofCommunity

5 4 3 20 15


17/57


17

Quality ofEducationalSystem

4 1 2 4 8

Access torail and air

transportation

3 10 8 30 24

Suitabilityof Climate

2 7 9 14 18

Availabilityof Power

2 6 4 12 8

Total Score 149 144


18/57


18

Point Rating Method Assign a weight to each objective

Calculate the points for each location

When two locations are equally attractive on tangible costs

Points usually made on intangible costs

Choose the location with highest points


19/57


19

IllustrationAfter evaluating two potential sites A and B by comparing costs

and finding them approximately equal from cost point of view,

a manufacturer decided to evaluate the intangible factors for

these two locations by point rating. Which is the better site ?


20/57


20

Factors rated MaximumPossible Points

Points assigned to Locations

Location A Location B

Future Availability

of fuel

300 200 250

TransportationGrowth

200 150 150

Water Supply 100 100 100

Labour Availability 250 220 200

PollutionRegulations

30 20 20

Site Topography 50 40 30

930 730 750


21/57


21

Qualitative Factor Analysis Method Develop a list of relevant factors

Assign a weight to each factor (total =1)

Assign a common scale to each factor (0 to 100) and designate

any minimum point to be scored by each location Multiply and total for each location

Choose the one with maximum points


22/57


22

Relevant

factors

Assigned

weight

Scores for Location

A B C

Production

cost

0.35 50 40 60

Raw Material

Supply

0.25 70 80 80

Labour

Availability

0.2 60 70 60

Cost of living 0.05 80 70 40

Environment 0.05 50 60 70

Markets 0.1 70 90 80

Total 1.00


23/57


23

Relevantfactors Assignedweight Scores for Location

A B C

Production

cost

0.35 17.5 14.0 21

Raw Material

Supply

0.25 17.5 20 20

Labour

Availability

0.2 12 14 12

Cost of living 0.05 4 3.5 2.0

Environment 0.05 2.5 3 3.5

Markets 0.1 7 9 8

Total 1.00 60.5 63.5 66.5


24/57


24

Break Even Analysis

A calculation of the sales volume (in units) required to justcover costs. A lower sales volume would be unprofitable anda higher volume would be profitable. Break-even analysisfocuses on the relationship between fixed cost, variable cost

(or cost per unit), and selling price (or selling price per unit).

Fixed Costs

Cost that do not change when production or sales levels dochange, such as rent, property tax, insurance, or interestexpense. The fixed costs are summarized for a specific time

period (generally one month)..


25/57


25

Variable Cost (Per Unit Cost)

Variable costs are costs directly related to productionunits. Typical variable costs include direct labor and directmaterials. The variable cost times the number of units sold will

equal the Total Variable Cost. Total Variable costs plus Fixedcosts make up the total cost of production


26/57


26

Locational Break Even Analysis When comparing locations on an economic basis (tangible

factors)

Consider only those revenues and costs which differ from site

to site

Identify fixed costs and variable costs


27/57


27

STEPS Determine all relevant costs that vary with location Categorize into

- Annual Fixed Costs

- Variable cost per unit- Total Cost

Select the location with the lowest Annual cost at the expected

production volume per annum.


28/57


28 Illustration

Potential locations A,B and C have the cost structures

shown for producing a product expected to sell at

Rs.100 per unit. Find the most economical location foran expected volume of 2000 units/year. Also determine

the range of annual volume of production for which each

of the locations A , B and C would be most economical.


29/57


29

Location Fixed Cost/year

(Rs.)

Variable Cost

per unit (Rs.)

A 25,000

50

B 50,000 25

C 80,000 15


30/57


30

Total Cost =( Fixed cost + (Variable cost X (Quantityper annum) per annum) produced)

Total cost at location A, TCA = (FCA)+(VCA) X Q

TCA = 25,000+ 50 X 2,00

25,000+1,00,000=Rs.1,25,000

Similarly,

Total cost at location B, TCB =50,000+25 X 2,000

50,000+

50,000

=Rs.1,00,000

Total cost at location C, TCC =80,000+ 15 X 2,000

80,000+ 30,000=Rs.1,10,000


31/57


31

Analytical MethodTo determine the range of annual volumes of production at whicheach of the three locations would become most economical, itis necessary to determine the break even volumes either bygraphical or by analytical method

To determine the break even volume between location A andLocation B, the total cost for producing the break evenQuantity QAB at each of location A and B are equated

25,000 + 50 QAB = 50,000 + 25 QAB50 QAB - 25 QAB = 25,000

QAB = 1000 unitsSimilarly, QBC = 3000 units


32/57


32

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

500 1000 1500 2000 2500 3000

annual volume

annualtota

lco


33/57


33

Brown and Gibson Model for Site Location Three classes of site location factors :

- Critical e.g. Water for a refinery

- Objective e.g labour costs, raw material costs

- Subjective e.g recreational facilities, union activities


34/57


34

whereCFMi = critical factor measure for site i ( 0 or 1)

OFM i = objective factor measure for site i

( 0 OFM i 1 and OFM i = 1)

SFM i = subjective factor measure for site i

( 0 SFM i 1 and SFM i = 1)

Sites with higher location measures are preferred


35/57


35

Possible parameters for SFM

0.1 extremely low receptivity

.

.

.

0.9 extremely high receptivity


36/57


36

IllustrationABC is looking for a site to set up a bottling

company. They have narrowed down to three

site locations and need to decide on one.

Consider the sites and the different parameters

for each. Apply Brown and Gibson method

and come to a conclusion.


37/57


37

Factors Gurgaon NOIDA Tirpur

Water supply y y

Tax Incentives y y y

Revenue(in 000s) 185

150 1

70

Labor costs(in 000s) 80 100 90

Energy costs(in 000s) 10 15 13

Community attitude 0.5 0.6 0.4Transportation 0.9 0.7 0.8

Labor union 0.6 0.7 0.2

Support services 0.7 0.8 0.8


38/57


38

Location Critical Factors Total

water tax

Gurgaon 0 1 1

NOIDA 1 1 2

Tirpur 1 1 2


39/57


39

Locat Subjective FactorsCommunity

0.3

Transp

0.4

Labor

0.25

Support

0.05

SFM

Gurgaon 0.5 0.9 0.6 0.7 0.7

NOIDA 0.6 0.7 0.7 0.8 0.67

Tirpur 0.4 0.8 0.2 0.8 0.53


40/57


40

Convert OFM toD

ecision weightsLocation Objective Decision

weight

revenue labor energy sum D

Gurgaon 185 80 10 95 0.48

NOIDA 150 100 15 35 0.18

Tirpur 170 90 13 67 0.34

Total 197 1


41/57


41

Total weights

Critical

Factors

Objective

Factors

Subjective

Factors

LM

Gurgaon 1 0.48 0.7 2.18

NOIDA 2 0.18 0.67 2.85

Tirpur 2 0.34 0.53 2.87


42/57


42

GLOBAL LOCATION(Tangible Reasons) Market Presence in the country of customers

Virtual Factory (BPOs)

Tax Advantages

Cost of manufacturing is low

- lower labor costs

- lower raw material costs

- better infrastructural inputs (power, water, ores, metals)


43/57


43

GLOBAL LOCATION (Intangible reasons)

Customer Related

- customers feel more secure

- personal touch of firm

- Better customer feedback- Discover potential customers

Organisational Learning Related

- learn advanced technology

- learn from new competitors

- Learn from Suppliers abroad


44/57


44

Strategic Reasons Gain local boy psychological advantage

Deterrent for competitors

Avoid political risk

Build alternative sources of supply

Human Capital. Hire best of best

Lowers market risk

Exposure to different systems makes it easier to cope with

change

Build BRAND internationally


45/57


45

Location / Relocation choice for an already

established organisation

Plants manufacturing distinct product lines

covers entire market area

new technology / oldwatch mfg / machine tools

textile unit / chemical plant

Each plant supplying to a specific market area

Plants divided on the basis of the processes or stages inManufacturing

Plants Emphasizing Flexibility in adapting to constantlychanging Needs


46/57


46

Models for Location of Service Facilities

Health Service

School


47/57


47

Health Service Location Abernathy and Hershey Model for PHCs (Primary Healthcentres)

L = no. of localities or block (i=1,2.L)

M = no. of categories or strata of people (j=1,2M) nij=no. of people of stratum j in block I

= nij

I j

G = no. of PHCs( k=1,2,.G) Zi1,Zi2 = coordinates of the centre of the block i

Xk,Yk= coordinates of the PHC k


48/57


48

Xk,Yk= coordinates of the PHCk

bik= distance betwee block I and PHC k

= |Zi1 Xk| + |Zi2 Yk|

vj = expected no. of visits per time period Dj= effect of distance on utilization for the different strata of

people ( j= 1,2 .M)

Overall utilization for nij individuals is defined as :

uij = nij.vj / ( 1 + dj bik)


49/57


49

Total utilization for one PHC

U = uijk


50/57


50

In short Maximize utilization ; maximize U

Minimize average distance to the closest PHC

Minimize distance per visit Minimize degradation in utilization


51/57


51

School Location Tewari and Jena, Bellary, Karnataka, 1985 Minimize the average distance travelled to the nearest school

Maximize the population covered within a radius of 8 kms

Lacunae

Government invites proposals asking for various details ; calls

for local initiative; self defeating

Facts are not always accurate Decisions on location are not objective based


52/57


52

QuestionA company has to select one location out of the five alternativesconsidered for a new plant. The annual operating costs and

other intangible factors are given on the following slide.

1. On the basis of annual operating factors, which site would

you choose ?

2. Devise a method of quantifying the intangible factors and

integrate them with the cost data into the overall evaluation.

Which is best now ?


53/57


53

factors Location

A B CD E

Economic (Rs.)

Labour 120000 110000 160000 85000 75000

Transportation 10000 8000 7000 12000 14000

Local 17000 20000 25000 19000 17000

Power 21000 29000 25000 18000 23000

Others 16000 11000 12000 16000 18000

Intangible

Community attitude v.good Fair Good Fair v good

Labor Availability Good V good Fair outstanding Acceptable

Quality ofTransport Fair acceptable outstanding acceptable Fair

Quality of lifeacceptable

Fair GoodVery good outstanding


54/57


54

On the basis of annual operating costs

A B CD E

Total

operating

costs

184000 178000 229000 150000 147000

Rank 4 3 5 2 1


55/57


55

Location E has lowest costGrade Point

Outstanding 5

Very Good 4

Good 3

Fair 2

Acceptable 1


56/57


56

Ratings for Intangible Factors

A B C D E

Communityattitude

4 2 3 2 4

aborvailability

3 4 2 5 1

Quality of

ransport

2 1 5 1 2

Quality of life 1 2 3 4 5

otal rating 10 9 13 12 12

Rank 3 41 2 2


57/57


57

Now apply any of the methods discussed earlier

Which location is the best ?

Pom Module 2

Documents

Transcript of Pom Module 2