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MBA, Semester 2
Production and Operations Management
Ms. Aarti Mehta Sharma
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Production And Operations
Management
Semester 2
Module 2
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Location of FacilitiesOrganisations objectives, goals, priorities and strategies
location of facilities
long term commitment
very few qualitative and quantitative changes possible
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Location Decisions
Overall Strategy
Any already existing site
Environmental Cost
Availability of Manpower
and Resources
Growth
Backward Areas and Industrial Policy
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Evaluating Locations Cost-Profit-Volume Analysis
Determine fixed and variable costs
Plot total costs
Determine lowest total costs
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Location Cost-Volume Analysis
Assumptions
Fixed costs are constant Variable costs are linear
Output can be closely estimated
Only one product involved
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Situations Location Choice for the first
time
Location choice for an
already established
organisation with one or
more facilities existing
Global Location
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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)
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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
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Methods
- Dimensional Analysis
- Factor Rating Method
- Point Rating Method
- Break Even Analysis
- Qualitative Factor Analysis
- Brown and Gibson Model for Site Location
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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
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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
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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
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= 0.0666
Site M is superior to site N
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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
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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
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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
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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
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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 ?
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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
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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
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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
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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
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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)..
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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
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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
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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.
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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.
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Location Fixed Cost/year
(Rs.)
Variable Cost
per unit (Rs.)
A 25,000
50
B 50,000 25
C 80,000 15
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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
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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
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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
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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
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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
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Possible parameters for SFM
0.1 extremely low receptivity
.
.
.
0.9 extremely high receptivity
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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.
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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
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Location Critical Factors Total
water tax
Gurgaon 0 1 1
NOIDA 1 1 2
Tirpur 1 1 2
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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
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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
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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
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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)
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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
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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
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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
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Models for Location of Service Facilities
Health Service
School
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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
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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)
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Total utilization for one PHC
U = uijk
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In short Maximize utilization ; maximize U
Minimize average distance to the closest PHC
Minimize distance per visit Minimize degradation in utilization
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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
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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 ?
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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
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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
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Location E has lowest costGrade Point
Outstanding 5
Very Good 4
Good 3
Fair 2
Acceptable 1
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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
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Now apply any of the methods discussed earlier
Which location is the best ?