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7/31/2019 4A+Plant Location
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OPERATIONS MANAGEMENT
PLANT LOCATION
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Plant Location
Table of Contents
Introduction...................................................................................................................................... 2
Factors Affecting the Plant Location:............................................................................................... 4
Primary Factors:.........................................................................................................................4Secondary Factors : ...................................................................................................................8
Selection of Site............................................................................................................................. 11
Comparing Chinese & Indian Manufacturing Environments ......................................................... 18
Location Models............................................................................................................................. 21
Factor Rating Method...............................................................................................................21
Point Rating Method.................................................................................................................23
Location Break-even Analysis:.................................................................................................25
Qualitative factor analysis method...........................................................................................28
Government Control on Location of Industries.............................................................................. 31
The objectives of state intervention and control are: ...............................................................31
Recent Trends in The Location Of Industries ................................................................................ 32
Gujarat Ambuja Case Study.......................................................................................................... 35
Conclusion..................................................................................................................................... 45
Bibliography & Webliography ........................................................................................................ 46
Webliography ...........................................................................................................................46
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IntroductionEvery entrepreneur is faced with the problem of deciding the best site for
location of his plant or factory.
What is plant location?
Plant location refers to the choice of region and the selection of a particular
site for setting up a business or factory.
But the choice is made only after considering cost and benefits of different
alternative sites. It is a strategic decision that cannot be changed once
taken. If at all changed only at considerable loss, the location should be
selected as per its own requirements and circumstances. Each individualplant is a case in itself. Businessman should try to make an attempt for
optimum or ideal location.
What is an ideal location?
An ideal location is one where the cost of the product is kept to minimum,
with a large market share, the least risk and the maximum social gain. It is
the place of maximum net advantage or which gives lowest unit cost of
production and distribution. For achieving this objective, small-scale
entrepreneur can make use of locational analysis for this purpose.
Locational analysis is a dynamic process where entrepreneur analyses and
compares the appropriateness or otherwise of alternative sites with the aim
of selecting the best site for a given enterprise. It consists the following:
Demographic Analysis:
It involves study of population in the area in terms of total population (in
no.), age composition, per capita income, educational level, occupational
structure etc.
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Trade Area Analysis:
It is an analysis of the geographic area that provides continued clientele to
the firm. He would also see the feasibility of accessing the trade area from
alternative sites.
Competitive Analysis:
It helps to judge the nature, location, size and quality of competition in a
given trade area.
Traffic analysis:
To have a rough idea about the number of potential customers passing by
the proposed site during the working hours of the shop, the traffic analysis
aims at judging the alternative sites in terms of pedestrian and vehicular
traffic passing a site.
Site economics:
Alternative sites are evaluated in terms of establishment costs and
operational costs under this. Costs of establishment is basically cost incurred
for permanent physical facilities but operational costs are incurred for
running business on day to day basis, they are also called as running costs.
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Factors Affecting the Plant Location:Plant location studies are conducted in three phases :
Regional factors ,
Community factors , and
Site factors
Regional Factors:
Regional factors decide the overall area within the country. Such factors
are : proximity to markets, proximity to sources of raw materials, availability
of utilities, transport facilities, climatic conditions , industrial and taxation
laws , etc .
Community Factors:
Community factors influence selection of the plant location within the region.
Such factors are: availability of labour, industrial and labour attitudes, social
structure, service facilities etc.
Site factors:
Site factors favour specific site within the community. Such factors are
availability and cost of the land, suitability of the land, etc
The location of an industry is determined by taking into consideration the
following factors:
Primary Factors:
Supply of raw materials:
Since raw materials usually constitute 50 to 60 percent of the product cost ,
it important that the firm should get its requirements of raw materials at the
right time and at the reasonable price for which the plant must be located in
the neighbourhood of some sources which can meet the raw materials
requirements of the unit .time of receipt of raw materials is important since
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inventory carrying costs rise pretty high if lead time is large due to distance
factors besides transport cost , distance can pose other problems.
Follow up the suppliers become costlier.
The buyer is unable to keep track of what is being dispatched by the
suppliers.
Replacement of defective materials is costlier, time consuming and
affects delivery commitments.
Raw materials can be classified in to two categories:
Gross materials , and
Pure Materials
Gross materials:
Gross materials are those weigh in the process of transformation in to
finished goods e.g. Iron ore, coal, limestone , sugarcane , timber etc .
Industries requiring gross materials therefore are located near the soures of
availability, e..g. steel mills are located nearer to places of iron ore and coal
deposit. The location of mentioned industry is justified because bulky rawmaterials can delivered economically if the unit are located close by.
Transporting these materials to distant places would be expensive.
Moreover, since these materials lose weight in the process of manufacture,
the transportation of finished products to market is comparatively cheaper.
Pure Materials:
Pure materials are those materials which add their weigh to finished
products in the process of manufacture e.g. cotton textile , woolen , silk
fabrics , ice factories, etc. plants requiring pure materials , depend upon the
other factors , may be located away from the soures of raw materials . the
place of production of these industries is usally the place of consumption
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where the final products is more expensive to carry because it is more bulky
and more perishable than its raw materials.
Supply of raw materials is equally important for small units. This is because
usally small units are not considered important customers. They get least
priority. The availability of materials to small units to a large extent thus
depends on their follow up and personal visits to the suppliers plants which
is possible only if the buyers plant is closely.
Nearness to the market :
Since goods are produced for sale, it is very essential that the factory should
be located near their market. A reduction in the cost of transporting finished
goods to the market; the ability to adjust the production programmed to suit
the likes and dislikes of consumers; the ability to render prompt service to
the consumers, provides after sale service and execute replacement orders
without delay. Industries using pure or non-weight- losing raw materials
,bulky products and servicing units tends to be located near their market .To
be specific concerns manufacturing wooden accessories for electrical wiring ,
must be located near their market.
Transport Facilities :
Speedy transport facilities are needed for the regular and timely supply of
raw materials at low cost and for transporting finished products on time to
the market. Transport facilities with good speed and capacity are needed for
transporting laborers and establishing contacts in the market, and
controlling supply according to change in demand. A producer has to choose
a speedy and cheap means of transport after making a comparative cost
study of different means of transport, e.g. roads , railways, waterways, etc.
transporting facilities are important for getting control over foreign markets.
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Supply of Labour :
Plant location should be such that required labor is easily available in the
neighourhood. Importing labour from outside is usually costly and it cause a
lot of administrative problems. Availability of required labor locally is better
since problem of arranging accommodation and other related problems do
not arise. Since normally workers with specific skills are required, some sort
of training facility should also available in the neighbourhood . skilled
employees are easily available if ITI s or Engineering colleges are in the
neighbourhood .
When thinking of starting an industry area , special attention should be paid
to the availability of infrastructure . however a backward area completely cut
off from any township is likely is likely to pose endless problems.
Productivity of labour is a factor of equal important .
Availability of power :
Power is necessary for process of production and for transporting finishing
goods and raw materials. Power may be diesel and atomis energy. All type
of power like electricity , diesel and atomic energy are localized and mobile .power shortage lead to tremendous losses due to the stoppage of
machinery. Therefore industry must have sufficient supply of power .
usually, heavy industries like machines tools and coal mining industries are
located near soures of power .in underdeveloped areas industry depends on
the diesel power or local availability of electricity.
Supply of Capital :
Industries require capital for initial promotion and expansion . therefore, a
capital market must be developed in industries centres. Large production ,
mechanization and big industries requires large amounts of equity capital
and debenture capital for a long period. Commercial banks should also be
developed for the supply of current or short term or working capital.
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Capital is more mobile than labour and , therefore nearer to capital is not
required for the purpose of industrialization.
Secondary Factors :
Facilities:
An enterprising spirit innovation , technical know how and an industrious
nature of population all these factors taken tighter and a favourable
Government policy create a favourable atmosphere for the purpose of the
establishment of industries . Heavy industries in India are the result of
personal factors like enterprise , industrious nature of one man creating an
industrial group or a family , e.g., Tatas , Kirloskars , etc.
Natural Factors:
Climatic factor may not have a major influence these days because of
modern air conditioning facilities available today. However it is important for
some industries like textiles mills which require high humidity, sugar and
jute. These industries depend on a good climate and source of natural raw
materials.
Government Subsidies and Facilities :
The Government may encourage the dispersal of industries in
underdeveloped areas by making capital , land , power and water available
at subsidized rates .The Government may give such such facilities as
developed rebate , tax exemption , price subsidies , banking , insurance and
postal facilities at low rates , priority in transport and supply of raw
materials etc. By giving these facilities , the Government may bring about
the development of industries in backward area and this will result in the
regional balancing of industries .
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Personal Factors :
There are entrepreneurs, specially small industrialists , who locate their
plants purely on personal grounds , disregarding economic considerations.
Such location sometime totally disapprove the many current theories of
plant location . M/s A , unit making ropes is located at naraina , 45 kms from
Jaipur Rajasthan . they manufacture sisal ropes , manila ropes and jute
twines. There are very few rope making units in the country and the unit at
naraina is the third biggest . It is located in a place where there are no
resources and no markets .It gets fibre from Maharashtra Karnataka and the
Philippines , and the suppliers rope to the navy. Moreover Naraina is a small
place and has no particular advantage of economic or social facilities . This is
clearly an examples of an enterprise which has been set up purely on the
basis of personal factors.
Miscellaneous Factors :
The following factors also affect the location of the industrial unit :
Suitability of the land :
Site selection should also take into account topography and soil structure of
the land . The soil structure must be capable of bearing loads of foundations.
Though modern building techniques can overcome the limitations of the soil ,
but if considerable improvement is required then selection of a low cost land
may ultimately turn out be expensive.
Disposal of waters :
The problems of the disposal of effluents is common to many industries ,
particularly chemical , sugar , steel and leather industries . The site selected
for the location of the plant should have provision for the disposal of waste .
There must be enough vacant land for the dumping of solid waste . For liquid
waste , satisfactory sewer connections connections and an effective drainage
system should be available .
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The site selected should , as far as possible , be in the midst of a good
environment . The question of its beauty should not be ignorned.
Availability of Water and Fire-fighting Facilities :
Some industries require plentiful supply of water for water for their working.
Some of these are : fertilizer units , bleaching , dyeing , and screen printing
units. These factories must be located in places where , water is available in
abundance . Water may be obtained from the local authority , from the canal
, from a river or a lake , or borewell . In any case , the supply of water
should be considered with respect to its regularity , cost and purity .
Industrial units are exposed to fire hazards .In such case , adequate fire-
fighting facilities must be available. Otherwise , the loss from a pire will be
considerable . Thought the availability of fire-fighting facilities is not a
decisive factor in the plant location, the fact remains that the existence of
such facilities will enhance the suitability of a location.
Community attitudes :
Community attitudes towards work ( i.e. whether the people in the location
are hard working or otherwise ) as well as their attitudes towards the
incoming entrepreneurs (helpful and co-operative or otherwise) can make or
mar an industry . Locational decisions , therefore , must take such factors
also into account particularly while setting up labour intensive units.
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Selection of SiteThere are broadly three possible alternatives open for selection of the
locality of the industrial unit:
Urban or City area.
Rural area.
Suburban area.
Urban or City area
Due to certain typical advantages available only in the city area, promoters
show preference for the city area as the location of the industrial unit.
Advantages of Urban area
Good transport facilities are available for the movement of raw-materials
and finished products by rail and road and at times, by water and air.
Good and prompt postal and communication services are available.
Banking and credit facilities available.
Services of insurance companies are available in city areas.
Sufficient storing facilities including cold-storage , are available.
Ample availability of skilled and unskilled workers.
Advantages of vicitinty of the market for the product. Due to large
population,
The local demand for the product is fairly high.
Facility of the ancillary and services units, which develop around the
industrial strip of the city area.
Sufficient passenger transport facilities by road and railways are available
to employees.
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Development of the training institutes for workers and management
institutes for executives put the city area units into privileged position.
Educational, medical and recreational institutes increase the amenities of
lives in the city area .
Certain specific municipal services facilities are available only in the city
areas, like water supply, drainage, fire fighting facilities, sufficient police
protection etc.
Disadvantages of Urban or City Area
The cost of land is very high as compared to rural areas
Even at high cost, sufficient land is not available, which puts constraints
on the arrangement of plants and machines. Sometimes multi-story
buildings are used which are not suitable for the installation of heavy
plant and machines
Due to high standard of living in city area, the cost of labour is relative
high
Due to possibilities of changing jobs from one unit to another, and
tendency of competitors to snatch away the good employees, the rate of
labour turnover is very high in city area
The trade union movement is very strong in city area. Militant trade
unionists disturd the amicable industrial relations, which gives rise to
strikes and lockouts
Various types of taxes is levied in city areas. The rates of taxes are
relative high. Eg. Octroi is a typical tax of the city area which is not levied
in rural areas.
Certain municipal restrictions put constraints and involve extra cost due
to height of the building, disposal of waters, treatment of affluent water ,
elimination of air pollution caused by smoke etc.
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The industrialization in the city areas gives birth to slumps and dirty
residence which creates the typical problems of sanitation and health.
Rural Area
In certain situations, a rural area is also preferred as a site for the industrial
unit.
Advantages of Rural area
As compared to the city area, the land is available at cheaper rates.
Large plots of the land area available which can be developed for a
factory sites, office buildings and residential quarters. Horizontal
arrangement of plant machines in the vast areas of land is possible.
Due to lower standard of living, the rates of labour are relatively lower.
As compared to the city area, the labour force is more or less stable
which reduces the rate of labour turnover.
The industrial relations between labour and management are relatively
amicable.
The local taxes which are found in the city areas are practically non-
existent in rural areas.
The municipal restrictions which are found in city areas do not exist in
rural areas. E.g. height of buildings.
Slumps and dirty residence are not found in rural areas. The rural areas is
conducive to good health of workers.
Due to lack of congestion, there is danger of fire caused by surrounding
units.
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Disadvantages of Rural Area
Transportation facilities are not available in good condition and sufficient
quantities.
Banking and credit facilities are also not available. The indigenous
money-lenders are charging exorbitantly for these services.
Absence of insurance facilities.
Storing and warehouse facilities are not available in rural areas.
Passenger transport facilities are not available, as are available in city
area.
Like in city areas, the advantage of ancillary and service units is not
available.
Such units are very far from the market place and this increases the cost
of distribution of finished goods.
Sometimes the means of transport are not available.
It is not possible to tap the advantage of industrial training institutes or
management development pragrammes which is possible in city areas.
It is generally not easy to get skilled workers in rural areas.
Municipal facilities like water supply, drainage, fire-fighting etc. are not
available in rural areas.
There is absence of recreation facilities, good educational institutes, good
and sufficient medical facilities.
Suburban Area
The city area as a location of industrial unit has got many negative aspects.
The other extreme is the rural area, which again is not free from many
limitations. The better compromise in the decision is the selection of
suburban area as the location of the industrial unit. Suburban area is the
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area which is located on the outskirts of the city area. Suburban area
matches the advantages of the rural area with those of city area which is
located at a short distance, e.g. Odhav, Narol, Kathawada, Naroda, vatva,
are the suburban areas of Ahmedabad City.
Advantages of Suburban Area
Land is available at a cheaper rate as compared to urban areas.
Adequate land is available for future expansion unit. The machines can be
installed horizontally and still the provision for future expansion can be
made.
Infrastructure facilities like road, water supply, drainage, banking, ware-housing, insurance etc. are developed Government, municipal authorities
or industrial associations.
As city area is nearest, the skilled and unskilled, both type of labour are
available.
It is possible to tap the advantage of industrial training institutes,
management development programmes, research institutes etc. which
are available in nearby city area.
The nearby city area provides a substantial market for the products of the
unit. This reduces the cost of marketing the finished products and other
ancillary advantages of marketing are available.
Educational institutes, medical facilities and other recreational facilities
are available in the suburban area itself as well as in the nearby city area.
The limitation of Suburban area as a site for industry is that in the
development process, it may be converted into a part of the urban area with
all its merits and demerits.
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In general, the big city (urban area ) offers particular benefits to the small
enterprise. Rural areas offer benefits to a large manufacturing firm and
suburban areas offer suits medium sized industries.
Comparison between Urban and Rural area in Connection with the Selection
of Site
URBAN RURAL
1.Availability of local market:
Due to large population the localdemand for the product is fairlyhigh.
2. Labour:Ample availability of diversified
labour.
3. Transport Facilities:Good transport facilities are
available.
4. Cost of Land:The cost of land is high. Even at
high cost sufficient land is not
available which puts constraintson the arrangement of plants
and machines.
5. Allied Industries:Proximity to allied industries and
services units.
6. Availability of Facilities:Availability of educationalrecreational
and social facilities.
7. Cost of Labour:Due high cost of living the cost
of labour is relatively high.
8. Rates of Taxes:
The market place is far away fromthe industries; therefore cost ofdistribution of finished products ismore.
It is rather difficult to get skilled
labour in rural areas.
Adequate transport facilities are not
available.
Sufficient land is available at
cheaper rates.
Absence of allied industries.
There are fewer educational,
recreational and social facilities.
Labour is available at cheaper rates.
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The rates of taxes is relatively
high.
9. Postal and CommunicationService:
Good and prompt postal andcommunication services are
available.
10. Labour Turnover:High labour turnover because of
large number of industries.
11. Training Facilities:Development of the training
facilities for workers andmanagement instiutes forexecutives put the city area into
privileged position.
12. Trade Union Movement:The trade union movement is
very high which often results instrikes, lockouts etc.
13. Others:
Government policy Storage facilities
Problems of Pollution
Restriction on Construction
The rates of taxes are quite low.
Prompt postal and communicationservices are not available.
Labour force is more stable.
Absence of training facilities and
management institutes.
Trade union movement is not very
strong.
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Comparing Chinese & Indian Manufacturing Environments
Labour Issues
24 hours shift Industries in China are allowed to operate all 24 hours.
This drastically brings down the investment in plant & machinery. In India,
production units cannot operate after 7 p.m. We can, therefore, take only
1/3 of production, in comparison to China. Obviously, it adds to the cost of
production in India.
Overtime basis In India, workers have to paid double wages for
overtime. In China, there are no such provisions. Hence, the cost of labourin China is less than that in India. The workers work in China is based on
the output target and not on the number of hours.
Work culture In China, workers are highly disciplined and are committed
to work. In India, the work culture leaves ample scope for improvement.
There is a need for Indian workers to be more disciplined and committed.
Chinese workers are 1517% more productive than Indian workers.
Labour Laws In China, labour laws are not restrictive. Industrial units are
permitted to dismiss a worker, if his productivity is not up to the mark.
Whereas in India, in an industrial unit, a person cannot be dismissed easily.
In India, even if a factory is closed, workers cannot be discharged.
Minimum wages In China, there are no laws related to minimum wages,
a worker is given his salary according to his performance. Whereas in India,
a worker has to be paid the minimum salary irrespective of the work done byhim.
Trade Unions There are no trade unions in China. Therefore, there are no
strikes/agitations on behalf of workers. This has benefited the workers, in
terms of higher wages due to increased productivity.
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Cost of Production
There are many industrial units in China that are manufacturing all types of
raw material and components/parts. This means good quality inputs are
available at very competitive prices. This leads to low cost of production.
Whereas in India, in segments such as clocks and calculators, the end
product manufacturer has to opt for integration, which is not his core
competence, which means higher capital investment, increased wastages
and higher cost of production.
Working Capital Requirements
In China, most production units run on the basis of just in time inventory. All
inputs such as raw material and components are received by the production
units, only on the day of production and finished goods are dispatched from
the units the same day. Whereas in India, inventory carrying cost is very
high, since producers have to risk raw material for at least two to three
months.
Problems of Supply Chain
In India, suppliers do not maintain delivery schedule, because they are not
disciplined. Besides, the delivery schedule cannot be maintained because of
labour problems, strike by transporters, or due to power problems. Whereas
in China, suppliers are given the time and date of delivery and the
production units receive the input on time.
Export & Import
Chinas import procedure is very simple, which leads to faster clearance of
consignments. Goods imported are cleared within 24 hours with the Customs
and Ports working continuously for all 365 days in a year. In India, due to
the complex procedures, consignments take a long time at the clearance
stage. In India, the Customs and Ports work for about 250 days, leading to
delays and resulting in huge inventories
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Government subsidy
In China, the government provides 19-27% subsidy for export. Further, the
import of inputs for export purposes are duty free. A large area has been
declared as a free zone.
Duty structure
In India, there are several anomalies in the duty structure. Customs duty on
raw material/components/parts is higher than the duty on finished products.
Excise duty is required to be paid in retail by local industries, while excise
duty on imported goods is paid on the invoiced price. The burden of sales
tax, octroi, etc. and also income tax is very high, which add to the cost.
Infrastructure
The quality of roads in China is very good. Therefore, material can be
transported from one place to another place very quickly. While in India, the
roads are in a very bad condition, leading to delay in transportation. For
example, for a distance of 800 km between Bombay and Rajkot it takes two
to three days to get the material. In China, the distance of 800 km can be
covered in 10 hours. The communication system in China is very reliable and
cheaper than India. In China, there are no power failures and good quality
electric energy is available at around Rs 2/ per unit. While in India, the
quality of electric energy is poor, there are frequent breakdowns and the
cost is Rs 4/- per unit.
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Location Models
Various models are available which help identify a near ideal location. The
most popular models are:
1. Factor Rating Method
2. Point rating Method
3. Break-even Analysis
4. Qualitative Factor Analysis
Factor Rating Method
In this method, factor ratings are used to evaluate alternative locations. The
method has following advantages:
Simplicity which facilitates communication about why location/site is
better than another.
Enables bringing diverse locational considerations into the evaluation
process.
Foster consistency of judgement about location alternatives.
The steps involved are:
List the most relevant factors in the location decision.
Rate each factor ( say from 1 for every low and to 5 for very high )
according to its relative importance, i.e a factor rating is given to each
factor, based on its importance, the higher the ratings the more
important is the factor.
Rate each location (say 1 for very low and to 10 foe very high) according
to its merits on each factor,
Compute the product of ratings multiplying the factor rating by the
location rating for each factor.
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Compute the sum of the product of ratings for each location.
Decision: Select the location alternative which has maximum sum of product
ratings as the choice.
Illustration : Table gives the various factor considered for location decision
and the factor rating assigned to each factor based on its importance for
location decision and locating rating for the location alternatives based on
the merits of each location in each of the factor considered.
TABLE: FACTOR RATINGS AND LOCATION RATINGS FOR LOCATION
ALTERNATIVES.
LOCATION RATING PRODUCT OF RATINGFACTOR FACTOR
RATING
LOCATIONA
LOCATIONB
LOCATIONA
LOCATIONB
1. TAXADVANTAGE
2. SUITABILITYOF LABOUR
SKILL
3. PROXIITYTO
CUSTOMERS
4. PROXIMITY
TO SUPPLIERS5. ADEQUACY OF
WATER
6. RECEPTIVITYOF
COMMUNITY
7. QUALITY OFEADUCATION
AL SYSTEM
8. ACCESS TORAIL AND AIR
TRANSPORTATION
9. SUITABILITYOF CLIMATE
10.AVAILABILITYOF POWER.
4
3
3
5
1
5
4
3
2
2
8
2
6
2
3
4
1
10
7
6
6
3
5
4
3
3
2
8
9
4
32
6
18
10
3
20
4
30
14
12
24
9
15
20
3
15
8
24
18
8
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TOTAL SCORE 149 144
Since the total score for location A is higher than that of location B, location
A is the choice.
Point Rating Method
In selecting a site or location, companies have several objectives, but not all
are of equal importance. The relative weight a company assigns to each
objective or to each location factor may be representative by the number of
points a perfect site would receive in each category. Each potential site is
then evaluated with respect to every factor a company is looking for and
points are assigned to each factor. The site with the highest number of
points is considered superior to other sites. The drawback of this method is
that the high score in any factor can overcome the score of any other factor.
Since some factors are considered as important or essential, any site that
does not have at least a specified number of points for those essential
factors will be excluded from further consideration.
What is significant in the point rating system is the relative importance of
tangible cost factors compared to intangible factors. Points are usually
assigned only to intangible factors and an evaluation is made to determine
whether the difference between the intangible score is worth the difference if
any, between the tangible costs of the competing locations.
If two alternative potential location are found to be equally attractive by
comparing the costs (based on tangible factors) then, these two locations
may further be evaluated, based on the intangible factors using the point
rating method.
ILLUSTRATION:
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After evaluating two potential sites A & 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 location by using the point
rating method. Comparative rating assigned to major intangible location
factors to determine the relative importance for each factor and the points
assigned to each location alternative for each of the factors are given in the
table:
Points assigned tolocations
Factors RatedMaximum
Possible PointsLocationA
LocationB
Future availability offuel 300 200 250
transportation flexibilityand growth 200 150 150
Adequacy of watersupply 100 100 100
Labour availability 250 220 200
Pollution regulations 30 20 20
Site topography 50 40 30
Living conditions 150 100 125
Total 830 875
From the table, it is seen that location B has slight advantage over location
A.
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Location Break-even Analysis:
In comparing several potential locations on an economic basis, (i.e, tangible
factors) only the revenue and costs that need to be considered are the ones
that that vary from one location to another. If revenue per unit is the same,
regardless of where the goods are produced the total revenue can be
eliminated from consideration. An economic comparison of location can be
made by identifying the fixed costs and the variable costs and plotting the
break even analysis on the graph for each location.
This graphical approach can easily identify the range of annual production
volume over which a location is preferable.
The steps involved in this method are :
(a) Determine all relevant costs that vary with each location.
(b) Categorize the costs for each location into annual fixed cost (FC) and
variable cost per unit (VC) and calculate the total cost (TC) for the desired
volume of production per annum, for each location.
(c) Plot the total costs associated with each location on a single chart or
graph of annual cost versus annual production volume.
(d) Select the location with the lowest total annual cost (TC) at the
expected production volume per annum (Q).
Note: If revenues vary from one location to another, then comparison of
location should be made on the basis of profits (i.e. Total revenue-Total
cost) at each location.
Illustration: Potential locations A,B and C have the cost structures shown for
producing a product expented to sell at Rs.100 per unit. Find the most
economical location for an expected volume of 2000 units/year. Also
determine the range of annual volume of production for which, each of the
location A, B and C would be most economical.
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Locationfixedcost/year
Variable costper unit
A Rs.25000 Rs.50
B Rs.50000 Rs.25
C Rs.80000 Rs.15
Sollution
(a) To determine the most economical location for an expected annual
volume of production of 2000 units, calculate the total cost of production at
each of the locations for the annual production volume Q= 2000nos.
Total cost = ( Fixed cost per annum) + (Variable cost per unit) x (Quantity
produced)
Total cost at location A, TC = (FC) + (VC) x Q
TC=25000 + 50 x 2000
=125000
Similarly
Total cost at location B, TC = 50000 + 25 x 2000
= 100000
Total cost at location C, TC = 80000 + 15 x 2000
= 110000
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By comparing the total costs at each of the three location, it is seen that
location B is the most economical location for the volume of production of
2000 nos. per year.
(b) To determine the range of annual volume of production at which each
of the three locations would become most economical, it is necessary to
determine the break-even volumes either by graphical method or by
analytical method.
Analytical Method
To determine the break even volume between location A and location B, the
total cost for producing the break even quantity say
Qab at each of location A & B are equated i.e
25000 + 50Qab = 50000 + 25Qab
50 Qab -25Qab = 50000 25000
25Qab = 25000
Qab = 25000 / 25
Qab = 1000
To determine the break even volume between location B & C, the total cost
for producing the break even quantity say Qbc at each of location B and C
are equated i.e,
50000 + 25Qbc = 80000 + 15Qbc
25Qbc 15Qbc = 80000 50000
10Qbc = 30000
Qbc = 3000
The above break even quantities are shown graphically below.
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Qualitative factor analysis method
If economic criteria are not sufficiently influential to decide the location
alternatives, a system of weighing the criteria might be useful in making a
plant location decision. This approach is referred to as qualitative factor
analysis. The steps involved are:
(a) Develop a list of relevant factors.
(b) Assign a weight to each factor to indicate its relative importance
(weights may total upto 1.0)
(c) Assign a common scale to each factor (say 0 to 100) and designate
any minimum points to be scored by any location.
(d) Score each potential location according to the designated scale and
multiply the scores by the weights to arrive at the weighted scores.
Annual Volume (Unit) (Q)
500 1000 1500 2000 2500 3000
80000
50000
25000
Location A
Location B
Location C
AnnualTotalCost
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Government Control on Location of IndustriesThe basic objective of the private sector is to obtain maximum profits out of
the business operations. So the private sector industries select such a sites
which reaps maximum economic advantage. Such a policy results in the
concentration or localization of industries in certain areas leaving the other
areas underdeveloped.
Such a policy distorts the quality of income , wealth and opportunity. So the
government being the custodian of public interest , intervenes in the
locational decisions as under:
Through the licensing policy, it restricts the concentration of industries in
developed areas;It provides certain tempting incentives for the spread of
the industries in the industrially backward areas ;
It establish the giant public sector units in the relatively less developed
areas
The objectives of state intervention and control are:
To attain balanced regional development.
To narrow down the gap of inequality of income and wealth through
creating and providing employment opportunities to less developed areas
To reduce the concentration of population and congestion of industries in
city areas
As strategic defence policy, spread of industries reduces the chances of
heavy losses in war time.
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Establishment of Industrial Estate
Industrial estate is a piece of vast land subdivided into different industrial
plots where in factories shades are constructed. The Govt of India has
planned a national policy for the development of industrial estates. It
assigned the responsibility of development of industrial estates to state
government. In each State, the State development corporation has
developed many industrial estates practically in all districts of the states.
Industrial estates have also been developed by private entrepreneurs and
chambers of commerce. The plots of land along with factory shades and
infrastructure facilities are developed in the industrial estate and are sold to
prospective promoters. The establishment of industrial\rail has greatly
affected the location of industries
Decentralisation of Industries:
Under the conscious policy of the government, concentration of industrial
unit is prevent through licensing policy. New units are not permitted to be
started in certain industrially congetsted areas. Similarly existing units either
establish their additional plants in less developed areas or sometimes
relocate the whole unit in such areas.
Increased Role of the Government in the Decision of Location of
Industries
Government through its persuasive and compulsive method, greatly affects
the location decision in recent times. It provides certain attractive incentives
to the promoters to establish their units in less developed area at the same
time it does not permit excessive industrialization in certain developed
areas.
Competition between Government and Institution:
As industry provides job opportunity to the local population, many local
organization attempts to tempt the prospective promoters to establish the
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units in their areas. They provide different type of incentives like cheap land,
relief in local taxes etc. Sometime objectives of local organizations and
government comes in conflict on the issue of location of industries. Thus, the
whole pattern of decision about the location of industries has undergone
substantial changes in recent times.
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Gujarat Ambuja Case Study
Working Hard Towards Operational Excellence
According to analysts, GACLs strategic farsightedness was evident in its
decision to locate its plants in backward areas, so as to take advantage of
substantial sales tax and income tax incentives[2] . GACLs units in the
states of Gujarat, HP and Punjab also received sales tax incentives.
This was possible as all new investments in cement after 1986 enjoyed a
sales tax benefit of up to 90% of the value of fixed assets for a period of 14
years. To get the sales tax incentives on a continual basis, companiesneeded to incur constant capital expenditure. Thus, GACL continually
expanded capacities in Gujarat and Punjab.
The Himachal Pradesh plant had the advantage of prioritized power supply at
a guaranteed cost for five years from the date of commissioning. The
decision to set up a plant in HP made all the more sense because the region
was cement deficit at that point of time. Also, the plant was closer to the
mines and the Punjab grinding unit.
Another reason GACL finalized the plant location in HP was that the area had
substantial limestone deposits. However, there were three hills directly
between the quarries and the nearest piece of flat land large enough for the
plant. Though the actual distance was just a few kilometres away, the only
way existing was a 17 km stretch of road full of potholes.
This would have involved time delays and large fuel bills for transporting thelimestone to the plant location. GACL engineers decided to get a conveyor
belt built across the three valleys, through the mountains. After many big
construction firms refused to do the job, GACL built the conveyor belt on its
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own, in just 18 months. The distance was cut down to just 2.8 kms and the
belt moved 800 tonnes of limestone every hour.
Even the companys latest plant at Chandrapur was set up to take advantage
of substantial sales-tax benefits for almost 18 years. This unit was situated
at the pit-head of coal mines, to save on freight costs. GACLs management
realized that the time taken to set up a plant was not entirely in its hands.
The companys actual work began after it had identified the right location,
acquired the necessary license, power and water supply connections and
machinery.
From this point onwards, the work at the site was something the company
could control. GACL decided to let its engineers define their own jobs and
gave them the authority to take on-the-spot decisions regarding capital
expenditure and schedules for achieving targets. The engineers were also
allowed to set daily, weekly and monthly tasks for themselves.
This empowerment of engineers proved to be very advantageous for the
company: job functions were more clearly defined and response time was
reduced by as much as 90% since engineers did not have to wait for
approvals. GACLs plant engineers placed orders for machinery well before
the site was chosen. So the equipment was ready for installation by the time
the site engineers had acquired the land.
As a result, GACL was able to cut down substantially on the commissioning
time of its plants. The very first plant at Ambuja Nagar was commissioned in
just 22 months. This was a significant achievement, as a plant of similar size
normally took three years to install. Even the second plant wascommissioned in a record time of 13 months. GACL was able to save a lot of
money just in terms of inflationary costs.
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Anil Singhvi (Singhvi), Treasurer, GACL said, By squeezing the project time,
you save 10 per cent on account of inflation alone; plus we estimated an
interest cost savings of around Rs 250 million. Once GACL got the plants
running, it realized that to compete with the established players, who had
larger plants and economies of scale, cost control would be important.
The major cost components of cement are fuel (20%), freight and raw
material (17% each) and power (16%), with other components accounting
for the balance 30%. GACL decided to adopt a two-pronged strategy to
achieve total cost management (TCM): enhancing plant productivity and
reducing costs on each of the cost components individually.
Enhancing Productivity
GACL worked hard to reduce mining expenses. Cement companies normally
operate their own limestone mines. Mines were not only extremely
destructive environmentally, they were also expensive to operate. The
explosives used for mining were on the negative list of imports and
substantial costs were involved in implementing safety measures.
In 1997, GACL sent its engineers to Australia to study the extraction ofmetals. On their return, GACL implemented new technologies that could
access limestone in smaller areas where blasting was not possible. To reduce
the noise and vibration that occurred during the conventional drilling,
blasting and crushing process, the company introduced an Australian device
called Surface Miner.
The Surface Miner was not only energy efficient, it also recovered more
material from a given area. GACL engineers found that by focusing on kiln
operations, they could not only ensure cement quality, but could also reduce
power consumption. A company official said, You have to make sure that
the reactivity is such in the burning zone that whatever you burn is
converted into clinker[3] minerals.
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And all this depends on the burning process, which we had no way of
monitoring from the outside. Inadequate heating yielded inferior quality
cement and over cooking made the clinker harder to grind.
In the early 1990s, during a visit to a cement plant in Japan, GACL
engineers learnt that factors like retention time (time elapsed in the kiln and
the speed of burning), temperature, and rate of cooling could be judged
from the microstructure of the clinker minerals. The Japanese engineers
physically scanned the clinker pieces extracted from the kiln under a
microscope to determine on the basis of their experience, whether the
clinker had been heated to the right temperature.
After undergoing extensive training, GACLs engineers tried the above
procedure at their own plants and successfully brought down power costs
from 120 units/ton to 90 units/ton. At GACLs second plant in Ambuja Nagar,
kiln productivity ranged between 2800-3000 tonnes.
While setting up the third plant in the area, GACL engineers realized that if
they had a larger pre-heater (in which the limestone was heated before
being fed into the kiln), they would be able to put more material into the kiln
and thereby increase production. However, the companys supplier of pre-
heaters said it was not possible to make a bigger pre-heater without
modifying the kiln. The engineers told the supplier to make a bigger pre-
heater, while they themselves modified the existing kiln.
Cutting Costs
POWER
Power accounted for a large part of GACLs cost of production. GACL realized
that a captive power plant would increase savings substantially as power
sourced from the power grids was both unreliable and costly. So it set up
fuel based captive power plants in Gujarat (40 MW) and Himachal Pradesh
(12 MW) in 1998.
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GACLs captive power generation cost was only Rs 1.30 per kilowatt
(excluding interest and depreciation), compared to Rs 4.50 per kilowatt for
power supplied by the Electricity Boards. Soon, the company was not only
getting around 60.3% of its total power requirement from these plants, it
was also selling the excess power it generated to the local state
governments.
B S Dulani, Vice President, Operations, at the Gujambuja plant said, Small
measures like modifications in higher capacity motors for fans, coolers etc.
Soon, the company was not only getting around 60.3% of its total power
requirement from these plants, it was also selling the excess power it
generated to the local state governments.
B S Dulani, Vice President, Operations, at the Gujambuja plant said, Small
measures like modifications in higher capacity motors for fans, coolers etc.
according to specific requirements (shifting from AC to DC drive, which
allows regulation of current) wherever possible, and many other simple
steps helped reduce GACLs power consumption from 120 units/tonne of
cement in 1987 to 88-90 units per tonne in 1995 against an industry
average of 121 units per tonne.
Fuel
Coal is an important source of energy for the cement industry. However,
while most of the coal production in India is located in the central and
eastern parts, the cement industry is concentrated in western and southern
parts. Thus, the cost of transporting coal to the cement plants was very
high. Moreover, the quality of coal was also very poor. Cement companieshad to decide whether to use imported coal or substitutes like lignite, natural
gas and oil.
GACL decided to import cheaper, higher quality coal from South Africa. The
company also began importing better quality furnace oil for its diesel
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generator (DG) sets for its power requirements. This led to a considerable
reduction in the operating costs of their power plants. GACL consumed only
96 kwh of power per tonne of cement against the industry average of 110-
115 kwh per tonne.
The companys coal consumption was also the lowest in the industry. GACL
consumed 170 kg per tonne of cement while the industry average was 250
kg per tonne. Since the companys Ambuja Nagar plants were located in the
agricultural belt of Saurashtra, where groundnut husk was available in
plenty, GACL engineers tried to use groundnut husk instead of coal to fire
the kilns in one of the plants.
The idea worked wonderfully and the company was able to bring down the
overall coal consumption by 3%. In another plant, GACL replaced coal with
crushed sugarcane. The use of sugarcane however, created problems
because the water content differed with every batch, leading to fluctuations
in kiln temperature. So the companys engineers designed a special
mechanical system that could adjust the rate of feeding to ensure a stable
temperature in the kiln. In the process, GACL brought the energy bill down
by Rs 20 for every tonne of crushed sugarcane.
GACL also began using fluorspar[4], a waste dumped by Gujarat Mineral
Development Corporation to reduce fuel consumption. They modified many
higher capacity motors for fans, coolers, and other equipments to reduce
power requirements by 1 to 1.5 units per tonne. The company also replaced
V belt drives (which consumed more energy due to friction) with flat belt
drives. Even though mechanical conveyors gave rise to problems like
spillages and breakdowns, GACL did not shift to pneumatic conveyors, which
consumed more power. Instead, the company devised an improved version
of the mechanical conveyor to eliminate its drawbacks.
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Freight
According to analysts, the most successful of GACLs innovative strategies
was the development of a sea transportation route for its cement. At a
company meeting in the early 1990s, a Marketing Manager said, As we all
know, Bombay is the countrys largest cement market. It consumes a vast 2
lakh tonnes a month.
The city is also 1060 kms away by rail. The transportation and packing costs
alone will be phenomenal. Road transport was very costly and rail transport
was not feasible due to the limited number of wagons available with Indian
Railways. Just when it seemed that the company would have to agree to
bear the road/rail transportation costs, an employee in the Logistics
department said, I can bring Bombay closer to our plant.
This marked the birth of the idea of using the sea route, instead of land. The
sea route would bring down the distance to 315 kms. GACL set up a special
cell to develop this idea. The company invested Rs 1 billion to set up modern
ports and freight-handling terminals at Muldwarka and Surat (south Gujarat)
and Panvel (near Bombay)
In addition, it bought three special ships (one designed in Singapore and the
other two in India) to transport the cement. The vessels, custom made for
Indian conditions and requirements, had the capacity to transport 2500
tonnes of cement each.
The port terminal at Muldwarka was an all-weather port, handling ships with
40,000 DWT[5]. It was also equipped to export clinker and cement and
import coal and furnace oil. A fleet of five ships, with a capacity of 2500
DWT each, ferried bulk cement to the packaging units from this port. The
bulk cement terminal at Surat had bulk cement unloading capacity with a
storage capacity of 15,000 tonnes.
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The terminal at Panvel had a storage capacity of 17,500 tonnes. To facilitate
transportation by ship, GACL sent cement in sealed road tankers from the
plant site to the shipping terminal, where it was transferred to silos.[6] From
these silos, it was transferred into airtight holds in the ships. At the
destination, the cement was unloaded from ship holds and again placed in
silos, before being pumped into the sealed road tankers.
Customers were provided small storage tanks into which cement was
pumped from the sealed tankers by a fluidization process[7]. For customers
who preferred bagged cement, GACL arranged special packing facilities at
the unloading terminals. GACL had conveyor belts running up to the dispatch
yard for loading the trucks and wagons. A fleet of around 350 self-financed
trucks and a railway siding on the factory premises provided flexibility in the
mode of transportation.
The cost of transporting cement to Bombay worked out to about Rs 400 per
tonne as compared to over Rs 1800 per tonne by road. Since the cement
was now being moved in bulk, packaging costs were also reduced. Thus,
GACL was able to save roughly Rs 160 million annually. Besides, there was
far less wastage and spillage, and since the cement was untouched by
human hand, it of the finest quality.
GACLs shipping facilities brought many coastal markets within easy reach
and made it one of the largest exporters of cement. Because of the port, it
was now much more convenient for the company to import coal. A strong
focus on logistics management helped GACL reduce finished goods inventory
levels also. A Mumbai dealer could obtain stocks within eight hours because
of the company-owned jetty[8]. The cement was packed at a plant at the
jetty itself, at the rate of 100 tonnes per hour.
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The Future
The continual capacity build-up in the Indian cement industry led to an
excess capacity situation by the beginning of the 21st century. During the
same period, growth in the cement industry declined from 21% (April-
September 1999) to 11% (October 1999-March 2000) because of drought in
many parts of the country.
Prices dropped because people feared that construction activities would
decline due to the drought. At the same time, the cost of production
continued to increase because of hikes in power, rail freight, and coal and
diesel prices. As a result of the above factors, cement companies were
affected negatively.
According to some analysts, even GACL seemed to have exhausted its
armory of cost-cutting and productivity enhancing strategies. For the third
quarter ended March 31, 2002, the company registered a 9.27% decline in
net profit. Its profits had come down from Rs 600 million to Rs 544 million in
2002 for the same period last year.
This was despite a 11% increase in turnover: Rs 4.3 billion in 2002 asagainst Rs 3.9 billion in 2001 for the corresponding quarter. The operating
margin also came down to 32% as compared to 38% in the previous year.
Critics even commented that GACLs cost efficiencies were more driven by
market compulsions rather than a strategic cost focus.
GACL however did not seem to be very worried, because the decline in
profitability was caused by factors that were beyond its control. Singhvi said,
We have put up a good show despite low cement prices during the quarter
by around Rs 300 per tonne. Lower cement prices have not been reflected in
the bottomline. At the same time, the company was not taking things
lightly.
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GACL realized that while its traditional cost-saving methods would continue
to prove valuable, they were not enough. As stated in the companys
Directors report, The route to higher profitability lay elsewhere: Namely,
better sales realization. Thus, GACLs marketing team began focusing its
attention on the retail market. The company believed that the retail market
offered it the opportunity to build loyalty through higher standards of
service. The company asked its marketing teams to push for better prices.
Because of these marketing initiatives, GACL was able to maintain its market
share in Gujarat, even while commanding a high price. The company posted
an increase in sales in the highly competitive and complex Mumbai market
even as demand growth slowed down and prices declined. Similarly, this
focus on marketing led to an 8% increase in sales in the northern region
during 1999-00.
GACL continued to seek ways to reduce costs. It planned to use a captive
thermal (coal-based) power plant to meet the power requirements of its
Chandrapur plant. As the power plant was close to coal mines, the company
expected the variable cost of power to be significantly lower.
Refuting the claims that the companys drive for achieving operational
excellence was totally market-driven, Singhvi said, We eat, live and breathe
cement and we are completely focused on the business. We try and bring in
global best practices into a commodity business. This obsession is important
for survival.
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ConclusionSite selection is an important activity which decides the fate of the business.
A good location may reduce the cost of production and distribution to
considerable extent.
If the site selection is not proper, all the money spent on the factory
building, machinery and their installation will go in waste and the owner has
to suffer a great loss. So the site selection plays a very important role.
The changes are occurring in the site selection , the importance is
given to the suburban areas rather than urban areas in the old times.Some
factors like govt. regulations the law and order situation in the state shouldbe given more importance in the selection process.
The SEZS are the new trend in the location of the industries, it gives
many kind of exemptions to industry so, the industries are keen to enter
into the SEZ.
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Bibliography & Webliography
Operation And Production Management By :
Chunnawala
Operation And Production Management By:
Ashwadh Thapa
Operation And Production Management By :
Bhatt
Operation And Production Management By :
L . C. Jhamb
Webliography
www.wikipedia.com