ASSIGNMENT

OPERATIONS MANAGEMENT

(MBA-I, A-Batch)

Submitted by: Submitted to:

Atul Chandra (037) Mr. Pinak Kulkarni

Nitichandra Ingle (038)

Pankaj Jadhav (039)

Anant Jain (040)

Nakul Joshi (041)

Prasanna K (042)

Objective:

Evaluating the location decisions for a FMCG industry.

Indian FMCG Industry:

The Indian FMCG sector is the fourth largest sector in the economy with a total market

size in excess of US$ 13.1 billion. It has a strong MNC presence and is characterized by a well

established distribution network, intense competition between the organized and unorganized

segments and low operational cost. FMCG Sector is expected to grow by over 60% by 2010. It

was been estimated that FMCG sector will rise from around Rs 56,500 crores in 2005 to Rs

92,100 crores in 2010. Hair care, household care, male grooming, female hygiene, and the

chocolates and confectionery categories are estimated to be the fastest growing segments, says

an HSBC report. Burgeoning Indian population, particularly the middle class and the rural

segments, presents an opportunity to makers of branded products to convert consumers to

branded products. Growth is also likely to come from consumer 'upgrading' in the matured

product categories. With 200 million people expected to shift to processed and packaged food

by 2010, India needs around US$ 28 billion of investment in the food-processing industry. The

FMCG market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015.

Glance at the beverages industry:

The Indian beverage industry faces over supply in segments like coffee and tea.

However, more than half of this is available in unpacked or loose form. Indian hot beverage

market is a tea dominant market. Consumers in different parts of the country have

heterogeneous tastes. Dust tea is popular in southern India, while loose tea in preferred in

western India. The urban-rural split of the tea market was 51:49 in 2000. Coffee is consumed

largely in the southern states. The size of the total packaged coffee market is 19,600 tonnes or

US$ 87 million. The urban rural split in the coffee market was 61:39 in 2000 as against 59:41 in

1995. The total soft drink (carbonated beverages and juices) market is estimated at 284 million

crates a year or US$ 1 billion. The market is highly seasonal in nature with consumption varying

from 25 million crates per month during peak season to 15 million during offseason. The

market is predominantly urban with 25 per cent contribution from rural areas. Coca cola and

Pepsi dominate the Indian soft drinks market. Mineral water market in India is a 65 million

crates (US$ 50 million) industry. On an average, the monthly consumption is estimated at 4.9

million crates, which increases to 5.2 million during peak season

Location selection:

Before the plant location is sought, long range forecasts should be made anticipating

the needs of the company based on company’s expansion policy, diversification of products,

changing market, the changing source of raw materials and any other foreseeable influences.

Given below are the few steps that should be followed before setting up a new plant.

1. Establish and explore the need for a new plant.

2. Determine the best geographical area for the plant on the basis of the company’s

Business needs.

3. Establish the requirements (i.e. product to be made, equipment and buildings needed,

utilities and transportation necessary, number of employees, etc.)

4. Screen many communities within the general area decided on

5. Pinpoint a few communities for detail studies.

6. Select the best location.

7. Build the plant.

Selecting the state in India.

Selection of the State where the manufacturing unit will be set up is of critical

importance because huge investments are made and selection of this state will have a huge

impact on the business to be carried out. The state should be investor friendly, abundant with

natural resources and good business environment as well as a prominent market.

Factors that influence the selection of the state :

1. Availability of Land and Land Costs

The cost of land is usually a minor factor in the choice of a location. However, the

availability of an adequate site sometimes presents a problem. In communities that are

interested in attracting new industries, land may be offered at a considerably reduced price

or at no cost, and this may influence some companies to locate there. However, a company

should not be misled into accepting a site that might later prove to be a serious handicap.

2. Government Policies

Investment friendly government policies also play a major role in the choice of a

location. Certain state governments come up with various incentives and provide subsidies

for certain products that are manufactured. These factors need to be considered before

zeroing in on a particular state.

3. Transportation

The company should be located in an area where adequate transportation facilities of

the desired type are available. The costs of shipping the product or bringing in raw materials

are significant factors for many companies, and the reduced freight rates available in some

areas should be weighed against other operating costs to determine the predominant

consideration. There should be proper availability for transportation with cold storage and

air cooled van so that the beverages can be stored in a cool dry atmosphere.

4. Power Supply

Every company has the need for electric power, but only to those companies using

tremendous quantities are these items of major importance in choosing the plant site. An

adequate supply of power at low rates is available in most areas: seldom is it necessary for

the company to develop its own. However, some companies prefer to maintain a power

station in a standby condition to take care of any emergencies that may arise. Power supply

also plays a major role for freezing and maintaining a constant temperature for the

beverages to prolong their life.

5. Pollution Control

During recent years, there has been a wave of public sentiment in regard to pollution

control. This led to the establishment of the Federal Environmental Protection Agency and

the setting of deadlines on air and water controls to protect the public health. The

combination of new laws and social pressure has had great impact on many companies,

particularly the heavily polluting industries (e.g. public utilities, steel, oil, paper, chemicals)

6. Taxes

The kinds and amounts of taxes levied by a state or community should be considered in

locating a plant. Taxes become one of the operating costs; the kinds of taxes and the basis

for fixing them should be thoroughly investigated. As an enticement to get plants to locate

there, some states and territories (particularly Puerto Rico) offer companies tax exemptions

for a stipulated period of time. This has influenced many companies to locate in these areas.

7. Climate

Seldom does the climate influence the location of a plant. In those companies requiring

controlled temperature, humidity, and ventilation, it is possible to install equipment to

maintain the required conditions. Sometimes the personal preferences of the company

executives who will be working in the plant influence the location of a plant in a particular

climate.

8. Infrastructure

Infrastructure is the collection of physical support systems including road network,

water and sewer and utilities. The level to which the government is investing in

development the infrastructure of the state should be considered.

For state selection:

Factor Rating Technique:

Initially we list down all the possible countries after that based on the listed factors we

assign the value to each of the country from the maximum value of 100.

Location Factor Weight State1 (0-100) State2(0-100) State3(0-100)

Availability of land and cost 0.2 60 70 80

Government policies 0.3 80 60 100

Environmental Laws 0.2 50 60 50

Taxes 0.1 70 50 60

Climate 0.1 30 40 40

Infrastructure 0.1 60 50 40

Weighted Scores

Location Factor State1 State2 State3

Availability of land and cost 12 14 16

Government policies 24 18 30

Environmental Laws 10 12 10

Taxes 7 5 6

Climate 3 4 4

Infrastructure 6 5 4

Total 62 58 70

Here as we can see that the total score of the state 3 is the highest and hence it is

selected. And now below are the factors which would decide the site which should be selected

from the State 3.

Factors influencing selection of local site within the state

Various factors such as proximity to a good highway network, abundant labor supply, proximity

to markets, adequate water supply, and so on need to be considered for selecting the site.

1. Proximity to good highways

One of the most important factor that should be considered for selecting the site

Is the proximity of the highways & the quality of the highway system, particularly its

relationship to markets, raw materials and labor supply. The existence of excellent

highways, such as the interstate superhighways, makes the suburbs, small communities,

and country as readily accessible as the cities.

2. Access to a Major Airports

The company will require the need to send the products reach distant customers

rapidly, to obtain raw materials on an emergency basis and to have service engineers

visit the plant .So a small regional airport would be of value.

3. Labor supply

Obviously a company cannot operate without employees, and the nature of the

labor market should be investigated to ensure that an adequate supply of qualified

employees is available in the area. It is necessary to some organizations that skilled

craftsmen be hired to fill many of the positions, and it is desirable to locate the plant in

an area where a sufficient number are available.

4. Nearness to Market

The cost and time required for transporting the product to the customer is very

important. For this reason it is desirable that the company be located near the center of

its market. This is particularly true when the manufacturing process increases the bulk

of the products as it is in this FMCG Company. The Lead time for supply should be as

small as possible to quench the demand of the client.

5. Nearness to raw materials

Companies using bulky or perishable materials find it desirable to be near a readily

available source of their materials. The food industry has this problem with its canning

factories, meatpacking plants, and creameries.

6. Transportation Facilities

The location should be easily accessible to the main highways. The railroad facilities

should be adequate to ensure prompt receipt and shipment of goods. Airports and shipping

ports should be at a reasonable distance. The transportation facilities should be reliable and

smooth with as less delay as possible.

7. Availability of water electric power, gas, and sewers

Water, gas, electric power and sewer system should be adequately available to meet

the plant needs.

8. Zoning restrictions

Whether the zoning restrictions will interfere with the company’s building plans or

operations should be taken into consideration.

9. Soil Characteristics

Whether the soil bearing characteristics are suitable for supporting the building and

Equipment and whether it will provide adequate drainage should also be considered.

10. Drainage

Whether the area will drain away all surface water so that the buildings will not become

an island in the middle of a flooded area during heavy rains should be taken into account.

An FMCG can incur huge losses if this is not taken into account. The waste coming out from

the beverage industry should be properly drained out in a right fashion.

11. Parking areas

Adequate space should be available to provide for employee and visitor parking.

12. Space for Expansion

Sufficient space should be available to take care of expansion of the plant within the

foreseeable future.

13. Accessibility by Workers

Location of the site should be such that it can be reached by public transportation. The

road and street network leading to the site should be adequate to allow speedy entrance

and exit of employees during rush periods.

For site selection:

Factor Rating Technique:

Initially we list down all the possible countries after that based on the listed factors we

assign the value to each of the country from the maximum value of 100.

Location Factor Weight Site1 (0-100) Site2(0-100) Site3(0-100)

Labour supply 0.15 80 70 70

Nearness to market 0.1 90 80 80

Nearness to Raw

materials

0.15 70 60 70

Availability of

water,power , gas &

sewers

0.2 70 60 50

Zoning Restrictions 0.1 60 50 70

Proximity to

rail,road,ports & airport

0.2 80 90 100

Accessibility by workers 0.05 50 60 70

Space for expansion 0.05 40 50 60

Weighted score:

Location Factor Site1 Site2 Site3

Labour supply 12 10.5 10.5

Nearness to market 9 8 8

Nearness to Raw

materials

10.5 9 10.5

Availability of

water,power , gas &

sewers

14 12 10

Zoning Restrictions 6 5 7

Proximity to

rail,road,ports & airport

16 18 20

Accessibility by workers 2.5 3 3.5

Space for expansion 2 2.5 3

Total score 72 68 72.5

As the score of the site 3 is more as compared to other sites, the manufacturing plant should be

constructed at this location

Factors affecting the warehouse selection:

Warehouse is the facility the location of which affects the cost efficiency of the system.

The location where the warehouse is constructed must be such that the cost of bringing the

goods from each of the manufacturing unit must be minimal. There are various factors which

affect the selection of the warehouses some of which are mentioned below

1. Proximity to manufacturing unit and retail stores:

As here the beverages are in consideration the warehouse must be near to the

manufacturing unit so that all the stock produced can be transferred to the storage area

quickly and easily incurring less cost. Also the warehouse must be placed in such a

location where the proximity the retailers is less, this would help in delivering the goods

in time and good condition.

2. The transportation cost:

The cost which is incurred when the goods are transported from the

manufacturing to warehouse or from warehouse to retailers is the transportation cost.

This warehouse must be situated near to manufacturing plant and retailers so that the

transportation cost is minimal.

3. Land cost and area:

Land required for warehouse is very large so the cost for the land must be

reasonable.

4. Proximity to other transportation medium such as airport, railways and sea ports:

The warehouse must be easily accessible to the various mode of transportation.

5. Power requirements:

The power requirements are of immense importance in the warehouses

especially when cold storage is consideration. So the location must suffice this

requirement.

6. Proximity to other warehouses of the company:

Locations must be such, from where the goods can be transferred easily to the

other warehouses of respective company.

7. Material and Labor handling cost:

The location selected must provide cheap and efficient labor so that the material

can be handled efficiently at a low cost.

8. Octroi Taxes:

Warehouses must be selected in such a location where the octroi taxes can be

avoided. For example if the ware house is selected on the outskirt of the city goods can

be transported to other cities without incurring this tax, which it would have incurred if

the warehouse was inside the city limits.

The location of the warehouse can be determined by considering the location of existing

manufacturing facility and the new proposed manufacturing facility. To determine the location

of the warehouse we use a location analysis technique called CENTER OF GRAVITY.

Center of gravity Technique (COG):

The center of gravity method is used to determine the location of a single distribution

center that will minimize distribution costs. It treats distribution cost as a linear function of the

distance and the quantity shipped, which is assumed to be fixed, although an acceptable

variation is that quantities are allowed to change as long as their relative amounts remain the

same. It is helpful in a limited number of situations – primarily service entities – where

geography and transportation costs are important; as opposed to the critical factor method,

which is more qualitative and general.

To find the new location coordinates below formulae are used.

x=� ��������

� ������

y=� ��������

� ������

x, y=coordinates of the new facility at the center of gravity.

, �=coordinates of the existing location.

=annual weighted shipped from facility i .

Conclusion:

After considering the various factors and scrutinizing them with miniscule details we as

a group zeroed down onto the site 3 on basis of the statistical data provided above, however

before launching and finalizing the project, there should be a proper discussion with Project

Managers who have built such projects and if there are any more factors which influence the

site preference, they should definitely be taken into consideration. Thus the location selection

decision is a very important aspect that plays a very vital role in survival and success of the

business.

Bibliography:

• www.ibef.org: http://www.ibef.org/artdisplay.aspx?cat_id=444&art_id=7933

• http://www.naukrihub.com/india/fmcg/scope

• http://farfromneutral.com/kaizen/center-of-gravity-method/

• Operations Management –Along the supply chain :Russell &Taylor.