Month 2007

Operations Management. Plant Location-Cases/models

Location Models (Facility location)

Nelson Group of Industries would like to establish a production unit at one of the locations proposed at site A, B and C. The table given below shows the various factor considered for location decision and the factor rating assigned to each factor based on its importance for location decision.

Q. As a project consultant, suggest the best alternative out of location A, B and C It can be analysed by:1. Factor Rating Method

2. Point Rating Method

3. Location Break-even Analysis

1. Factor Rating Method:The steps involved are:

List the most relevant factors in the location decision.

Rate each factor ( say from 1for every low and to 5for 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 for 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.

Compute the sum of the product of ratings for each location.

Table: Factor Ratings and Location Ratings for Location Alternatives.

FACTORSFACTOR

RATINGLOCATION RATINGPRODUCT OF RATINGS

LOCATION ALOCATION BLOCATION CLOCATION ALOCATION BLOCATION C

1. TAX ADVANTAGE

2. SUITABILITY

OF LABOUR SKILL

3. PROXIITY

TO CUSTOMERS

4. PROXIMITY TO SUPPLIERS

5. ADEQUACY OF WATER

6. RECEPTIVITY OF COMMUNITY

7. QUALITY OF EADUCATIONAL SYSTEM

8. ACCESS TO RAIL AND AIR TRANSPORTATION

9. SUITABILITY OF CLIMATE

10. POWER AVAILABILITY 4

3

3

5

1

5

4

3

2

28

2

6

2

3

4

1

10

7

66

3

5

4

3

3

2

8

9

4

33

34

23

2

554

Total Score

DECISION: Since the total score for location __ is the highest than that of __& __Hence location__is the choice.2. Point Rating Method:After evaluating the potential sites A, B & C by comparing costs, the company management decided to evaluate on the basis of intangible factors for the locations 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 below.Location Factors Maximum Possible PointsPoints assigned to locations

Location ALocation BLocation C

Future availability of fuel300200250200

Ease of transportation & growth200150150150

Adequacy of water supply100100100100

Labour availability200170150100

Pollution regulations50404050

Site topography50403030

Living conditions100507570

Total Score out of 1000 750795700795

DECISION: - From the table, it is seen that location B has slight advantage over location A & C.3. Location Break-even Analysis:

In comparing several potential locations on an economic basis, (i.e., intangible and tangible factors) only the revenue and costs that needs to be evaluated which varies 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 . It can be shows by analytical or graphical method.The potential locations A, B and C have the cost structures shown for producing a product expected to sell at Rs.100 per unit. Q1.Find the most economical location for an expected volume of 2000 units/year. Q2.Also determine the range of annual volume of production for which, each of the location A, B and C would be most economical.Locationfixed cost/yearVariable cost per unit

ARs.25000Rs.50

BRs.50000Rs.25

CRs.80000Rs.15

Solution (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= 2000 units. (TC=FC+VC * Q)1)2)3)DECISION: By comparing the total costs at each of the three locations, it is seen that location ___ is the most economical location for the volume of production of 2000 nos. per year.

Solution (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 analytical method or graphical method .

Analytical Method

To determine the break even volume between locations A and & B, the total cost for producing the break even quantity say Qab at each of location A & B are equated. 25000 + 50Qab = 50000 + 25Qab

Qab =

To determine the break even volume between locations B & C, the total cost for producing the break even quantity say Qbc at each of location B and C are equated. 50000 + 25Qbc = 80000 + 15Qbc

Qbc = To determine the break even volume between locations A & C, the total cost for producing the break even quantity say Qac at each of location A and C are equated. 25000 + 50Qac = 80000 + 15Qac

Qac =

Graphical Method: The above break even quantities are shown graphically below.

(CLASS ROOM ASSIGNMENT):4. 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.

XYZ Company is evaluating 4 locations for a new plant and has weighted the relevant scores as given below. Scores have been assigned with higher values indicative of preferred conditions. Using these scores, develop a qualitative factor comparison for the 4 locations.

RELEVANT FACTORSASSIGNED

WEIGHTSCORES FOR LOCATION

ABCD

PRODUCTION COST

RAW MATERIAL SUPPLY

LABOUR AVAILABILITY

]

COST OF LIVING

ENVIORMENT

MARKETS

0.35

0.25

0.20

0.05

0.05

0.10

50

70

60

80

50

7040

80

70

70

60

9060

80

60

40

70

8030

60

50

80

90

50

TOTAL1.00

Solution

FACTORSWEIGHTED SCORES FOR LOCATION

ABCD

PRODUCTION COST

RAW MATERIAL SUPPLY

LABOUR AVAILABILITY

]

COST OF LIVING

ENVIORMENT

MARKETS

TOTAL

Location ____ is preferred because of highest weighted score.THANKS: .Annual Total Cost

Location C

Location B

Location A

80000

50000

25000

50010001500200025003000

Annual Volume (Unit) (Q)

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