Discuss how to select among conflicting locations – Plant Location Methods

Various models are available which help to identify the ideal location. Some of the popular models are:
(Wisdomjob.com. Plant Location Model Production and Operations Management)

1. Factor rating method

2. Weighted factor rating method
3. Load-distance method
4. Centre of gravity method
5. Break even analysis

1. Factor Rating Method

The process of selecting a new facility location involves a series of following steps:

1. Identify the important location factors. (Wisdomjob.com. Plant Location Model

Production and Operations Management)
2. Rate each factor according to its relative importance, i.e., higher the ratings is indicative
of prominent factor. (Wisdomjob.com. Plant Location Model Production and Operations
Management)
3. Assign each location according to the merits of the location for each factor.
(Wisdomjob.com. Plant Location Model Production and Operations Management)
4. Calculate the rating for each location by multiplying factor assigned to each location
with basic factors considered. (Wisdomjob.com. Plant Location Model Production and
Operations Management)
5. Find the sum of product calculated for each factor and select best location having
highest total score. (Wisdomjob.com. Plant Location Model Production and Operations
Management)
2. Weighted Factor Rating Method

In this method to merge quantitative and qualitative factors, factors are assigned weights based
on relative importance and weightage score for each site using a preference matrix is calculated.
The site with the highest weighted score is selected as the best choice. (Wisdomjob.com. Plant
Location Model Production and Operations Management)

3. Load-distance Method

The load-distance method is a mathematical model used to evaluate locations based on

proximity factors. The objective is to select a location that minimizes the total weighted loads
moving into and out of the facility. The distance between two points is expressed by assigning
the points to grid coordinates on a map. An alternative approach is to use time rather than
distance. (Wisdomjob.com. Plant Location Model Production and Operations Management)

Example: Matrix Manufacturing is considering where to locate its warehouse in order to service
its four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being
considered; Mansfield and Springfield, Ohio. Use the load-distance model to make the decision.

dAB  30  10  40  15  45 miles
 Source: Reid.D.R & Sanders.R.N (2005)

Source: Reid.D.R & Sanders.R.N (2005)

4. Centre of Gravity

Centre of gravity is based primarily on cost considerations. This method can be used to assist
managers in balancing cost and service objectives. The centre of gravity method takes into
account the locations of plants and markets, the volume of goods moved, and transportation
costs in arriving at the best location for a single intermediate warehouse. (Wisdomjob.com.
Plant Location Model Production and Operations Management)

Computing the Center of Gravity for Matrix Manufacturing

Coordinates Load
Location (X,Y) (li) lixi liyi
Cleveland (11,22) 15 165 330
Columbus (10,7) 10 165 70
Cincinnati (4,1) 12 165 12
Dayton (3,6) 4 165 24
Total 41 325 436
Source: Reid.D.R & Sanders.R.N (2005)

Calculating Centre of Gravity :

 Xc.g. 
 lX i i

325
 7.9 ; Yc.g. 
l Yi i

436
 10.6
l i 41 l i 41
Source: Reid.D.R & Sanders.R.N (2005)

5. Break Even Analysis

Break even analysis implies that at some point in the operations, total revenue equals total cost.
Break even analysis is concerned with finding the point at which revenues and costs agree
exactly. It is called ‘Break-even Point’. The Fig. 1 portrays the Break Even Chart: Break even point
is the volume of output at which neither a profit is made nor a loss is incurred. (Wisdomjob.com.
Plant Location Model Production and Operations Management)

To find this break-even quantity, the manager uses the standard profit equation, where profit is
the difference between total revenues and total costs. Predetermining the profit to be $0,
he/she then solves for the quantity that makes this equation true, as follows: (Brown.L.K. Break-
Even Point)

Let TR = Total revenues

TC = Total costs

P = Selling price

F = Fixed costs

V = Variable costs

Q = Quantity of output

TR = P × Q

TC = F + V × Q

TR − TC = profit

Because there is no profit ($0) at the break-even point, TR − TC = 0, and then P × Q − ( F + V × Q )

= 0. Finally, Q = F ( P − V ). (Brown.L.K. Break-Even Point)
 Units of output or percentage of capacity

Plotting the break even

chart for each location
can make economic
comparisons of
locations. This will be
helpful in identifying
the range of
production volume
over which location
can be selected.
(Wisdomjob.com. Plant Location Model Production and Operations Management)

Figure 1: Break even point Analysis

Example:

Break-even analysis is a simple tool that defines the minimum quantity of sales that will cover
both variable and fixed costs. Such analysis gives managers a quantity to compare to the
forecast of demand. If the break-even point lies above anticipated demand, implying a loss on
the product, the manager can use this information to make a variety of decisions. The product
may be discontinued or, by contrast, may receive additional advertising and/or be re-priced to
enhance demand. For example, in the restaurant industry, unknown demand requires that
cooks and table-service personnel be on duty, even when customers are few. In retail sales,
clerical and cash register workers must be scheduled. If a barber shop is open, at least one
barber must be present. Emergency rooms require round-the-clock staffing. The absence of
sufficient service personnel frustrates the customer, who may balk at this visit to the service
firm and may find competitors that fulfill the customer's needs. (Brown.L.K. Break-Even Point)

References:

Wisdomjob.com. Plant Location Model Production and Operations Management. Retrieved from
https://www.wisdomjobs.com/e-university/production-and-operations-management-tutorial-
295/location-models-9476.html

Brown.L.K. Break-Even Point. Retrieved from https://www.referenceforbusiness.com/management/A-

Bud/Break-Even-Point.html

Reid.D.R & Sanders.R.N (2005) Chapter 9– Capacity Planning & Facility Location.