BMT1009

Production and Operations

Management
Unit-III

Dr. I.S.Stephan Thangaiah

Professor, VIT Business School
VIT University
Vellore 632014
Cabin: SJT 611C

Facility Location
Business systems utilize facilities like, plant
and machineries, warehouses, etc., while
performing the task of producing products/
services. A proper planning of these facility
location would definitely reduce their cost of
operation and maintenance.
Facility location decisions are very important
because they have direct bearing on factors
like, financial, employment and distribution
patterns.

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Reasons for facility location decision

The following events are quite common in any
business venture to take decision on facility
location for its production activities.
Establishment of a new venture
Expansion of existing business
Significant change in existing demand,
supply and marketing locations
Significant change in the cost structure
Government policies

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Factors influencing Facility Location

General Factors:

Availability of land for present and future needs and cost

of land, land development and buildings, etc.
Availability of inputs such as labour, raw materials, etc.
Closeness to the market places
Stability of demand
Availability of communication facilities
Availability of necessary modes of transportation like
road, rail, airport and water ways.

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General Factors (Contd.)

Availability of infrastructure facilities such as power,
financial institutions, banks, etc.
Disposal of waste and effluent and their impact on the
environment
Government support, grant, subsidy, tax structure
Availability

of

housing

facilities

and

recreational

facilities
Demographic factors like population, trained man power,
academic institutions, standard of living, income level,
etc.
Security, culture of society

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Specific factors (Contd.)

A multinational company, desiring to set up plant should consider the
following aspects in addition to the general factors.
The economic stability of the country and the concern of the country
towards outside investments are to be considered
The success of operation of the factory depends on the cultural factors,
language and cultural differences which can present operating, control and
even policy problems.
Analysis must be based on the factors like wage rate, policy, duties,
etc.
The company can set up joint ventures with any leading local giants that
will solve many operational problems

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General steps in location selection

1. Decide on the criteria to use for evaluating location
alternatives, such as increased revenues or community
service
2. Identify important factors, such as location of markets
or raw materials
3. Develop location alternatives:
a)
b)
c)
d)

Identify
Identify
Identify
Identify

a country or countries
the general region for a location
a small number of community alternatives
site alternatives among the community alternatives

4. Evaluate the alternatives and make a selection

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Factors affecting location decision

Regional level

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Factors affecting location decision

Community level

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Factors affecting location decision

Site level

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Location Analysis Techniques

Location factor rating method
Break-even analysis
Centre of gravity technique
Load distance method

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Factor Rating Method

In the location factor rating system,
Factors that are important in the location decision are
identified. Each factor is weighted from 0 to 1 to prioritize the
factor and reflects its importance.
A subjective score is assigned (usually between 0 and 100) to
each factor based on its attractiveness compared with other
locations, and weighted scores are summed.
Decisions typically will not be made based solely on these
ratings, but they provide a good way to organize and rank
factors.

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Factor Rating Method, Ex-1

ABC Manufacturing Company is going to build a new plant to manufacture
ring bearings (used in automobiles and trucks). The site selection team is
evaluating three sites, and they have scored the important factors for
each as follows. They want to use these ratings to compare the
locations.

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Factor Rating Method (Contd.)

Solution: The weighted scores for each site are computed by multiplying the
factor weights by the score for that factor. For example, the weighted score for
labour availability for site 1 is (0.30) x (80) = 24 points. The weighted scores
for each factor for each site and the total scores are summarised as follows:

Site 3 has the highest factor rating compared with the other locations; however,
this evaluation would have to be used with other information, particularly a cost
analysis, before making a decision.

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Break Even Analysis

A generalized methodology for locational break-even analysis is
given below:
Determine all relevant costs for each of the locations
Classify the costs for each location into annual fixed costs (FC)
and variable cost per unit (v)
Compute the break even quantity for each site conditions
Select the location with the lowest total annual cost (TC) at
the expected volume of sale per year.

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Break Even Analysis, Ex-2 (Contd.)

Potential locations A, B and C have the cost structure shown
below for manufacturing a product expected to sell for Rs.2700
per unit. Find the most economical location for an expected
volume of sale of 5000 units per year.
Facility
A
B
C

Fixed
Cost/Year, Rs
60,00,000
70,00,000
50,00,000

Variable
Cost/Unit, Rs
1,500
500
2,000

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Break Even Analysis, Ex.2 (Contd.)

For each site find the total cost using the following formula:
TC = Fixed Cost + (Variable Cost/ unit) x Quantity
Break-Even Quantity = Contribution / (Selling price/unit Variable cost/unit)
Selling price = Rs.2,700 per unit. Expected volume to sell = 5,000 units

From the above table, it is clear that the total cost and break even quantity to
produce for the location B is the minimum. Hence, it is to be selected for locating
the plant.

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Centre of Gravity Technique

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Centre of Gravity Technique, Ex-3 (Contd.)

XYZ restaurant chain purchases ingredients from four different food
suppliers. The company wants to construct a new central distribution
centre to process and package the ingredients before shipping them to
their various restaurants.The suppliers transport ingredients items in 40
feet truck trailers, each with a capacity 18 MT. The locations of the
four suppliers A,B,C and D (in kilo-meters) and the annual number of
trailer loads that will be transported to the distribution centre are given
in the table.

Using the centre of gravity method, determine a possible location for

the distribution centre.

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Centre of Gravity Technique, Ex-3 (Contd.)

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Load-Distance Technique

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Load-Distance Technique (Contd.)

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Load Distance Technique, Ex.4 (Contd.)

XYZ company wants to evaluate three different sites it has
identified for its new distribution centre relative to the
four suppliers identified in example 3. The coordinates of
the three sites under consideration are as follows.
Site 1: x1 = 360, y1 = 180
Site 2: x2 = 420, y2 = 450
Site 3: x3 = 250, y3 = 400
Solution:
First, the distances between the proposed sites (1,2, and
3) and each existing facility (A,B,C, and D), are computed
using the straight-line formula

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Load Distance Technique, Ex.4 (Contd.)

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Load Distance Technique, Ex.4 (Contd.)

Next, the formula for load distance is computed for each
proposed site:
LD (site 1) = (75x161.2)+(105x412.3)+(135x434.2)+(60x184.4)
= 1,25,063
LD (site 2) = (75x333)+(105x323.9)+(135x226.7)+(60x170)
= 99,789
LD (site 3) = (75x206.2)+(105x180.3)+(135x200)+(60x269.3)
=77,555

Since site 3 has the lowest load-distance value, it would be

assumed
that
this
location
would
also
minimize
transportation costs.

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Cost Analysis , Ex.5

There are two sites considered for locating a plant. The details
are given in the following table

Find the best site for locating the plant

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Cost Analysis , Ex.5 (contd.)

The cost of site-2 is less than that of the site -1 by Rs.38,000;

hence it is to be selected the site-2 for locating the plant.

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Thank You and All the

Very Best!