B.

Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 19 Date: 20/8/2015 Period: VII

Topic: Introduction of Facility Location , Need for Location Decisions

3.1 Introduction of Facility Location

Location can be define as " a place to put something". facility location means a place to
put the facility. facility location decisions are strategic, long term and non repetitive in nature.
Without sound location planning in the beginning the new facility may pose continuous
operating disadvantages for the future operations. Location decisions are affected by many
factors, both internal and external, to the organization's operations. Internal factors include the
technology used, the capacity, the financial position, and the workforce required. External factors
include the economic, political ,and social conditions in various locations.
Plant location or the facilities location problem is an important strategic level decision
making for an organization. One of the key features of a conversion process (manufacturing
system) is the efficiency with which the products (services) are transferred to the customers. This
fact will include the determination of where to place the plant or facility.
The selection of location is a key-decision as large investment is made in building plant
and machinery. It is not advisable or not possible to change the location very often. So an
improper location of plant may lead to waste of all the investments made in building and
machinery, equipment.
Before a location for a plant is selected, long range forecasts should be made anticipating
future needs of the company. The plant location should be based on the company’s expansion
plan and policy, diversification plan for the products, changing market conditions, the changing
sources of raw materials and many other factors that influence the choice of the location
decision. The purpose of the location study is to find an optimum location one that will result in
the greatest advantage to the organization.
3.2 Need for Location Decisions
The need for selecting a suitable location arises because of three situations
I. When starting a new organization, i.e., location choice for the first time.
II. In case of existing organization.
III. In case of Global Location.
3.2.1. In Case of Location Choice for the First Time or New Organizations
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organizational objectives. The following are the
factors to be considered while selecting the location for the new organizations:
3.2.1.1 Identification of region: The organizational objectives along with the various long-term
considerations about marketing, technology, internal organizational strengths and weaknesses,
region specific resources and business environment, legal-governmental environment, social
environment and geographical environment suggest a suitable region for locating the operations
facility.
3.2.1.2 Choice of a site within a region: Once the suitable region is identified, the next step is
choosing the best site from an available set. Choice of a site is less dependent on the
organization's long-term strategies. Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem.
The problem of location of a site within the When starting a new factory, plant location
decisions are very important because they have direct bearing on factors like, financial,
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 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 19 Date: 20/8/2015 Period: VII

Topic: Introduction of Facility Location , Need for Location Decisions

employment and distribution patterns. In the long run, relocation of plant may even benefit the
organization. But, the relocation of the plant involves stoppage of production, and also cost for
shifting the facilities to a new location. In addition to these things, it will introduce some
inconvenience in the normal functioning of the business.
Hence, at the time of starting any industry, one should generate several alternate sites for
locating the plant. After a critical analysis, the best site is to be selected for commissioning the
plant. Location of warehouses and other facilities are also having direct bearing on the
operational performance of organizations The existing firms will seek new locations in order to
expand the capacity or to place the existing facilities. When the demand for product increases, it
will give rise to following decisions:
(i) Whether to expand the existing capacity and facilities.
(ii) Whether to look for new locations for additional facilities.
(iii)Whether to close down existing facilities to take advantage of some new locations.
3.2.2. In Case of Location Choice for Existing Organization
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:
1. Plant manufacturing distinct products.
2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:
3.2.2.1. Plants manufacturing distinct products: Each plant services the entire market area for
the organization. This strategy is necessary where the needs of technological and resource inputs
are specialized or distinctively different for the different product-lines. For example, a high
quality precision product-line should not be located along with other product-line requiring little
emphasis on precision. It may not be proper to have too many contradictions such as
sophisticated and old equipment, highly skilled and semi-skilled personnel ,delicates processes
and those that could permit rough handlings, all under one roof and one set of managers. Such a
setting leads to much confusion regarding the required emphasis and the management policies.
Product specialization may be necessary in a highly competitive market. It may be necessary to
exploit the special resources of a particular geographical area. The more decentralized these pairs
are in terms of the management and in terms of their physical location, the better would be the
planning and control and the utilization of the resources.
3.2.2.2 Manufacturing plants supplying to a specific market area: Here, each plant
manufactures almost all of the company’s products. This type of strategy is useful where market
proximity consideration dominates the resources and technology considerations. This strategy
requires great deal of coordination from the corporate office. An extreme example of this
strategy is that of soft drinks bottling plants.
3.2.2.3. Plants divided on the basis of the process or stages in manufacturing: Each
production process or stage of manufacturing may require distinctively different equipment
capabilities, labour skills, technologies, and managerial policies and emphasis. Since the
products of one plant feed into the other plant, this strategy requires much centralized
SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
AGGREGATE PLANNING
 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 19 Date: 20/8/2015 Period: VII

Topic: Introduction of Facility Location , Need for Location Decisions

coordination of the manufacturing activities from the corporate office that are expected to
understand the various
technological aspects of all the plants.
3.2.2.4. Plants emphasizing flexibility: This requires much coordination between plants to meet
the changing needs and at the same time ensure efficient use of the facilities and resources.
Frequent changes in the long-term strategy in order to improve be efficiently temporarily, are not
healthy for the organization. In any facility location problem the central question is: ‘Is this
allocation at which the company can remain competitive for a long time?’
For an established organization in order to add on to the capacity, following are the ways:
(a) Expansion of the facilities at the existing site: This is acceptable when it does not violate the
basic business and managerial outlines, i.e., philosophies, purposes, strategies and capabilities.
For example, expansion should not compromise quality, delivery, or customer service.
(b) Relocation of the facilities (closing down the existing ones):This is a drastic step which can
be called as ‘Uprooting and Transplanting’. Unless there are very compelling reasons, relocation
is not done. The reasons will be either bringing radical changes in technology, resource
availability or other destabilization. All these factors are applicable to service organizations,
whose objectives, priorities and strategies may differ from those of hardcore manufacturing
organizations.
3.2.3. In Case of Global Location
Because of globalization, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.
3.2.3.1 VIRTUAL PROXIMITY
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the
information/communication pathway. Many firms use the communications highway for
conducting a large portion of their business transactions. Logistics is certainly an important
factor in deciding on a location—whether in the home country or abroad. Markets have to be
reached. Customers have to be contacted. Hence, a market presence in the country of the
customers is quite necessary.
3.2.3.2 VIRTUAL FACTORY
Many firms based in USA and UK in the service sector and in the manufacturing sector often out
sources part of their business processes to foreign locations such as India. Thus, instead of one’s
own operations, a firm could use its business associates’ operations facilities. The Indian BPO
firms a foreign-based company’s ‘virtual service factory’. So a location could be one’s own or
one’s business associates. The location decision need not always necessarily pertain to own
operations.
3.2.3.3 REASONS FOR A GLOBAL/FOREIGN LOCATION
A. Tangible Reasons
The tangible reasons for setting up an operations facility abroad could be as follows:
Reaching the customer: One obvious reason for locating a facility abroad is that of capturing a
share of the market expanding worldwide. The phenomenal growth of the GDP of India is a big
SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
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 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 19 Date: 20/8/2015 Period: VII

Topic: Introduction of Facility Location , Need for Location Decisions

reason for the multinationals to have their operations facilities in our country. An important
reason is that of providing service to the customer promptly and economically which is logistics-
dependent. Therefore, cost and case of logistics is a reason for setting up manufacturing facilities
abroad. By logistics set of activities closes the gap between production of goods/services and
reaching of these intended goods/services to the customer to his satisfaction. Reaching the
customer is thus the main objective. The tangible and intangible gains and costs depend upon the
company defining for itself as to what that ‘reaching’ means. The tangible costs could be the
logistics related costs; the intangible costs may be the risk of operating is a foreign country. The
tangible gains are the immediate gains; the intangible gains are an outcome of what the company
defines the concepts of reaching and customer for itself.
The other tangible reasons could be as follows:
(a) The host country may offer substantial tax advantages compared to the home country.
(b) The costs of manufacturing and running operations may be substantially less in that foreign
country. This may be due to lower labour costs, lower raw material cost, better availability of the
inputs like materials, energy, water, ores, metals, key personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing plant in a
foreign country rather than exporting the items to that country.
B. Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be as
follows:
1. Customer-related Reasons
(a) With an operations facility in the foreign country, the firm’s customers may feel secure that
the firm is more accessible. Accessibility is an important ‘service quality’ determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.
2. Organizational Learning-related Reasons
(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an technologically more advanced country.
The firm can learn from advanced research laboratories/universities in that country. Such
learning may help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) It can also learn from its competitors operating in that country. For this reason, it may have to
be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant there,
it will have intensive interaction with the suppliers in that country from whom there may be
much to learn in terms of modern and appropriate technology, modern management methods,
and new trends in business worldwide.
3. Other Strategic Reasons

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Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 19 Date: 20/8/2015 Period: VII

Topic: Introduction of Facility Location , Need for Location Decisions

(a) The firm by being physically present in the host country may gain some ‘local boy 'kind of
psychological advantage. The firm is no more a ‘foreign’ company just sending its products
across international borders. This may help the firm in lobbying with the government of that
country and with the business associations in that country.
(b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.
(d) The firm could hunt for human capital in different countries by having operations in those
countries. Thus, the firm can gather the best of people from across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market risks for the
firm. If one market goes slow the other may be doing well, thus lowering the overall risk.

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

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 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 20 Date: 21/8/2015 Period: V

Topic: FACTORS AFFECTING LOCATION DECISIONS

3.3 FACTORS AFFECTING LOCATION DECISIONS

The following factors (Fig.3.1) should be considered while evaluating a location for starting a
new facility.
3.3.1 Proximity to customers (markets)When the customers/markets are located near the plant,
products can be easily supplied to them. This reduces the cost of the product as the transportation
cost is not added to it. The product, thus, competes well with the competitor’s product. Most of
the small ancillary units are located near the big automotive factories. The big factories are the
institutional customers of small parts, components, or sub-assemblies from these ancillary units.
Pune has many ancillary units because of the presence of big auto factories such as Bajaj auto
Limited and Kinetic engineering Ltd.
Proximity to markets allows companies to meet any sudden spurt in demand, thus
providing an advantage over competitors located at far-off places. The response time to such
demand is of prime importance for service sector organizations such as hospitals, clinics, nursing
homes, post offices, banks, and insurance companies. These organizations locate their
facilities/offices in high-population zones so that they are able to serve a large number of
customers.

Fig.3.1 Factor affecting facility location planning

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 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 20 Date: 21/8/2015 Period: V

Topic: FACTORS AFFECTING LOCATION DECISIONS

3.3.2 Proximity to raw material Most textile units are located in Gujarat and Maharashtra
because these are the largest cotton-growing areas in the country. Iron and steel plants are
located in Bihar and Orissa because of the large presence of iron ore mines in these regions. Easy
access to coal, the raw material required for power generation in the process, is an added
advantage. Raw material is thus cheaper because of negligible transportation cost. Also, it
becomes easier to control its quality.
3.3.3 Good transportation facilitiesRegions near metro cities have the advantage of good
transportation facilities as they have good rail, air, water, and road transportation networks.
Cities such as Mumbai and Chennai have been industrial and business hubs for a long time as
they are located on the seashore.
3.3.4 Availability of power supplyUninterrupted power supply is a basic requirement of most
industries. Some factories have to set up their own captive power plants if located in areas with
power problems. For example, the factories of HINDALCO (Aditya Birla Group) as well as
Kanoria Chemical Industries Ltd at Renukoot (UP) have their own captive power plants.
3.3.5 Basic amenitiesThe area for location of the plant should have water supply lines managed
by the local municipal corporation. Roads up to the factory premises are always desirable. These
basic amenities are very useful even during the construction period of the plant. Other amenities
desired are sanitation facilities such as sewer lines, and drainage system.
3.3.6 Government policiesThe governments of states such as Maharashtra. Gujarat, and
Karnataka have been very successful in inducing big business houses to set up their plants in
these states. Local taxation policies and various promotional efforts help in increasing the
industrial activity in the region. Pondicherry and Daman and Diu are examples of 'no sales tax
regions' and, therefore, we find that most of the companies have their offices/warehouses located
there.
Many state governments promote industrial activities in their regions by creating
Industry Development Zones. Various facilities are provided by the government; for example,
the governments of Karnataka, Andhra Pradesh, and UP have created software development
parks, where facilities such as high-speed internet, servers, etc. are provided to software
companies at subsidized rates.
Agriculture is one area that gets maximum subsidies from the central as well as state
governments. Various processing plants of agricultural and horticultural products have these
advantages. Before locating such plants in a region, the existing government policies of that
place must be considered.
3.3.7 Environmental and community considerationsMany state governments have strict
environmental policies in place, which have to be followed by the industries operating there. The
people residing in the area should not be against the idea of having a plant in their region as the
effluents from a factory spoil the natural environment of the region. Opposition from the
community regarding the construction of a plant in their region can disrupt the whole project.
The SardarSarovar Darn project is an example where opposition from the local people
had led to complete disruption in the construction of the dam over the Narmada river. After the
Union Carbide factory disaster in Bhopal, every new factory there faces close scrutiny on the
environmental front.
SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
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Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 20 Date: 21/8/2015 Period: V

Topic: FACTORS AFFECTING LOCATION DECISIONS

3.3.8 Proximity to subcontractorsThe presence of small ancillary units manufacturing small

components/sub-assemblies is important for any new factory. If a new auto plant is set up in
Gurgaon, where the Maruti Suzuki plant is already located, it will get the advantage of the
subcontractors existing there. These subcontractors can immediately start supplying the
components required by the new plant for starting its production process.
3.3.9 Easy availability of cheap land landLandis the basic necessity for the construction of a
new plant. Regions such as UP, Bihar, and Orissa may be lucrative for big companies because of
this. Still, because of many other factors, companies prefer costly land near Mumbai, Pune,
Ahmedabad, etc.
3.3.10 Less construction costsConstruction costs of a plant may be low at a particular place due
to cheap labour available there. The construction material may also be cheaper at another place.
Such places are obviously preferred for locating a plant.
3.3.11 Availability of cheap, skilful, and efficient labourIndia and other developing nations
appear to have cheap labour. However, the reality is that labour turns out to be expensive here
because it is not efficient when compared to the labour in developed countries. Multinational
companies prefer China over India to set up their global sourcing bases because the labour in
China has become more skilful and efficient as a result of increased industrial activity in the past
few decades.
3.3.12 Residential complexes, schools, hospitals, clubs, etc. Usually new factories are given
land in remote villages by the state governments Proper facilities such as residential complexes,
schools, hospitals, clubs, etc. are not available for the managers of these plants and their families
at such places. Under such situations, companies have to create these facilities of their own. The
TISCO factory at Jamshedpur is the first example of this kind in India, where the company has
created all such facilities for its employees In UP, Indian Telephone Industries (Mankapur),
HINDALCO (Renukoot) Indo-Gulf Fertilizers (Jagdishpur), and Kanoria Chemical Industries are
similar examples. If a new factory is set up at a place where all such facilities already exist, fixed
costs can be saved by the company.

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

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 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 21 Date: 21/8/2015 Period: V

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

3.4 QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

When we make business decisions as a manager, we take into account qualitative factors
like reputations, brand strength and employee morale, as well as quantifiable data such as sales
figures, profitability and return of investment. Qualitative method relay on information's that is
not easily measurable and quantitative methods deal with data. The results of qualitative analysis
often are ambiguous but may contain additional information, while the quantitative results tend
to be decisive.
3.4.1 Quantitative Factors:
1. Property Tax Rates 2. Corporate Income Tax Rates
3. Sales Tax Rates 4. Real Estate Cost
5. Utility Rates 6.Average Wage/ Salary Levels
7.Construction Costs 8. Worker's Compensations Rates
9.Unemployment Compensation Rate 10. Personal Income Tax Rates
11. Industrial Sector Labour Pool Size 12. Infrastructure Development Costs
13.Education Achievement Levels 14. Crime Statistics
15.frequency of Natural Disasters 16. Cost of Living Index
17.Number of Commercial Flights to key Markets.
18. Proximity to major Key Geographic Markets
19. Unionization Rate to Work verses Non- Right to Work Stat
20. Population of Geographic Area
3.4.2 Qualitative Factors: One has to analyses SWOT( Strength, Weakness , Opportunity,
Threat ) and PEST (Political , Economical ,Social & Technological) Factors such as
1. Level Of Collaboration With Government, Educational And Utility Officials
2. Sports, Recreational And Cultural Amenities
3. Confidence In Ability Of All Parties To Meet Company's Dead Lines
4. Political Stability Of Locations
5. Climate
6. Availability Of Quality Healthcare
7. Chemistry Of Project Team With Local And State Officials
8. Perception Of Quality Of Professional Services Firms To Meet The Company's Need
9. Predictability Of Long Team Operational Costs
10.Ability To Complete Real Estate Due Diligence Process Quickly

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 B.Tech IV Year V II Semester (Shift - I) Subject: Operations Management (7ME5A)

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Lecture No: 21 Date: 21/8/2015 Period: V

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

Fig. 3.2 Steps of Facility Location Planning

3.4.3 Factor and Location Ratings

The factors affecting the facility location decision discussed earlier are all important for any type
of industry. At the same time, the importance of each of these factors may vary for different
types of plants. According to the requirements of a new plant, a set of these factors is considered.
These factors are rated from I to 5 to indicate the importance attached to them. A rating of 5 is
given to the most important factor and a rating of 1 is given to the least important one. These are
galled factor ratings.
Let us consider three location options for a new leather goods manufacturing facility
being commissioned by a company. These location options are, say, Unnao (near Kanpur),
Noida, and Gorakhpur. Table 3.1 gives the factors considered important for a leather goods
manufacturing facility and their factor ratings.

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Lecture No: 21 Date: 21/8/2015 Period: V

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

Table 3.1
Factor ratings for a leather goods manufacturing facility

Factor Factor ratings

Close proximity to markets 3
Close proximity to raw material (leather) 5
Transportation facilities 4
Basic amenities 2
Acceptance of a leather factory by the local people 4
Availability of cheap land 3
Low construction costs 1
Easy availability of cheap and skill ful/efficient labour 3
Now, with respect to each of the three locations, let us give each of these factors another rating,
called the location rating, according to the benefits a particular location option offers. Location
ratings vary from 1 to 10. A rating of 10 is given to the most beneficial factor at that particular
location. Similarly, a rating of 1 is given to the least beneficial factor at that location. Table 3.2
gives the location ratings for the leather goods manufacturing facility.
Hence, we observe that the total score of Unnao is the highest, followed by Noida. This
technique is used for screening locations with higher scores, which are then subjected to final
analysis for finding the best location option (Table 3.2).

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Lecture No: 21 Date: 21/8/2015 Period: V

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

Table 3.2
Location ratings for a leather goods manufacturing facility

Factor Factor Location rating

Ratings Unnao Noida Gorakhpur
Proximity to markets 3 4 6 3
Proximity to raw material (leather) 5 10 5 4
Transportation facilities 4 9 10 5
Basic amenities 2 6 7 6
Acceptance of a leather factory by 4 8 3 7
the local people
Availability of cheap land 3 7 2 8
Low construction costs 1 5 1 6
Easy availability of cheap and 3 3 8 4
skilful/efficient labour

For each location, let us find the product of factor and location ratings:
Table 3.3
Location ratings Calculation for a leather goods manufacturing facility

Unnao Noida Gorakhpur

3 x4=12 3 x 6 = 18 3x3=9
5x 10 = 50 5 x 5 =25 5x4=20
4x9=36 4 x 10 =40 4 x 5=20
2x6=12 2 x7=14 2x6=12
4x8=32 4 x 3 = 12 4 x 7=28
3 x 7 = 21 3x2=6 3 x 8 = 24
1 x5 =5 1 x 1=1 1 x 6=6
3 x3 = 9 3 x 8 = 24 3 x 4 = 12
177 140 131

3.4.4 Break-even Analysis for Facility Location Planning

The conversion process from inputs to outputs involves two types of costs, namely, the fixed cost
and the variable cost. Fixed costs are the capital expenditures (long-term investments in fixed
assets), for example, cost of land, construction of building, and cost of machines and equipment.
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Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 21 Date: 21/8/2015 Period: V

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

These costs remain constant, irrespective of the volume of production (number of units produced
within a given duration) (Fig. 3.3).

Fig. 3.3 Volume of the Production Vs Cost

we see that at the production of zero units, 500 units, and 1,000 units, the fixed cost remains the
same. Variable cost is the cost of labour (directly involved in the production process) and raw
material. As the volume of production increases, more labour and raw material are required for
production and, thus, the variable cost increases.
When the variable cost (VC) is added to the fixed cost (FC), we get the total cost (TC) at
a particular volume of 1,000 production (Fig. 3.4).

Fig. 3.4 Volume of the Production Vs Various Costs

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Lecture No: 21 Date: 21/8/2015 Period: V

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

We now draw the total revenue (TR) curve. Revenue is the money that comes into a firm when it
sells its products at sales price. The TR curve is a straight line from the origin at a particular
slope, which represents the sales price of an item (Fig. 3.5 ).
Figure 3.5 shows that the region where TR is more than TC is the region of profit, while
the region where TR is less than TC is the region of loss. The point at which TR = TC is the
break-even point, which corresponds to the break-even volume VBE at the x-axis. VBE represents
the volume of output at which there is no profit and no loss. All the expenses incurred are
completely covered by the revenue generated.
An organization always prefers to have a low break-even volume so that its investments
can be completely recovered soon. In facility location planning, a location at which the break-
even volume is lower is preferred. The fixed cost and the variable costs may be different at
different location options and, hence, these options may have different values of VBE (Fig. 3.6).
Clearly, in Fig. 3.6, the best location option is location, with visibly the lest value of VBE [Fig.
3.8(d)].

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

Fig. 3.5 Volume of the Production Vs Various Costs where TR is more than TC

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

Fig. 3.6 Volume of the Production Vs fixed cost and the variable costs may be different at
different location options
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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

Fig.3.7 VEB at four different location

As shown earlier, break-even analysis is more suitable for screening the better location options
rather than for selecting the best one.
Example 3.1
Triveni steel (P) Ltd is planning to start a new factory for manufacturing steel utensils. It is
considering three location options, namely , Bokaro, Jamshedpur , and Bhilai.The fixed costs at
the three locations have been estimated at ₹8.15 million ,₹7.377 million, and ₹7.903 million,
respectively. The variable costs at the three locations are estimated at ₹500 per unit,₹580 per
unit, and ₹490 per unit , respectively . The factory will have an annual production capacity of
10,000 steel utensils and in the initial years it will operate at 70% efficiency. Find the best
location option, which has the lowest total cost of production.
Solution
At 75% efficiency , the factory will annually produce
75% of 10,000 units = 7,500 units
Total production cost
TC=FC + VC × no. of units
For Bokaro,
TC = 81,50,000 + 500 × 7,500 = 81,50,000 + 37,50,000= ₹1,19,00,000
For Jamshedpur
TC= 73,77,000 + 580 ×7,500 = 73,77,000 + 43,50,000 = ₹1,17,27,000
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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

For Bhilai,
TC = 79,03,000 + 490×7,500 = 79,03,000 + 36,75,000 = ₹ 1,15,78,000
Hence , Bhilai is the best location from the economics point of view, as the total cost is minimum
here.
Example 3.2
Sigma instruments (P) Ltd is considering three location for its new factory – Faridabad, Kolkata ,
and new Delhi . The estimates of cost for the three location options are shown in table 3.3
The company has financed the construction cost of the factory by a loan from the state Bank of
India at 15% interest per annum . Find the economically best location option for the production
5,000 – 10,000 Units.

Table 3.4
Faridabad Kolkata New Delhi
Transportation cost (₹ per unit) 10 20 9
Cost of materials(₹ per unit) 120 110 100
Taxes(₹ per year) 40,000 35,000 45,000
Cost of construction of the factory(₹) 5 million 4 million 4.7 million
Electricity (₹ per year) 22,000 15,000 25,000
Labour (₹ per unit) 26 21 23

Solution
Fixed cost (per annum):
Table 3.5
Comparison of fixed costs
Faridabad Kolkata New Delhi
Cost of construction of the factory(₹)(15 7,50,000 6,00,000 7,05,000
% of investment)
Electricity (₹ per year) 22,000 15,000 25,000
Taxes(₹ per year) 40,000 35,000 45,000
8,12,000 6,50,000 7,75,000
Variable cost (Per unit):
Table 3.6
Faridabad Kolkata New Delhi
Transportation cost (₹ per unit) 10 20 9
Cost of materials(₹ per unit) 120 110 100
Labour (₹ per unit) 26 21 23

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

156 151 132

Let us calculate the total cost of production for 5,000 units for each of the three location options
using the costs given in table 5.4 and 5.5
For Faridabad,
TC = FC + VC × no. of units = 8,12,000 + 156 × 5,000
= 8,12,000 + 7,80,000 = ₹15,92,000
For Kolkata,
TC = FC + VC × no. of units = 6,50,000 + 151 × 5,000
= 6,50,000 + 7,55,000 = ₹14,05,000
For New Delhi,
TC = FC + VC × no. of units = 7,75,000 + 132 × 5,000
= 7,75,000 + 6,60,000 = ₹14,35,000
Let us now calculate the total cost of production for 10,000 unit for each of the three location
options (Table 5.6)
For Faridabad,
TC = FC + VC × no. of units = 8,12,000 + 156 × 10,000
= 8,12,000 + 15,60,000 = ₹23,72,000
For Kolkata,
TC = FC + VC × no. of units = 6,50,000 + 151 × 10,000
= 6,50,000 + 15,10,000 = ₹21,60,000
For New Delhi,
TC = FC + VC × no. of units = 7,75,000 + 132 × 10,000
= 7,75,000 + 13,20,000 = ₹20,95,000
Table 3.7
Total cost of production (in₹ ) at the three locations
Units Faridabad Kolkata New Delhi
0 8,12,000 6,50,000 7,75,000
5,000 15,92,000 14,05,000 14,35,000
10,000 23,72,000 21,60,000 20,95,000
We see that the Kolkata is the most economical location for a production capacity.
Example 3.3
Time Clocks Ltd is considering two location options for locating its new clock manufacturing
facility Pune and Noida. The company has its existing manufacturing facility at Chennai, which
caters to the markets in the southern part of the country.
The new plant will cater to the northern and central regions of the country. The company
estimates that the FC and VC at Pune for the facility are ₹2 million and ₹30 per clock,
respectively. On the other hand, at Noida, the FC and VC are estimated at ₹1.8 million and ₹40
per clock, respectively.

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

The sales revenue estimates are also different for the two locations because of the consumers'
perception of the quality of products manufactured at Pune being better. A clock can be sold for
₹100 if manufactured at Noida, and the same clock can fetch ₹120 if manufactured at Pune.
The management of the company will choose that location option for its new facility at which the
break-even volume is lower. Which option should the company choose according to this
criterion?
Solution
Table 3.8 shows the estimates for Noida.
Table 3.8
TC and TR at Noida
Volume of production (n) (1,000 units) Total cost (₹) Total revenue(₹)
= FC + VC × n = selling price × n
= 18,00,000 + 40 n = 100 × n
0 18,00,000 0
10 22,00,000 10,00,000
20 26,00,000 20,00,000
30 30,00,000 30,00,000
40 34,00,000 40,00,000
50 38,00,000 50,00,000
Table 3.9 show the estimate for Pune.
Table 3.9
TC and TR at Pune
Volume of production (n) (1,000 units) Total cost (₹) Total revenue(₹)
= FC + VC × n = selling price × n
= 20,00,000 + 30 n = 120 × n
0 20,00,000 0
10 23,00,000 12,00,000
20 26,00,000 24,00,000
30 29,00,000 36,00,000
40 32,00,000 48,00,000
50 35,00,000 60,00,000
From fig. 3.8 and 3.9 , we see that the break-even volume for the Pune is 22,000 units as
compared to 30,000 units for Noida , therefore, Pune is the best location according to criterion.

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

6000000

NOIDA TOTAL REVENUE

5000000
Total cost or revenue

4000000

3000000 TOTAL COST

2000000

1000000

0
0 10 20 30 40 50 60
Volume of production (1,000 units)

Fig .3.8chart showing volume of production (n) vs total cost /revenue for Noida

7000000

6000000 PUNE TOTAL REVENUE

5000000
Total cost or revenue

4000000
TOTAL COST
3000000

2000000

1000000

0
0 10 20 30 40 50 60
Volume of production (1,000 units)

Fig 3.9 chart showing volume of production (n) vs total cost /revenue for Pune
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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

3.4.5 Simple Median Model

This model is used for the final selection of the best location option. Transportation cost is a
major consideration in facility location planning.This model helps to locate a new facility such
that the total transportation cost between the new facility and the existing facilities of the
organization minimum.
The model is very simple in application; therefore, the name of the model has the term
'simple' in it. The term 'median' refers to the statistical median of the loads to be transported
between the existing facilities and the new facility. The model has the simplifying assumption
that the movement of goods can take place only in two directions, namely, the x and Y axes. No
diagonal movement is allowed.
Let us take up an example to understand this model.
Table 3.10
Information about the existing facilities of a beverage company.
Facility(F) Coordinate Cost (C) of moving one Annual
Location(x,y) unit by unit distance (₹) Load (L) (units)
Bareilly (10,80) 10 452
Shahjahanpur (30,60) 10 678
Gonda (80,50) 10 483
Kanpur (50,10) 10 711
Sultanpur (80,10) 10 539
Total = 2,863
The existing facilities may be the factories, warehouses, or markets of the company. The
company wants to know where it should locate its new plant. The annual load (in units) is the
goods to be moved between a facility (F) and the new plant (NP). Plot the existing facilities of
the company on the coordinate axes as shown in Fig. 3.10.
The simple median model can be used in three steps.

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

100

90
Bareilly
80 10, 80
y

70 Shahjahanpur
60 30, 60 Gonda
50 80, 50

40

30

20
Kanpur Sultanpur
10 50, 10 80, 10

0
0 10 20 30 40 50 60 70 80 90 100

Fig.3.10 Plot of existing facilities for the simple median model

3.4.5.1 Step 1: Find the median load
Add the annual loads given for all the existing facilities. The sum is 2,863 units. This is an odd
number. Assume that the loads are marked with identification numbers starting from 1 to 2,863.
Hence, we may say that the loads are arranged in the ascending order of numbering (a
requirement for finding the median). For odd numbers, the median is the
(𝑛+1)
th item Therefore, (2,863 + 1)/2, that is, 1,432 units, is the median load.
2
For even number of loads, the average of two items in the centre of the series of items in
ascending order is the median load.
3.4.5.2 Step 2: Find the x-coordinate of the new plant
Move from the extreme left towards the right along the positive x-axis. In doing so, we come
across Bareilly first, being located at the extreme left of the x-axis. Assume that loads 1-452 have
to be moved between Bareilly and the NP as Bareilly's annual load is 452. This range does not
include the median load 1,432. Therefore, we move further towards the right and come across
Shahjahanpur next. Assume that loads 453-1,130 (678 is the annual load for Shahjahanpur) are
moved between Shahjahanpur and the NP. This range does not include the median load 1,432.
We move again towards the right and come across Kanpur now. Assume that loads 1,131-1,842
(712 is the annual load for Kanpur) are moved between Kanpur and the NP. This range includes

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

the median load 1,432. Therefore, the x-coordinate of the new plant is same as the x-coordinate
of Kanpur, that is, 50.
xo = 50
3.4.5.3 Step 3: Find the y-coordinate of the new plant
Move from the bottom along the positive y-axis. In doing so, we come first across Kanpur and
Sultanpur simultaneously. Assume that loads 1-1,250 have to be moved between Kanpur and the
NP, and Sultanpur and the NP (as Kanpur and Sultanpur have annual loads of 711 and 539,
respectively). This range does not include the median load 1,432. Therefore, we move further
upwards and come across Gonda next. Assume that loads 1,251-1,733 (483 is the annual load for
Gonda) are moved between Gonda and the NP. This range includes the median load 1,432.
Therefore, the y-coordinate of the new plant is same as the y-coordinate of Gonda, that is, 50.
yo = 50
As shown in Fig. 3.11, the route to be followed between, say, the NP and Bareilly is represented
by a dotted line. The total distance here is
100

90
Bareilly
80 10, 80
y

70 50-10=40 Shahjahanpur 80 - 50 = 30
60 30, 60 New plant Gonda
50 50, 50 80, 50

40

30

20
Kanpur Sultanpur
10 50, 10 80, 10

0
0 10 20 30 40 50 60 70 80 90 100

Fig. 3.11 Route to be followed between NP and Bareilly

X
|50 – x| + |y - 50|
=|50 – 10| +|80 – 50|
= 40 + 30 = 70

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION

(x,y) are the coordinates of the existing facility. The parallel lines in |50 — x| mean that only the
magnitude of the difference is to be considered, and if the difference is negative, the negative
sign is dropped. Similarly, we find the distance between the NP and other existing facilities. Let
us now find the total transportation cost involved. Table 3.11 gives the minimum transportation
cost for the optimal location of the new plant (50,50).
Table 3.11
information about the minimum transportation cost for the optimal location of the new plant

Facility(F) Coordinate Cost (C) of Annual Transportati

Location(x, Distance moving one Load (L) on cost (₹) T
y) unit by unit (units) =DCL
distance (₹)
Bareilly (10,80) 70 10 452 3,16,400
Shahjahanpur (30,60) 30 10 678 2,03,400
Gonda (80,50) 30 10 483 1,44,900
Kanpur (50,10) 40 10 711 2,84,400
Sultanpur (80,10) 70 10 539 3,77,300
Total = 13,26,400

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Lecture No: 22 Date: 25/8/2015 Period: II

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

3.4.6 The Centre of Gravity Method

The centre of gravity method is also simple in approach. The coordinates of the new plant (x o,y0)
according to this method are given by
∑𝑥 𝐿 ∑𝑦 𝐿
𝑥0 = ∑ 𝐿𝑖 𝑖 𝑦0 = ∑ 𝐿𝑖 𝑖 𝑥𝑖 𝑦𝑖
𝑖 𝑖
where (𝑥𝑖 , 𝑦𝑖 ) are the coordinates of existing facilities and 𝐿𝑖 represent the loads to be transported
between the existing facilities and the new plant. The x, y coordinates of the new plant (𝑥0 , 𝑦0 )
are found by taking the weighted average of the x,y coordinates of all the existing facilities. The
loads𝐿𝑖 to be carried between existing facilities and the new plant are the weights used in these
calculations, as shown by the above formulae. Let us consider the same example that we had
considered in the simple median model (see Table 5.9).
(10 x 452) + (30 x 678) + (80 x 483) + (50 x 711) + (80 x 539)
𝑥0 = 452 + 678 + 483 + 711+ 539
4,520 + 20,340 + 38,640 + 35,550 + 43,120
=
2,863
142,170
= 49.66
2,863
(80 x 452) + (60 x 678) + (50 x 483) + (10 x 711) + (10 x 539)
𝑦0 = 452 + 678 + 483 + 711+ 539
36,160 + 40,680 + 24,150 + 7,110 + 5,390
2,863
113,490
= = 39.64
2,863
3.4.7 The transportation model using MSExcel
This model is based upon linear programming and is much more complicated than the simple
median model and the centre of gravity model. At the same time, it is much more accurate in
finding the total transportation cost. Thus, this model is useful for finding the best location with
the minimum transportation cost. The complexity of using this model manually can be overcome
by using a computer spreadsheet software such as MS Excel, which is what we will use to solve
these problems. Let us take up an example to understand the use of this model in facility location
planning.
Example 3.4
Mileage Tyres Ltd has four production facilities located at Chennai (C), Ahmedabad (A), Bhopal
(BHO), and Lucknow (L). The company has three major sources of raw materials for its plants at
New Delhi (ND), Kolkata (K), and Bhubaneshwar (BHU). It wants a fourth source of raw
materials and has identified two options—Bangalore (BANG) and Mumbai (M). Both these
suppliers can supply a maximum of 2,000 units of raw material per year.
The company has constructed two tables showing the annual requirement of plants and
annual capacity of raw material suppliers. One table (Table 5.11) includes Bangalore as the raw
material supplier and the other table (Table 5.12) includes Mumbai as the raw material supplier.
The data in the table are the costs of transportation of a unit load of raw material from a raw
material supplier to a plant. Table 3.12 shows that ₹500 is the cost of moving a unit load of raw
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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

material from New Delhi to Chennai. Similarly, ₹700 is the cost of moving a unit load of raw
material from Kolkata to Chennai. The Chennai plant requires 2,500 units of the raw material
annually. Similarly, the Ahmedabad plant requires 1,500 units of the raw material annually. The
New Delhi supplier can supply a maximum of 3,500 units annually, and so on.
Table 3.12
Transportation costs (in ₹per unit load) (Bangalore as one of the suppliers)

Destination→ Chennai Ahmedabad Bhopal Lucknow Availability

Source↓
New Delhi 500 300 400 150 3,500
Kolkata 700 600 300 450 1,000
Bhubaneshwar 100 600 250 550 4,500
Bangalore 200 700 400 750 2,000
Requirement 2,500 1,500 3,000 4,000 11,000

Solution:- N-W corner rule

Destination Chennai Ahmedabad Bhopal Lucknow Availability
Source
New Delhi 500(2500) 300(1000) 400 150 3,500/1000/0
Kolkata 700 600(500) 300(500) 450 1,000/500/0
Bhubaneshwar 100 600 250(2500) 550(2000) 4,500/2000/0
Bangalore 200 700 400 750(2000) 2,000/0
Requirement 2,500/0 1,500/500/0 3,000/2500/0 4,000/2000/0 11,000

= 500×2500 + 300 × 1000 + 600 × 500 + 300 × 500 + 250×2500 + 550 × 2000 + 750 × 2000
= ₹ 52,25,000

Table 3.13
Transportation costs (in ₹per unit load) (Mumbai as one of the suppliers)
Destination Chennai Ahmedabad Bhopal Lucknow Availability
Source
New Delhi 500 300 400 150 3,500
Kolkata 700 600 300 450 1,000
Bhubaneshwar 100 600 250 550 4,500
Mumbai 550 200 250 650 2,000
Requirement 2,500 1,500 3,000 4,000 11,000

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Lecture No: 22 Date: 25/8/2015 Period: II

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

Table 3.14
Apply N-W corner rule,
Destination Chennai Ahmedabad Bhopal Lucknow Availability
Source
New Delhi 500(2,500) 300(1000) 400 150 3,500/1000/0
Kolkata 700 600(500) 300(500) 450 1,000/500/0
Bhubaneshwar 100 600 250(2500) 550(2000) 4,500/2000/0
Mumbai 550 200 250 650(2000) 2,000/0
Requirement 2,500/0 1,500/500/0 3,000/2500/0 4,000/2000/0 11,000

= 500 × 2500 + 300 × 1000 + 600 × 500 + 300 × 500 + 250 × 2500 + 550 × 2000 + 650 × 2000
= ₹ 50,25,000
Now will select the Mumbai location.

Example 3.5 .Godavari Auto motives is an automotive manufacturer, having its factories in
W,X,Y and Z locations. It sources components/parts/sub-assemblies from its suppliers in K,L,M,
and N. Table shows the cost of transporting a unit of stand boxes containing components/parts
/sub-assemblies between any two locations. The annual requirement at each factory is given in
lower-most row of the table. Similarly , the maximum capacities of the suppliers are shown in
the right-most column under ‘Availability’.
To→ W X Y Z Availability
From↓
K 520 460 250 170 1,500
L 240 390 410 210 3,000
M 310 270 530 480 4,500
N 450 180 330 360 3,000
Requirement 1,500 5,000 3,500 2,000 12,000

You have been hired as a consultant to advice Godavari Auto motives as to how many boxes
should be shipped from which suppliers so that the overall transportation cost is the minimum.

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Lecture No: 22 Date: 25/8/2015 Period: II

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

Solution:- N-W corner rule

To→ W X Y Z Availability
From↓
K 520(1,500) 460 250 170 1,500/0
L 240 390(3,000) 410 210 3,000/0
M 310 270(2,000) 530(2,500) 480 4,5002,500/0
N 450 180 330(1,000) 360(2,000) 3,000/2,000/0
Requirement 1,500/0 5,000/2,000/0 3,500/1000/0 2,000/0 12,000

= 520×1500 + 390 × 3000 + 270 × 2000 + 530 × 2500 + 330×1000 + 360 × 2000
= ₹ 3,698,390
3.4.8 Ardalan Heuristic for Location Planning of Service Facilities
The Ardalan heuristic is used in making decisions regarding the location of service facilities,
such as post offices, banks, medical clinics/hospitals, etc., so that a large population can benefit
from these facilities (Ardalan 1984, 1988). From the business point of view, the heuristic helps in
deciding the location of facilities, such as fuel service stations (petrol pumps), departmental
stores, etc., so that these are accessible to people from a number of nearby locations, thus
resulting in high profits.
Let us take up an example to understand this heuristic. State Bank of India is planning to
open its rural branches in four villages/towns, which are located close to each other. (SBI already
has its branches at these locations. This example is for illustration only.) It has the policy of
having rural branches (which are not very profitable to the bank from the investment point of
view) to serve its social objectives.
SBI decides that it would first open only one branch in any one of these four places.
Depending upon the performance of this branch, it may open a second, third, and fourth branch
in the remaining places over a period of time. It wants to determine the sequence in which the
branches should be opened in the four places, namely, Bachchrawan, Maharajganj, Pehremau,
and Raebareli. The distance between each of these places, their populations, and weights
attached (according to the bank's social criteria) are given in Table 3.15.
Table 3.15
populations, and weights attached (according to the bank's social criteria)
Location Distance to Population
(in Weights
Bachchrawan Maharajganj Pehremau Raebareli thousands)
Bachchrawan 0 8 12 10 10 0.7
Maharajganj 8 0 15 6 11 1.2
Pehremau 12 15 0 11 5 1.1
Raebareli 10 6 11 0 8 0.9

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Lecture No: 22 Date: 25/8/2015 Period: II

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

The Ardalan heuristic can be applied as follows.

Step 1 Take the products of the distances, population, and weights for the corresponding places
in every cell of the table and place the product values in the respective cells of the table (see
Table 3.16). The total cost here is equivalent to the sum of all the weighted population distances
in a column (for a place). Maharajganj, with the lowest total cost, is the best location for the first
branch of SBI.

Table 3.16
Weighted population distances

Location Weighted population distances to

Bachchrawan Maharajganj Pehremau Raebareli

Bachchrawan 0 56 84 70
Maharajganj 105.6 0 198 79.2
Pehremau 66 82.5 0 60.5
Raebareli 72 43.2 79.2 0
243.6 181.7 361.2 209.7

Step 2 Columnwise, compare the cell values of all other locations with that of Maharajganj. If
the cell value is less than or equal to that of Maharajganj, keep it as it is. Otherwise, replace it
with the cell value of Maharajganj (Table 3.17).
Table 3.17
Modification of Table 3.14 following step 2
Location Weighted population distances to

Bachchrawan Maharajganj Pehremau Raebareli

Bachchrawan 0 56 56 56
Maharajganj 0 0 0 0
Pehremau 66 82 0 60.5
Raebareli 43.2 43.2 43.2 0
109.2 181.7 99.2 116.5

This procedure has been followed because a person at Bachchrawan would not like to go to a
branch at Pehremau or at Raebareli, because of the higher costs involved. Therefore, the cost
value of the cell of Maharajganj replaces the values for Pehremau and Raebareli. The total cost
of Pehremau is now the lowest. Therefore, the second branch of SBI should be opened at
Pehremau. The column for Maharajganj can be deleted now as Maharajganj was selected already

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

for the location of the first branch, and its costs have been already adjusted.
Step 3 Repeat step 2 for the reduced table (Table 3.18)
Table 3.18
Modification of table 3.17 following step 2
Location Weighted population distances to
Bachchrawan Pehremau Raebareli
Bachchrawan 0 56 56
Maharajganj 0 0 0
Pehremau 0 0 0
Raebareli 43.2 43.2 0
43.2 99.2 56
Now ,Bachchrawan is selected for the third branch because of its lowest cost. The last remaning
place Raebareli can the last (forth) branch of SBI
Example 3.6 The government of India has identified five tribal communities located near each
other in the north eastern region of the country. The population of all the five communities are
the almost equal to each other , and to the government , all the five communities are equally
important from the social point of view. The government plans to provide medical dispensaries
in any three of these communities will have to travel to these three locations for getting the
services of a dispensary.
Table 3.19
The travel costs (in ₹ per person) between various communities

Destination→ A B C D E
Source ↓
A 0 20 15 10 5
B 25 0 24 8 18
C 15 22 0 12 20
D 10 9 11 0 5
E 6 18 20 7 0
Using the Ardalan heuristic, advise the government about the three locations where dispensaries
should be opened. Also, find the total travel cost involved.

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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

Solution:
Here population and weight is equal, Now

Destination→ A B C D E Population Weight

Source ↓
A (0×1×1) (20×1×1) (15×1×1) (10×1×1) (5×1×1) 1 1
=0 =20 =15 =10 =5
B 25 0 24 8 18 1 1
C 15 22 0 12 20 1 1
D 10 9 11 0 5 1 1
E 6 18 20 7 0 1 1

Destination→ A B C D E
Source ↓
A (0×1×1) (20×1×1) (15×1×1) (10×1×1) (5×1×1)
=0 =20 =15 =10 =5
B 25 0 24 8 18
C 15 22 0 12 20
D 10 9 11 0 5
E 6 18 20 7 0
Total 56 72 70 37 48

Destination→ A B C D E
Source ↓
A (0×1×1) (20×1×1) (15×1×1) (10×1×1) (5×1×1)
=0 =20 =15 =5
=10
B 25 0 24 8 18
C 15 22 0 12 20
D 10 9 11 0 5
E 6 18 20 7 0
Total 56 72 70 37 48

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Lecture No: 22 Date: 25/8/2015 Period: II

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

Destination→ A B C D E
Source ↓
A (0×1×1) (20×1×1) (15×1×1) (10×1×1) (5×1×1)
=0 =20 =15 =10 =5
B 25 0 24 8 18
C 15 22 0 12 20
D 10 9 11 0 5
E 6 18 20 7 0
Total 56 72 70 37 48

Here the minimum value is 37 means D id the best location for dispensaries.
Now compare column wise the cell values of all locations with that of the D.
If cell values is less than or equal to that of D keep it is , otherwise replace it with the cell value
of D.
Destination→ A B C D E
Source ↓
A 0 10 10 10 5
B 8 0 8 8 8
C 12 12 0 12 12
D 0 0 0 0 0
E 6 7 7 7 0
Total 26 29 25 37 25

If two value of total is same then we will take first value of column in which value is same
Destination→ A B C D E
Source ↓
A 0 10 10 10 5
B 8 0 8 8 8
C 0 0 0 12 0
D 0 0 0 0 0
E 6 0 7 7 0
Total 14 17 25 37 13

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Lecture No: 22 Date: 25/8/2015 Period: II

Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

Destination→ A B C D E
Source ↓
A 0 5 10 10 5
B 8 0 8 8 8
C 0 0 0 12 0
D 0 0 0 0 0
E 0 0 7 7 0
Total 8 5 25 37 13

Now we will choose D ,C, E, B. A is the best location .

3.5 Facility Layout
In manufacturing ,facility layout consists of configuring the plant site with lines, buildings, major
facilities, work areas, aisles and other pertinent features such as department boundaries. While
facility layout for services may be similar to that for manufacturing ,it also may be somewhat
different as in the case with officers, retailers, and warehouses. Because of its relative
permanence , facility layout probably is one of the most crucial elements affecting efficiency. An
efficient layout can reduce unnecessary material handling, help to keep costs low , and maintain
product flow through the facility.
The physical disposition of the facilities of a plant is referred to as the plant layout
.Plant layout refers to the physical arrangement of production facilities. It is the configuration of
departments, work centers and equipment in the conversion process. It is a floor plan of the
physical facilities, which are used in production.
According to Moore “Plant layout is a plan of an optimum arrangement of facilities
including personnel, operating equipment, storage space, material handling equipment and all
other supporting services along with the design of best structure to contain all these facilities”.
3.5.1 Objectives of Plant Layout
The primary goal of the plant layout is to maximize the profit by arrangement of all the plant
facilities to the best advantage of total manufacturing of the product.
The objectives of plant layout are:
1. Streamline the flow of materials through the plant.
2. Facilitate the manufacturing process.
3. Maintain high turnover of in-process inventory.
4. Minimise materials handling and cost.
5. Effective utilisation of men, equipment and space.
6. Make effective utilisation of cubic space.
7. Flexibility of manufacturing operations and arrangements.
8. Provide for employee convenience, safety and comfort.
9. Minimize investment in equipment.
10. Minimize overall production time.
11. Maintain flexibility of arrangement and operation.
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Topic: QUALITATIVE AND QUALITATIVE TECHNIQUES OF LOCATION,

Facility Layout

12. Facilitate the organizational structure.

3.5.2 Principles of Plant Layout
1. Principle of integration: A good layout is one that integrates men, materials, machines and
supporting services and others in order to get the optimum utilisation of resources and maximum
effectiveness.
2. Principle of minimum distance: This principle is concerned with the minimum travel (or
movement) of man and materials. The facilities should be arranged such that, the total distance
travelled by the men and materials should be minimum and as far as possible straight line
movement should be preferred.
3. Principle of cubic space utilisation: The good layout is one that utilise both horizontal and
vertical space. It is not only enough if only the floor space is utilised optimally but the third
dimension, i.e., the height is also to be utilised effectively.
4. Principle of flow: A good layout is one that makes the materials to move in forward direction
towards the completion stage, i.e., there should not be any backtracking.
5. Principle of maximum flexibility: The good layout is one that can be altered without much
cost and time, i.e., future requirements should be taken into account while designing the present
layout.
6. Principle of safety, security and satisfaction: A good layout is one that gives due
consideration to workers safety and satisfaction and safeguards the plant and machinery against
fire, theft, etc.
7. Principle of minimum handling: A good layout is one that reduces the material handling to
the minimum.

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Topic: 8 CLASSIFICATION OF LAYOUT

3.5.3 CLASSIFICATION OF LAYOUT

Layouts can be classified into the following five categories:
1. Process layout
2. Product layout
3. Combination layout
4. Fixed position layout
5. Group layout
3.5.3 .1 Process Layout
Process layout is recommended for batch production. All machines performing similar type of
operations are grouped at one location in the process layout e.g., all lathes, milling machines, etc.
are grouped in the shop will be clustered in like groups.
Thus, in process layout the arrangement of facilities are grouped together according to
their functions. The flow paths of material through the facilities from one functional area to
another vary from product to product. Usually the paths are long and there will be possibility of
backtracking.
Process layout is normally used when the production volume is not sufficient to justify a
product layout. Typically, job shops employ process layouts due to the variety of products
manufactured and their low production volumes.
Facility Location and Layout 83
Advantages of Process Layout
1. In process layout machines are better utilized and fewer machines are required.
2. Flexibility of equipment and personnel is possible in process layout.
3. Lower investment on account of comparatively less number of machines and lower cost of
general purpose machines.
4. Higher utilization of production facilities.
5. A high degree of flexibility with regards to work distribution to machineries and workers.
6. The diversity of tasks and variety of job makes the job challenging and interesting.
7. Supervisors will become highly knowledgeable about the functions under their department.
Limitations of Process Layout
1. Backtracking and long movements may occur in the handling of materials thus, reducing
material handling efficiency.
2. Material handling cannot be mechanized which adds to cost.
3. Process time is prolonged which reduce the inventory turnover and increases the in process
inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the process) time is longer.
6. Space and capital are tied up by work-in-process.
3.5.3.2 Product Layout
In this type of layout, machines and auxiliary services are located according to the processing
sequence of the product. If the volume of production of one or more products is large, the
facilities can be arranged to achieve efficient flow of materials and lower cost per unit. Special
purpose machines are used which perform the required function quickly and reliably.
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Topic: 8 CLASSIFICATION OF LAYOUT

The product layout is selected when the volume of production of a product is high such that
a separate production line to manufacture it can be justified. In a strict product layout, machines
are not shared by different products. Therefore, the production volume must be sufficient to
achieve satisfactory utilization of the equipment.
Advantages of Product Layout
1. The flow of product will be smooth and logical in flow lines.
2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are possible.
6. Less space is occupied by work transit and for temporary storage.
7. Reduced material handling cost due to mechanized handling systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle capacity.
9. Manufacturing cycle is short due to uninterrupted flow of materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
Limitations of Product Layout
1. A breakdown of one machine in a product line may cause stoppages of machines in the
downstream of the line.
2. A change in product design may require major alterations in the layout.
3. The line output is decided by the bottleneck machine.
4. Comparatively high investment in equipments is required.
5. Lack of flexibility. A change in product may require the facility modification.
3.5.3.3 Combination Layout
A combination of process and product layouts combines the advantages of both types of layouts.
A combination layout is possible where an item is being made in different types and sizes. Here
machinery is arranged in a process layout but the process grouping is then arranged in a sequence
to manufacture various types and sizes of products. It is to be noted that the sequence of
operations remains same with the variety of products and sizes.
3.5.3.4 Fixed Position Layout
This is also called the project type of layout. In this type of layout, the material, or major
components remain in a fixed location and tools, machinery, men and other materials are brought
to this location. This type of layout is suitable when one or a few pieces of identical heavy
products are to be manufactured and when the assembly consists of large number of heavy parts,
the cost of transportation of these parts is very high.
Advantages
The major advantages of this type of layout are:
1. Helps in job enlargement and upgrades the skills of the operators.
2. The workers identify themselves with a product in which they take interest and pride in
doing the job.
3. Greater flexibility with this type of layout.
4. Layout capital investment is lower.
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Topic: 8 CLASSIFICATION OF LAYOUT

3.5.3.5 Group Layout (or Cellular Layout)

There is a trend now to bring an element of flexibility into manufacturing system as regards to variation in
batch sizes and sequence of operations. A grouping of equipment for performing a sequence of operations
on family of similar components or products has become all the important.
Group Technology (GT) is the analysis and comparisons of items to group them into families
with similar characteristics. GT can be used to develop a hybrid between pure process
layout and pure flow line (product) layout. This technique is very useful for companies that produce
variety of parts in small batches to enable them to take advantage and economics of flow line layout.
The application of group technology involves two basic steps; first step is to determine
component families or groups. The second step in applying group technology is to arrange the plants
equipment used to process a particular family of components. This represents small plants
within the plants. The group technology reduces production planning time for jobs. It reduces the
set-up time.
Thus group layout is a combination of the product layout and process layout. It combines the advantages
of both layout systems. If there are m-machines and n-components, in a group layout (Group-Technology
Layout), the m-machines and n-components will be divided into distinct 6 number of machine-component
cells (group) such that all the components assigned to a cell are
almost processed within that cell itself. Here, the objective is to minimize the intercellular movements.
The basic aim of a group technology layout is to identify families of components that enquire
similar of satisfying all the requirements of the machines are grouped into cells. Each cell is capable of
satisfying all the requirements of the component family assigned to it. The layout design process
considers mostly a single objective while designing layouts. In process layout, the objective is to
minimize the total cost of materials handling. Because of the nature of the layout, the cost of equipments
will be the minimum in this type of layout. In product layout, the cost of materials handling will be at the
absolute minimum. But the cost of equipments would not be at the minimum if the equipments are not
fully utilized.
In-group technology layout, the objective is to minimize the sum of the cost of transportation and the cost
of equipments. So, this is called as multi-objective layout.
Advantages of Group Technology Layout
Group Technology layout can increase—
1. Component standardization and rationalization.
2. Reliability of estimates.
3. Effective machine operation and productivity.
4. Customer service.
It can decrease the—
1. Paper work and overall production time.
2. Work-in-progress and work movement.
3. Overall cost.
Facility Location and Layout 87
Limitations of Group Technology Layout
This type of layout may not be feasible for all situations. If the product mix is completely dissimilar, then
we may not have meaningful cell formation.

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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

3.6 DESIGN OF PRODUCT LAYOUT

In product layout, equipment or departments are dedicated to a particular product line, duplicate
equipment is employed to avoid backtracking, and a straight-line flow of material movement is
achievable. Adopting a product layout makes sense when the batch size of a given product or
part is large relative to the number of different products or parts produced.
Assembly lines are a special case of product layout. In a general sense, the term
assembly line refers to progressive assembly linked by some material-handling device. The usual
assumption is that some form of pacing is present and the allowable processing time is
equivalent for all workstations. Within this broad definition, there are important differences
among line types. A few of these are material handling devices (belt or roller conveyor, overhead
crane); line configuration (U-shape, straight, branching); pacing (mechanical, human); product
mix (one product or multiple products); workstation characteristics (workers may sit, stand, walk
with the line, or ride the line); and length of the line (few or many workers). The range of
products partially or completely assembled on lines includes toys, appliances, autos, clothing and
a wide variety of electronic components. In fact, virtually any product that has multiple parts and
is produced in large volume uses assembly lines to some degree.
A more-challenging problem is the determination of the optimum configuration of
operators and buffers in a production flow process. A major design consideration in production
lines is the assignment of operation so that all stages are more or less equally loaded.
Assembly-line systems work well when there is a low variance in the times required to
perform the individual subassemblies. If the tasks are somewhat complex, thus resulting in a
higher assembly-time variance, operators down the line may not be able to keep up with the flow
of parts from the preceding workstation or may experience excessive idle time. An alternative to
a conveyor-paced assembly-line is a sequence of workstations linked by gravity conveyors,
which act as buffers between successive operations.
3.73DESIGN OF PROCESS LAYOUT
The analysis involved in the design of production lines and assembly lines relates primarily to
timing, coordination, and balance among individual stages in the process. For process layouts,
the relative arrangement of departments and machines is the critical factor because of the large
amount of transportation and handling involved.
3.7.1 PROCEDURE FOR DESIGNING PROCESS LAYOUTS
Process layout design determines the best relative locations of functional work centers. Work
centers that interact frequently, with movement of material or people, should be located close
together, whereas those that have little interaction can be spatially separated. One approach of
designing an efficient functional layout is described below.
1. List and describe each functional work centre.
2. Obtain a drawing and description of the facility being designed.
3. Identify and estimate the amount of material and personnel flow among work centres
4. Use structured analytical methods to obtain a good general layout.
5. Evaluate and modify the layout, incorporating details such as machine orientation, storage
area location, and equipment access.

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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

The first step in the layout process is to identify and describe each work centre. The description
should include the primary function of the work centre; drilling, new accounts, or cashier; its
major components, including equipment and number of personnel; and the space required. The
description should also include any special access needs (such as access to running water or an
elevator) or restrictions (it must be in a clean area or away from heat).
For a new facility, the spatial configuration of the work centers and the size and shape of
the facility are determined simultaneously. Determining the locations of special structures and
fixtures such as elevators, loading docks, and bathrooms becomes part of the layout process.
However, in many cases the facility and its characteristics are given. In these situations, it is
necessary to obtain a drawing of the facility being designed, including shape and dimensions,
locations of fixed structures, and restrictions on activities, such as weight limits on certain parts
of a floor or foundation.

Fig 3.12 Relationship flow diagram

To minimize transport times and material-handling costs, we would like to place close together
those work centres that have the greatest flow of materials and people between them. To
minimize transport times and material-handling costs, we would like to place close together
those To estimate the flows between work centres, it is helpful to begin by drawing relationship
diagram as shown in Fig. 3.12.
For manufacturing systems, material flows and transporting costs can be estimated
reasonably well using historical routings for products or through work sampling techniques
applied to workers or jobs. The flow of people, especially in a service system such as a business
office or a university administration building, may be difficult to estimate precisely, although
work sampling can be used to obtain rough estimates.
The amounts and/or costs of flows among work centers are usually presented using a
flow matrix, a flow-cost matrix, or a proximity chart.
3.7.2334.113
3.7.2 SERVICE LAYOUT
The major factors considered for service providers, is an impact of location on sales and
customer satisfaction. Customers usually look about how close a service facility is, particularly if
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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

the process requires considerable customer contact. Hence, service facility layouts should
provide for easy entrance to these facilities from the freeways. Well-organized packing areas,
easily accessible facilities, well designed walkways and parking areas are some of the
requirements of service facility layout.
Service facility layout will be designed based on degree of customer contact and the
service needed by a customer. These service layouts follow conventional layouts as required. For
example, for car service station, product layout is adopted, where the activities for servicing a car
follows a sequence of operation irrespective of the type of car. Hospital service is the best
example for adaptation of process layout. Here, the service required for a customer will follow
an independent path.
3.8 LINE BALANCING
Assembly-line balancing often has implications for layout. This would occur when, for balance
purposes, workstation size or the number used would have to be physically modified. The most
common assembly-line is a moving conveyor that passes a series of workstations in a uniform
time interval called the workstation cycle time (which is also the time between successive units
coming off the end of the line). At each workstation, work is performed on a product either by
adding parts or by completing assembly operations. The work performed at each station is made
up of many bits of work, termed tasks, elements, and work units. Such tasks are described by
motion-time analysis. Generally, they are grouping that cannot be subdivided on the assembly-
line without paying a penalty in extra motions.
The total work to be performed at a workstation is equal to the sum of the tasks assigned
to that workstation. The line-balancing problem is one of assigning all tasks to a series of
workstations so that each workstation has no more than can be done in the workstation cycle
time, and so that the unassigned (idle) time across all workstations is minimized.
The problem is complicated by the relationships among tasks imposed by product design
and process technologies. This is called the precedence relationship, which specifies the order in
which tasks must be performed in the assembly process.
The steps in balancing an assembly line are:
1. Specify the sequential relationships among tasks using a precedence diagram.
2. Determine the required workstation cycle time C, using the formula

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦

C=
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝑑𝑎𝑦 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠)

3. Determine the theoretical minimum number of workstations (Nt) required to satisfy the
workstation cycle time constraint using the formula.
𝑆𝑢𝑚 𝑜𝑓 𝑡𝑎𝑠𝑘 𝑡𝑖𝑚𝑒𝑠 (𝑇)
Nt = 𝐶𝑦𝑐𝑙𝑒 𝑡𝑖𝑚𝑒 (𝐶)

4. Select a primary rule by which tasks are to be assigned to workstations, and a secondary
rule to break ties.

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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

5. Assign tasks, once at a time, to the first workstation until the sum of the task times is equal to
the workstation cycle time, or no other tasks are feasible because of time or sequence
restrictions. Repeat the process for workstation 2, workstation 3, and so on until all tasks are
assigned.
6. Evaluate the efficiency of the balance derived using the formula

𝑆𝑢𝑚 𝑜𝑓 𝑡𝑎𝑠𝑘 𝑡𝑖𝑚𝑒𝑠 (𝑇)

Efficiency = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑠𝑡𝑎𝑡𝑖𝑜𝑛(𝑁
𝑎 ) 𝑋 𝑊𝑜𝑟𝑘𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑐𝑦𝑐𝑙𝑒 𝑡𝑖𝑚𝑒 (𝐶)
Example3.6: The MS 800 car is to be assembled on a conveyor belt. Five hundred cars are
required per day. Production time per day is 420 minutes, and the assembly steps and times for
the wagon are given below. Find the balance that minimizes the number of workstations, subject
to cycle time and precedence constraints.
Task Task time Description Tasks that
(In seconds) Must
precede
A 45 Position rear axel support and hand fasten -
B 11 For screw and nuts A
C 9 Insert rear axel B
D 50 Tighten rear axel support screws to nuts -
E 15 Position front axel assembly and hand D
F 12 Fasten with for screws and nuts C
G 12 Tighten front axel assembly screws C
H 12 Position rear wheel 1 and fasten hubcap E
I 12 Position rear wheel 2 and fasten hubcap E
J 8 Position rear wheel 1 and fasten hubcap F,G,H,I
K 9 Position rear wheel 2 and fasten hubcap J

SOLUTION
1. Draw a precedence diagram as follows:

2. Determine workstation cycle time. Here we have to convert production time to seconds
because our task times are in seconds
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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦

C = 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝑑𝑎𝑦 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠)
420𝑚𝑖𝑛 𝑋 60 𝑠𝑒𝑐 25200
= = = 50.4 secs
500 𝑐𝑎𝑟 500

3. Determine the theoretical minimum number of workstations required (the actual number
may be greater)
𝑇 195 𝑠𝑒𝑐𝑜𝑛𝑑𝑠
Nt = 𝐶 = 50.4 𝑠𝑒𝑐𝑜𝑛𝑑𝑠 = 3.87 = 4 (rounds up)

4. Select assignment rules.

(a) Prioritize tasks in order of the largest number of following tasks:

Task Number of following task

A 6
B or D 5
C or E 4
F,G,H, or I 2
J 1
K 0

Our secondary rule, to be invoked where ties exist from our primary rule, is (b) Prioritize tasks in
order of longest task time. Note that D should be assigned before B, and E assigned before C due
to this tie-breaking rule.
5. Make task assignments to form workstation 1, workstation 2, and so forth until all tasks are
assigned. It is important to meet precedence and cycle time requirements as the assignments are
made.

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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

Station Task Task time Remaining Feasible Task with Task with
(in sec) unassigned remaining most longest
time (in sec) tasks followers operation time
Station 1 A 45 5.4 Idle None

Station 2 D 50 0.4 Idle None

Station 3 B 11 39.4 C,E C,E E

E 15 24.4 C,H,I C

C 9 15.4 F,G,H,I F,G,H,I F,G,H,I

F 12 3.4 IDLE None

Station 4 G 12 38.4 H,I H,I H,I

H 12 26.4 I

I 12 14.4 J

J 8 6.4 idle NONE

Station 5
K 9 41.4 idle NONE

6. Calculate the efficiency.

𝑇 195
Efficiency = (𝑁 ) 𝑋 𝐶 =5 𝑋 50.4 = .77 or 77 %
𝑎
7. Evaluate the solution. An efficiency of 77 per cent indicates an imbalance or idle time of 23
per cent (1.0 – .77) across the entire line.
In addition to balancing a line for a given cycle time, managers must also consider four other
options: pacing, behavioural factors, number of models produced, and cycle times. Pacing is the
movement of product from one station to the next after the cycle time has elapsed. Paced lines
have no buffer inventory. Unpaced lines require inventory storage areas to be placed between
stations.

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Topic: 8 9 DESIGN OF PRODUCT LAYOUT, LINE BALANCING

3.8.1.NUMBER OF MODELS PRODUCED

A mixed-model line produces several items belonging to the same family. A single-model line
produces one model with no variations. Mixed model production enables a plant to achieve both
high-volume production and product variety. However, it complicates scheduling and increases
the need for good communication about the specific parts to be produced at each station.
3.8.2 CYCLE TIMES
A line’s cycle time depends on the desired output rate (or sometimes on the maximum number
of workstations allowed). In turn, the maximum line efficiency varies considerably with the
cycle time selected. Thus, exploring a range of cycle times makes sense. A manager might go
with a particularly efficient solution even if it does not match the output rate. The manager can
compensate for the mismatch by varying the number of hours the line operates through overtime,
extending shifts, or adding shifts. Multiple lines might even be the answer.

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Topic: 8 9 Material handling

3.8 Material handling

Haynes defines “Material handling embraces the basic operations in connection with the
movement of bulk, packaged and individual products in a semi-solid or solid state by means of
gravity manually or power-actuated equipment and within the limits of individual producing,
fabricating, processing or service establishment”. Material handling does not add any value to
the product but adds to the cost of the product and hence it will cost the customer more. So the
handling should be kept at minimum. Material handling in Indian industries accounts for nearly
40% of the cost of production. Out of the total time spent for manufacturing a product, 20% of
the time is utilised for actual processing on them while the remaining 80% of the time is spent in
moving from one place to another, waiting for the processing. Poor material handling may result
in delays leading to idling of equipment.
Materials handling can be also defined as ‘the function dealing with the preparation,
placing and positioning of materials to facilitate their movement or storage’. Material handling
is the art and science involving the movement, handling and storage of materials during different
stages of manufacturing. Thus the function includes every consideration of the product except
the actual processing operation. In many cases, the handling is also included as an integral part of
the process. Through scientific material handling considerable reduction in the cost as well as in
the production cycle time can be achieved.
3.8.1 OBJECTIVES OF MATERIAL HANDLING
Following are the objectives of material handling:
1. Minimise cost of material handling.
2. Minimise delays and interruptions by making available the materials at the point of use at right
quantity and at right time.
3. Increase the productive capacity of the production facilities by effective utilisation of capacity
and enhancing productivity.
4. Safety in material handling through improvement in working condition.
5. Maximum utilisation of material handling equipment.
6. Prevention of damages to materials.
7. Lower investment in process inventory.
3.8.2 PRINCIPLES OF MATERIAL HANDLING
Following are the principles of material handling:
1. Planning principle: All handling activities should be planned.
2. Systems principle: Plan a system integrating as many handling activities as possible and
coordinating the full scope of operations (receiving, storage, production, inspection, packing,
warehousing, supply and transportation).
3. Space utilisation principle: Make optimum use of cubic space.
4. Unit load principle: Increase quantity, size, weight of load handled.
5. Gravity principle: Utilise gravity to move a material wherever practicable.
6. Material flow principle: Plan an operation sequence and equipment arrangement to optimize
material flow.

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Topic: 8 9 Material handling

7. Simplification principle: Reduce combine or eliminate unnecessary movement

and/orequipment.
8. Safety principle: Provide for safe handling methods and equipment.
9. Mechanisation principle: Use mechanical or automated material handling equipment.
10. Standardisation principle: Standardise method, types, size of material handling equipment.
11. Flexibility principle: Use methods and equipment that can perform a variety of task and
applications.
12. Equipment selection principle: Consider all aspect of material, move and method to
beutilised.
13. Dead weight principle: Reduce the ratio of dead weight to pay load in mobile equipment.
14. Motion principle: Equipment designed to transport material should be kept in motion.
15. Idle time principle: Reduce idle time/unproductive time of both MH equipment and man
power.
16. Maintenance principle: Plan for preventive maintenance or scheduled repair of all handling
equipment.
17. Obsolescence principle: Replace obsolete handling methods/equipment when more efficient
method/equipment will improve operation.
18. Capacity principle: Use handling equipment to help achieve its full capacity.
19. Control principle: Use material handling equipment to improve production control,
inventory control and other handling.
20. Performance principle: Determine efficiency of handling performance in terms of cost per
unit handled which is the primary criterion.
3.8.3 SELECTION OF MATERIAL HANDLING EQUIPMENTS
Selection of Material Handling equipment is an important decision as it affects both cost and
efficiency of handling system. The following factors are to be taken into account while selecting
material handling equipment.
3.8.3.1. PROPERTIES OF THE MATERIAL
Whether it is solid, liquid or gas, and in what size, shape and weight it is to be moved, are
important considerations and can already lead to a preliminary elimination from the range of
available equipment under review. Similarly, if a material is fragile, corrosive or toxic this will
imply that certain handling methods and containers will be preferable to others.
3.8.3.2. LAYOUT AND CHARACTERISTICS OF THE BUILDING
Another restricting factor is the availability of space for handling. Low-level ceiling may
preclude the use of hoists or cranes, and the presence of supporting columns in awkward places
can limit the size of the material-handling equipment. If the building is multi-storeyed, chutes or
ramps for industrial trucks may be used. Layout itself will indicate the type of production
operation (continuous, intermittent, fixed position or group) and can indicate some items of
equipment that will be more suitable than others. Floor capacity also helps in selecting the best
material handling equipment.
3.8.3.3. PRODUCTION FLOW
If the flow is fairly constant between two fixed positions that are not likely to change, fixed
equipment such as conveyors or chutes can be successfully used. If, on the other hand, the flow
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Topic: 8 9 Material handling

is not constant and the direction changes occasionally from one point to another because several
products are being produced simultaneously, moving equipment such as trucks would be
preferable.
3.8.3.4. COST CONSIDERATIONS
This is one of the most important considerations. The above factors can help to narrow the range
of suitable equipment, while costing can help in taking a final decision. Several cost elements
need to be taken into consideration when comparisons are made between various items of
equipment that are all capable of handling the same load. Initial investment and operating and
maintenance costs are the major cost to be considered. By calculating and comparing the total
cost for each of the items of equipment under consideration, a more rational decision can be
reached on the most appropriate choice.
3.8.3.5. NATURE OF OPERATIONS
Selection of equipment also depends on nature of operations like whether handling is temporary
or permanent, whether the flow is continuous or intermittent and material flow pattern-vertical or
horizontal.
3.8.3.6. ENGINEERING FACTORS
Selection of equipment also depends on engineering factors like door and ceiling dimensions,
floor space, floor conditions and structural strength.
3.8.3.7. EQUIPMENT RELIABILITY
Reliability of the equipment and supplier reputation and the after sale service also plays an
important role in selecting material handling equipments.
3.8.4 EVALUATION OF MATERIAL HANDLING SYSTEM
The cost factors include investment cost, labour cost, and anticipated service hours per year,
utilization, and unit load carrying ability, loading and unloading characteristics, operating costs
and the size requirements are the factors for evolution of material handling equipment. Other
factors to be considered are source of power, conditions where the equipment has to operate and
such other technical aspects. Therefore, choices of equipments in organisation will improve the
material handling system through work study techniques. They usually result in improving the
ratio of operating time to loading time through palletizing, avoiding duplicative movements, etc.
Obsolete handling systems can be replaced with more efficient equipments.
The effectiveness of the material handling system can be measured in terms of the ratio
of the time spent in the handling to the total time spent in production. This will cover the time
element. The cost effectiveness can be measured by the expenses incurred per unit weight
handled. It can be safely said that very few organisations try to collate the expenses and time in
this manner so as to objectively view the performance and to take remedial measures. Some of
the other indices which can be used for evaluating the performance of handling systems are listed
below:
3.8.5 EQUIPMENT UTILISATION RATIO
Equipment utilisation ratio is an important indicator for judging the materials handling system.
This ratio can be computed and compared with similar firms or in the same over a period of time.
In order to know the total effort needed for moving materials, it may be necessary to
computeMaterials Handling Labour (MHL) ratio.
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Topic: 8 9 Material handling

This ratio is calculated as under:

𝑝𝑒𝑟𝑠𝑜𝑛𝑛𝑒𝑙 𝑎𝑠𝑠𝑖𝑔𝑛𝑒𝑑 𝑡𝑜 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 ℎ𝑎𝑛𝑑𝑒𝑙𝑖𝑛𝑔
𝑀𝐻𝐿 =
𝑡𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑤𝑜𝑟𝑘 𝑓𝑜𝑟𝑐𝑒

In order to ascertain whether is the handling system delivers materials work centres with
maximum efficiency, it is desirable to compute direct labour handling loss ratio. The ratio is:
𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 ℎ𝑎𝑛𝑑𝑙𝑖𝑛𝑔 𝑡𝑖𝑚𝑒 𝑙𝑜𝑠𝑡 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟
𝐷𝐿𝐻𝐿 =
𝑡𝑜𝑡𝑎𝑙 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 𝑡𝑖𝑚𝑒

The movement’s operations ratio which is calculated after dividing total number of moves by
total number of productive operations indicates whether the workers are going through too many
motions because of poor routing.
It should, however, be emphasized that the efficiency of materials handling mainly
depends on the following factors: (i) efficiency of handling methods employed for handling a
unit weight through a unit distance, (ii) efficiency of the layout which determines the distance
through which the materials have to be handled, (iii) utilisation of the handling facilities, and (iv)
efficiency of the speed of handling.
In conclusion, it can be said that an effective material handling system depends upon
tailoring the layout and equipments to suit specific requirements. When a large volume has to be
moved from a limited number of sources to a limited number of destinations the fixed path
equipments like rollers, belt conveyors, overhead conveyors and gauntry cranes are preferred.
For increased flexibility varied path equipments are preferred.
3.8.6 MATERIAL HANDING EQUIPMENTS
Broadly material handling equipment’s can be classified into two categories, namely:
(a) Fixed path equipments, and (b) Variable path equipments.
(a) Fixed path equipmentswhich move in a fixed path. Conveyors, monorail devices, chutes and
pulley drive equipments belong to this category. A slight variation in this category is provided by
the overhead crane, which though restricted, can move materials in any manner within a
restricted area by virtue of its design. Overhead cranes have a very good range in terms of
hauling tonnage and are used for handling bulky raw materials, stacking and at times palletizing.
(b) Variable path equipmentshave no restrictions in the direction of movement although their
size is a factor to be given due consideration trucks, forklifts mobile cranes and industrial tractors
belong to this category. Forklifts are available in many ranges, they are manoeuvrable and
various attachments are provided to increase their versatility.
Material Handing Equipments may be classified in five major categories.
3.8.6.1. CONVEYORS
Conveyors are useful for moving material between two fixed workstations, either continuously
or intermittently. They are mainly used for continuous or mass production operations—indeed,
they are suitable for most operations where the flow is more or less steady. Conveyors may be of
various types, with rollers, wheels or belts to help move the material along: these may be power-
driven or may roll freely. The decision to provide conveyors must be taken with care, since they
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Topic: 8 9 Material handling

are usually costly to install; moreover, they are less flexible and, where two or more converge, it
is necessary to coordinate the speeds at which the two conveyors move.
3.8.6.2. INDUSTRIAL TRUCKS
Industrial trucks are more flexible in use than conveyors since they can move between various
points and are not permanently fixed in one place. They are, therefore, most suitable for
intermittent production and for handling various sizes and shapes of material. There are many
types of truckpetrol- driven, electric, hand-powered, and so on. Their greatest advantage lies in
the wide range of attachments available; these increase the trucks ability to handle various types
and shapes of material.
3.8.6.3. CRANES AND HOISTS
The major advantage of cranes and hoists is that they can move heavy materials through
overhead space. However, they can usually serve only a limited area. Here again, there are
several types of crane and hoist, and within each type there are various loading capacities.
Cranes and hoists may be used both for intermittent and for continuous production.
3.8.6.4. CONTAINERS
These are either ‘dead’ containers (e.g. Cartons, barrels, skids, pallets) which hold the material
to be transported but do not move themselves, or ‘live’ containers (e.g. wagons, wheelbarrows
or computer self-driven containers). Handling equipments of this kind can both contain and
move the material, and is usually operated manually.
3.8.6.5. ROBOTS
Many types of robot exist. They vary in size, and in function and manoeuvrability. While many
robots are used for handling and transporting material, others are used to perform operations
such as welding or spray painting. An advantage of robots is that they can perform in a hostile
environment such as unhealthy conditions or carry on arduous tasks such as the repetitive
movement of heavy materials.
The choice of material-handling equipment among the various possibilities that exist is
not easy. In several cases the same material may be handled by various types of equipments, and
the great diversity of equipment and attachments available does not make the problem any easier.
In several cases, however, the nature of the material to be handled narrows the choice.

Fig. 3.13 Wheel and Screw Conveyor

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Topic: 8 9 Material handling

Fig.3.14 Various types of industrial conveyor

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Topic: 8 9 Material handling

Fig.3.15 Various types of industrial conveyor

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Topic: 8 9 Material handling

3.8.7 GUIDELINES FOR EFFECTIVE UTILISATION OF MATERIAL HANDLING

EQUIPMENTS
The following guidelines are invaluable in the design and cost reduction of the materials
handling system:
1. As material handling adds no value but increases the production cycle time, eliminate handling
wherever possible. Ideally there should not be any handling at all!
2. Sequence the operations in logical manner so that handling is unidirectional and smooth.
3. Use gravity wherever possible as it results in conservation of power and fuel.
4. Standardise the handling equipments to the extent possible as it means interchangeable usage,
better utilisation of handling equipments, and lesser spares holding.
5. Install a regular preventive maintenance programme for material handling equipments so that
downtime is minimum.
6. In selection of handling equipments, criteria of versatility and adaptability must be the
governing factor. This will ensure that investments in special purpose handling equipments are
kept at a minimum.
7. Weight of unit load must be maximum so that each ‘handling trip’ is productive.
8. Work study aspects, such a elimination of unnecessary movements and combination of
processes should be considered while installing a material handling system.
9. Non-productive operations in handling, such as slinging, loading, etc., should be kept at a
minimum through appropriate design of handling equipment. Magnetic cranes for scrap
movement and loading in furnaces combination of excavators and tippers for ores loading and
unloading in mines are examples in this respect.
10. Location of stores should be as close as possible to the plant which uses the materials. This
avoids handling and minimizing investment in material handling system.
11. Application of OR techniques such as queueing can be very effective in optimal utilisation
of materials handling equipments.
12. A very important aspect in the design of a material handling system is the safety aspect. The
system designed should be simple and safe to operate.
13. Avoid any wasteful movements-method study can be conducted for this purpose.
14. Ensure proper coordination through judicious selection of equipments and training of
workmen.
3.8.8 RELATIONSHIP BETWEEN PLANT LAYOUT AND MATERIAL HANDLING
There is a close relationship between plant layout and material handling. A good layout ensures
minimum material handling and eliminates rehandling in the following ways:
1. Material movement does not add any value to the product so, the material handling should be
kept at minimum though not avoid it. This is possible only through the systematic plant layout.
Thus a good layout minimises handling.
2. The productive time of workers will go without production if they are required to travel long
distance to get the material tools, etc. Thus a good layout ensures minimum travel for workman
thus enhancing the production time and eliminating the hunting time and travelling time.
3. Space is an important criterion. Plant layout integrates all the movements of men, material
through a well designed layout with material handling system.
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Topic: 8 9 Material handling

4. Good plant layout helps in building efficient material handling system. It helps to keep
material handling shorter, faster and economical. A good layout reduces the material
backtracking, unnecessary workmen movement ensuring effectiveness in manufacturing.
Thus a good layout always ensures minimum material handling.

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Lecture No: 26 Date: 01/9/2015 Period: II

Topic: 8 9 AGGREGATE PLANNING

3.9 AGGREGATE PLANNING

Aggregate planning is the process of planning the quantity and timing of output over the
intermediate range (often 3 to 18 months) by adjusting the production rate, employment,
inventory, and other controllable variables. Aggregate planning links long-range and short-range
planning activities. It is “aggregate” in the sense that the planning activities at this early stage are
concerned with homogeneous categories (families) such as gross volumes of products or number
of customers served. Master scheduling follows aggregate planning and expresses the overall
plan in terms of the amounts of specific end items to produce and dates to produce them. It uses
information from both forecasts and orders on hand, and it is the major control (driver) of all
production activities
For example, imagine a paint company that produces blue, brown, and pink paints; the
aggregate plan in this case would be expressed as the total amount of the paint without specifying
how much of it would be blue, brown or pink. Such an aggregate plan may dictate, for example, the
production of 100,000 gallons of paint during an intermediate-range planning horizon, say during
the whole year. The plan can later be disaggregated as to how much blue, brown, or pink paint to
produce every specific time period, say every month.
Achieving a balance of expected supply and demand is the goal of aggregate planning.
Informal graphical techniques, as well as mathematical techniques are used by decision makers to
handle aggregate planning.
3.9.1 VARIABLES USED IN AGGREGATE PLANNING
Aggregate planning is a complex problem largely because of the need to coordinate interacting
variables in order for the firm to respond to the (uncertain) demand in an effective way. Table
3.4 identifies some of the key variables available to planners and the costs associated with them.
Table. 3.20
Decision variable and Associated cost
Decision variable Associated cost

1 Varying size of work force Hiring, training, and layoff costs

1
2 Using overtime or accepting idle time Wage premiums and non-productive time
2
costs
3 Varying inventory levels 3 . Carrying and storage costs
4 Accepting back orders 4 Stockout costs of lost orders
5 Subcontracting work to others 5 Higher labour and material costs
6 Changing the use of existing capacity 6 Delayed response and higher fixed costs
To best understand the effect of changes in these variables, it is useful to first focus upon the
impact of a change in only one variable at a time, with other variables held constant. The
examples that follow show the effect on production costs of (isolated) changes in the decision
variables. They are presented in a simplified format in order to best convey the underlying
concept; more realistic examples follow in later sections.

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Lecture No: 26 Date: 01/9/2015 Period: II

Topic: 8 9 AGGREGATE PLANNING

Example 3.7: Paris Candy Company has estimated its quarterly demand (cases) as shown in
Table 3.5 and Figure 8.1. It expects the next demand cycle to be similar to this one and wishes to
restore ending inventory, employment, etc., to beginning levels accordingly
Table 3.21
Demand

Quarter Units

1st 500
2nd 900

3rd 700

4th 300

Fig.3.16 Histogram of demand

Each quarterly change of 200 units output has an incremental labour cost of Rs. 2,000 and ending
levels must be restored to initial levels. What is the cost associated with changing the work force
size?
SOLUTION
Period Demand Work force required Change of work Cost

1 500 3 1 2000
2 900 5 2 4000
3 700 4 1 2000
4 300 2 2 4000
Six changes of work force have to be made. Employment change cost = 6 (Rs.2,000) =
Rs.12,000.
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Lecture No: 26 Date: 01/9/2015 Period: II

Topic: 8 9 AGGREGATE PLANNING

3.9.2AGGREGATE PLANNING STRATEGIES

Several different strategies have been employed to assist in aggregate planning. Three “pure
"strategies are recognized. The pure strategies stem from early models that depicted production
results when only one of the decision variables was permitted to vary all others being held
constant. Three focused strategies are:
3.9.2.1. Vary production to match demand by changes in employment (Chase demand
strategy)
This strategy permits hiring and layoff of workers, use of overtime, and subcontracting as
required in each period. However, inventory build-up is not used.
3.9.2.2. Produce at a constant rate and use inventories. (Level production strategy)
This strategy retains a stable work force producing at a constant output rate. Inventory can be
accumulated to satisfy peak demands. In addition, subcontracting is allowed and back orders can
be accepted. Promotional programmer may also be used to shift demand.
3.9.2.3. Produce with stable workforce but vary the utilization rate (Stable work-force
strategy):
This strategy retains a stable work force but permits overtime, part-time, and idle time. Some
versions of this strategy permit back orders, subcontracting, and use of inventories. Although this
strategy uses overtime, it avoids the detrimental effects of layoff.. These figures display a
histogram of a 9-month forecast for motors. The total requirement for the 9 months is 360
motors. This works out to an average (mean) of 40 motors per month, which is shown as a dotted
line in Figure 3.17.
Table 3.22
Month Jan. Feb. Mar. April May June July Aug. Sept. Total

Forecast 40 25 55 30 30 50 30 60 40 360
Cumulative 40 65 120 150 180 230 260 320 360
Demand

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Topic: 8 9 AGGREGATE PLANNING

Fig.3.17
1. Chase Strategy: If the production planner designed a plan to exactly match the forecast of
demand shown in Fig.3.5, by adding or laying off employees to change the level of production,
the planner would be using a chase strategy. Some overtime or subcontracting might also be
used, but no inventories would be accumulated.
2. Level Production Strategy: The graph in Fig.3.17 shows (visually) that the demand exceeds
the average requirement in some months and is below average in others. A production plan could
be developed to produce at the constant rate of 40 motors per month, accumulating inventory in
months 2, 4, 5, and 7, and using that inventory to meet the above average demands in months 3,
6, and 8. Table shows that the cumulative demand (forecast) never exceeds the cumulative
averages (production), so no initial inventory is needed to prevent shortages. However, if there
were shortages, some back orders could be allowed under a level production, or inventory
strategy.
3. Stable Work-Force Strategy: Referring to Fig.3.5, suppose the firm has a stable work force
capable of producing 36 motors per month on regular time. Production might go as high as 60
motors per month by using overtime, but if demand falls to less than 36 motors per month, some
workers would be idle. Using overtime and idle time to meet demand would be employing a
stable work-force strategy. As part of this strategy, however, it seems likely that planners would
build up some inventory during what might otherwise be idle time periods.
3.9.3 Aggregate Planning Guidelines
The following are the guidelines for aggregate planning:
1. Determine corporate policy regarding controllable variables.
2. Use a good forecast as a basis for planning.
3. Plan in proper units of capacity.
4. Maintain the stable workforce.
5. Maintain needed control over inventories.
6. Maintain flexibility to change.
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Lecture No: 26 Date: 01/9/2015 Period: II

Topic: 8 9 AGGREGATE PLANNING

7. Respond to demand in a controlled manner.

8. Evaluate planning on a regular base
Example3.8: An aggregate plan is to be developed for the forecast of demand covering nine
periods shown in Table 8.8. Other relevant production and cost information is also provided.
Find the cost associated with an aggregate plan that involves varying the size of the work force
in order to have a production rate that matches demand.
Note: Since this plan does not allow for any inventory buildup, a decision has been made to
carry 10 units of safety stock, but no overtime or subcontract labour is used.
Month Jan. Feb. Mar. April May June July Aug. Sept. Total

Forecast 40 25 55 30 30 50 30 60 40 360

Production information Cost information

Current number workers 10 Hiring Rs.600/employee
Worker time /month 160hr Layoff cost Rs. 500/employee
Time to produce one unit 40 hr Regular – time cost Rs. 30/hr
Individual worker output: Overtime cost Rs. 45/hr
(160 hr/mo/40 hr/unit) 4 units Subcontract labor cost Rs. 50/hr
Safety stock of inventory 10 units Inventory carrying Rs. 35/period
required cost

SOLUTION: The cost associated with changing the employment level is calculated in Table
The number of workers required is first determined by dividing the forecast amount by the
worker output of 4 units per month. Fractional values have been rounded up. Beginning with the
current level of 10 workers, the number that must be hired, or laid off, is then determined. Costs
are then computed for (1) regular-time hours, (2) hiring and layoff, and (3) carrying safety stock.
These are added to get the total plan cost of Rs. 470,450.

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Lecture No: 26 Date: 01/9/2015 Period: II

Topic: 8 9 AGGREGATE PLANNING

PERIOD 1 2 3 4 5 6 7 8 9
Production forecast 40 25 55 30 30 50 30 60 40
(units/mo)
Work-force size data

No. worker required 10 7 14 8 8 13 8 15 10

(fost./o/p of 4
units/wk-mo)
(a)No. hired @ beg. 0 0 7 0 0 5 0 7 0
Of mo
(b)No. laid of @ beg. 0 3 0 6 0 0 5 0 5
of mo
COSTS
Regular time cost, Rs. 48,00 33,600 67,200 38,400 38,400 62,200 38,400 72,000
(No. wkr)(Rs. 30/wkr-hr) 0
(160 hr/wkr-mo)

Hiring or layoff cost,Rs.: 0 1,500 4,200 3,00 0 3,000 2,500 4,200 2,500
@(a) (Rs. 600) or (b) (Rs.
500)
Inventory carrying cost 350 350 350 350 350 350 350 350 350
(10 units) (Rs. 35/unit-
period)
Totral cost for plan = SRegular-time employment + SHiring and layoff + SInventory carrying cost
= Rs. 446,400 + Rs. 20,900 + Rs. 3,150 = 470,450

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 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

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Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

3.10 MASTER SCHEDULING

The Master Production Schedule (MPS) formalizes the production plan and translates it into
specific end-item requirements over a short to intermediate planning horizon. The end items are
then exploded3 into specific material and capacity requirements by the Material Requirements
Planning (MRP) and Capacity Requirements Planning (CRP) systems. Thus, the MPS essentially
drives the entire production and inventory system.
The major inputs to the master production schedule are:
1. Forecasts of demand, e.g., of end items and service parts.
2. Customer orders, i.e., including any warehouse and interplant needs.
3. Inventory on-hand from the previous period Forecasts of demand are the major input for
make-to-stock items. However, to be competitive, many make-to-order firms must anticipate
orders by using forecasts for long lead-time items and by matching the forecasts with customer
orders as the orders become available.
3.10.1 Master Scheduling Planning Horizon
The time horizon of master scheduling depends upon the type of product, volume of production,
and component lead times. It can be weeks, months, or some combination, but the schedule must
normally extend far enough into the future so that the lead times for all purchased and assembled
components are adequately encompassed.
Master schedules frequently have both firm and flexible (or tentative) portions. Table
3.18 illustrates an MPS for a furniture company that has one such schedule-where the firm and
flexible portions have been marked. The firm portion encompasses the minimum lead-time
necessary and is not open to change.

Table 3.23
Master schedule for furniture company
Week
Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
R28 table 50 50 50 40 40 40 40 40 40
R30 table 80 20 60 80 80 60 80
L7 lamp 20 20 10 20 20 20 10 20 20 20 20
(Firm) (Flexible) (Open)
(Emergency changes (Capacity firm and material (Additions and changes
only) ordered) OK)

Two-time fence can be identified in MPS: A demand and a planning time fence.
(a) A demand time fence is the firm or ‘frozen’ portion of the master schedule (beginning with
the current period) during which no changes can be made to the schedule without management
approval.

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Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

(b) A planning time fence is the portion of the master schedule (also beginning with the current
period) during which changes will not automatically be made (i.e., via computer) to
accommodate demand. This gives the master scheduler a manageable base to work from and still
allows some discretion in overriding the constraint.

Fig. 3.18 Location of Master Scheduling Activities

3.10.2 Master Scheduling Format
Planning production that integrates a forecast of demand, incoming customer orders, and current
inventory levels is difficult–especially when it must be done over a multi week period. These
difficulties are amplified as hundreds or thousands of items become involved. Numerous
computer programmes have been designed to assist in the scheduling and to provide detailed
reports and graphs for analyzing and testing proposed master schedules. Although the extras
differ from one programme to another, much of the logic is similar. It consists of (l)
incorporating the forecast and customer orders, (2) determining whether the inventory balance is
sufficient to satisfy the larger of either the forecast or the orders on hand for the period, and (3)
scheduling the production of a predetermined lot size in periods whenever the inventory balance
is inadequate.
Example 3.9: Use the master schedule shown in Table 3.24 to answer the following:
(a) Does this product appear to be made primarily for stock, or is it made-to-order?
(b) How long is the planning period, and how many production runs will be scheduled in esponse
to demand?
(c) Why is no production run scheduled for week 1, and how is the projected available balance
determined?
(d) How many end items will be "exploded" into component parts in the MRP system as a result
of the MPS requirements during week 3?
(e) Does the capacity appear to be fully utilized during the 6-week planning period?
Table3.24
Master schedule for TR28 blood analyzer unit
Lead time 0 Lost size 25 Demand time fence 0
On-hand 23 Safety stock 0 Planning time fence 6
Period 1 2 3 4 5 6 7 8 9
Forecast 20 20 20 20 20
Customer orders(booked)
Project available balance 10 15 20 0 5 10
Master production schedule 25 25 25 25
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Topic: 89 MASTER SCHEDULING

SOLUTION
(a) Product appears to be made for stock in response to a forecast; no customer orders are shown.
(b) The planning time fence is 6 weeks, and the schedule calls for four production runs (i.e., of
25 units each in weeks 2, 3, 5, and 6).
(c) No production is needed in week 1 because the beginning inventory of 30 is more than
enough to meet the forecast demand of 20 needed in week 1.
Projected Available Balance = Previous available balance + MPS – Current period requirements
(@ end of period) = 30 + 0 – 20 = 10 units.
(Note: No changes are normally accepted up to the Demand Time Fence (DTF). Prior to the DTF
the Projected Available Balance is based upon customer orders only, and disregards the
forecast.)
(d) The MPS amount in week 3 (25 units). All MPS items become projected requirements in the
MRP system.
(e) We cannot tell the extent to which capacity is utilized without additional information from
the capacity planning system. One of the uses of the MPS is to provide the information to drive
rough-cut capacity planning. However, no production of blood analyzer units is scheduled for
weeks 1 and 4, so the production facilities might be idle at that time-unless they are being used
for another product.
3.10.3 Available-to-Promise Quantities
In make-to-order operations, as actual customer orders are received, they essentially take the
place of an equivalent amount in the forecast, or consume the forecast. For this reason, the
scheduled production of a lot is initiated by the larger demand of either the forecast amount or
the actual (booked) customer orders.
As new orders are evaluated (and received), it is important to provide marketing with
realistic promises of when shipments can be made. In well-designed master scheduling systems,
this information is provided by a simple calculation that yields an available-at-promise
inventory.
Available-to-Promise (ATP) inventory is that portion of the on-hand inventory plus
scheduled production that is not already committed to customer orders. For the first (current)
period, the ATP includes the beginning inventory plus any MPS amount in that period, minus the
total of booked orders up to the time when the next MPS amount is available. In subsequent
periods, the ATP inventory consists of the MPS amount in that period, minus the actual customer
orders already received for that period and all other periods until the next MPS amount is
available.

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Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Example 3.10: Find the ATP inventory values for the master schedule shown in
Table 3.25
Master schedule for tractor levelers.
On-hand 23 Lost size 25 Planning time fence 6
Period 1 2 3 4 5 6 7 8 9
Forecast 10 10 10 10 20 20
Customer orders 13 5 3 1
Project available balance 10 0 15 5 10 15
Master production schedule 25 25 25
Available-to-promise

Available-to-Promise values are computed for the current period (1) and for other periods when
the MPS shows that a lot will be produced.
For period
1. ATP1 = (On-hand Inv.) – (orders in periods 1 and 2) = 23 – (13 + 5) = 5
2. ATP3 = (MPS amount in 3) – (orders in periods 3 and 4) = 25 – (3 + 1) = 21
3. ATP5 = (MPS amount in 5) – (orders in period 5) = 25 – 0 = 25
4. ATP6 = (MPS amount in 6) – (orders in period 6) = 25 – 0 = 25
The last row should have values of 5, 21, 25 and 25 in the columns for periods 1, 3, 5 and 6
respectively.
3.10.4 Functions of MPS
Master Production Schedule (MPS) gives a formal details of the production plan and converts
this plan into specific material and capacity requirements. The requirements with respect to
labour, material and equipment is then assessed.
The main functions of MPS are:
3.10.4.1. To translate aggregate plans into specific end items: Aggregate plan
determines level of operations that tentatively balances the market demands with the material,
labour and equipment capabilities of the company. A master schedule translates this plan into
specific number of end items to be produced in specific time period.

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Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Fig. 3.19 Flowchart of aggregate plan and master schedule

3.9.1.2. Evaluate alternative schedules: Master schedule is prepared by trial and error.
Many computer simulation models are available to evaluate the alternate schedules.
3.9.1.3. Generate material requirement: It forms the basic input for material requirement
planning (MRP).
3.9.1.4. Generate capacity requirements: Capacity requirements are directly derived from
MPS. Master scheduling is thus a prerequisite for capacity planning.
3.9.1.5. Facilitate information processing: By controlling the load on the plant. Master
schedule determines when the delivery should be made. It coordinates with other management
information systems such as, marketing, finance and personnel.
3.9.1.6. Effective utilization of capacity: By specifying end item requirements schedule
establishes the load and utilization requirements for machines and equipment The Master
Production Schedule (MPS) formalized the production plan & translates it into specific end –
item required over a short to intermediate planning horizon.
The Master Production Schedule provides details about the quantities & delivery timings of a
product, but not the production plan.

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Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

The process of developing a master production schedule includes

1) Calculating the projected - on – inventory.
2) Detrmining the timing and size of the production quantities of specific products.
Example 3.9 – The manufacturer of a company of the Ladder back chair produces the chair to
stock and neds to develop an MPS for it. Marketing has forcasts a demand of 30 chairs for the
first week of April, but actual customer orders booked are for 38 chairs. The current on – hand
Inventory is 55 chairs. No MPS quantity is due in week 1
Solutios :-.
Item:-Ladder back – chair April May
Quantity on hand = 55 1 2 3 4 5 6 7 8
Forcast 30 30 30 35 35 35 35
Customer order (booked) 38 27 24 8 0 0 0 0
Projected on – hand Inventory 17 137 107 77 42 7 122 87
MPS quantity 0 150 0 0 0 0 150 0
MPS start 150 0 0 0 0 150 0 0
Available to promise (ATP) Inventory 17 91 150

The total of customer order booked until the next MPS receipt is 38 units.
The ATP 55 (on – hand) + 0 (MPS quantity) – 38 = 17

The Total of customer orders booked until the next MPS receipt is
27 +24 + 8 + 0 + 0 = 59
ATP = 150 (MPS) – 59 = 91 units

Step 1 :Calculate projected on – hand Inventoy

(Projected on – hand inventory at the end of this week) =
(on – hand inventory at the end of last week) + (MPS quality due at start of this week)
- (Projected requirements this week)

Example : We calculate Projected on – hand inventory for 1 week of April

It is given in the problem the on – hand inventory is 55 chair.
POHI = [55 (chair currently in use)] + [(MPS quality) 0 (for week 1)] –
[38 (chairs already promised for delivery in week 1)]
POHI = 55 + 0 – 38 =17
For week 2 it will be => 17 + 150 -30 =137
For week 3 => 137 +0 -30 = 107
For week 4 => 107 + 0 - 30 = 77
For week 5 => 77 + 0 -35 =42 .....
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Topic: 89 MASTER SCHEDULING

Step 2 :Determine the Timing and size of MPS Quantities :

The goal of determining the timing and size of MPS quantities is to maintain a non negative
projected on – hand inventory balance.
In the first week projected - on– hand Inventory is “17”
For week 2 it will be [17 (POHI)] +[0 (MPS quantity)] – [30 (Forcast) = 17 + 0 - 30 = -13
So, avoiding –ve POHI we place an order of 150 units whose lead time is week 1.
So, we place an order in week 1 and receive in week 2.
Example 3.10:-Rajasthan Saris is a 100% export – oriented 5,000 million turnover company
based at Jaipur. It exports its typical Rajasthani Saris to the European countris through a sales
agency at Zurich.
Months January February

Lead size = 1000; Lead time = 1 week w-1 w-2 w-3 w-4 w-5 w-6 w-7 w-8
Demand Forcasts (Units) 300 200 100 500 800 900 600 700
Customer order (Committed) 350 100 50 300 400
Initial inventory in period week 0
=500 units

Solutions :
January February

w-1 w-2 w-3 w-4 w-5 w-6 w-7 w-8

Demand Forcasts (Units) 300 200 100 500 800 900 600 700
Customer orders (Committed) 350 100 50 300 400
Initial Inventory in period week 0 = 500
500
Net Inventory before MPS 150 -50 850 350 450 -350 50 -650
Projected on – hand – inventory 150 950 850 350 550 650 50 350
MPS quantity 1000 1000 1000 1000
MPS Start 1000 1000 1000 1000

Projected on –hand – inventory for w-1 = (Initial /inventory + MPS of w-1) – Customer order
= (500+0) -350 =150
Projected on – hand – inventory for w-2 = (II + MPS) – DF
= (150 +1000) -200 = 950
Projected on – hand – inventory for w-3 = (950 + 0) – 100 = 850
Projected on – hand –inventory for w-4 = (850 + 0) - 500 = 350

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Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Master Production Schedule (MPS) with available – to – purchase Inventory :

January February

W-1 W-2 W-3 W-4 W-5 W-6 W-7 W-8

Demand forecast(units) 3000 200 100 500 800 900 600 700
Customer orders(committed) 350 100 50 300 400 0 0 0
Initial inventory in period week
500 0 0 0 0 0 0 0
0=500
Net inventory before MPS 150 -50 850 350 -450 -350 50 -650
Master Production Schedule (MPS) 0 1000 0 0 1000 1000 0 1000
Projected on-hand inventory 150 950 850 350 550 550 50 350
Available to promise Inventory (ATP) 150 550 600 1000

ATP for w-1 = (I.I – C.O.) = 500 – 350 =150

ATP for w-2 = 1000 – (100 + 50 + 300) = 550
ATP for w-5 = (1000 – 400) = 600

3.10 BILL OF MATERIALS

A bill of materials (BOM) is a listing of all the materials, components, and subassemblies needed
to assemble one unit of an end item. Major function of the bill of materials is to provide the
product structure hierarchy that guides the explosion process.
Different methods of describing a BOM are in use. Figure 3.20 shows (a) a product
structure tree, and (b) an indented BOM. Both are common ways of depicting the parent-
component relationships on a hierarchical basis. Knowledge of this dependency structure reveals
clearly and immediately what components are needed for each higher-level assembly. A third
method (c) is to use single-level bills of material
3.10.1 Low-level Coding
Figure 3.2 also includes level coding information. Level 0 is the highest (e.g., the end-item code)
and level 3 the lowest for this particular BOM. Note that the four clamps Operations
Management (C 20) constitute a subassembly that is combined with base (A 10) and two springs
(B 11) to complete the end-item bracket (Z 100). However, the same clamp (C 20) is also a
component of the base (A 10). To facilitate the calculation of net requirements, the product tree
has been restructured from where the clamp components might have been (shown dashed) to the
lower level consistent with the other (identical) clamp. This low-level coding enables the
computer to scan the product structure level-by-level, starting at the top, and obtain an accurate
and complete count of all components needed at one level before moving on to the next.
Bill of materials for Z 100 bracket is shown below:

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AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Fig. 3.20 Product structure tree

Table 3.25(a) Indented bill of materials

Bill of Materials

Item: Z 100 Bracket Level 0

Part No. Description NO. Level

C20 Clamp 4 2
E30 Handle 1 3
A10 Base 1 1
C20 Clamp 1 2
E30 Handle 1 3
D21 Housing 2 2
F31 Bearing 2 3
G32 Shaft 1 3
B11 Spring 2 1
3.10.2 SINGLE-LEVEL BOM
Table 3.25 (a) depicts a single-level bill of materials for Z 100 bracket. It is a less intuitive but
more F31efficient means of storing the information on computer. In the single-level bill each
entry (on the left) contains only an item or part number followed by a list of the part numbers
and quantities of components needed to make up the parent item only. This type of listing avoids
the searches for duplicate items down through several levels of a tree. On the other hand, it
necessitates that the computer search through many single-level bills to find all the components
that are included in a product that has several levels of code. Single-level bills frequently contain
“pointers” to link the records of components with their parents and accommodate the retrieval of
a complete bill of materials for an item.

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Table 3.25 (b)

Single-level BOM
Number Description
Zl00 Bracket
A10 (1) Base
B 11 (2) Spring
C20 (4) Clamp
Al0 Base
C20(1) Clamp
D21(2) Housing
C20 Clamp
E30 (1) Handle
D21 Housing
F31 (2) Bearing
G32(1) Shaft

Example 3.11: Determine the quantities of A10, B11, C20, D2l, E30, F3l, and G32 needed to
complete 50 of the Z100 brackets depicted in Fig. 3.2.
SOLUTION

Table 3.26
Determining BOM requirements
Component Dependency Effect Requirements

A (base) 1A per Z 1

B (spring) 2B’s per Z 2

C (clamp) (IC per A)’ (IA per Z) + (4C’s per Z) 5

D (housing) (2D’s per A)’ (IA per Z) 2

E (handle) (IE per C) (IC per A)’ (IA per Z) + (IE per C)’ (4C’s 5
per Z)
F (bearing) (2F’s per D) . (2D’s per A) . (IA per Z) 4

G (shaft) (IG per D) . (2D’s per A) . (lA per Z) 2

2
First determine the requirements for one bracket as shown in Table 9.2, and then multiply by 50.

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Note that parts C and E are used in two different subassemblies, so their separate amounts must
be summed. For 50 brackets, each of the requirements column amounts must be multiplied by 50
to obtain the gross requirements.
Example 3. 12: Given the product structure tree shown in Figure 3.21 for wheelbarrow
W099, develop an indented bill of materials.
Wheel barrow
W099

Box(1) HBA(1)
1011 1020 WHA(1) Paint(1)
1030 1042

Box(2) GRIPS(2) AXLE(1) BRNG(2) WHL(1)

2022 2025 2031
2032 2035

Fig. 3.21 Product structure tree

TIRE(1)
3026

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 27 Date: 03/9/2015 Period: VII

Topic: 89 MASTER SCHEDULING

Table 3.27
Part No. W099: Wheelbarrow Level: 0

Part No Description Quantity/Assembly Units Level

1011 Box: deep 1 Each 1
size,
aluminum
1020 Handlebar 1 Each 1
assembly
2022 Aluminum 2 Each 2
bars
2025 Grips: 2 Each 2
neoprene
1030 Wheel 1 Each 1
assembly
2031 Axle 1 Each 2
2032 Bearing: 2 Each 2
normal-duty
2035 Wheel 1 Each 2
2026 Tire: size A 1 Each 3
1042 Paint: blue 1 Print 1

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 28 Date: 4/9/2015 Period: V

Topic: MATERIAL REQUIREMENT PLANNING (MRP) & MRPII ,ERP

3.11 MATERIAL REQUIREMENT PLANNING (MRP)

MRP refers to the basic calculations used to determine components required from end item
requirements. It also refers to a broader information system that uses the dependence relationship
to plan and control manufacturing operations.
“Materials Requirement Planning (MRP) is a technique for determining the quantity and timing
for the acquisition of dependent demand items needed to satisfy master production schedule
requirements.”
3.11.1 Objectives of MRP
1. Inventory reduction: MRP determines how many components are required when they are
required in order to meet the master schedule. It helps to procure the materials/ components as
and when needed and thus avoid excessive build up of inventory.
2. Reduction in the manufacturing and delivery lead times: MRP identifies materials and
component quantities, timings when they are needed, availabilities and procurements and actions
required to meet delivery deadlines. MRP helps to avoid delays in production and priorities
production activities by putting due dates on customer job order.
3. Realistic delivery commitments: By using MRP, production can give marketing timely
information about likely delivery times to prospective customers.
4. Increased efficiency: MRP provides a close coordination among various work centers and
hence help to achieve uninterrupted flow of materials through the production line. This increases
the efficiency of production system.
3.11.2 MRP SYSTEM
The inputs to the MRP system are: (1) A master production schedule, (2) An inventory status
file and (3) Bill of materials (BOM). Using these three information sources, the MRP processing
logic (computer programme) provides three kinds of information (output) for each product
component: order release requirements, order rescheduling and planned orders.

Fig. 3.22 MRP system

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 28 Date: 4/9/2015 Period: V

Topic: MATERIAL REQUIREMENT PLANNING (MRP) & MRPII ,ERP

3.11.2.1. MASTER PRODUCTION SCHEDULE (MPS)

MPS is a series of time phased quantities for each item that a company produces, indicating how
many are to be produced and when. MPS is initially developed from firm customer orders or
from forecasts demand before MRP system begins to operate. The MRP system whatever the
master schedule demands and translates MPS end items into specific component requirements.
Many systems make a simulated trial run to determine whether the proposed master can be
satisfied.
3.11.2.2. INVENTORY STATUS FILE
Every inventory item being planned must have an inventory status file which gives complete and
up to date information on the on-hand quantities, gross requirements, scheduled receipts and
planned order releases for an item. It also includes planning information such as lot sizes, lead
times, safety stock levels and scrap allowances.
3.11.2.3. BILL OF MATERIALS (BOM)
BOM identifies how each end product is manufactured, specifying all subcomponents items,
their sequence of build up, their quantity in each finished unit and the work centers performing
the buildup sequence. This information is obtained from product design documents, workflow
analysis and other standard manufacturing information.
3.11.3 MRP LOGIC
Following are some of the terms frequently used on (computerized) MRP planning forms. Note,
however, that not all programs use the same terms or provide the same detail of information.
1. Gross requirements: Projected needs for raw materials, components, subassemblies, or
finished goods by the end of the period shown. Gross requirements come from the master
schedule (for end items) or from the combined needs of other items.
2. Scheduled receipts: Materials already on order from a vendor or in-house shop due to be
received at the beginning of the period. MRP form shows quantity and projected time of receipt.
(Note: Some MRP forms include planned receipts here too.)
3. On hand/available: The quantity of an item exacted to be available at the end of the time
period in which it is shown. This includes amount available from previous period plus planned-
order receipts and scheduled receipts less gross requirements.
On hand/available = on hand at end of previous period + receipts – gross requirements …....
4. Net requirements: Net amount needed in the period. This equals the gross requirements less
any projected inventory available from the previous period along with any scheduled receipts.
Net requirements = gross requirements – (on hand/available + scheduled receipts) ….........
5. Planned-order receipt: Materials that will be ordered from a vendor or in-house shop to be
received at the beginning of the period. Otherwise similar to a scheduled receipt.
3.11.4 BENEFITS AND DRAWBACKS OF MRP
MRP systems offer a number of potential benefits to manufacturing firms. Some of the main
benefits include helping production managers to minimize inventory levels and the associated
carrying costs, track material requirements, determine the most economical lot sizes for orders,
compute quantities needed as safety stock, allocate production time among various products, and
plan for future capacity needs. The information generated by MRP systems is useful in other
SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 28 Date: 4/9/2015 Period: V

Topic: MATERIAL REQUIREMENT PLANNING (MRP) & MRPII ,ERP

areas as well. There is a large range of people in a manufacturing company that may find the use
of information provided by an MRP system very helpful. Production planners are obvious users
of MRP, as are production managers, who must balance workloads across departments and make
decisions about scheduling work. Plant foremen, responsible for issuing work orders and
maintaining production schedules, also rely heavily on MRP output. Other users include
customer service representatives, who need to be able to provide projected delivery dates,
purchasing managers, and inventory managers.
MRP systems also have several potential drawbacks. First, MRP relies upon accurate
input information. If a small business has not maintained good inventory records or has not
updated its bills of materials with all relevant changes, it may encounter serious problems with
the outputs of its MRP system. The problems could range from missing parts and excessive order
quantities to schedule delays and missed delivery dates. At a minimum, an MRP system must
have an accurate master production schedule, good lead-time estimates, and current inventory
records in order to function effectively and produce useful information.
Another potential drawback associated with MRP is that the systems can be difficult,
time consuming, and costly to implement. Many businesses encounter resistance from employees
when they try to implement MRP. For example, employees who once got by with sloppy record
keeping may resent the discipline MRP requires. Or departments that became accustomed to
hoarding parts in case of inventory shortages might find it difficult to trust the system and let go
of that habit.
The key to making MRP implementation work is to provide training and education for all
affected employees. It is important early on to identify the key personnel whose power base will
be affected by a new MRP system. These people must be among the first to be convinced of the
merits of the new system so that they may buy into the plan. Key personnel must be convinced
that they personally will be better served by the new system than by any alternate system. One
way to improve employee acceptance of MRP systems is to adjust reward systems to reflect
production and inventory management goals.

3.11.4 MRP II
MRP II is a second-generation approach to planning that incorporates MRP. It has a broader
scope to manufacturing resource planning in that it links business planning, production planning,
and the master schedule.
In the 1970s, manufacturers began to recognize the importance of the difference between
independent demand which is relatively stable and dependent demand which is rather “lumpy”
by nature. Earlier EOQ models which worked well for independent demand items did not work
very well for the more “lumpy” dependent demand items. Hence, MRP was developed to handle
the more “lumpy” dependent demand items. Adjustments still have to be made under MRP, but it
was developed to handle seasonal variations better than the older EOQ models.
MRP II (Manufacturing Resource Planning) involves an effort to expand the scope of
production resource planning to include other functional areas of the firm in the planning process
such as marketing, finance, and purchasing. The integration of these areas in the formulation of
the resource plan allows the company to develop a plan that works and is acceptable to different
SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 28 Date: 4/9/2015 Period: V

Topic: MATERIAL REQUIREMENT PLANNING (MRP) & MRPII ,ERP

areas of the company. On the other hand ERP is an expanded effort to integrate standardized
record keeping that will permit information sharing among different departments in order to
make better decisions more rapidly and to manage the system more effectively. While MRP II
builds links between the overall business plan, aggregate plan and the master production
schedule, ERP attempts to link and synchronize various independent databases within the firm
and integrate them into one system.
3.11.5 ERP
ERP (Enterprise Resource Planning) is an integrated information system that is used to plan the
resources and processes needed to produce, ship and account for all customer orders both in
manufacturing and service organizations. Integration of databases permits standardization of
processes, allows easier access to information by various departments and more importantly
makes it possible to share information to make better and timely decisions in serving the
customers. For example, ERP would make it possible for departments such as accounting, sales,
production, materials management having immediate access and to new customer orders
within the same system. ERP would also allow the customer service representative to quickly
check various databases such as inventory, accounting, and marketing and production to
rapidly respond to questions from customers.
2. Following are ways ERP can improve a company’s business performance:
a) Improvements in order tracking and order fulfillment
b) Rapid completion of orders by customer service representatives due to easy access to
various databases within the firm
c) Rapid movement of an order through the organization
d) Improvement in data analysis to make better decisions due to improved software
capabilities and integration of the different databases within the company
3. Obstacles to implementing ERP include:
a) Getting employees and departments to cooperate and to agree to a new software system
b) Implementation problem due to lack of training
c) Technical problems involving the software
d) Consultant problems
4. ERP offers a natural platform to connect the firm's internal databases with e-commerce
operations of the company. However, due to specialized needs of e-commerce operations,
ERP vendors are unable to support all of the requirements and needs of Internet related
operations of the firm. The niche Internet software vendors provide firms with specialized
e-commerce software that is easy to hook-up and use. Both the ERP and specialized
software vendors assist companies with their e-commerce applications. In addition, ERP
also provides a natural platform to connect to the databases of suppliers, and customers on
the supply chain that permits sharing of information regarding sales forecasts, inventories,
SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND
AGGREGATE PLANNING
 B.Tech IV Year VII Semester (Shift - I) Subject: Operations Management (7ME5A)

Branch: Mechanical Engineering Prepared by: Mr. JAIPRAKASH BHAMNIYA

Lecture No: 28 Date: 4/9/2015 Period: V

Topic: MATERIAL REQUIREMENT PLANNING (MRP) & MRPII ,ERP

production plans, etc. The integration of databases between suppliers and customers assist
firms in making better decisions as a result of having additional information from their
suppliers and or their customers on the supply chain.

SBCET/ME/SEM-VII/OPERATIONS MANAGEMENT /UNIT- 3 FACILITY LOCATION PLANNING AND

AGGREGATE PLANNING