DESIGN OF PRODUCTION SYSTEMS

FACILITY LOCATION PLANNING

Introduction

Facilities location may be defined as selection of suitable location or site or place where the
factory or plant or facilities to be installed, where factory will start functioning. Plant or facility
location is the placement of a facility with respect to customers, suppliers, and other facilities
with which it interacts. The location is the general area and the site is the place selected within
location.

The problem of how many facilities to have and where they should be located is faced by service
and product organizations in both the public and private sectors. Banks, restaurants, recreation
agencies, and manufacturing companies are all concerned with the selection of sites that will best
enable them to meet their long-term goals. The success of location planning both affects and is
affected by organizing and control activities. Since the operations manager fixes many costs with
the location decision, both the efficiency and effectiveness of the conversion process are
dependent up on location. This decision leads to analyses with both modeling and behavioral
dimensions. This section will describe the facility location activities in brief.

Plant location is an important decision that decides the fate of the business. In the past, the
location decisions were based on the preferences of individual entrepreneurs and much
importance was not given to the selection of site. This resulted in failure of many organizations
which otherwise could have been successful. Government also became instrumental in the
selection of location for various industries in undeveloped areas by providing various investment
benefits and other incentives with the objective of industrialists to follow a more scientific and
logical approach towards the selection of site to establish their industries.

The degree of significance for the selection of location for any enterprise mainly depends on its
size and nature. From time to time, the nature of the product itself suggests some suitable
location. A small scale industry mainly selects the site where in accordance with its capacity, the
local market is available for its products. It can easily shift to other place when there is any
change in the market. But for large scale industries requiring huge amount of investment there
are many considerations other than the local demand in the selection of proper plant location.
These plant cannot be easily shifted to other places and an error of judgment in the site selection
can be very expensive to the organization.

Importance of Plant location

The success of the engineering business depends on the selection of the location. Therefore the
activity of plant location selection is an important activity which requires careful analysis. The
selection of location is of prime importance both for new and already established enterprises.
Fundamental objective of an enterprise is to maximize its profit which can be done either by
increasing sales or by reducing production cost. The choice of location is therefore vital for any
new firm for its success. If an industry (enterprise) is located near its potential market then the

1
organization can have better and up to date understanding of the market and thus can formulate
more effective production and marketing strategies to increase sales. The reduction in cost of
production is possible when a firm is located at a place where all kinds of production economies
with respect to input factors are available. In case the site for locating the plant is unfavorable the
business cannot be managed economically and profitably. Now it is obvious that the location
determines to great extent, the survival as well as prosperity of a business unit.

The reasons of the importance of site selection

 A good location may reduce the cost of production and distribution which ultimately
helps in raising competitive strength or the profit margin of business.
 Locating a business means large and permanent investment. In case of wrong selection all
money spent on factory building, machinery, and their installation will go in waste.
Possibility of great loss for the owner.
 Plant location fixes some of the physical factors of the overall plant design such as
heating and ventilation requirements, storage capacity for raw materials, taking into
consideration their local availability, transportation needed for raw-materials and finisher
goods, power needs, cost of labor, taxes, land construction, fuel etc.
 Plant location determines the nature of investment cost to be incurred and also the level
of many operating costs.
 Government sometimes plays an important role in the choice of the location keeping in
view the national benefits.
 Probably no location is so perfect as to guarantee success. But bad locations can be so
bad as to bankrupt a company.

When to select site to house the factory/plant?

There may be three conditions as follows:

1. While starting a new factory/enterprise
2. During the expansion of existing plant
3. When the existing plant is to be relocated at some other place to remove its drawbacks or
to gain the benefits of still better location.

Dynamic nature of factory (plant) location

It is very difficult to assume all of the locations as ideal ones for all of the time. With respect to
the changing need and business environment, very few locations may be appropriate for all of the
time. But most of the good locations of today may convert into an inferior one of tomorrow and
vice versa. Location study thus requires constant monitoring. Thus the problem of decision to
move or to stay at a particular location is always before the management specially when some
expansion program is undertaken. The shift of location of plant to some other place is known as
relocation. The relocation of plant may be required due to the following reasons:

1. Shifts in the structure of the market or movement of markets

2. Changes in the nature and costs of transportation
3. Changes in the costs and the availability of raw-materials
4. changes in the pricing policy of the enterprise

2
 5. undesirable labor situation
6. non-availability of labor, raise in labor costs, changes in other factors etc.
7. Demolition, compulsory purchase of premises or national legislation
8. relocation of various associated industries and plants
9. scientific discoveries/developments, new field of technology, increasing competition
etc.

Plant or facility location is the placement of a facility with respect to customers,

suppliers, and other facilities with which it interacts. The managers locating a
facility should consider:
 Operating costs at a location
 Costs to acquire the land and build the facility
 Labor costs, taxes and utilities
 Convenience of a particular location for customers as well as the cost to
transport materials to the facility and move finished products from the facility.

CAPACITY AND LOCATION DCISIONS

Capacity is the maximum output of a facility or conversion system in a given period and is
generally expressed as rate –volume of output per time period (e.g. the number of tons of steel
that can be produced per week, per month, or per year).

Choice of site for plant location

The problem of site selection of an industry (factory) can be solved in the following three stages:
1. Selection of the region
2. Selection of the locality
3. Selection of actual site

In general the geographical area of a country is divided based on natural regions or political
boundaries within the nation (five regions in Nepal, for example). Suitability of various regions
are considered on the basis of comparative cost advantages available out of the possible regions.
In general, availability and proximity of raw-materials, vicinity of the market, labor supply,
climatic conditions etc. are some of the major considerations in selecting the regions.

The specific locality is considered after the selection of region. Generally following alternatives
are open in selecting the locality within that particular region:

 Urban area
 Rural area
 Suburban area in the vicinity of the urban area

3
The comparative advantages of each locality are considered at this stage and actual site is
selected.
After the establishment of the manufacturing plant on the site, it is a long time commitment on
the capacity created i.e. capacity in terms of arrangement and development of raw-materials
resources, labor skills, market and distribution channels, and the adjustment with the
environment. Thus location of facilities for operations is a long-term capacity decision which
involves a long-term commitment about the geographically static factors that affect a business
organization. Some changes and adjustments in capacity-qualitatively and quantitatively –at the
location are always possible. However, in most of the cases, it is not easy to change the location
of operations base once it has been established.

The development of a location strategy depends up on the type of firm being considered. The
focus of industrial location analysis is on minimizing costs, retail and professional service
organizations typically have a focus of maximizing revenue. Warehouse location, on the other
hand, may be determined by a combination of cost and speed of delivery. The objective of
location strategy is to maximize the benefit of location to the firm.

Relationship of capacity and location decisions

Decisions about capacity are closely associated with the decisions about location. For example,
commercial banks simultaneously expand capacity and demand by building branch banks.
Decisions about the size and location of the branch are made according to projections about
neighbourhood population densities and growth, geographic locations of markets, transportation
flows, and the location of competitors. The addition of a new branch provides greater
convenience to some existing customers and, management hope, attract new customers as well. It
is obvious that this decision affects the revenues, operating costs, and capital costs of the
organization.

Critical Factors in Location Decision

Critical factors to be considered in general while selecting the location of the factory are as
follows:

1. Availability of raw-materials
2. Proximity to customers and markets
3. Availability of skilled labor (labor cost), living cost and labor stability
4. Transportation facilities
5. Communication facilities
6. Availability of utilities such as power, fuel and water
7. Climate conditions
8. Ancillary (auxiliary) industries
9. Tax system, financial and other aids (government support, facilities and industrial
incentives)
10. Business and commercial facilities
11. Educational facilities
12. Recreation facilities

4
State/ District Environment
A number of specific factors associated with the local state/district where a business might
locate, can be important to the location decision. These specific factors are as follows:

 climate
 available housing in different price ranges
 taxes
 financial health and institutions
 universities and research laboratories
 system of local government
 cultural and entertainment activities
 land use regulations and ordinance (law)
 educational system
 crime rates
 medical, fire and police services
 local population and available labor pool
 distance to convenient air service
 local road system and traffic
 shopping
 environmental, noise, and pollution regulations
 local attitudes towards business

Site characteristics

When locating a new site a business can either purchase or lease an (a) existing building or (b)
select a piece of land and construct a new facility. If a new facility is built, a range of factors
must be considered as follows:
 size of the space
 potential for expansion
 soil stability and content
 neighbourhood
 drainage
 direct access to roads,
 sewere and water connection
 utilities and costs.

FACTORS TO BE CONSIDERED IN IDENTIFYING LOCATIONAL INFORMATION

To identify the information related to particular site (location) (a) qualitative and (b) quantitative
factors are considered.

A. Qualitative Factors and their evaluation (intangible factors):

5
 1. Related to employees: availability of appropriate culture, recreational facilities,
educational facilities, library, banking, transport, housing facilities, medical, shopping,
etc facilities
2. Related to customers and competitors: availability of easy access of customers, quick
and quality products availability, quality spare parts availability, etc
3. Related to site: Requirement for present and future should be met. One can quantify
intangible factors on the basis of relative point values assigned to each factors for the
specific plant to be located. What often differs from one industry to another are the
weights assigned to these various factors. The size of the weight assigned to a factor
indicates its importance. For example, a primary factor in locating a fire station is its
“Response Time” to the buildings in that fire district. So response time should be
assigned a large weight.

B. Quantitative Factors and Their Evaluation (Tangible Factors)

The location decision usually involves commitment of large capital investment that normally
cannot be moved from one location to another. As a result, it should be viewed as a long-term
strategic decision. The quantifiable factors are given here:

 Costs associated with facility construction, production, overhead, etc.

 Costs on transportation to and from the facility, and communication
 Costs involved regarding availability of utilities at site (power, water, housing, waste
disposal, etc)
 Government incentives like tax rebate (refund), low interest loans, low taxes, etc.

The impact of location on costs:

The location decision plays an important role in shaping the cost function. The total cost
equation is:

TC = (VC) X + FC
Where
TC = Total Cost
VC = Variable cost per unit
X = the number of units produced.
FC = Fixed Costs.

Example of variable production costs:

 Labor (Rs.per hour)
 Material (Rs.per Kg)
 Utilities (Rs.per kilowatt hr), gas, electricity, water
 Transportation (Rs.per kg., Rs.per cu.m), railway, air, ship, land.

Facility overhead

Initial investment

6
  Land acquisition costs
 Building construction
 Plant start-up costs
 Initial employee training

The impact of location on revenue

It is possible that a plant’s location will influence the sales volume, as well as the selling price
per unit of a product.

The revenue function is:

TR = (SP) X

Where
TR = Total revenue
SP = Selling price per unit.
X = the number of unites sold

Example:
If a location is selected that has a higher cost, then a higher selling price may be needed. This can
affect the volume sold. A location that is convenient for customers can increase sales volume.

Dominant location factors in manufacturing

Five groups of factors dominate location decision for new U.S. manufacturing plants. In a
survey done in the 80’s, the percentage shown for each group represents the proportion of
respondents who picked it as a ‘must’ when considering new location.

1. Favorable labor climate (76%)

2. Proximity to markets (55%)
3. Quality of life (35%)
4. Proximity to suppliers and resources (31%)
5. Proximity to company’s other facilities (25%)

PLANT LOCATION DECISION-MAKING

Firms such as stores, fast food restaurants, hotels, and gasoline distributors locate new facilities
frequently. In these companies, they may make decisions at the department level or make
recommendations to higher levels of management for a final decision.

7
In other firms where the decision to locate or re-locate is made infrequently, the typical
procedure is to establish a committee, gather data, perhaps hire specialized consultants, meet
with representatives from possible sites, and eventually present a recommendation to top
management for a decision.

Analysis or evaluation methods

A variety of approaches, methods, and quantitative tools are available to make the location
decision. Several of the more important methods are reviewed here.

1. Factor Ratings Method:

One way to make the location decision is to assign weights to the critical factors considered
important. Each alterative site in evaluations are totaled for each site to provide insights into the
location decision.

Example: Factor Ratings for Location Alternatives

Factors Factor Rating Location Rating Product of

Rating
Tax advantages 4 8 32
Suitability of labor skills 3 2 6
Proximity to customers 3 6 18
Proximity to suppliers 5 2 10
Adequacy of water 1 3 3
Receptivity of community 5 4 20
Quality of educational system 4 1 4
Access to rail and air 3 10 30
transportation
Suitability of climate 2 7 14
Availability of power 2 6 12
Total Score 149

Factor rating is a decision procedure in which each alternative is rated according to each factor
relevant to the decision, and each factor is weighted according to importance.

Factor Rating Steps:

 List the most relevant factors – 1st column in above example.

 Each factor is rated, say from 1 (very low) to 5 (very high)- column 2nd in above example.
 Each location is rated, say from 1 (very low) to 10 (very high) according to its merits on
each characteristics (column 3 in example).
 Factor rating is multiplied by the location rating for each factor- column 4 in above
example.

8
  Total Score is calculated for that particular location.

Remark: total scores indicate which alternative locations are most promising, considering of all
various location factor.

2. Economic Survey of Site Selection

(a) Computation of investment and cost of production and distribution.

(b) Rate of return

Determination of costs of production & distribution, an example:

Location A B C

Land      

Building      

Improvement      

Equipment      

Total
Fixed Investment Rs… Rs… Rs…

Raw materials:
Fuel & Power:-
(a) coal
(b) water
(c )gas
(d) oil

Factory expenses
(a) labor
(b) supervision
(c ) inspection
(d) testing, etc.

9
 General expenses: A B C

(a) administration
(b) salaries
(c ) inspection
(d) insurance
(e) postage, etc.

Distribution expenses:      
(a) advertising
(b) packing
(c ) stocking
(d) transport, sales,
etc.

Total cost/unit Rs… Rs… Rs…

Computation of rate of return, as an example:

Rate of return (in %) =

(Total sales – Total expenses)/ (Total investment) x 100.

Problem:

Calculate the rate of return for the following

data for location A & B.

Particulars Site A Site B

• Total investment 30,00,000 30,00,000

• Total sales 45,00,000 37,50,000
• Total expenses 28,00,000 32,00,000
(variable costs)
(Answer: A = 56.66 %, B = 18.33 %)

Which site is more advantageous and why?

10
Break-even Analysis (BEA):

BEA is a graphical and algebraic representation of the relationships among volume of

output, costs, and revenues. There is an increase in costs and revenues as the volume of
output from a plant (facility) increases. Costs can generally be divided in to two categories:

(a) fixed costs and

(b) variable costs.

Fixed costs are those incurred regardless of output volume such as heating, lighting, and
administrative expenses. These costs are same whether one or one thousand units of output
are produced.

Variable costs are those that fluctuate directly with volume of output. Higher output results
in higher total variable costs. Lower output results in lower variable costs. In general, they
are the costs associated with direct labor and material.

Determination of Break Even Point (BEP), an example:

Plant Location A (high FC and low VC) Plant Location B (high VC and low FC)
Cost Cost
TR
TR
RPP RP

TC
TC
RL

VC RL
VC

FC

FC

Vbep OV Vbe OV
p
Vbep = BEP FC = Fixed Cost VC = Variable Cost TC = Total Cost
TR = Total Revenue RP = Region of Profit RL = Region of Loss
OV = Output Volume

11
In above diagrams the total revenues and total costs are shown as linear functions of output
volume. From above diagram, it is clear that costs exceed revenues in the initial stages of output
up to point Vbep. Point Vbep is the BEP, the level of volume for which total costs equal total
revenues. Thereafter, revenues exceed costs of operation.

Break-even analysis identifies the level of output that must be reached in order to recover
through revenues all the costs of operation. BEP depends on the selling price of the product and
the operating cost structure. Some of the conversion processes require high fixed costs –that is,
large capital outlays and high overhead expenses- but low unit variable costs. They require a
large volume of output to reach break even, but obce they have attained it, profitability increases
rapidly. Other conversion processes have low fixed costs and high unit variable costs. The above
diagram shows both kinds of cost structures.

12
 Production function for selected firms:

Organization Basic inputs Demand Conversion products Rem

Automobile Labor, capital, Forecasts Fabrication and Autos ands

manufacturer material, assembly other vehicles,
energy services such as
financing and
warranties.

Fast food Labor, capital, Counter Cooking and Sandwiches,

restaurant material, customer preparation fries, drinks,
energy friendly
efficiently
service,
Hospital Labor, capital, Ill or injured Health care Healthy people.
material, people
energy.
University Labor, capital, Applications for Teaching and Graduates and
material, enrollment research new knowledge
energy. (articles, books,
papers, etc.

Bank Labor, capital, Customer Financial Loans, checking

material, requirements analysis, accounts,
energy decision savings plans
making, record
keeping

City park and Labor, capital, Voter Construction Softball leagues

recreation material, preferences, and special events,
department energy enrollments, maintenance of park facilities
visitations parks,
operations of
programs

Home builder Labor, capital, Customer order Construction Houses

material, activities
energy
Airline Labor, capital, Ticket sales, Aircraft Transported
material, shipping scheduling, freight and
energy requests operation, and passengers,
maintenance friendly service.

13
Products Equals Goods and Services

 All non-manufacturing organizations acquire inputs of people, materials and equipment.

They convert them into outputs (in this case services), and deliver them to their
customers. This is true foe banks, hospitals, public utilities, restaurants, counseling
services, state parks, military bases, barber shops, bookstores, trucking firms, libraries,
health clubs, and, of course universities. Each firm must respond to a demand or
customer order in some form.

 Large manufacturing companies are related to produce products to meet the forecasts of
anticipated customer needs. For example: automobiles, furniture, food products, and
books are all products.

 The term products is a more efficient way of saying the cumbersome phrase goods and
services. More importantly, it helps us deal with manufacturing and service firms within
the same framework.

Why Study Production/ Operations Management?

 To develop a level of expertise in operations management graduates. The success of all

types of organizations depends on the knowledge and talent of its managers.

 The operation and control of the production process –whether producing hamburgers,
automobiles, or insurance policies-is demanding work, requiring talent, skill, and a desire
to get the job done right and on time. The people who manage the direct work process
derive great satisfaction from seeing the results of their efforts in terms of goods shipped
and service delivered.

 The POM relates to the laws of supply and demand. As the need continues to grow in
service industries for people who can plan, schedule, and control, the market for POM
graduates will remain stable. In many international universities, POM graduates receive
more job offer at higher salaries than any of their peers.

 The knowledge of the special problems and issues in POM enhances the effectiveness of
the accountant, the marketing manager, the financial analyst, or the personnel specialist.
An integrated system approach based upon an understanding and appreciation of all
business functions is the goal of every organization.

The Production Function

Every organization has a production function, just as it has a finance function and a marketing
function. Finance is concerned with the acquisition and use of funds. The marketing is focused
on selling and distributing the products and services. The production function is the third side of
this triangle, for it uses the funds acquired by finance to buy raw materials, machines, and labor,
and converts these into products and services that marketing can sell.

14
Main parts of production functions are: inputs, conversion, outputs and environment.

Functions of Production/ Operations Management

The process of converting inputs into outputs requires certain functions to be performed.
Such as design functions, control functions, etc.

Some of the important functions are listed below:

 Product design and development:

Innovations in complete detail, ready for manufacture is the result of detail design,
manufacturing, testing and correction of prototype. The original idea may be creative, but the
development of that idea into a marketable product requires a systematic, scientific study
involving diligent work and attention to detail.

Most of the companies have research and development departments that study new products
and new processes to produce them.

In service industries, product development means determining the specifications of the

service and how it is to be delivered. Services should be specified in terms of level of service,
line of service, hours of availability, and many other, more detailed characteristics if the
organization is to be competitive.

 Facilities location:
 Capital equipment
 Facilities layout
 Work Design and Measurement
 Production Forecasting:
 Production Planning and Scheduling:
 Purchasing/ Materials Management
 Inventory Management:
 Quality Control

Types of Manufacturing

Manufacturing firms can be classified according to size, type of product, location and many other
variables. A general classification is given below:

1. Job-Shop Production

Job shops do work on many different products in small lot sizes rather than manufacturing the
same product continuously. For example in a print shop, the press is set up to run one job, when
that is completed, the press is set up for next job. Each work area in the job shop performs its
function on each job as it arrives.

15
One of the major problems in a job shop production is scheduling the work in the proper amount
and sequence to balance the costs of idle time against the costs of having jobs waiting.

The resources in a job shop are general rather than specialized. Basic materials can be used in
many different jobs with different specifications. Equipment should be adaptable to different
uses. Similarly the skills of the employees should be broad enough to allow them to work on any
job within their area.

2. Repetitive Production:

Repetitive manufacturing is associated with a moving assembly line. It involves high volume
production of discrete units such as automobiles, pencils, chairs, or bicycles. When the volume
for one item is high enough, repetitive manufacture is more economical than the job shop
method. Specialized materials, equipment, and skills are employed to produce this one item and
are not used on anything else.

The automobile industry is a good example of repetitive manufacturing. The lot size for a given
model may be in the hundreds of thousands, and the production run will be almost one year.
Specialized equipment is built to perform a task on this particular model, and workers are trained
to be responsible for only one job.

The critical problem is repetitive production is not daily scheduling, but setting up and balancing
the jobs so the process will run smoothly and efficiently.

Intermittent Production:

The intermediate level of production between job shop and repetitive production is intermittent
production. Production runs in this types of manufacturing are longer than in a job shop but not
as long as in repetitive production. Equipment is set up to run a job for several weeks and then is
changed for a run of another product. Toy manufacturers, food processors, and some clothing
manufacturers are examples of intermittent production.

3. Flow Process Production

It is characterized by the continuous flow required by production technology. The petroleum

industry, for example does not produce discrete units, it transforms crude oil into various end
products through a process that rarely stops. Individual operations don’t exist. The input
gradually is converted to outputs. Because of these special characteristics, a strong emphasis is
placed on design and planning. Once the process begins, replanning is seldom possible, so the
process is carefully monitored and controlled to adhere to the original plan.
4. Project Production

Project production is employed when only one very complex unit is being produced. Examples
are: building construction, shipbuilding, missile programs, etc.

16
Types of services

The above classification of production methods applies to manufacturing firms, but, to some
extent, it can be applied to services. For example, some aspects of food service resemble an
assembly line in repetitive production (such as preparing identical plates for airline meals), while
others more nearly resemble a job shop (as in preparing batches of salads or desserts in a
restaurant). Similarly, a wedding banquet for 250 people could be considered a “project” and
employ many of the planning and scheduling techniques of project management. To the extent
that a service firm approximates the characteristics and shares the problems of a given type of
manufacturing firm, it probably can employ the problem solving methodology already used in
the other firms in that category. A more useful classification of services, however, is based on a
typology with two dimensions:
(1) The degree to which a tangible product is produced as part of the service and
(2) The requirement of the presence of the customer for the service to be delivered. See
the following chart of a typology of Services.

A Typology of Services

CUSTOMER CONTACT

Present Not Present

Physical Products PSEUDOMANUFACTURING PRODUCT DELIVERY

 Food Services  Mail-order
 Retailing Catalogues
 Publishing  Transportation
 Retails /Shipping
 Stock brokering
 Insurance
TANGIBILITY
PERSONAL SERVICE ABSENTEE SERVICE
 Counseling  Lawn care
No Physical Product  Health care  Auto repair
 Education  Security protection
 Physical fitness  Custodial service

Goals of Production/Operation Management

17
To remain economically viable, a firm must convert inputs into outputs effectively and
efficiently. It must be concerned with both the unit cost of its products and the contribution of its
products to profit. The major goals of production/operation management are discussed below:

 Effectiveness:

The degree to which the purpose of an organization is achieved is termed as effectiveness. The
purpose of a firm in the transportation industry is to move materials, people, or both. The more it
moves, the more effective it is. Effectiveness requires eliminating unnecessary activities and
outputs that fail to meet the quality standard. It is a combination, therefore, of how much and
how well the output of the firm confirms to the purpose of the organization.

Effectiveness can be measured by sales, market share, consumer opinion, and other global
measures, as well as by comparing specific results to specific company objectives.

 Efficiency

Efficiency is the ratio of output to input. It refers to how fast the output is produced and how
many resources are consumed. Efficiency generally relates to reducing waste – of time, effort
and materials. Greater efficiency can result through technical changes, such as better, faster
machines, through managerial changes such as better planning, scheduling, and control
activities. Another way of increasing efficiency is through behavioral changes in workers,
such as working smarter or working harder. Improved efficiency means greater output for a
given amount of resources, which leads to greater benefits for all concerned.

 Unit cost

One of the best “how are we doing?” measures available to a production manager is unit cost. If
the production manager is doing a good job of controlling the quantity, quality, and price of the
inputs and is carefully planning, scheduling, and controlling the process, those efforts will be
reflected in a favorable unit cost. One must be wary, however, because many different
accounting methods exist to determine unit cost. In making comparisons between firms or
divisions or from year to year, one should use comparable accounting procedures.

 Contribution to profit

Profit is one of the major objectives of the firm. Therefore contributions to profit should be
recognized. When comparing one product line with another or one division with another,
measures of unit cost, efficiency, or effectiveness may not be meaningful. Contribution to profit
– the excess of revenue over costs – can determine whether a product line should be expanded or
discontinued. Contribution to profit also can be a factor in decisions regarding new capital
equipment, plant location, research and development activities, and other areas in which
efficiency measures are incomplete or inappropriate.

 Productivity

18
The total productivity is the total of all outputs divided by the total of all inputs. However, this
measure seldom is found because of the difficult of identifying and measuring all these factors in
some common unit of measurement. We usually deal with partial measures, such as labor
productivity, capital productivity, or material productivity.

Productivity differs from efficiency in that efficiency seeks the maximum output from a given
amount of resources. Productivity looks for the maximum ratio between the two and, thus, can
involve a change in the output, the input, or both.

Productivity is critically important to individual business firm and to the economy as a whole.
To remain profitable, a firm must maintain or improve its productivity. Improvements in a firm’s
productivity will lead to improved unit cost, profit, and return on investment. At the national
level, improvements in productivity means less inflation, better use of natural resources, and a
stronger position in the world market.

 Responsiveness

Rapid response rate is required in the world of fast changing technology and intense
international competition. Firms must develop new products and get those products to market
quickly. Being late in the market for a highly competitive new product might be much more
costly to the manufacturing firm than even a significant overrun in research and development
cost would be.

Efficiency, effectiveness, unit cost, and all the other criteria depend in part on the flexibility
of the firm and its ability to respond quickly. For example, inventories can be greatly reduced
without affecting customer service if the firm can restock its shelves in days instead of
waiting weeks or months.

 Environmental Responsibility

Every business firm operates within five environments as listed below:

1. Legal
2. Social
3. Economic
4. Technological
5. Physical.

The responsibility of the firm spans all of these. It is obligated to obey laws and regulations,
operate in an ethical and socially responsible manner, and to help protect the physical
environment upon which we all depend.

Virtually every sub-function of operations management has implications for the environment
and for the constituencies that the firm serves. Product design, for example, must consider safety
features such as guards on power tools, regardless of whether they are required by law.

19
Scheduling decisions can enhance or disrupt the personal lives of employees, and quality control
decisions can affect the health and safety of both employees and customers.

Design of Production System:

Plant location

Points to be considered for plant location decision

1. Raw Materials and Markets

2. Labor costs, Living Costs, Labor Stability

3. Power, fuel and water

4. Taxation, national and local climate

5. Analysis of Communities

6. Community government and infrastructure

7. Incentives for new industries

8. Transportation Facilities

9. Educational, recreational and civic facilities

10. Population Statistics

20
 The managers locating a facility should consider

- Operating costs at a location

- Costs to acquire the land and build the facility

- Labor costs, taxes and utilities

- Convenience of a particular location for customers as well as the cost

to transport materials to the facility and move finished products from
the facility.

Example:

A primary factor in locating a fire station is its “Response Time” to the buildings in
that fire district. So response time should be assigned a large weight.

Factors affecting the location decision

a) Quantitative Factors

b) Qualitative Factors

Quantitative Factors:

 Costs associated with facility construction, production, overhead, etc.

 Transportation to and from the facility

 Government incentives like tax rebate (refund), low interest loans,

low taxes, etc.

21
The impact of location on costs:

The location decision plays an important role in shaping the cost function. The
total cost equation is:

TC = (VC) X + FC
Where
TC = Total Cost
VC = Variable cost per unit
X = the number of units produced.
FC = Fixed Costs.

Example of variable production costs:

 Labor (Rs per hour)

 Material (Rs.per Kg)

 Utilities (Rs. per kilowatt hr), gas, electricity, water

 Transportation (Rs. per kg. Rs. per cu. m), railway, air, ship, land.

Facility overhead:

Initial investment

 Land acquisition costs

 Building construction
 Plant start-up costs
 Initial employee training

22
The impact of location on revenue (income):

The revenue function is:

TR = (SP) X

Where

TR = Total revenue
SP = Selling price per unit.
X = the number of unites sold

Example:

If a location is selected that has a higher cost, then a higher selling price may be
needed. This can affect the volume sold. A location that is convenient for
customers can increase sales volume.

Dominant location factors in manufacturing:

Five groups of factors dominate location decision for new U.S. manufacturing
plants. In a survey done in the 80’s, the percentage shown for each group
represents the proportion of respondents who picked it as a ‘must’ when
considering new location.

 Favorable labor climate (76%)

 Proximity (nearness) to markets (55%)

 Quality of life (35%)

 Proximity to suppliers and resources (31%)

23
  Proximity to company’s other facilities (25%)

Qualitative Factors:

Qualitative factors are also affected by location decision. Although their direct
impact on profits is usually not measurable, these factors need to be carefully
considered and integrated into the decision by management.

 Recreational (entertaining) facilities

 Educational facilities
 Banking facilities.

Plant location decision-making:

Question for thinking: Discuss whether the Jhimruk Hydro-electric Project located
properly?

 Weighted factor Method.

 Break-Even Analysis

Breakeven analysis

Another approach is to make a location breakeven analysis. First relevant fixed and variable
costs are determined for each proposed location. Next the total cost curves for each alternative
are plotted on a single graph. Then, based on forecasted level of activity, the alternative location
with the lowest total cost is selected.

In this example, projected volume of VI would lead to the selection of site A. In general, site A is
best for high volumes, D for intermediate levels, and C for low volume. Site B would never be
chosen by this method, because it is never the low cost alternative.

24
 Weighted factor Method.

One way to make the location decision is to assign weights to the regional,
community, and site factors considered important. Each alterative site is evaluated
on each factor, evaluations are multiplied by the weights, and the weighted
evaluations are totaled for each site to provide insights into the location decision.

Example 1: Weighted Factor Analysis of Locations

FACTORS (weights)

Land Possible Transportation Total

Cost Expansion Availability Amenities Weighted
SITES (.40) (.10) (.30) (.20) Factor

Industrial Park
Evaluation 8 5 8 8
Weighted 3.2 0.5 2.4 1.6 7.7

Rural
Evaluation 10 10 4 1
Weighted 4.0 1.0 1.2 0.2 6.4

Central City
Evaluation 2 0 10 6
Weighted 0.8 0.0 3.0 1.2 5.0

Suburban
Evaluation 6 5 6 10
Weighted 2.4 0.5 1.8 2.0 6.7

25
Production function for selected firms:

Organization Basic inputs Demand Conversion products Rem

Automobile Labor, capital, Forecasts Fabrication and Autos ands

manufacturer material, assembly other vehicles,
energy services such as
financing and
warranties.
Fast food Labor, capital, Counter Cooking and Sandwiches,
restaurant material, customer preparation fries, drinks,
energy friendly
efficiently
service,
Hospital Labor, capital, Ill or injured Health care Healthy people.
material, people
energy.
University Labor, capital, Applications for Teaching and Graduates and
material, enrollment research new knowledge
energy. (articles, books,
papers, etc.

Bank Labor, capital, Customer Financial Loans, checking

material, requirements analysis, accounts,
energy decision- savings plans
making, record
keeping.
City park and Labor, capital, Voter Construction Softball leagues
recreation material, preferences, and special events,
department energy enrollments, maintenance of park facilities
visitations parks,
operations of
programs

Home builder Labor, capital, Customer order Construction Houses

material, activities

26
 energy
Airline Labor, capital, Ticket sales, Aircraft Transported
material, shipping scheduling, freight and
energy requests operation, and passengers,
maintenance friendly service.

Functions of Production/ Operations Management:

Some of the important functions are listed below:

 Product design and development:

 Facilities location:

 Capital equipment

 Facilities layout

 Work Design and Measurement

 Production Forecasting:

 Production Planning and Scheduling:

 Purchasing/ Materials Management

 Inventory Management:

 Quality Control

Types of Manufacturing:
1. Job-Shop Production:
2. Repetitive Production:
3. Intermittent Production:
4. Flow Process Production:
5. Project Production:

27
Types of services:

A more useful classification of services, however, is based on a typology with two

dimensions:

 The degree to which a tangible product is produced as part of the service

and

 The requirement of the presence of the customer for the service to be

delivered. See the following chart of a typology of Services.

A Typology of Services

CUSTOMER CONTACT
Present Not Present

Physical Products PSEUDOMANUFACTURING PRODUCT DELIVERY

 Food Services  Mail-order
 Retailing Catalogues
 Publishing  Transportation
 Retails /Shipping
 Stock brokering
 Insurance
TANGIBILITY
PERSONAL SERVICE ABSENTEE SERVICE
 Counseling  Lawn care
No Physical Product  Health care  Auto repair
 Education  Security protection
 Physical fitness  Custodial service

Goals of Production/Operation Management:

 Effectiveness:

The degree to which the purpose of an organization is achieved is termed as

effectiveness.

28
Effectiveness can be measured by sales, market share, consumer opinion, and other
global measures, as well as by comparing specific results to specific company
objectives.

 Efficiency

Efficiency is the ratio of output to input. It refers to how fast the output is
produced and how many resources are consumed. Efficiency generally relates
to reducing waste – of time, effort and materials.

 Unit cost

 Contribution to profit

Profit is one of the major objectives of the firm. Therefore contributions to profit
should be recognized.

 Productivity

The total productivity is the total of all outputs divided by the total of all inputs.

Productivity differs from efficiency in that efficiency seeks the maximum output
from a given amount of resources.

 Responsiveness

Rapid response rate is required in the world of fast changing technology and
intense international competition.

29