OPERATION MANAGEMENT

Course Leader: Dr. B Dayal

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Chapter 02

Location Of Production & Service Facilities

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Lecture 2: Location of Production & Service Facilities

● Introduction
● Reason for location changes
● General factors influencing location
● Specific factors for manufacturing and service organisations
● Comparison of rural and urban sites
● General procedure for facility location
● Facility location models

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INTRODUCTION
● The problem of how many facilities to have and where they should be
located is encountered by service and product organization in both the
public and private sectors. Banks, restaurants, recreation agencies, and
manufacturing companies are all concerned with selecting sites that will
best enable them to meet their long-term goals. Since the operation
managers fixes many costs with the location decision, both the efficiency
and effectiveness of the conversion process are dependent upon location.

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INTRODUCTION
● Location and Costs. Because location is such a significant cost and
revenue driver, location often has the power to make (or break) a
company’s business strategy. Key multinationals in every major industry,
from automobiles to cellular phones, now have or are planning a presence
in each of their major markets. Location decisions to support a low-cost
strategy require particularly careful consideration.

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REASONS FOR LOCATION CHANGES
Different situations for location change could be:
● A new plant is just being started,
● A new branch of an existing plant is to be located, or
● A new location for an existing plant is being sought.

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REASONS FOR LOCATION CHANGES
In addition to the need for greater capacity, there are other reasons for
changing or adding locations:
● Changes in resources may occur. The cost or availability of labor, raw
materials, and supporting resources (such as subcontractors) may change.
● The geography of demand may shift. As product markets change, it may
be desirable to change facility location to provide better service to
customers.
● Some companies may merge, making facilities location redundant.
● New products may be introduced, changing the availability of resources
and markets.
● Political and economic conditions may change.

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REASONS FOR LOCATION CHANGES
● Location decision should be based on long range policy and forecasts, e.g.
company’s expansion policy, anticipated diversification of products,
changing markets, changing sources of raw materials, etc.
● Other decisions to be made before a plant selection/construction are:
a) products or services to be made or offered in the plant,
b) type of equipment required,
c) type of structure needed, and
d) location of the plant.

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GENERAL FACTORS INFLUENCING LOCATION
The factors to be taken into account depend on the type of industry to be
located. Thus the factors important for locating a steel plant may be different
from the factors to be considered in locating a computer assembly plant.
However, the general factors affecting the location of plant or facility are as
mentioned below.

CONTROLLABLE FACTORS
1. Proximity to markets
● Plant should be located nearer to the consumers’ market. Plants related to
cement, bricks, roofing, and gypsum board are located nearer to the
market. However, for those companies producing items like fountain pens,
jewelry, and watches in which the costs of materials and labor are high,
shipping costs are of secondary importance, and the location of plant is
not on the basis of proximity of markets. 10
GENERAL FACTORS INFLUENCING LOCATION
CONTROLLABLE FACTORS (Continued)
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labour and wages
6. External economies
7. Capital

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GENERAL FACTORS INFLUENCING LOCATION
UNCONTROLLABLE FACTORS
8. Government policy
9. Climate conditions
10. Supporting industries and services
11. Community and labour attitudes
12. Community Infrastructure

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GENERAL FACTORS INFLUENCING LOCATION
Proximity to Good Highways
● This consists of the quality of highway system, its relationship to markets,
raw materials, and labor supply. It is obvious that availability of inter state
super highways makes the suburbs, small communities, and country easily
accessible.

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GENERAL FACTORS INFLUENCING LOCATION
Abundant Labor Supply
● It is always preferable to locate the plant in an area where skilled, semi-skilled,
an unskilled labor are available. This explains why the glass and bangles
industries are located in Firozabad (India) where skilled manpower in this field
are available. The same reasons are true for carpets industry in Mirzapur, and
silk sarees in Kanziwaram. It is also desirable to have no labor problem.
Location of facility will also depend on the prevalent wage rate, facilities for
labor, history of relationship between trade-union and management in the area
under consideration. Rural labors can be hired at lower wages
and Steel industry needs a lot of rural labor. Perhaps this is why
most of the steel plants in India are located in rural areas.

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GENERAL FACTORS INFLUENCING LOCATION
Availability of Suitable Land and Land Cost
● Cost of land is usually a minor factor in the location of a plant. In the
communities that are interested in attracting new plants, land may be
offered at a reduced price or at no cost, which may influence some plants
to locate there.
Adequate Water Supply
● Water is necessary for almost all kinds of plants. However,
some plants heavily depend on water supply. For example,
thermal power plant, Hydroelectric power plant, steel plant
need lots of water for its day to day operation. This needs
the plant to be located nearer to the water sources like
lake or river.

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GENERAL FACTORS INFLUENCING LOCATION
Nearness to Raw Materials and Suppliers
● In general, bulky or perishable products manufacturing companies are located
near to the source of the raw materials. For example, food processing industry
should be located nearer to canning factories, meat packing plants and
creameries. Firms locate near their suppliers because of the perishability of raw
materials and products, and transportation costs. Bakeries, dairy plants, and
frozen seafood processors deal with perishable raw materials, so they often
locate themselves close to suppliers
Transportation
● Some companies find it desirable to be located near the
seaport or near one of the inland waterways to take advantage
of the lower cost of transporting materials (e.g., coal, iron ore,
petroleum products, etc.) by boat, barge, or ship. Access to
railroad or trucking facilities is also desirable.
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GENERAL FACTORS INFLUENCING LOCATION
Community Administration and Attitude
● Local authorities and people should be willing to have the plant located in their
area. Community should also provide the necessary municipal services, e.g.
police and fire protection, maintenance of streets, waste disposal, etc. Worker
attitude may also differ from country to country, region to region, and small
town to city. Worker views about turnover, unions, and absenteeism are all
relevant factors.
Schools, Churches, Parks, and Residential Area
● It makes sense to pick up a town or locality that will provide the
best services and living conditions for their employees and their
families. Excellent schools, parks, hospitals, residential areas, etc.
should be desirable.

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GENERAL FACTORS INFLUENCING LOCATION
National Defense
● Industry related to defense or military hardware should be located on the basis
of national defense interest and may preferably be away from the country’s
borders.
Space for Future Expansions
● Demand of products is dynamic in nature. It may be required to increase the
production capacity of the plant in future if the demand increases or change
the product altogether if the demand is very low. Thus, there should be an
adequate space for future expansion or diversification of the plant.

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GENERAL FACTORS INFLUENCING LOCATION
● Climate
Companies requiring controlled temperature, humidity, and ventilation should
consider the climatic factor while locating the plant. For example, textile factories
in India needing high humidity are located in Maharashtra, Gujarat, etc which are
near the sea coast and have adequate humidity for the textile mills. Even the
choice of the executives may affect the plant location.

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Specific Locational Factors for Manufacturing Organisation

DOMINANT FACTORS
1. Favourable labour climate
2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs
● Specific Locational Factors for Service Organisation
DOMINANT FACTORS
● The factors considered for manufacturers are also applied to
service providers, with one important addition — the impact of
location on sales and customer satisfaction. Customers usually
look about how close a service facility is, particularly if the
process requires considerable customer contact.

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 Comparison of Rural and Urban sites
Urban site (located in city) Rural site (located in village)

Very well connected by rail, roads, and air Just the opposite. Rural sites are not easily
accessible.
Provides good market for the final products Products need to be transported to some
nearby markets.
Labor force with right kind of skill may be Mostly labor force of low skill or no skill are
available available.
Power and water available in adequate Water may be adequate but one may not be
quantity lucky with the power supply.

Good hospitals, marketing centers, schools, Almost nothing of this sort exists on rural
banks, recreation clubs, etc. are available. site.

Training centers available for all kinds of No such facility exists here.
labor force.

Services of experts, specialists available Can’t think of such facility in rural sites.
from other companies or consultants.

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 Comparison of Rural and Urban sites
Urban site (located in city) Rural site (located in village)

Ancillary units available to support the main This may exist in rural sites too.
plant

Land for the building is limited and costly Land is cheaper and available in plenty.

Local taxes are high Taxes are low.

Expansion of industry may be difficult Expansion and diversification will not be
challenged by land availability.

Labor cost is high Labor cost is cheap.

Union labor problems related may be more, This problem is not so acute in rural sites
employer-employees relation not good. because the labor union may not be as right
conscious as their urban counterparts.

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DISCUSSION POINT
- You as Operation manager have to suggest to your
stakeholders the best location for juice production
out of these three locations.
- A. Dukom
- B. Awash
- C. Chaki
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(Please discuss your thoughts on the LMS discussion

board) 23
GENERAL PROCEDURES FOR FACILITY LOCATION
PRELIMINARY SCREENING
● It consists of decision about:
a) Zone to which the plant should belong,
b) Region in which it should be placed, and
c) The exact site where the plant be erected.
● A preliminary screening to identify feasible sites begins the planning process.
For some kinds of facilities, particular environmental or labor considerations are
crucial. Breweries, for example, need an adequate supply of clear water. Aircraft
manufacturers must be located near a variety of subcontractors; and basic
aluminum producers need electrical power and aluminum ores.
o Sources of Information
o Detailed Analysis

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GENERAL PROCEDURES FOR FACILITY LOCATION
Sources of Information
● After identifying several key location requirements, management starts
looking for alternative locations that are consistent with these
requirements. The possible sources of information could be: local
chambers of commerce and industries, local communities, relevant
ministries, Government agencies, and trade journals. The data available
with these wings could be geographic breakdowns of labor availability,
population, transportation facilities, types of commerce, and similar
information.

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GENERAL PROCEDURES FOR FACILITY LOCATION
Detailed Analysis
● Once the preliminary screening narrows down the alternative sites to just
a few, more detailed analysis begins. At each potential site a labor survey
may be conducted to assess the local skills. Community response can be
obtained by survey. Community response is important, for example, in
deciding where to locate a nuclear reactor, recreation area, commercial
bank, state prison, or restaurant. Among the many considerations, each
company must identify which ones are most pertinent for their location
strategies.

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GENERAL PROCEDURES FOR FACILITY LOCATION
SELECTION OF EXACT SITE
● Drainage
● Will the area drain away all surface water so that the buildings or
work area will not be flooded?
● Parking space
● Is adequate space available to provide for employees and visitors’
vehicles parking?
● Space for expansion
● Is enough space available for future expansion of the plant?

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GENERAL PROCEDURES FOR FACILITY LOCATION
SELECTION OF EXACT SITE
● Accessibility by workers
● Can the sites be reached by public transport ?
● Is the road and street network suitable for speedy
entrance and exit of employees during rush hours or
emergency?
● Existing buildings
● Are the existing buildings suitable for company’s operation on
rent or final purchase basis?

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FACTORS RATINGS
Factor ratings are used to evaluate location alternatives because:
● Their simplicity helps decide why one site is better than another;
● They enable managers to bring diverse locational considerations into the
evaluation process; and
● They foster consistency of judgment about location alternatives.

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FACTORS RATINGS
The following steps are involved in factor rating:
● Develop a list of relevant factors.
● Assign a weight to each factor to indicate its relative importance (weights
may total 1.00).
● Assign a common scale to each factor (e.g., 0 to 100 points), and designate
any minimums.
● Score each potential location according to the designated scale, and
multiply the scores by the weights.
● Total the points for each location, and choose the location
with the maximum points.

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FACTORS RATINGS
Example:
● A glass company is evaluating four locations A, B, C, and D for a new plant
and has weighted the relevant factors as shown in Table Scores have been
assigned with higher values indicative of preferred conditions. Using these
scores, develop a qualitative factor comparison for the four locations.

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 FACTORS RATINGS
A B C D

Relevant Assigned Score Weighted Score Weighted Score Weighted Score Weighted
Factor weight score score score score

Productio 0.33 50 16.5 40 13.2 35 11.55 30 9.9

n cost

Raw 0.25 70 17.5 80 20.0 75 18.75 80 20.0

material
supply

Labor 0.20 55 11.0 70 14.0 60 12.00 45 9.0

availabilit
y

Cost of 0.05 80 4.0 70 3.5 40 2.00 50 2.5

living

Environm 0.02 60 1.2 60 1.2 60 1.20 90 1.8

ent
Markets 0.15 80 12.0 90 13.5 85 12.75 50 7.5

Totals 1.00 62.2 65.4 58.25 50.7

On the basis of this data, B is the best location, and thus selected. 32
FACILITY LOCATION MODELS
Cost Analysis
● Estimates should also be made for all the costs entering into the operation of
the plant in each of the locations. This cost will include: initial cost, cost of raw
materials, cost of manufacturing, cost of distribution. Revenues and costs are
both affected by facility location. A technique called breakeven analysis can be
used to relate the costs and revenue to facility location.
SOME OTHER FACILITY LOCATION MODELS.
● Simple median model,
● Center of gravity model,
● Break even analysis, and
● Simulation.
● All these models focus on transportation costs, although
each considers a different version of the basic problem.

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SIMPLE MEDIAN MODEL
● Suppose we want to locate a new plant that will annually receive
shipments of raw materials from two sources: F1 and F2. The plant will
create finished goods that must be shipped to two distribution
warehouses, F3 and F4. Given these four facilities, where should we locate
the new plant to minimize annual transportation costs for this network of
facilities?
● The simple median model (SMM) can help answer this question. This
model considers the volume of loads transported on rectangular paths. All
movements are made in east-west or north-south directions; diagonal
moves are not considered. The SMM provides an optimal solution.

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SIMPLE MEDIAN MODEL
Procedure.
● Step 1: Identify the median value of the loads Li moved.
● Step 2: Find the x-coordinate of the existing facility that sends (or receives)
the median load.
● Step 3: Find the y-coordinate value of the existing facility that sends or
receives) the median load

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SIMPLE MEDIAN MODEL
Example.
● Let Li = Loads to be shipped annually between each existing facility Fi, and
new plant
● Ci = Cost to move a load one distance unit to or from Fi.
● Di = Distance units between facility Fi and the new plant.
● Then, the total transit cost is the sum of the products CiLiDi for all i.
● Total cost of transportation = ΣCiLiDi

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Center Of Gravity Model
● This method assumes that the distribution cost is a function of the
volumes shipped and the rectilinear distances (i.e., X and Y coordinates).
The distances in each of the X and Y coordinates are averaged, using the
volumes as weights. The resultant coordinates then constitute the center
of gravity for that grid.

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Center Of Gravity Model
If Xc = X coordinate of the center of gravity
Yc = Y coordinate of the center of gravity
Vi = volume of goods transported to or from each of i destination
Xi = distances traveled by the goods in X direction
Yi = distances traveled by the goods in Y direction
Then, Xc = Σ Vi Xi / ΣVi and
Yc = Σ Vi Yi / ΣVi
● Once determined, the Xc, Yc coordinates constitute a
starting point for a new site. Locations in that vicinity may
then be evaluated, changes suggested, and perhaps some
recalculations done before the final choice is made.

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Center Of Gravity Model
● Example. Table below shows eight market locations to which a manufacturer of
wooden windows expects to ship its products. The shipment volumes, X and Y
coordinates of the locations are shown in Table. Using the center of gravity
method, (a) find the Xc and Yc coordinates, and (b) suggest a possible
warehouse location.
Market Area Vi (tonne) Xi (km) Yi (km)
A 8 2.5 10
B 20 3 5
C 12 6.5 8
D 10 11 10
E 30 11 8
F 20 10 4
G 40 13 3.5
H 30 12 2
Total 170
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Center Of Gravity Model
● Solution:
Marketing Vi Xi (km) Yi (km) Vi Xi Vi Yi Xc=EViXi/ Yc=EViYi/
Area (ton) (t-km) (t-km) Evi EVi
A 8 2.5 10 20 80 =1678/170 896/170
B 20 3.0 5 60 100 =9.87 km =5.3 km
C 12 6.5 8 78 96
D 10 11 10 110 100
E 30 11 8 330 240
F 20 10 4 200 80
G 40 13 3.5 520 140
H 30 12 2 360 60
170 1678 896

● (a) Thus, Xc = 9.87 kms and Yc = 5.3 kms

● (b) Looking at the various coordinates in Table, we feel that (Xc = 9.87 and Yc =
5.3 ) are very close to F, suggesting that it may be good to have the distribution
center located here.

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 BREAK EVEN ANALYSIS
● In break even charts, the total cost (fixed costs + variable costs), and revenue
are plotted against the output (either in units, dollar volume, or % of capacity).
Such a graphical portrayal of revenue and costs, as a function of the output is
called ‘break even chart’.
● Example. A businessman is thinking of opening a factory in one of these places
in Ethiopia: Nazereth, or on the outskirt of Addis Ababa (Kaliti) to produce high
quality electronic components for computer. He has gathered data on fixed
cost and variable cost as given in Table.
Fixed Variable costs per unit production
cost/year

Location Material labour Over head

Kaliti 200,000 0.20 0.40 0.40

Nazereth 170,000 1.0 1.0 1.0

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SIMULATION
● Although many quantitative models are available to deal with location
problems, many real world problems are more complex than our examples.
● Some systems have multiple sources shipping to numerous plants; they in turn
ship finished goods to warehouses from which further shipments are made to
retailers.
● Multi-echelon (multilevel) production distribution systems such as these pos
formidable problems. Even with the simplest revision of this system, adding or
deleting one network component, the combinatorial aspects
of the problem make it computationally difficult. More realistically,
we may want to consider more drastic changes, such as total
revision of the warehousing network.
● With problems of this complexity, no optimal solution is
possible. Instead, approximation techniques like computer
simulation are used.
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DISCUSSION POINT
- Which model will give you the minimum cost, simple
median model or center of gravity model? Discuss

(Please discuss your thoughts on the LMS discussion board)

CREDITS: This presentation template was created by

Slidesgo, including icons by Flaticon, infographics &
images by Freepik

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THANK YOU!

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