Dos & Don’ts

ON
1. You are unable to hear/see the faculty member, Re-join the meeting.
2. I go offline, will Re-join the meeting in 3-4 minutes.
3. When asked, write SEAT_ENROLL_First NAME in chat e.g. 14_1234_Sidd
4. For first 55 minutes : Lecture.
5. During the lecture leave your questions in chat.
6. After 55 minute, I will address the questions from chat. For any
pending question see faculty during consultation hours.
 Session 1
Operations Management

Dr. Siddhartha Kushwaha

ksiddhartha@ibsindia.org
Your Faculty : Dr. Siddhartha Kushwaha
• BE (Mechanical)
• MBA (Operations Management, IBS Hyderabad, 2011)
• PhD (Operations & Supply Chain Management, IBS Hyderabad, 2016)
• Visiting Scholar ( University of Memphis, the Fogelman College of
Business & Economics, TN, USA)
• Teaching Interest: Business Analytics, Operations Management,
Quality Management, Innovation Management, Project Management
• Research Interest: Sustainable Supply Chain Management,
Outsourcing
Course Description
• Design and Improvement of processes of both profit as well as non-profit
organizations that create Products and Services upon which economies depend.
• Production Processes in Manufacturing and Service Organizations need to both
increase revenues and reduce costs to have a competitive advantage as well as
remain relevant
• This course helps students understand, appreciate and apply concepts and
contemporary practices of managing operations in manufacturing as well as
service sectors.
• Students will learn several analytical techniques and frameworks used to
overcome the challenges faced in integration of numerous activities and
processes to produce products and services competitively.
• Operations Management is a Theory of Action.
• Many a plan runs aground due to poor execution.
• Strategy, Processes, logistics, Planning and control help managers succeed at
operations and its management.
Course Objectives
Upon the successful completion of the Course, the students are expected to:
• Identify and describe the strategic role of OM in creating and enhancing a
firm’s competitive advantages
• Classify and discuss key concepts and issues of OM in both manufacturing
and service organizations
• Define and organize business processes in services / manufacturing
required for improvement
• Identify the operational issues in the value addition processes of a firm
• Discuss and execute analytical skills and problem-solving tools to resolve
operational issues
Expected Learning Outcomes
• Discuss and explain the concepts related to manufacturing/services in
operations management.
• Identify and describe issues faced by operations manager and select the
possible solutions for the same.
• Define and demonstrate multiple process-oriented options related to the
design and management of quality, inventory, logistics, facility location and
layout and select the optimal solutions for the same.
• Describe industry-based relevant applications of the concepts (theoretical
and numerical) and provide necessary outcomes based on situations
• Discuss and examine the various issues related to the successful
implementation of operations strategies and the identification of remedial
measures for the same.
Recommended Text Book
• Operations Management, IUP, FedUni, 2020
Suggested Reference Books:
• “Operations & Supply Management” by Richard B. Chase, Ravi Shankar, F.
Robert Jacobs, (15th Edition), 2018
• “Operations Management”, William J. Stevenson, Tata McGraw-Hill
Education, New Delhi. 2009, 11eth Edition (Special Indian Edition)
• “Quantitative Analysis for Management” by Barry Render, Ralph M. Stair,
and Michael E. Hanna. Prentice Hall Publication, New Delhi. 2008. 9th
Edition. (For Linear Programming and Transportation Problems)
• “Production and Operations Management”, Everette E. Adam and Ronald J.
Ebert. Prentice Hall of India. New Delhi. 2004. 5th Edition.
• “Operations Management Strategy & Analysis”, Lee J. Krajweski and Larry P.
Ritzman. Person Education. New Delhi. 2002. 6th Edition.
Course Coverage
• Supply Chain Strategy
• Operations Strategy
• Transportation and Logistics
• Facility location
• Production Process & Facility Layout
• Product and Service design
• Process Analysis
• Intermediate Planning
• MRP
• Inventory Management
• Short Term Scheduling
• Project Management
Operations
Operations is that part of a business organization that is responsible for producing goods
• What is Operations?
and/or services.

• Chronological
• Sequence of
• Tasks/activity
• Towards producing product/rendering service
Types of Operations/ transformation
process
• Physical (manufacturing process)
Types of Operations/ transformation
process
• Storage ( warehouse)
Types of Operations/ transformation
process
• Location(transportation)
Types of Operations/ transformation
process
• Exchange (retail operations)
Types of Operations/ transformation
process
• Information (as in comm)
Types of Operations/ transformation
process
• Physiological (as in heallthcare)
Types of Operations/ transformation
process
• Psychological (as in entertaitment)
Quiz:
Which transformation process we can observe in video?
https://www.youtube.com/watch?v=qlxk6oLzCTw
Operations
• Goodsare physical items that include raw materials, parts, such as motherboards that go
Goods
into computers, and final products such as cell phones and automobiles.

• Examples
Examples: Automobiles, Commodities, Groceries

•Services
Servicesare activities that provide some combination of time, location, form, or psychological
value.

• Examples
Examples: : Healthcare, Banking, Mobile Communications
Operations Management, & Value
Addition
• Operations
Operations Management
management (OM) : the design, operation, and improvement of the systems that
create and deliver the firm’s primary products and services.

• Value Addition in Goods: How Raw Materials are Collected, Step-by-Step Distributed,
and Utilized to Develop the Final Product for Consumer Use.

I. Collect Raw Materials (Inputs)

II. Raw materials introduced in machines (Process)
III. Produce the final Product (Output)

How Information is Collected, Step-by-Step Distributed, and

• Value Addition in Services: Utilized to Develop the Final Service Package for Consumer
I. Customers arrive at Service Locations Utility
II. Service Person listens to Customer’s Requests
III. Service Person suggests solutions to Customers
IV. Based on the Customer convenience, the service
is delivered
 Manufacturing of Product vs.
Rendering of Service
1. Degree of customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design
Roles of Operations Manager
• Effective communicator
• Dealing with crisis and resolving conflicts
• Taking Strategic decisions related to
planning and designing of operating
systems

• Managing resources
• Inventory management
• Ensures operation systems compliance with organizations
goals

• Manufacturing
• Quality Control
• Maintenance
Quiz: What roles the professor Playing here?
https://www.youtube.com/watch?v=BKCLQbWkEKE
 Historical Evolution of OM
• Industrial Revolution
• Scientific Management
• Decision Models and Management Science
• Influence of Japanese Manufacturers
Industrial Revolution
• Pre-Industrial Revolution
• Craft production - System in which highly skilled workers use simple, flexible
tools to produce small quantities of customized goods
• Some key elements of the industrial revolution
• Began in England in the 1770s
• Division of labor - Adam Smith, 1776
• Application of the “rotative” steam engine, 1780s
• Cotton Gin and Interchangeable parts - Eli Whitney, 1792
• Management theory and practice did not advance appreciably during this
period
Scientific Management
• Movement was led by efficiency engineer, Frederick Winslow
Taylor
• Believed in a “science of management” based on observation,
measurement, analysis and improvement of work methods, and
economic incentives
• Management is responsible for planning, carefully selecting and
training workers, finding the best way to perform each job, achieving
cooperate between management and workers, and separating
management activities from work activities
• Emphasis was on maximizing output
Scientific Management - contributors
• Frank Gilbreth - father of motion studies
• Henry Gantt - developed the Gantt chart scheduling system and recognized the
value of non-monetary rewards for motivating employees
• Henry Ford - employed scientific management techniques to his factories
• Moving assembly line
• Mass production
Decision Models & Management Science
• F.W. Harris – mathematical model for inventory management, 1915
• Dodge, Romig, and Shewart – statistical procedures for sampling and quality control, 1930s
• Tippett – statistical sampling theory, 1935
• Operations Research (OR) Groups – OR applications in warfare
• George Dantzig – linear programming, 1947
Influence of Japanese Manufacturers
• Refined and developed management practices that increased productivity
• Credited with fueling the “quality revolution
• Just-in-Time production
 Assignment
• https://www.youtube.com/watch?v=KVcqbqpMfQY

• https://www.youtube.com/watch?v=1qlrRmRTbVY

• Watch above videos and answer following

Q : What supply chain challenges you think operations managers are
face?
Questions?
 Thank you
Siddhartha Kushwaha
ksiddhartha@ibsindia.org
Dos & Don’ts

ON
1. You are unable to hear/see the faculty member, Re-join the meeting.
2. I go offline, will Re-join the meeting in 3-4 minutes.
3. When asked, write SEAT_ENROLL_First NAME in chat e.g. 14_1234_Sidd
4. For first 55 minutes : Lecture.
5. During the lecture leave your questions in chat.
6. After 55 minute, I will address the questions from chat. For any
pending question see faculty during consultation hours.
 Session 2
Supply Chain Management

Dr. Siddhartha Kushwaha

ksiddhartha@ibsindia.org
Supply Chain
the sequence of organizations (suppliers, manufacturers, distributors, and customers)
- their facilities, functions, and activities - that are involved in producing and
delivering a product or service

Suppliers Service support Local service Customers

Services operations providers

Supply networks Transformation Output

Inputs Localization

Manufacturing
Suppliers Manufacturing Distribution Customers
 Supply Chain

Feedback: To ensure
that the desired outputs
are obtained, an
organization takes
measurements at
various points
Transformation Process:
The creation of goods or
services involves
transforming or converting
inputs into outputs Control: Compare
Why Trucking is
feedback with
circled?
established standards
What is control in this What would be the to check need for
case? Feedback for trucking? corrective action
Logistics:
• The part of a supply chain
involved with the forward
and reverse flow of
goods, services, cash, and
information.
Managing Supply & Demand
Operations &
Supply Chains Sales & Marketing

Wasteful
Supply
> Demand Costly

Opportunity Loss
Supply
< Demand Customer
Dissatisfaction

The goal of SCM is to

Supply
= Demand Ideal
match supply to demand
as effectively and
efficiently as possible
Demand-Supply
Mismatch #1:
Bull-Whip Effect

https://www.youtube.com/watch?v=v3WK1Sgmu50
Bullwhip Effect
The magnification of variability in orders in the supply-chain

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Time Time Time

A lot of …can lead to …can lead to

retailers each greater variability even greater
with little for a fewer number variability for a
variability in of wholesalers, single
their orders…. and… manufacturer.
Demand-Supply Mismatch #2: SCM functioning
1. Inventory management: (Managing procurement and suppliers)
• Carry extra inventory as a way to avoid shortages due to supply chain interruption
• Have backups for delivery from suppliers and to customers
2. Reducing risks
• Use only reliable suppliers
• Determine which suppliers are critical and get to know them and any challenges they have
• Measure supplier performance
• Recognize warning signs of supplier issues
• Have plans in place to manage supply chain problems
3. International trade
• Work with someone who has expertise to help oversee foreign suppliers
• Set expectations for demand and timing
• Do not rely on a single supplier
• Build goodwill to help in negotiations and resolving any problem that arise
• Consider using domestic suppliers if the risks of working with foreign suppliers are prohibitive
Demand-Supply Mismatch #4 : Outsourcing?
Outsourcing is defined as the act of moving a firm’s internal activities and
decision responsibility to outside providers
Reasons to Outsource
• Organizationally-driven

• Improvement-driven

• Financially-driven

• Revenue-driven

• Cost-driven

• Employee-driven
Benefits of Outsourcing
• Lower prices may result from lower labor costs
• The ability of the organization to focus on its core strengths
• Permits the conversion of some fixed costs to variable costs
• It can free up capital to address other needs
• Some risks can be shifted to the supplier
• The ability to take advantage of a supplier’s expertise
• Makes it easier to expand outside of the home country
Risks of Outsourcing
• Inflexibility due to longer lead times
• Increased transportation costs
• Language and cultural differences
• Loss of jobs
• Loss of control
• Lower productivity
• Loss of business knowledge
• Knowledge transfer and intellectual property concerns
• Increased effort required to manage the supply chain
 NEXT Session : Case- ZARA: Future Ready?
Case Preparation Questions
• Identify Risk sources for ZARA.
• Identify Benefits of Outsourcing for ZARA
• Identify probable supply chain for ZARA

Video Resources:
• https://www.youtube.com/watch?v=2OvBYL6u0cg
• https://www.youtube.com/watch?v=Ir1b-ez2x5g
• https://www.youtube.com/watch?v=tLfNUD0-8ts
• https://hbr.org/webinar/2015/11/a-new-approach-to-manage-supply-
chain-risk
Questions?
 Thank you
Siddhartha Kushwaha
ksiddhartha@ibsindia.org
Dos & Don’ts

ON
1. You are unable to hear/see the faculty member, Re-join the meeting.
2. I go offline, will Re-join the meeting in 3-4 minutes.
3. When asked, write SEAT_ENROLL_First NAME in chat e.g. 14_1234_Sidd
4. For first 55 minutes : Lecture.
5. During the lecture leave your questions in chat.
6. After 55 minute, I will address the questions from chat. For any
pending question see faculty during consultation hours.

07-02-2021 Dr. Siddhartha Kushwaha 1

 Session 4-5
Operations Strategy Concepts

Dr. Siddhartha Kushwaha

ksiddhartha@ibsindia.org
2
 Mission/Strategy/Tactics

Mission Strategy Tactics

How does mission, strategies and tactics relate to

decision making and distinctive competencies?

07-02-2021 Dr. Siddhartha Kushwaha 3

 Strategy
• Strategies
• Plans for achieving organizational goals
• Mission
• The reason for existence for an organization
• Mission Statement
• Answers the question “What business are we in?”
• Goals
• Provide detail and scope of mission
• Tactics
• The methods and actions taken to accomplish strategies

07-02-2021 Dr. Siddhartha Kushwaha 4

 Planning and Decision Making

Mission

Goals

Organizational Strategies

Functional Goals

Finance Marketing Operations

Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
07-02-2021 Dr. Siddhartha Kushwaha 5
 Examples of Strategies
• Low cost
• Scale-based strategies
• Specialization
• Flexible operations
• High quality
• Service

07-02-2021 Dr. Siddhartha Kushwaha 6

 Strategy Example

Rita is a high school student. She would like to have a

career in business, have a good job, and earn enough
income to live comfortably
Mission: Live a good life
• Goal: Successful career, good income
• Strategy: Obtain a college education
• Tactics: Select a college and a major
• Operations: Register, buy books, take
courses, study, graduate, get job

07-02-2021 Dr. Siddhartha Kushwaha 7

ZARA Operation Strategy https://www.youtube.com/watch?v=whFsziS3x18

07-02-2021 Dr. Siddhartha Kushwaha 8

The Role of Operations Strategy
• Provide a plan that makes best use of resources which;
• Specifies the policies and plans for using organizational resources
• Supports Business Strategy as shown on next slide

07-02-2021 Dr. Siddhartha Kushwaha 9

Importance of Operations Strategy
• Essential differences between operational efficiency and strategy:
• Operational efficiency is performing tasks well, even better than competitors
• Strategy is a plan for competing in the marketplace
• Operations strategy ensures all tasks performed are the right tasks

07-02-2021 Dr. Siddhartha Kushwaha 10

 Operations Strategy
Strategy Process Example

Customer Needs More Product

Corporate Strategy Increase Org. Size

Operations Strategy Increase Production Capacity

Decisions on Processes
and Infrastructure Build New Factory

07-02-2021 Dr. Siddhartha Kushwaha 11

Competing on Cost
• Offering product at a low price relative to competition
• Typically high volume products
• Often limit product range & offer little customization
• May invest in automation to reduce unit costs
• Can use lower skill labor
• Probably uses product focused layouts
• Low cost does not mean low quality

07-02-2021 Dr. Siddhartha Kushwaha 12

Competing on Quality
• Quality is often subjective
• Quality is defined differently depending on who is defining it
• Two major quality dimensions include
• High performance design:
• Superior features, high durability, & excellent customer service

• Product & service consistency:

• Meets design specifications
• Close tolerances
• Error free delivery
• Quality needs to address
• Product design quality – product/service meets requirements
• Process quality – error free products

07-02-2021 Dr. Siddhartha Kushwaha 13

Competing on Speed or Time
• Time/speed one of most important competition priorities
• First that can deliver often wins the race
• Time related issues involve
• Rapid delivery:
• Focused on shorter time between order placement and delivery
• On-time delivery:
• Deliver product exactly when needed every time

07-02-2021 Dr. Siddhartha Kushwaha 14

Competing on Flexibility
• Company environment changes rapidly
• Company must accommodate change by being flexible
• Product flexibility:
• Easily switch production from one item to another
• Easily customize product/service to meet specific requirements of a customer

• Volume flexibility:
• Ability to ramp production up and down to match market demands

07-02-2021 Dr. Siddhartha Kushwaha 15

 List of Competitive Dimensions
• Cost or Price
• Make the Product or Deliver the Service Cheap
• Quality
• Make a Great Product or Deliver a Great Service
• Delivery Speed
• Make the Product or Deliver the Service Quickly
• Delivery Reliability
• Deliver It When Promised
• Coping with Changes in Demand
• Change Its Volume
• Flexibility and New Product Introduction Speed
• Change It
• Location
• Field or customer residence
• Other Product-Specific Criteria
• Support It
07-02-2021 Dr. Siddhartha Kushwaha 16
 Dealing with Trade-offs

07-02-2021 Dr. Siddhartha Kushwaha 17

 Cost

Durability

Flexibility Delivery

Location
Quality

07-02-2021 Dr. Siddhartha Kushwaha 18

 https://www.youtube.com/watch?v=_qB2r2EwE6A
07-02-2021 Dr. Siddhartha Kushwaha 19
 Strategy Formulation
• Order qualifiers
• Characteristics that customers perceive as minimum standards of
acceptability to be considered as a potential purchase
• Order winners
• Characteristics of an organization’s goods or services that cause it to be
perceived as better than the competition

07-02-2021 Dr. Siddhartha Kushwaha 20

Challenge ? Resource vs Requirement

07-02-2021 Dr. Siddhartha Kushwaha 21

 Questions?

07-02-2021 Dr. Siddhartha Kushwaha 22

 Thank you
Siddhartha Kushwaha
ksiddhartha@ibsindia.org

07-02-2021 Dr. Siddhartha Kushwaha 23

Dos & Don’ts

ON
1. You are unable to hear/see the faculty member, Re-join the meeting.
2. I go offline, will Re-join the meeting in 3-4 minutes.
3. When asked, write SEAT_ENROLL_First NAME in chat e.g. 14_1234_Sidd
4. For first 55 minutes : Lecture.
5. During the lecture leave your questions in chat.
6. After 55 minute, I will address the questions from chat. For any
pending question see faculty during consultation hours.

07-02-2021 Dr. Siddhartha Kushwaha 1

 Session 5
Operations Strategy Concepts
1. QUALITY
2. SPEED
3. DURABILITY/RELIABILITY
4. FLEXIBILITY
5. COST/PRICE
6. LOCATION
7. SERIVCE

Dr. Siddhartha Kushwaha

07-02-2021 Dr. Siddhartha Kushwaha
ksiddhartha@ibsindia.org
2
 Strategy Design Process
Strategy Map What it is about!
Financial Perspective Improve Shareholder Value

Customer Perspective Customer Value Proposition

Internal Perspective Build-Increase-Achieve

Learning and Growth Perspective A Motivated and Prepared

Workforce
07-02-2021 Dr. Siddhartha Kushwaha 3
• HERE IS APPLE RELATED VIDEO
• Link:

https://www.youtube.com/watch?v=M92I6rAbRfU

07-02-2021 Dr. Siddhartha Kushwaha 4

Key Internal Factors

07-02-2021 Dr. Siddhartha Kushwaha 5

Key External Factors
• Economic conditions
• Political conditions
• Legal environment
• Technology
• Competition
• Markets

07-02-2021 Dr. Siddhartha Kushwaha 6

 OPERATIONS STRATEGY MATRIX
1.

07-02-2021 Dr. Siddhartha Kushwaha 7

 OPERATIONS STRATEGY MATRIX
2.

07-02-2021 Dr. Siddhartha Kushwaha 8

 OPERATIONS STRATEGY MATRIX
3

07-02-2021 Dr. Siddhartha Kushwaha 9

 OPERATIONS STRATEGY MATRIX
4

07-02-2021 Dr. Siddhartha Kushwaha 10

 OPERATIONS STRATEGY MATRIX
5

operations strategy bike share

07-02-2021 Dr. Siddhartha Kushwaha 12

OPERATIONS STRATEGY MATRIX
6

07-02-2021 Dr. Siddhartha Kushwaha 13

Example

07-02-2021 Dr. Siddhartha Kushwaha 14

Strategy Formulation

07-02-2021 Dr. Siddhartha Kushwaha 15

What is Productivity?
Defined

Productivity is a common measure on how well resources

are being used. In the broadest sense, it can be defined as
the following ratio:
Outputs
Inputs

07-02-2021 Dr. Siddhartha Kushwaha 16

 Total Measure Productivity
Total Measure Productivity = Outputs
Inputs
or
= Goods and services produced
All resources used

07-02-2021 Dr. Siddhartha Kushwaha 17

 Partial Measure Productivity

• Partial measures of productivity =

Output or Output or Output or Output

Labor Capital Materials Energy

07-02-2021 Dr. Siddhartha Kushwaha 18

 Multifactor Measure Productivity
• Multifactor measures of productivity =

• Output .
Labor + Capital + Energy
or

• Output .
Labor + Capital + Materials

07-02-2021 Dr. Siddhartha Kushwaha 19

 Productivity Growth

Productivity Growth =
Current Period Productivity – Previous Period Productivity
Previous Period Productivity

07-02-2021 Dr. Siddhartha Kushwaha 20

 Example of Productivity Measurement

7040 Units Produced

Sold for $1.10/unit

Cost of labor of $1,000 What is the labor,

material and
Cost of materials: $520 multifactor
productivity?
Cost of overhead: $2000

07-02-2021 Dr. Siddhartha Kushwaha 21

 Example Solution

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)*($1.10)

$1000 + $520 + $2000

MFP = 2.20 LP = (7040 *1.1)/1000

MP = (7040*1.1)/520

07-02-2021 Dr. Siddhartha Kushwaha 22

 Example of Productivity Measurement
• You have just determined that your service employees have used a
total of 2400 hours of labor this week to process 560 insurance
forms. Last week the same crew used only 2000 hours of labor to
process 480 forms.
• Which productivity measure should be used?
• Answer: Could be classified as a Total Measure or Partial Measure.
• Is productivity increasing or decreasing?
• Answer: Last week’s productivity = 480/2000 = 0.24, and this
week’s productivity is = 560/2400 = 0.23. So, productivity is
decreasing slightly.

07-02-2021 Dr. Siddhartha Kushwaha 23

 Factors Affecting Productivity

Capital Quality

Technology Management

07-02-2021 Dr. Siddhartha Kushwaha 24

 Other Factors Affecting Productivity
• Standardization
• Quality
• Use of Internet
• Computer viruses
• Searching for lost or misplaced items
• Scrap rates
• New workers

07-02-2021 Dr. Siddhartha Kushwaha 25

 Other Factors Affecting Productivity
• Safety
• Shortage of IT workers
• Layoffs
• Labor turnover
• Design of the workspace
• Incentive plans that reward productivity

07-02-2021 Dr. Siddhartha Kushwaha 26

 Bottleneck Operation

10/hr
Machine #1

10/hr
Machine #2
Bottleneck 30/hr
Operation
Machine #3
10/hr

Machine #4 10/hr

07-02-2021 Dr. Siddhartha Kushwaha 27

 Improving Productivity
• Develop productivity measures
• Determine critical (bottleneck) operations
• Develop methods for productivity improvements
• Establish reasonable goals
• Get management support
• Measure and publicize improvements
• Don’t confuse productivity with efficiency

07-02-2021 Dr. Siddhartha Kushwaha 28

 Questions?

07-02-2021 Dr. Siddhartha Kushwaha 29

 Thank you
Siddhartha Kushwaha
ksiddhartha@ibsindia.org

07-02-2021 Dr. Siddhartha Kushwaha 30

Transportation and
Assignment Models

© 2008 Prentice-Hall, Inc.

 Introduction
◼ In this chapter we will explore two special
linear programming models
◼ The transportation model
◼ The assignment model
◼ Because of their structure, they can be
solved more efficiently than the simplex
method
◼ These problems are members of a
category of LP techniques called network
flow problems

© 2009 Prentice-Hall, Inc. 10 – 2

 Introduction
◼ Transportation model
◼ The transportation problem deals with the
distribution of goods from several points of
supply (sources) to a number of points of
demand (destinations)
◼ Usually we are given the capacity of goods at
each source and the requirements at each
destination
◼ Typically the objective is to minimize total
transportation and production costs

© 2009 Prentice-Hall, Inc. 10 – 3

 Introduction
◼ Example of a transportation problem in a network
format
Factories Warehouses
(Sources) (Destinations)

100 Units Des Moines Albuquerque 300 Units

300 Units Evansville Boston 200 Units

300 Units Fort Lauderdale Cleveland 200 Units

Capacities Shipping Routes Requirements

Figure 10.1
© 2009 Prentice-Hall, Inc. 10 – 4
 Introduction
◼ Assignment model
◼ The assignment problem refers to the class of
LP problems that involve determining the most
efficient assignment of resources to tasks
◼ The objective is most often to minimize total
costs or total time to perform the tasks at hand
◼ One important characteristic of assignment
problems is that only one job or worker can be
assigned to one machine or project

© 2009 Prentice-Hall, Inc. 10 – 5

 Introduction
◼ Special-purpose algorithms
◼ Although standard LP methods can be used to
solve transportation and assignment problems,
special-purpose algorithms have been
developed that are more efficient
◼ They still involve finding and initial solution and
developing improved solutions until an optimal
solution is reached
◼ They are fairly simple in terms of computation

© 2009 Prentice-Hall, Inc. 10 – 6

 Introduction
◼ Streamlined versions of the simplex method are
important for two reasons
1. Their computation times are generally 100 times faster
2. They require less computer memory (and hence can
permit larger problems to be solved)
◼ Two common techniques for developing initial
solutions are the northwest corner method and
Vogel’s approximation
◼ The initial solution is evaluated using either the
stepping-stone method or the modified
distribution (MODI) method
◼ We also introduce a solution procedure called the
Hungarian method, Flood’s technique, or the
reduced matrix method
© 2009 Prentice-Hall, Inc. 10 – 7
 Setting Up a Transportation Problem

◼ The Executive Furniture Corporation

manufactures office desks at three locations: Des
Moines, Evansville, and Fort Lauderdale
◼ The firm distributes the desks through regional
warehouses located in Boston, Albuquerque, and
Cleveland
◼ Estimates of the monthly production capacity of
each factory and the desks needed at each
warehouse are shown in Figure 10.1

© 2009 Prentice-Hall, Inc. 10 – 8

 Setting Up a Transportation Problem

◼ Production costs are the same at the three

factories so the only relevant costs are shipping
from each source to each destination
◼ Costs are constant no matter the quantity
shipped
◼ The transportation problem can be described as
how to select the shipping routes to be used and
the number of desks to be shipped on each route
so as to minimize total transportation cost
◼ Restrictions regarding factory capacities and
warehouse requirements must be observed

© 2009 Prentice-Hall, Inc. 10 – 9

 Setting Up a Transportation Problem

◼ The first step is setting up the transportation

table
◼ Its purpose is to summarize all the relevant data
and keep track of algorithm computations

Transportation costs per desk for Executive Furniture

TO
FROM ALBUQUERQUE BOSTON CLEVELAND
DES MOINES $5 $4 $3

EVANSVILLE $8 $4 $3

FORT LAUDERDALE $9 $7 $5

Table 10.1

© 2009 Prentice-Hall, Inc. 10 – 10

 Setting Up a Transportation Problem

◼ Geographical locations of Executive Furniture’s

factories and warehouses

Boston

Cleveland
Factory
Des Moines
Evanston Warehouse

Albuquerque

Fort Lauderdale

Figure 10.2

© 2009 Prentice-Hall, Inc. 10 – 11

 Setting Up a Transportation Problem

Des Moines
◼ Transportation table for Executive Furniture capacity
constraint

TO WAREHOUSE WAREHOUSE WAREHOUSE

AT AT AT FACTORY
FROM ALBUQUERQUE BOSTON CLEVELAND CAPACITY

DES MOINES $5 $4 $3
100
FACTORY

EVANSVILLE $8 $4 $3
300
FACTORY

FORT LAUDERDALE $9 $7 $5
300
FACTORY

WAREHOUSE
300 200 200 700
REQUIREMENTS
Cell representing a
Table 10.2 Total supply source-to-destination
Cost of shipping 1 unit from Cleveland (Evansville to Cleveland)
Fort Lauderdale factory to and demand
warehouse shipping assignment
Boston warehouse demand that could be made
© 2009 Prentice-Hall, Inc. 10 – 12
 Setting Up a Transportation Problem

◼ In this table, total factory supply exactly

equals total warehouse demand
◼ When equal demand and supply occur, a
balanced problem is said to exist
◼ This is uncommon in the real world and
we have techniques to deal with
unbalanced problems

© 2009 Prentice-Hall, Inc. 10 – 13

 Developing an Initial Solution:
Northwest Corner Rule
◼ Once we have arranged the data in a table, we
must establish an initial feasible solution
◼ One systematic approach is known as the
northwest corner rule
◼ Start in the upper left-hand cell and allocate units
to shipping routes as follows
1. Exhaust the supply (factory capacity) of each row
before moving down to the next row
2. Exhaust the demand (warehouse) requirements of each
column before moving to the right to the next column
3. Check that all supply and demand requirements are
met.
◼ In this problem it takes five steps to make the
initial shipping assignments
© 2009 Prentice-Hall, Inc. 10 – 14
 Developing an Initial Solution:
Northwest Corner Rule
1. Beginning in the upper left hand corner, we
assign 100 units from Des Moines to
Albuquerque. This exhaust the supply from Des
Moines but leaves Albuquerque 200 desks short.
We move to the second row in the same column.
TO ALBUQUERQUE BOSTON CLEVELAND FACTORY
FROM (A) (B) (C) CAPACITY

DES MOINES $5 $4 $3
100 100
(D)

EVANSVILLE $8 $4 $3
300
(E)

FORT LAUDERDALE $9 $7 $5
300
(F)

WAREHOUSE
300 200 200 700
REQUIREMENTS

© 2009 Prentice-Hall, Inc. 10 – 15

 Developing an Initial Solution:
Northwest Corner Rule
2. Assign 200 units from Evansville to Albuquerque.
This meets Albuquerque’s demand. Evansville
has 100 units remaining so we move to the right
to the next column of the second row.

TO ALBUQUERQUE BOSTON CLEVELAND FACTORY

FROM (A) (B) (C) CAPACITY

DES MOINES $5 $4 $3
100 100
(D)

EVANSVILLE $8 $4 $3
200 300
(E)

FORT LAUDERDALE $9 $7 $5
300
(F)

WAREHOUSE
300 200 200 700
REQUIREMENTS

© 2009 Prentice-Hall, Inc. 10 – 16

 Developing an Initial Solution:
Northwest Corner Rule
3. Assign 100 units from Evansville to Boston. The
Evansville supply has now been exhausted but
Boston is still 100 units short. We move down
vertically to the next row in the Boston column.

TO ALBUQUERQUE BOSTON CLEVELAND FACTORY

FROM (A) (B) (C) CAPACITY

DES MOINES $5 $4 $3
100 100
(D)

EVANSVILLE $8 $4 $3
200 100 300
(E)

FORT LAUDERDALE $9 $7 $5
300
(F)

WAREHOUSE
300 200 200 700
REQUIREMENTS

© 2009 Prentice-Hall, Inc. 10 – 17

 Developing an Initial Solution:
Northwest Corner Rule
4. Assign 100 units from Fort Lauderdale to Boston.
This fulfills Boston’s demand and Fort
Lauderdale still has 200 units available.

TO ALBUQUERQUE BOSTON CLEVELAND FACTORY

FROM (A) (B) (C) CAPACITY

DES MOINES $5 $4 $3
100 100
(D)

EVANSVILLE $8 $4 $3
200 100 300
(E)

FORT LAUDERDALE $9 $7 $5
100 300
(F)

WAREHOUSE
300 200 200 700
REQUIREMENTS

© 2009 Prentice-Hall, Inc. 10 – 18

 Developing an Initial Solution:
Northwest Corner Rule
5. Assign 200 units from Fort Lauderdale to
Cleveland. This exhausts Fort Lauderdale’s
supply and Cleveland’s demand. The initial
shipment schedule is now complete.
Table 10.3
TO ALBUQUERQUE BOSTON CLEVELAND FACTORY
FROM (A) (B) (C) CAPACITY

DES MOINES $5 $4 $3
100 100
(D)

EVANSVILLE $8 $4 $3
200 100 300
(E)

FORT LAUDERDALE $9 $7 $5
100 200 300
(F)

WAREHOUSE
300 200 200 700
REQUIREMENTS

© 2009 Prentice-Hall, Inc. 10 – 19

 Developing an Initial Solution:
Northwest Corner Rule
◼ We can easily compute the cost of this shipping
assignment
ROUTE
UNITS PER UNIT TOTAL
FROM TO SHIPPED x COST ($) = COST ($)
D A 100 5 500
E A 200 8 1,600
E B 100 4 400
F B 100 7 700
F C 200 5 1,000
4,200

◼ This solution is feasible but we need to check to

see if it is optimal
© 2009 Prentice-Hall, Inc. 10 – 20
 Stepping-Stone Method:
Finding a Least Cost Solution

◼ The stepping-stone method is an iterative

technique for moving from an initial
feasible solution to an optimal feasible
solution
◼ There are two distinct parts to the process
◼ Testing the current solution to determine if
improvement is possible
◼ Making changes to the current solution to
obtain an improved solution
◼ This process continues until the optimal
solution is reached

© 2009 Prentice-Hall, Inc. 10 – 21

 Stepping-Stone Method:
Finding a Least Cost Solution
◼ There is one very important rule
◼ The number of occupied routes (or squares) must
always be equal to one less than the sum of the
number of rows plus the number of columns
◼ In the Executive Furniture problem this means the
initial solution must have 3 + 3 – 1 = 5 squares
used
Occupied shipping Number Number of
routes (squares) = of rows + columns – 1

◼ When the number of occupied rows is less than

this, the solution is called degenerate

© 2009 Prentice-Hall, Inc. 10 – 22

 Testing the Solution for
Possible Improvement

◼ The stepping-stone method works by

testing each unused square in the
transportation table to see what would
happen to total shipping costs if one unit
of the product were tentatively shipped on
an unused route
◼ There are five steps in the process

© 2009 Prentice-Hall, Inc. 10 – 23

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
1. Select an unused square to evaluate
2. Beginning at this square, trace a closed path
back to the original square via squares that are
currently being used with only horizontal or
vertical moves allowed
3. Beginning with a plus (+) sign at the unused
square, place alternate minus (–) signs and plus
signs on each corner square of the closed path
just traced

© 2009 Prentice-Hall, Inc. 10 – 24

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
4. Calculate an improvement index by adding
together the unit cost figures found in each
square containing a plus sign and then
subtracting the unit costs in each square
containing a minus sign
5. Repeat steps 1 to 4 until an improvement index
has been calculated for all unused squares. If all
indices computed are greater than or equal to
zero, an optimal solution has been reached. If
not, it is possible to improve the current solution
and decrease total shipping costs.

© 2009 Prentice-Hall, Inc. 10 – 25

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
◼ For the Executive Furniture Corporation data

Steps 1 and 2. Beginning with Des Moines–Boston

route we trace a closed path using only currently
occupied squares, alternately placing plus and
minus signs in the corners of the path
◼ In a closed path, only squares currently used for
shipping can be used in turning corners
◼ Only one closed route is possible for each square
we wish to test

© 2009 Prentice-Hall, Inc. 10 – 26

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
Step 3. We want to test the cost-effectiveness of the
Des Moines–Boston shipping route so we pretend
we are shipping one desk from Des Moines to
Boston and put a plus in that box
◼ But if we ship one more unit out of Des Moines
we will be sending out 101 units
◼ Since the Des Moines factory capacity is only
100, we must ship fewer desks from Des Moines
to Albuquerque so we place a minus sign in that
box
◼ But that leaves Albuquerque one unit short so we
must increase the shipment from Evansville to
Albuquerque by one unit and so on until we
complete the entire closed path
© 2009 Prentice-Hall, Inc. 10 – 27
 Five Steps to Test Unused Squares
with the Stepping-Stone Method
◼ Evaluating the unused Warehouse A Warehouse B

$5 $4
Des Moines–Boston Factory
100
D
shipping route – +
Factory
+ $8 – $4
E 200 100

TO FACTORY
ALBUQUERQUE BOSTON CLEVELAND
FROM CAPACITY
$5 $4 $3
DES MOINES 100 100

$8 $4 $3
EVANSVILLE 200 100 300

$9 $7 $5
FORT LAUDERDALE 100 200 300

WAREHOUSE
300 200 200 700 Table 10.4
REQUIREMENTS
© 2009 Prentice-Hall, Inc. 10 – 28
 Five Steps to Test Unused Squares
with the Stepping-Stone Method
◼ Evaluating the unused Warehouse A Warehouse B

$5 $4
Des Moines–Boston Factory
99
100 1
D
shipping route – +
Factory 201 + $8 99 – $4
E 200 100

TO FACTORY
ALBUQUERQUE BOSTON CLEVELAND
FROM CAPACITY
$5 $4 $3
DES MOINES 100 100

$8 $4 $3
EVANSVILLE 200 100 300

$9 $7 $5
FORT LAUDERDALE 100 200 300

WAREHOUSE
300 200 200 700 Table 10.4
REQUIREMENTS
© 2009 Prentice-Hall, Inc. 10 – 29
 Five Steps to Test Unused Squares
with the Stepping-Stone Method
◼ Evaluating the unused Warehouse A Warehouse B

$5 $4
Des Moines–Boston Factory
99
100 1
D
shipping route – +
Factory 201 + $8 99 – $4
E 200 100

TO FACTORY
ALBUQUERQUE BOSTON CLEVELAND
FROM Result
CAPACITY of Proposed
$5 $4 $3 Shift in Allocation
DES MOINES 100 100
= 1 x $4
$8 $4 $3 – 1 x $5
EVANSVILLE 200 100 300 + 1 x $8
– 1 x $4 = +$3
$9 $7 $5
FORT LAUDERDALE 100 200 300

WAREHOUSE
300 200 200 700 Table 10.4
REQUIREMENTS
© 2009 Prentice-Hall, Inc. 10 – 30
 Five Steps to Test Unused Squares
with the Stepping-Stone Method
Step 4. We can now compute an improvement index
(Iij) for the Des Moines–Boston route
◼ We add the costs in the squares with plus signs
and subtract the costs in the squares with minus
signs
Des Moines–
Boston index = IDB = +$4 – $5 + $5 – $4 = + $3

◼ This means for every desk shipped via the Des

Moines–Boston route, total transportation cost
will increase by $3 over their current level

© 2009 Prentice-Hall, Inc. 10 – 31

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
Step 5. We can now examine the Des Moines–
Cleveland unused route which is slightly more
difficult to draw
◼ Again we can only turn corners at squares that
represent existing routes
◼ We must pass through the Evansville–Cleveland
square but we can not turn there or put a + or –
sign
◼ The closed path we will use is
+ DC – DA + EA – EB + FB – FC

© 2009 Prentice-Hall, Inc. 10 – 32

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
◼ Evaluating the Des Moines–Cleveland shipping
route
TO FACTORY
ALBUQUERQUE BOSTON CLEVELAND
FROM CAPACITY
$5 $4 Start $3
DES MOINES 100 100
– +
$8 $4 $3
EVANSVILLE 200 100 300
+ –
$9 $7 $5
FORT LAUDERDALE 100 200 300
+ –
WAREHOUSE
300 200 200 700
REQUIREMENTS

Table 10.5

Des Moines–Cleveland
improvement index = IDC = + $3 – $5 + $8 – $4 + $7 – $5 = + $4

© 2009 Prentice-Hall, Inc. 10 – 33

 Five Steps to Test Unused Squares
with the Stepping-Stone Method
◼ Opening the Des Moines–Cleveland route will not
lower our total shipping costs
◼ Evaluating the other two routes we find
Evansville-
Cleveland index = IEC = + $3 – $4 + $7 – $5 = + $1
◼ The closed path is
+ EC – EB + FB – FC
Fort Lauderdale–
Albuquerque index = IFA = + $9 – $7 + $4 – $8 = – $2
◼ The closed path is
+ FA – FB + EB – EA
◼ So opening the Fort Lauderdale-Albuquerque
route will lower our total transportation costs
© 2009 Prentice-Hall, Inc. 10 – 34
 Obtaining an Improved Solution

◼ In the Executive Furniture problem there is only

one unused route with a negative index (Fort
Lauderdale-Albuquerque)
◼ If there was more than one route with a negative
index, we would choose the one with the largest
improvement
◼ We now want to ship the maximum allowable
number of units on the new route
◼ The quantity to ship is found by referring to the
closed path of plus and minus signs for the new
route and selecting the smallest number found in
those squares containing minus signs

© 2009 Prentice-Hall, Inc. 10 – 35

 Obtaining an Improved Solution

◼ To obtain a new solution, that number is added to

all squares on the closed path with plus signs
and subtracted from all squares the closed path
with minus signs
◼ All other squares are unchanged
◼ In this case, the maximum number that can be
shipped is 100 desks as this is the smallest value
in a box with a negative sign (FB route)
◼ We add 100 units to the FA and EB routes and
subtract 100 from FB and EA routes
◼ This leaves balanced rows and columns and an
improved solution

© 2009 Prentice-Hall, Inc. 10 – 36

 Obtaining an Improved Solution

◼ Stepping-stone path used to evaluate route FA

TO FACTORY
A B C
FROM CAPACITY
$5 $4 $3
D 100 100

$8 $4 $3
E 200 100 300
– +
$9 $7 $5
F 100 200 300
+ –
WAREHOUSE
300 200 200 700
REQUIREMENTS

Table 10.6

© 2009 Prentice-Hall, Inc. 10 – 37

 Obtaining an Improved Solution
◼ Second solution to the Executive Furniture
problem
TO FACTORY
A B C
FROM CAPACITY
$5 $4 $3
D 100 100

$8 $4 $3
E 100 200 300

$9 $7 $5
F 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

Table 10.7

◼ Total shipping costs have been reduced by (100

units) x ($2 saved per unit) and now equals $4,000
© 2009 Prentice-Hall, Inc. 10 – 38
 Obtaining an Improved Solution
◼ This second solution may or may not be optimal
◼ To determine whether further improvement is
possible, we return to the first five steps to test
each square that is now unused
◼ The four new improvement indices are

D to B = IDB = + $4 – $5 + $8 – $4 = + $3
(closed path: + DB – DA + EA – EB)
D to C = IDC = + $3 – $5 + $9 – $5 = + $2
(closed path: + DC – DA + FA – FC)
E to C = IEC = + $3 – $8 + $9 – $5 = – $1
(closed path: + EC – EA + FA – FC)
F to B = IFB = + $7 – $4 + $8 – $9 = + $2
(closed path: + FB – EB + EA – FA)
© 2009 Prentice-Hall, Inc. 10 – 39
 Obtaining an Improved Solution
◼ Path to evaluate for the EC route

TO FACTORY
A B C
FROM CAPACITY
$5 $4 $3
D 100 100

$8 $4 Start $3
E 100 200 300
– +
$9 $7 $5
F 100 200 300
+ –
WAREHOUSE
300 200 200 700
REQUIREMENTS

Table 10.8

◼ An improvement can be made by shipping the

maximum allowable number of units from E to C
© 2009 Prentice-Hall, Inc. 10 – 40
 Obtaining an Improved Solution
◼ Total cost of third solution

ROUTE
DESKS PER UNIT TOTAL
FROM TO SHIPPED x COST ($) = COST ($)
D A 100 5 500
E B 200 4 800
E C 100 3 300
F A 200 9 1,800
F C 100 5 500
3,900

© 2009 Prentice-Hall, Inc. 10 – 41

 Obtaining an Improved Solution
◼ Third and optimal solution

TO FACTORY
A B C
FROM CAPACITY
$5 $4 $3
D 100 100

$8 $4 $3
E 200 100 300

$9 $7 $5
F 200 100 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

Table 10.9

© 2009 Prentice-Hall, Inc. 10 – 42

 Obtaining an Improved Solution
◼ This solution is optimal as the improvement
indices that can be computed are all greater than
or equal to zero

D to B = IDB = + $4 – $5 + $9 – $5 + $3 – $4 = + $2
(closed path: + DB – DA + FA – FC + EC – EB)
D to C = IDC = + $3 – $5 + $9 – $5 = + $2
(closed path: + DC – DA + FA – FC)
E to A = IEA = + $8 – $9 + $5 – $3 = + $1
(closed path: + EA – FA + FC – EC)
F to B = IFB = + $7 – $5 + $3 – $4 = + $1
(closed path: + FB – FC + EC – EB)

© 2009 Prentice-Hall, Inc. 10 – 43

 Summary of Steps in Transportation
Algorithm (Minimization)
1. Set up a balanced transportation table
2. Develop initial solution using either the northwest
corner method or Vogel’s approximation method
3. Calculate an improvement index for each empty
cell using either the stepping-stone method or
the MODI method. If improvement indices are all
nonnegative, stop as the optimal solution has
been found. If any index is negative, continue to
step 4.
4. Select the cell with the improvement index
indicating the greatest decrease in cost. Fill this
cell using the stepping-stone path and go to step
3.
© 2009 Prentice-Hall, Inc. 10 – 44
 Using Excel QM to Solve
Transportation Problems
◼ Excel QM input screen and formulas

Program 10.1A

© 2009 Prentice-Hall, Inc. 10 – 45

 Using Excel QM to Solve
Transportation Problems
◼ Output from Excel QM with optimal solution

Program 10.1B

© 2009 Prentice-Hall, Inc. 10 – 46

 Vogel’s Approximation Method:
Another Way To Find An Initial Solution
◼ Vogel’s Approximation Method (VAM) is not as
simple as the northwest corner method, but it
provides a very good initial solution, often one
that is the optimal solution
◼ VAM tackles the problem of finding a good initial
solution by taking into account the costs
associated with each route alternative
◼ This is something that the northwest corner rule
does not do
◼ To apply VAM, we first compute for each row and
column the penalty faced if we should ship over
the second-best route instead of the least-cost
route
© 2009 Prentice-Hall, Inc. 10 – 47
 Vogel’s Approximation Method

◼ The six steps involved in determining an initial

VAM solution are illustrated below beginning with
the same layout originally shown in Table 10.2
VAM Step 1. For each row and column of the
transportation table, find the difference between
the distribution cost on the best route in the row
or column and the second best route in the row or
column
◼ This is the opportunity cost of not using the
best route
◼ Step 1 has been done in Table 10.11

© 2009 Prentice-Hall, Inc. 10 – 48

 Vogel’s Approximation Method

◼ Transportation table with VAM row and column

differences shown
OPPORTUNITY
3 0 0 COSTS
TO TOTAL
FROM
A B C AVAILABLE
$5 $4 $3
D 100 100 1

$8 $4 $3
E 200 100 300 1

$9 $7 $5
F 100 200 300 2

TOTAL REQUIRED 300 200 200 700

Table 10.11

© 2009 Prentice-Hall, Inc. 10 – 49

 Vogel’s Approximation Method

VAM Step 2. identify the row or column with the

greatest opportunity cost, or difference (column A in
this example)
VAM Step 3.Assign as many units as possible to the
lowest-cost square in the row or column selected
VAM Step 4. Eliminate any row or column that has
been completely satisfied by the assignment just
made by placing Xs in each appropriate square
VAM Step 5. Recompute the cost differences for the
transportation table, omitting rows or columns
eliminated in the previous step

© 2009 Prentice-Hall, Inc. 10 – 50

 Vogel’s Approximation Method

◼ VAM assignment with D’s requirements satisfied

OPPORTUNITY
31 03 02 COSTS
TO TOTAL
FROM
A B C AVAILABLE
$5 $4 $3
D 100 X X 100 1

$8 $4 $3
E 300 1

$9 $7 $5
F 300 2

TOTAL REQUIRED 300 200 200 700

Table 10.12

© 2009 Prentice-Hall, Inc. 10 – 51

 Vogel’s Approximation Method

VAM Step 6. Return to step 2 for the rows and

columns remaining and repeat the steps until an
initial feasible solution has been obtained

◼ In this case column B now has the greatest

difference, 3
◼ We assign 200 units to the lowest-cost square in
the column, EB
◼ We recompute the differences and find the
greatest difference is now in row E
◼ We assign 100 units to the lowest-cost square in
the column, EC

© 2009 Prentice-Hall, Inc. 10 – 52

 Vogel’s Approximation Method

◼ Second VAM assignment with B’s requirements

satisfied
OPPORTUNITY
31 03 02 COSTS
TO TOTAL
FROM
A B C AVAILABLE
$5 $4 $3
D 100 X X 100 1

$8 $4 $3
E 200 300 1

$9 $7 $5
F X 300 2

TOTAL REQUIRED 300 200 200 700

Table 10.13

© 2009 Prentice-Hall, Inc. 10 – 53

 Vogel’s Approximation Method

◼ Third VAM assignment with E’s requirements

satisfied

TO TOTAL
FROM
A B C AVAILABLE
$5 $4 $3
D 100 X X 100

$8 $4 $3
E X 200 100 300

$9 $7 $5
F X 300

TOTAL REQUIRED 300 200 200 700

Table 10.14

© 2009 Prentice-Hall, Inc. 10 – 54

 Vogel’s Approximation Method

◼ Final assignments to balance column and row

requirements

TO TOTAL
FROM
A B C AVAILABLE
$5 $4 $3
D 100 X X 100

$8 $4 $3
E X 200 100 300

$9 $7 $5
F 200 X 100 300

TOTAL REQUIRED 300 200 200 700

Table 10.15

© 2009 Prentice-Hall, Inc. 10 – 55

 Location Strategies
8
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition

PowerPoint slides by Jeff Heyl

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 8-1
 Outline
► Global Company Profile:
FedEx
► The Strategic Importance of Location
► Factors That Affect Location
Decisions
► Methods of Evaluating Location
Alternatives
► Service Location Strategy
► Geographic Information Systems
© 2014 Pearson Education, Inc. 8-2
 Learning Objectives
When you complete this chapter you
should be able to:
1. Identify and explain seven major factors
that effect location decisions
2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-even analysis
graphically and mathematically

© 2014 Pearson Education, Inc. 8-3

 Learning Objectives
When you complete this chapter you
should be able to:
5. Use the center-of-gravity method
6. Understand the differences between
service- and industrial-sector location
analysis

© 2014 Pearson Education, Inc. 8-4

 Location Provides Competitive
Advantage for FedEx

▶Central hub concept

▶Enables service to more locations with
fewer aircraft
▶Enables matching of aircraft flights with
package loads
▶Reduces mishandling and delay in transit
because there is total control of packages
from pickup to delivery

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 8-5
 The Strategic Importance of
Location
► One of the most important decisions
a firm makes
► Increasingly global in nature
► Significant impact on fixed and
variable costs
► Decisions made relatively
infrequently

© 2014 Pearson Education, Inc. 8-6

 The Strategic Importance of
Location
► Long-term decisions
► Once committed to a location, many
resource and cost issues are difficult
to change

© 2014 Pearson Education, Inc. 8-7

 The Strategic Importance of
Location
The objective of location strategy is
to maximize the benefit of location
to the firm
Options include
1. Expanding existing facilities
2. Maintain existing and add sites
3. Closing existing and relocating

© 2014 Pearson Education, Inc. 8-8

 Location and Costs
► Location decisions based on low cost
require careful consideration
► Once in place, location-related costs
are fixed in place and difficult to
reduce
► Determining optimal facility location is
a good investment

© 2014 Pearson Education, Inc. 8-9

 Factors That Affect Location
Decisions
▶Globalization adds to complexity
▶Market economics
▶Communication
▶Rapid, reliable transportation
▶Ease of capital flow
▶Differing labor costs
▶Identify key success factors (KSFs)

© 2014 Pearson Education, Inc. 8 - 10

 Location Decisions
Country Decision Key Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
Figure 8.1 risks
© 2014 Pearson Education, Inc. 8 - 11
 Location Decisions
Region/ Key Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
MN
3. Labor availability and costs
WI 4. Costs and availability of utilities
MI 5. Environmental regulations
IL IN
OH 6. Government incentives and fiscal
policies
7. Proximity to raw materials and
customers
Figure 8.1
8. Land/construction costs
© 2014 Pearson Education, Inc. 8 - 12
 Location Decisions
Site Decision Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

Figure 8.1

© 2014 Pearson Education, Inc. 8 - 13

 TABLE 8.1
Competitiveness of 142 Selected
Global Countries
2011-2012

Competitiveness COUNTRY
Switzerland
RANKING
1
Singapore 2
Index of Sweden 3
Finland 4
Countries USA
Japan
5
9
UK 10
Canada 12
Israel 22
China 26
Mexico 58
Vietnam 65
Russia 66
Haiti 141
Chad 142

© 2014 Pearson Education, Inc. 8 - 14

 Factors That Affect
Location Decisions
► Labor productivity
► Wage rates are not the only cost
► Lower productivity may increase total cost

Labor cost per day

= Cost per unit
Productivity (units per day)

South Carolina Mexico

$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units

© 2014 Pearson Education, Inc. 8 - 15

 Factors That Affect
Location Decisions
► Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
► Costs
► Tangible - easily measured costs such as
utilities, labor, materials, taxes
► Intangible - less easy to quantify and include
education, public transportation, community,
quality-of-life

© 2014 Pearson Education, Inc. 8 - 16

 Factors That Affect
Location Decisions
► Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
Location decisions
► Costs
based on costs
► Tangible - easily measured costs such as
alone
utilities, labor, materials, taxes
can create
difficult ethical
► Intangible - less easy to quantify and include
situations
education, public transportation, community,
quality-of-life

© 2014 Pearson Education, Inc. 8 - 17

 Factors That Affect
Location Decisions
► Political risk, values, and culture
► National, state, local governments attitudes
toward private and intellectual property,
zoning, pollution, employment stability may
be in flux
► Worker attitudes towards turnover, unions,
absenteeism
► Globally cultures have different attitudes
towards punctuality, legal, and ethical issues

© 2014 Pearson Education, Inc. 8 - 18

 Ranking Corruption
Rank Country 2012 CPI Score (out of 100)
1 Demark, Finland, New Zealand 90 Least
4 Sweden 88 Corrupt
5 Singapore 87
6 Switzerland 86
7 Australia, Norway 85
9 Canada, Netherlands 84
13 Germany 79
14 Hong Kong 77
17 Japan, UK 74
19 USA 73
37 Taiwan 61
39 Israel 60
45 South Korea 56 Most
80 China 39 Corrupt
123 Vietnam 31
133 Russia 28
© 2014 Pearson Education, Inc. 8 - 19
 Factors That Affect
Location Decisions
► Proximity to markets
► Very important to services
► JIT systems or high transportation costs may
make it important to manufacturers
► Proximity to suppliers
► Perishable goods, high transportation costs,
bulky products

© 2014 Pearson Education, Inc. 8 - 20

 Factors That Affect
Location Decisions
► Proximity to competitors (clustering)
► Often driven by resources such as natural,
information, capital, talent
► Found in both manufacturing and service
industries

© 2014 Pearson Education, Inc. 8 - 21

 Clustering of Companies
TABLE 8.3 Clustering of Companies
REASON FOR
INDUSTRY LOCATIONS CLUSTERING
Wine making Napa Valley (US) Natural resources of land
Bordeaux region and climate
(France)
Software firms Silicon Valley, Talent resources of bright
Boston, Bangalore graduates in
(India) scientific/technical areas,
venture capitalists nearby
Clean energy Colorado Critical mass of talent and
information, with 1,000
companies

© 2014 Pearson Education, Inc. 8 - 22

 Clustering of Companies
TABLE 8.3 Clustering of Companies
REASON FOR
INDUSTRY LOCATIONS CLUSTERING
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal Studios, weather, tourists, and
and Sea World) inexpensive labor
Electronics firms Northern Mexico NAFTA, duty free export to
U.S.
Computer hardware Singapore, Taiwan High technological
manufacturers penetration rate and per
capita GDP,
skilled/educated workforce
with large pool of engineers

© 2014 Pearson Education, Inc. 8 - 23

 Clustering of Companies
TABLE 8.3 Clustering of Companies
REASON FOR
INDUSTRY LOCATIONS CLUSTERING
Fast food chains Sites within 1 mile of Stimulate food sales, high
(Wendy’s, each other traffic flows
McDonald’s, Burger
King, and Pizza
Hut)
General aviation Wichita, Kansas Mass of aviation skills
aircraft (Cessna,
Learjet, Boeing,
Raytheon)
Athletic footwear, Portland, Oregon 300 companies, many
outdoor wear owned by Nike, deep talent
pool and outdoor culture

© 2014 Pearson Education, Inc. 8 - 24

 Factor-Rating Method
► Popular because a wide variety of factors
can be included in the analysis
► Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Make a recommendation based on the highest
point score
© 2014 Pearson Education, Inc. 8 - 25
 Factor-Rating Example
TABLE 8.4 Weights, Scores, and Solution

SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK

Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude

People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3

Education and
.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
health
Totals 1.00 70.4 68.0

© 2014 Pearson Education, Inc. 8 - 26

 Locational
Cost-Volume Analysis
► An economic comparison of location
alternatives
► Three steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume

© 2014 Pearson Education, Inc. 8 - 27

 Locational Cost-Volume
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

© 2014 Pearson Education, Inc. 8 - 28

 Locational Cost-Volume
Analysis Example
Crossover point – Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000

Crossover point – Brussels/Lisbon

60,000 + 45(x) = 110,000 + 25(x)

20(x) = 50,000
(x) = 2,500

© 2014 Pearson Education, Inc. 8 - 29

 Locational Cost-Volume
Analysis Example
Figure 8.2

–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
Annual cost

–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 – Athens Lisbon
Brussels
lowest lowest
– cost
lowest cost
cost
$10,000 –
|
– | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
© 2014 Pearson Education, Inc. 8 - 30
 Center-of-Gravity Method
► Finds location of distribution center
that minimizes distribution costs
► Considers
► Location of markets
► Volume of goods shipped to those
markets
► Shipping cost (or distance)

© 2014 Pearson Education, Inc. 8 - 31

 Center-of-Gravity Method
► Place existing locations on a
coordinate grid
► Grid origin and scale is arbitrary
► Maintain relative distances
► Calculate x and y coordinates for
‘center of gravity’
► Assumes cost is directly proportional
to distance and volume shipped

© 2014 Pearson Education, Inc. 8 - 32

 Center-of-Gravity Method
åd Q ix i
x-coordinate of the = i
center of gravity åQ i
i

åd Q iy i
y-coordinate of the = i
center of gravity åQ i
i

where dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods moved to or from
location i

© 2014 Pearson Education, Inc. 8 - 33

 Center-of-Gravity Method

TABLE 8.5 Demand for Quain’s Discount Department Stores

NUMBER OF CONTAINERS
STORE LOCATION SHIPPED PER MONTH
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000

© 2014 Pearson Education, Inc. 8 - 34

 Center-of-Gravity Method
North-South Figure 8.3

New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –

60 – d1x = 30
d1y = 120
30 – Q1 = 2,000
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
© 2014 Pearson Education, Inc. 8 - 35
 Center-of-Gravity Method

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7

(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3

© 2014 Pearson Education, Inc. 8 - 36

 Center-of-Gravity Method
North-South Figure 8.3

New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
© 2014 Pearson Education, Inc. 8 - 37
 Transportation Model

► Finds amount to be shipped from

several points of supply to several
points of demand
► Solution will minimize total production
and shipping costs
► A special class of linear programming
problems

© 2014 Pearson Education, Inc. 8 - 38

 Worldwide Distribution of
Volkswagens and Parts
Figure 8.4

© 2014 Pearson Education, Inc. 8 - 39

 Service Location Strategy
1. Purchasing power of customer-drawing area
2. Service and image compatibility with
demographics of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’
locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management
© 2014 Pearson Education, Inc. 8 - 40
 Location Strategies
TABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
REVENUE FOCUS COST FOCUS
Volume/revenue Tangible costs
Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw
Physical quality material; taxes, and so on
Parking/access; security/lighting;
appearance/ image Intangible and future costs
Attitude toward union
Cost determinants Quality of life
Rent Education expenditures by state
Management caliber Quality of state and local
Operation policies (hours, wage government
rates)

© 2014 Pearson Education, Inc. 8 - 41

 Location Strategies
TABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
TECHNIQUES TECHNIQUES
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Locational cost–volume analysis
Traffic counts Crossover charts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
ASSUMPTIONS ASSUMPTIONS
Location is a major determinant of Location is a major determinant of cost
revenue Most major costs can be identified
High customer-contact issues are critical explicitly for each site
Costs are relatively constant for a given Low customer contact allows focus on
area; therefore, the revenue the identifiable costs
function is critical Intangible costs can be evaluated

© 2014 Pearson Education, Inc. 8 - 42

 How Hotel Chains Select Sites
► Location is a strategically important decision
in the hospitality industry
► La Quinta started with 35 independent
variables and worked to refine a regression
model to predict profitability
r2 = .51
► The final model had only four variables
51% of the
► Price of the inn profitability is
► Median income levels predicted by
just these
► State population per inn four variables!
► Location of nearby colleges
© 2014 Pearson Education, Inc. 8 - 43
 Geographic Information
Systems (GIS)
► Important tool to help in location analysis
► Enables more complex demographic analysis
► Available data bases include
► Detailed census data
► Detailed maps
► Utilities
► Geographic features
► Locations of major services

© 2014 Pearson Education, Inc. 8 - 44

 Geographic Information
Systems (GIS)

© 2014 Pearson Education, Inc. 8 - 45

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

© 2014 Pearson Education, Inc. 8 - 46

 Practice Problems: Chapter 8, Location Strategies

Problem 1:

A major drug store chain wishes to build a new warehouse to serve the whole
Midwest. At the moment, it is looking at three possible locations. The factors,
weights, and ratings being considered are given below:

Ratings
Factor Weights Peoria Des Moines Chicago
Nearness to 20 4 7 5
markets
Labor cost 5 8 8 4
Taxes 15 8 9 7
Nearness to suppliers 10 10 6 10

Which city should they choose?

Problem 2:

Balfour’s is considering building a plant in one of three possible locations. They have
estimated the following parameters for each location:

Location Fixed Cost Variable Cost

Waco, Texas $300,000 $5.75
Tijuana, Mexico $800,000 $2.75
Fayetteville, Arkansas $100,000 $8.00

For what unit sales volume should they choose each location?
Problem 3:

Our main distribution center in Phoenix, AZ is due to be replaced with a much larger,
more modern facility that can handle the tremendous needs that have developed with
the city’s growth. Fresh produce travels to the seven store locations several times a
day making site selection critical for efficient distribution. Using the data in the
following table, determine the map coordinates for the proposed new distribution
center.

Store Locations Map Coordinates (x,y) Truck Round Trips per Day
Mesa (10,5) 3
Glendale (3,8) 3
Camelback (4,7) 2
Scottsdale (15,10) 6
Apache Junction (13,3) 5
Sun City (1,12) 3
Pima (5,5) 10

Problem 4:

A company is planning on expanding and building a new plant in one of three

countries in Middle or Eastern Europe. The general manager, Patricia Donegal, has
decided to base her decision on six critical success factors: technology availability and
support, availability and quality of public education, legal and regulatory aspects,
social and cultural aspects, economic factors, and political stability.
Using a rating system of 1 (least desirable) to 5 (most desirable) she has arrived at the
following ratings (you may, of course, have different opinions). In which country
should the plant be built?

Critical Success Factor Turkey Serbia Slovakia

Technology availability and support 4 3 4
Availability and quality of public 4 4 3
education
Legal and regulatory aspects 2 4 5
Social and cultural aspects 5 3 4
Economic factors 4 3 3
Political stability 4 2 3
Problem 5:

Assume that Patricia decides to use the following weights for the critical success
factors:
Technology availability and support 0.3
Availability and quality of public education 0.2
Legal and regulatory aspects 0.1
Social and cultural aspects 0.1
Economic factors 0.1
Political stability 0.2
Would this change her decision?

Problem 6:

Patricia’s advisors have suggested that Turkey and Slovakia might be better
differentiated by either (a) doubling the number of critical success factors, or (b)
breaking down each of the existing critical success factors into smaller, more
narrowly defined items, e.g., Availability and quality of public education might be
broken into primary, secondary, and post-secondary education. How would you
advise Ms. Donegal?