Plant location

➢ One of the most important decisions a firm makes

➢ Long term decisions made relatively infrequently by the organizations
➢ Plant location has significant impact on fixed and variable costs
➢ Is understood as the function of determining where the plant should be
located for maximum operating economy and effectiveness
Plant location

➢ Once committed to a location, many resource and cost issues are difficult to
change i.e. Difficult to reverse
➢ The objective of location strategy is to maximize the benefit of location to the
firm
➢ Determining optimal facility location is a good investment
When do firms need to take plant location decision?

➢ When the business is newly to be started

➢ Existing business has outgrown its original facilities and expansion not
possible
➢ Volume of the business or the extent market necessitates the establishment
of branches
➢ Lease expires and the landlord does not renew the lease
➢ Social and economic reasons i.e., in-adequate labor supply and shifting of
the market and political reasons
Industrial and service location decision

➢ Due to differences in the nature of manufacturing and service industries, the

considerations for selecting location decisions for these also differs
Industrial and service location decision

Industrial Location Decision Service Location Decision

➢ Industrial organizations prefer their ➢ Service organizations prefer their

location to be in proximity to market location to be in proximity to
and resources customers
➢ Considers location as a major cost ➢ Considers location as a major revenue
factor factor
➢ Assumes costs vary greatly between ➢ Assumes revenue vary greatly across
locations (market vs customers) location (Market vs customers)
➢ Assumes revenue varies little between ➢ Assumes cost varies little between
locations locations
Industrial and service location decision
Organizations that locate close to Organizations that locate close to
Markets/Materials customers/service organization
➢ Manufacturing firms ➢ Government agencies.
➢ By necessity.
➢ Mining, fishing, farming, etc. ➢ Police & fire departments, post
offices, public libraries.
➢ Retail sales and Services.
➢ Fast food restaurants,
supermarkets, gas stations.
➢ Doctors, lawyers, barbers,
banks, auto repair, etc.
 Factors affecting locating decision

➢ Government policies, incentives and zoning restrictions

➢ Environmental regulations of state and town
➢ Labor availability, cost and productivity
➢ Availability of supplies, communications, energy and other infrastructures
➢ Access to air, rail, highway, and waterway systems.
➢ Proximity to suppliers, markets and/or customers
➢ Land/construction costs at site.
Location Decision Example - BMW

In 1992, BMW decided to build its first major manufacturing plant outside
Germany in South Carolina, USA.

Why USA?
Why USA?

➢U.S. was world’s largest luxury car market and is growing

➢U.S. has lower manufacturing labor costs
➢ $ 8/hr. (U.S.) vs. $ 12 (Germany)
➢U.S. may have higher labor productivity
➢ 11 holidays (U.S.) vs. 31 (Germany)
➢Lower shipping cost ($ 500/car less)
➢New plant & equipment would increase productivity (lower cost/car $1,000-
1,500)
➢
Why South Carolina?

Labor
➢ Lower wages in South Carolina (SC).
➢ About $17,000/year in SC vs. $27,051/year in U.S. (based on 1993).
Government incentives
➢ $135 million in state & local tax breaks
➢ Free-trade zone from airport to plant
➢ No duties on imported components or on exported cars
General process for facility location

➢ Creation of a multifunctional team to perform the study

➢ Preliminary analysis
➢ Search of Location Alternatives
➢ Evaluation of Alternatives (detailed analysis)
➢ Selection of Facility Location
General process for facility location: Cross function team

➢ Creation of a multifunctional/cross functional team to perform the study

about the probable locations
General process for facility location: Preliminary analysis

➢ Study of the company’s strategies and the policies to translate them into
Facility Location requirements.
➢ Due to the large factors affecting facility/location, the company should
determine which criteria to evaluate:
➢ Transportation need
➢ Land
➢ Supplies
➢ Labor
➢ Infrastructures
➢ Services
➢ Environmental conditions etc.
➢ The multifunctional team must distinguish between:
➢ Dominant factors (essential)
➢ Secondary factors (desirable)
General process for facility location: Search of location
alternatives

➢ Cross functional team establishes a group of location candidates as

alternatives
General process for facility location: Evaluation of
alternatives (Detailed analysis)

➢ Cross functional team evaluates the alternative locations by measuring

against each of the factors considered using the following methods
➢ Transportation model
➢ Factor-rating method
➢ Locational break-even analysis
➢ Center of gravity method
General process for facility location: Selection of facility
location

➢ Through qualitative and quantitative analysis, the different alternatives will be

compared against each other to determine several valid locations and the
most optimal location is selected
Location evaluation methods

➢ Transportation model
➢ Factor-rating method
➢ Locational break-even analysis
➢ Center of gravity method
Transportation model

➢ This model is used primarily for industrial locations

➢ Finds amount to be shipped from several sources to several destinations
➢ Objective: Minimize total shipping costs or maximize the profit
Requirements:
➢ Production or supply capacities of various factories
➢ Demand or requirements of various markets
➢ Shipping cost per unit from each source to each destination
Factor rating method

➢ Suppose we have three locations A, B and C.

➢ Suppose there are four factors to be considered Cost, proximity to
transportation, taxes and labor.
➢ The weight assigned for each factors are 0.3, 0.2,0.1 and 0.4
Find the optimal location for the team i.e., Which location is optimal?
Factor rating method: Allocate the score for each location on
each factor

➢All 3 locations are provided score by the cross functional teams in a scale of 1-5,
1-10 etc.
➢Here the scale of 1-10 has been used
➢The cross functional team assigns the average score for each factor for each
location
➢Here 10 is considered to be best and 1 is considered to be worst.
Factor rating method: Weighted score

Factor weight A B C
Cost 0.3 10 9 7
Proximity to trans. 0.2 7 3 10
Taxes 0.1 7 5 10
Labor 0.4 6 8 5
7.5 7 7.1

Decision: Here weighted score 7.5 is the highest thus, A is the optimal location.
Factor rating method

➢ Most widely used location evaluation technique

➢ Useful for both service & industrial locations
➢ Rates locations using factors
➢ Based on weighted average
Steps in factor rating method

➢ Determine location alternatives

➢ List relevant factors :Transportation need, Land, Supplies, Labor,
Infrastructures, Services, Environmental conditions etc.
➢ Assign importance weight to each factor (0-1): Total weights sum should be
one
➢ Set a scale for scoring each factor (1 -5 or 1-10)
➢ Rate each location for each factor in a scale of 1-5 or 1-10
➢ Multiply ratings of each location for all factors weights and add it to
determine total score for each location
➢ Select location with maximum total score as the best location among others
Locational break-even analysis

➢ Method of cost-volume analysis used for industrial locations

➢ Three steps in the method
➢ Determine fixed and variable costs for each location
➢ Plot the cost for each location
➢ Select location with lowest total cost for expected production volume
➢ The decision must be based on break even point and production volume
must be above break-even point.
Locational Break-Even Analysis: Example

You’re an analyst for AC Delco. You’re considering a new manufacturing

plant in New Road, Kings Way or Queens Street and details is as given. If
the selling price per case is $1200.
Over what range of production are each location best?
Or
a. When is New Road the best location?
b. When is Kings Way the best location?
c. When is Queens Street the best location?
Location Fixed Cost Variable Cost Per Unit
Kings Way 60000 45
Queens Street 110000 25
New Road 30000 75
Locational break even analysis: Use cross over point or
indifference point method to solve

➢ Cross Over point is the point in which total cost becomes same between two
locations i.e. A and B & B and C. Here,
➢ A= New Road
➢ B= Kings Way
➢ C= Queens Street
➢ While calculating cross over point, the locations must be arranged in
ascending order in terms of Fixed Cost.
Locational Break-Even Analysis: Arrange the location in
ascending order as per fixed cost

Location Fixed Cost Variable Cost Per Unit

New Road 30000 75
Kings Way 60000 45
Queens Street 110000 25
Locational break even analysis: Solution

Let x units to be manufactured

TC New Road=FC+VCPU*x=30000+75x
TC Kings Way=FC+VCPU*x=60000+45x
TC Queens Street=FC+VCPU*x=110000+25x
Locational break even analysis: Calculation of Cross Over
Point
QCO New Road & Kings Way is
TC New Road=TC Kings Way
or, 30000+75x=60000+45x
Therefore x=1000 Units
Again,
QCO Kings Way & Queens Street is
TC Kings Way Green=TC Queens Street
or, 60000+45x=110000+25x
Therefore x=2500 Units

Note: QCO =Quantity Cross Over Point

Locational break even analysis: Decision

Location Best for Range of Production

New Road 0-1000 units
Kings Way 1000-2500 units
Queens Street 2500 or more than 2500 units

➢New Road is best location for the production range between 0 to 1000
➢Kings Way is best location for the production range between 1000 to 2500.
➢Queens Street is best location for the production range equal to 2500 units or
more.
Center-of-gravity method

➢ Used to find location when single distribution center is serving several

destinations
➢ Finds location of distribution center that minimizes distribution costs
➢ Assumes the distribution cost is the function of distance of location and the
weight of the goods to be distributed.
Requirements
➢ Location of markets
➢ Volume of goods shipped to those markets
➢ Distance
Center-of-gravity method
Number of Containers
Store Location Shipped per Year
Pokhara (30, 120) 2,000
Butwal (90, 110) 1,000
Dharan (130, 130) 1,000
Chitwan (60, 40) 2,000

or
Volume (Units per
Store Location X Y
Year)
Pokhara 30 120 2000
Butwal 90 110 1000
Dharan 130 130 1000
Chitwan 60 40 2000
Where should the company locate its distribution point?
Center-of-gravity method
North-South
Dharan (130, 130)
Pokhara (30, 120)
120 –
Butwal (90, 110)
90 –

60 –

30 –
Chitwan (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Not necessary to draw in exam.
Center of gravity method: Calculating X and Y coordinate

∑dixQi
X - coordinate = i
∑Qi
i

∑diyQi
Y - coordinate = i
∑Qi
i
Where,
dix = x-coordinate of location i
diy = y-coordinate of location i
Q = Quantity of goods moved to or from location i
Center-of-gravity method: Decision

X-coordinate = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000
= 66.7 km

Y-coordinate = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000
= 93.3 km

The distribution center should be located at the X coordinate of 66.7 km and y

coordinate of 93.3 km.
Center of gravity method: Decision
North-South
Dharan (130, 130)
Pokhara (30, 120)
120 –
Butwal (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Chitwan (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
The distribution center should be located at the X coordinate of 66.7 km and y
coordinate of 93.3 km.
Facility layout

➢ Facility Layout refers to the configuration of departments, work centers, and

equipment, with particular emphasis on movement of work (customers or
materials) through the system of production or service process
➢ Proper layout has the advantage from the point of workers, labor costs, other
production costs, supervision, capital investment and customers if they are
involved
➢ Have a significant impact on the cost and efficiency of operations
Objectives of plant layout

➢ Facilitate the smooth manufacturing/service process

➢ Effective utilization of men, equipment, space & cubic space
➢ Provide for employee and customers (if they are involved) convenience,
safety and comfort
➢ Provide flexibility of manufacturing/service operations for organiztaion
➢ Minimize overall production time
➢ Minimize materials handling cost
Principles of Ideal layout

➢ Principle of smooth flow of the process (no backtracking)

➢ Principle of integration (Optimum utilization of resources)
➢ Principle of safety (workers & customers safety)
➢ Principle of maximum flexibility
➢ Principle of minimum distance movement
➢ Principle of optimum material handling and cost reduction
Factors affecting plant layout

➢ Plant location and area/building structure

➢ Nature of product/service and production or service process
➢ Types of machinery and equipment
➢ Management policy
➢ Human needs (Employees need/quality of working environment))
➢ Safety and security
➢ Customer requirements (if they are involved)
Plant layout : Types

➢ Product layout/Line layout

➢ Process layout/Functional layout
➢ Hybrid/Combination layout
➢ Fixed position plant layout
Product/line layout

➢ Product or line layout is concerned with locating machines or work stations as

per the product’s processing sequence
➢ Its main focus is on the sequence of operations related to production or
assembly of a product

➢ Usually, this layout is beneficial for industries that have continuous or

mass/assembly production
Production system and layouts
Product /line layout

➢ The raw material is supplied at one end of the line and goes from one
operation to the next quite rapidly with a minimum work in process, storage
and material handling
➢ Only one product of one type in a time is produced in an operating area.
(Machine will not be shared for other products).
➢ This product must be standardized and produced in large quantities in order
to justify the product layout
➢ Product layouts are used to achieve a smooth and rapid flow of large
volumes of goods or customers through a system.
Some terminologies used in metal industries: Lathe

A machine for shaping wood, metal, or other material by means of a rotating

drive which turns the piece being worked on against changeable cutting tools.
Some terminologies used in metal industries: Milling and
Drilling

(of a machine) designed to cut or shape metal using a rotating tool.

Some terminologies used in metal industries: Forming
Some terminologies used in metal industries: Heat treatment
Product/line layout in metal equipment production
Product/line layout in metal equipment production
Advantages of product layout

➢ Output: Product layouts can generate a large volume of products in a short

time.
➢ Low cost: Unit cost is low as a result of the high volume
➢ Labor specialization results in reduced training time and cost
➢ A wider span of supervision also reduces labor costs.
➢ Accounting, purchasing, and inventory control are routine
➢ Because routing is fixed, less attention is required.
➢ Higher utilization: There is a high degree of labor and equipment utilization.
Disadvantages of product layout

➢ Lacks motivation: The system's inherent division of labor can result in dull,
repetitive jobs that can prove to be quite stressful. Also, assembly-line layouts
make it very hard to administer individual incentive plans.
➢ Less flexibility: Product layouts are inflexible and cannot easily respond to
required system changes—especially changes in product or process design.
➢ Low system protection: The system is at risk from equipment breakdown,
absenteeism, and downtime due to preventive maintenance.
Process/functional layout

➢ A process layout is one in which resources (equipment and people) are

grouped together based upon the process in which they are used or as per
their functions
➢ This layout is necessary when an organization produces a large variety of
products or services in a low volume with intermittent processing system
basically job shop
Production system and layouts
Product families
Process/functional layout

➢ Since many different items are produced, each with unique processing
requirements, it is not possible to dedicate an entire facility (product layout) to
each item
Process/functional layout
➢ It is more efficient to group resources (equipment and people) based on their
function
➢ The products are then moved from one resource to another, based on their
unique needs
➢ The challenge in process layouts is to arrange resources (equipment and
people) to maximize efficiency and minimize waste of movement
Process/functional layout

➢ Process layouts are designed to process items or provide services that

involve a variety of processing requirements for different products/people
Advantages of process layout

➢ Flexibility: The firm has the ability to handle a variety of processing

requirements.
➢ Cost: General purpose equipment may be suitable for this type of layout and
they are less costly to purchase and easier to maintain than specialized
equipment required for product layout
➢ System protection: Since there are multiple machines available, process
layouts are not particularly vulnerable to equipment failures
➢ Motivation: Employees in this type of layout will probably be able to perform a
variety of tasks on multiple machines, as opposed to the boredom of
performing a repetitive task on an assembly line
Disadvantages of process layout

➢ Low utilization: Equipment utilization rates in process layout are frequently

very low, because machine usage is dependent upon a variety of output
requirements.
➢ High cost: If batch processing is used, in-process inventory costs could be
high. Lower volume means higher per-unit costs
➢ More specialized attention is necessary for both products and customers. Setups are
more frequent, hence higher setup costs.
➢ Material handling is slower and more inefficient.
➢ The span of supervision is small due to job complexities (routing, setups, etc.), so
supervisory costs are higher. Additionally, in this type of layout accounting, inventory
control, and purchasing usually are highly involved.
➢ Confusion: Constantly changing schedules and routings make juggling
process requirements more difficult.
Hybrid/combination layout

➢ Pure state of product or process layouts is rarely found

➢ If the good features of both types of layouts are connected, a compromise
solution can be obtained which will be more economical and flexible
➢ These mixtures are commonly called hybrid or combination layout
➢ Also sometimes known as cellular or group layout
➢ A hybrid layout combines some aspects of process layout and product
layout
➢ It brings the efficiencies of a product layout to a process layout environment
Product families
Process layout: Inefficient layout
Hybrid/combination layout: Efficient in compare to process
layout

➢In hybrid layouts, departments are arranged according to the type of

processes but the product flows through on a product layout
It is to be noted that the sequence of operations remains same with the variety
of products under product family
Fixed position layout

➢ A fixed-position layout is appropriate for a product that is too large or too

heavy to move
➢ E.g., Battleships are not produced on an assembly line, other examples
include construction (e.g., buildings, dams, or nuclear power plants), aircraft,
aerospace, farming, drilling for oil, home repair, and automated car washes
➢ In order to make this work, required resources must be portable so that they
can be taken to the job for "on the spot" performance
Fixed position layout
Fixed position layout
Fixed position layout