ZeePedia Add to Favourites   |   Contact us


Production Operations Management

<<< Previous LOCATION PLANNING AND ANALYSIS:MANAGING GLOBAL OPERATIONS, Regional Factors Next >>>
 
img
Production and Operations Management ­MGT613
VU
Lesson 22
LOCATION PLANNING AND ANALYSIS
Lecture Objectives
By studying location planning and analysis, an operations management student should be able to
understand the
Importance of Location Planning and Analysis
Criteria for Manufacturing and Service Location selection considerations
Transportation Model
IMPORTANCE OF LOCATION
Location decisions are not limited to one time strategic planning decisions for building a new
manufacturing or service facility rather most of the organizations face the challenge of increasing their
capacity through selection of new locations or extension of existing locations.
As an operations management student, we can focus on the importance of location for any organization
through various departments of the organization.
Accounting which prepares cost estimates for changing locations as well as operating at new
locations.
Distribution which seeks warehouse layouts that make material handling easier and customer
response shorter.
Importance of Location
Engineering which considers the impact of product /service location choices.
Finance which performs the financial analysis for investments in new locations.
Human Resources, which hires and trains employees to support new locations or relocations of
operations.
Management Information Systems which provide information technologies that link operations
at different locations.
Importance of Location
Marketing which assesses new locations and revised locations that are popular with the
customers.
Operations Management which seeks and finalizes locations that create, sustains, protect and
project the best performance criteria for the whole organization.
Location plays an important role for every business whether new or existing. We can refer to the same
airport example we discussed in our earlier lectures before. The airport is not only crowded but fails to
separate the different services it provides to different categories of individuals present at the airport. The
airport may need to explain its existing facility. In Pakistan too, we have seen new airports set up at
Karachi, Lahore and Islamabad which cater to greater traffic of the aero planes and more passengers.
Location decisions play an integral part of the strategic planning process of every organization. It is
important to learn about the need and nature of location decisions. As a part of his routine
responsibilities a senior Operations Manager often carries out the evaluation of different available
locations.
GLOBALIZATION AND GEOGRAPHIC DISPERSION OF OPERATIONS
Globalization has affected Pakistan tremendously. A number of  Multi National Corporations are
operating and functioning in Pakistan. It is important to spend some time in understanding how
globalization makes it necessary and pertinent for a MNC to disperse and spread its scope and function
of Operation. It would be more correct if try to understand the philosophy of MNC's not operating in
certain regions or certain particular countries. The western worlds call these the disadvantages of
Globalization, if an organization decides to pack up its business and leave a host company.
95
img
Production and Operations Management ­MGT613
VU
DISADVANTAGES TO GLOBALIZATION
The common disadvantages which lead to a MNC forgoing globalization includes.
Handing over proprietary Technology to host countries.
Political risks.
Poor Employee ( Managers and worker ) skills.
Slow customer response time.
Effective communication between interfaces difficult
MANAGING GLOBAL OPERATIONS
When organizations become global they often end up paying a heavy price in terms of managing
complex managerial issues and challenges.
Host country languages
Host Country Norms and Customs.
Workforce management
Unfamiliar laws and regulations.
Unexpected Cost mix.
Need for Location Decisions
Quite often MNC's move to a host country with a lot of hype and propaganda of bringing jobs to the
local labour but the reality is its own need to increase its revenue and profits. Most of the time the need
for location decision focuses on
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources
Nature of Location Decisions
Location Decisions are primarily strategic in nature and have certain objectives and options attached
Strategic Importance
1. Long term commitment/costs
2. Impact on investments, revenues, and operations
3. Supply chains
Objectives
1. Profit potential
2. No single location may be better than others
3. Identify several locations from which to choose
Options
1. Expand existing facilities
2. Add new facilities
3. Move
Making Location Decisions
1.
Decide on the criteria
2.
Identify the important factors
3.
Develop location alternatives
4.
Evaluate the alternatives
96
img
Production and Operations Management ­MGT613
VU
5. Make selection
Location Decision Factors
Regional Factors
Location of raw materials
Location of markets
Labor factors
Climate and taxes
Community Considerations
Quality of life
Services
Attitudes
Taxes
Environmental regulations
Utilities
Developer support
Site Related Factors
Land
Transportation
Environmental
Legal
Multiple Plant Strategies
1. Product plant strategy
2. Market area plant strategy
3. Process plant strategy
Mostly mix of all three
Factors Affecting Location Decisions
The process of determining a geographic site for firms operations takes into account both manufacturing
and marketing aspects. We just focus on the manufacturing aspects as its more closely related to
Operations Management
Manufacturing
Favorable Labor Climate
Proximity to markets.
Quality of Life
Proximity of Suppliers and Resources.
Proximity to the Parent Company's facilities.
Utilities, Taxes and Real estate costs.
Other factors ( expansion, construction costs, and location near the highway or main railways)
Dominant Factors in Services
Look for concept check information provided by our expert. We also present the following
dominant factors in selection of locations for services.
Proximity to Customers.
Transportation costs and proximity to markets.
Location of competitors.
Site specific factors.
Trends in Locations
97
img
Production and Operations Management ­MGT613
VU
Foreign producers locating in different host countries even Pakistan
Currency fluctuations
Just-in-time manufacturing techniques
Micro-factories
Information Technology
Evaluating Locations
Cost-Profit-Volume Analysis
Determine fixed and variable costs
Plot total costs
Determine lowest total costs
Location Cost-Volume Analysis
Assumptions
Fixed costs are constant
Variable costs are linear
Output can be closely estimated
Only one product involved
Example 1: Cost-Volume Analysis
The quantity is 10,000 and the Fixed and variable costs for four potential locations
Location
Fixed
Variable
Cost
Cost
Rs 11
Rs 250,000
A
30
100,000
B
20
150,000
C
35
200,000
D
Example 1: Solution
Fixed
Variable
Total
Costs
Costs
Costs
A Rs250,000 Rs11(10,000) Rs360,000
B
100,000
30(10,000)
400,000
C
150,000
20(10,000)
350,000
D
200,000
35(10,000)
550,000
Example 1: Solution
We calculate the variable costs by multiplying the unit cost with the given quantity and
calculate total costs for all four locations
98
img
Production and Operations Management ­MGT613
VU
We also graph them to decide effectively, the total costs are graphed and we see that for 10,000
units clearly location c has an advantage, beyond 10,000 units, diseconomies of scales set in and
makes Location C look less lucrative.
We select the Location for which the total cost is the lowest.
Our Location C, shows the lowest total cost for an equal quantity of 10,000 units.
Rs(000)
800
D
700
B
600
500
C
400
A
300
A
200
C
100
B
0
0
2
4
6
8
10
12
14
16
Annual Output (000)
Evaluating Locations
Operations Manager can evaluate business site locations by making use of the following three
techniques
1. Transportation Model
Decision based on movement costs of raw materials or finished goods
2. Factor Rating
Decision based on quantitative and qualitative inputs
3. Center of Gravity Method
Decision based on minimum distribution costs
Transportation Method
Transportation Method is a quantitative approach that can help solve multiple facility location problems.
It is used to determine the allocation pattern that can be used to minimize the cost of shipping products
from two or more plants or sources of supply to two or more warehouses or destinations.
Based on Linear Programming.
It does not solve all the problems of the multiple facility location.
It only finds the best shipping pattern between plants and warehouses for a particular set of
plant locations with a given capacity.
The Operations manager or logistics analyst must try a variety of location-capacity
combinations and use this to find the optimal distribution for each alternative.
Distribution costs( variable shipping and possible variable production costs) are important
inputs in evaluating a particular location allocation combination.
Investments costs and other fixed costs are also considered.
Qualitative factors ( like land and construction cost against annual profits) are also included in
the analysis for each location capacity combination.
Transportation Method
Step I
Set up the initial matrix/tableau. The basic steps include
Create a row for each plant ( existing or new) being considered and a column for each warehouse.
Add a column for plant capacities and a row for warehouse demands and then insert specific
numerical values.
Transportation Method
Step II
Each cell not in the requirement row or capacity column represents a shipping route from a plant to
warehouse. Insert the unit costs in the upper right hand corner of each of these cells.
99
img
Production and Operations Management ­MGT613
VU
Example
Pakistan Cellular Mobile Company plans to build a 5000 unit production plant at Islamabad because
demand for mobile phones in Pakistan has gone up. The tableau on the next slide shows the unit cost of
shipping one truck/loader of mobiles from the existing plant at Lahore and the possible location at
Islamabad.
Transportation Method Ma
Plant
Capacity
WAREHOUSE
1
2
3
Lahore
500.0
600.0
5500
5000
Islamabad
700.0
4500
6000
5000
REQUIREMENTS 2500
4500
3000
10000
10000
Matrix/Tableau
In transportation method, the sum of the shipments in a row must equal the corresponding plants
capacity.
Similarly the sum of the shipments to a column must add to corresponding warehouses demand
requirements. Thus shipments to Warehouse 1 from Lahore and Islamabad must equal 2500
mobiles.
Dummy Plants or Warehouses
The prime requirement of transportation model is that the sum of capacities must equal the sum
of demands, which happens to be 10,000 units of mobile phones.
IN reality the total capacity may exceed total requirements or vice verca.
Dummy Plants or Warehouses
If capacity exceeds requirements by say M units, we add extra column ( a dummy warehouse)
with a demand of M units and make the shipping costs in the new created cell equal to Rs. 0.
Since no shipments are made to the dummy warehouse so it represents an unused plant capacity.
Dummy Plants or Warehouses
If requirements exceed capacity by say M units, we add extra row ( a dummy plant) with a
supply of M units and make the shipping costs ( stock out costs) in the new created cell equal to
Rs. 0.
Since no shipments are made to the dummy warehouse or plants so this step is automatically
taken care of in Softwares used for such issues.
Optimal Solution
We try to find the least allocation cost process.
And we keep on repeating with various options till a new solution with least costs is obtained
and we call it the optimal solution.
Transportation Method
Plant
Capacity
WAREHOUSE
1
2
3
Dummy
Lahore
1.0
6.0
1.0
0
5000
2500
2500
Islamabad
7.0
2.00
6.00
0
5000
4500
500
0
0
0
0
Dummy
REQUIREMENTS 2500
4500
3000
0
10000
10000
100
img
Production and Operations Management ­MGT613
VU
The total transportation cost would be Sum of all Units time X the Unit Cost
= 2500(1.0)+4500(2.0)+2500(1.0)+500(6.0)
=2500+9000+2500+3000=Rs 17,000.
The operations manager needs to be judicious in his approach and may decide to expand the plant at
Lahore and build a small plant in Islamabad.
Summary
The lecture focused primarily on the importance of location. Various aspects relating to Location
Planning and Analysis were focused. MNC's reasons for not selecting various countries under the garb
of disadvantages in Global Operations were also examined. Site locations for both manufacturing and
services were considered. Last but not the least a detailed study of the Transportation Model was also
carried out. Students should also know how to make use of cost volume analysis and transportation
model to carry out practical investigation of real life time Operations Management problems.
101
Table of Contents:
  1. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT
  2. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Decision Making
  3. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Strategy
  4. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Service Delivery System
  5. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Productivity
  6. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:The Decision Process
  7. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Demand Management
  8. Roadmap to the Lecture:Fundamental Types of Forecasts, Finer Classification of Forecasts
  9. Time Series Forecasts:Techniques for Averaging, Simple Moving Average Solution
  10. The formula for the moving average is:Exponential Smoothing Model, Common Nonlinear Trends
  11. The formula for the moving average is:Major factors in design strategy
  12. The formula for the moving average is:Standardization, Mass Customization
  13. The formula for the moving average is:DESIGN STRATEGIES
  14. The formula for the moving average is:Measuring Reliability, AVAILABILITY
  15. The formula for the moving average is:Learning Objectives, Capacity Planning
  16. The formula for the moving average is:Efficiency and Utilization, Evaluating Alternatives
  17. The formula for the moving average is:Evaluating Alternatives, Financial Analysis
  18. PROCESS SELECTION:Types of Operation, Intermittent Processing
  19. PROCESS SELECTION:Basic Layout Types, Advantages of Product Layout
  20. PROCESS SELECTION:Cellular Layouts, Facilities Layouts, Importance of Layout Decisions
  21. DESIGN OF WORK SYSTEMS:Job Design, Specialization, Methods Analysis
  22. LOCATION PLANNING AND ANALYSIS:MANAGING GLOBAL OPERATIONS, Regional Factors
  23. MANAGEMENT OF QUALITY:Dimensions of Quality, Examples of Service Quality
  24. SERVICE QUALITY:Moments of Truth, Perceived Service Quality, Service Gap Analysis
  25. TOTAL QUALITY MANAGEMENT:Determinants of Quality, Responsibility for Quality
  26. TQM QUALITY:Six Sigma Team, PROCESS IMPROVEMENT
  27. QUALITY CONTROL & QUALITY ASSURANCE:INSPECTION, Control Chart
  28. ACCEPTANCE SAMPLING:CHOOSING A PLAN, CONSUMERíS AND PRODUCERíS RISK
  29. AGGREGATE PLANNING:Demand and Capacity Options
  30. AGGREGATE PLANNING:Aggregate Planning Relationships, Master Scheduling
  31. INVENTORY MANAGEMENT:Objective of Inventory Control, Inventory Counting Systems
  32. INVENTORY MANAGEMENT:ABC Classification System, Cycle Counting
  33. INVENTORY MANAGEMENT:Economic Production Quantity Assumptions
  34. INVENTORY MANAGEMENT:Independent and Dependent Demand
  35. INVENTORY MANAGEMENT:Capacity Planning, Manufacturing Resource Planning
  36. JUST IN TIME PRODUCTION SYSTEMS:Organizational and Operational Strategies
  37. JUST IN TIME PRODUCTION SYSTEMS:Operational Benefits, Kanban Formula
  38. JUST IN TIME PRODUCTION SYSTEMS:Secondary Goals, Tiered Supplier Network
  39. SUPPLY CHAIN MANAGEMENT:Logistics, Distribution Requirements Planning
  40. SUPPLY CHAIN MANAGEMENT:Supply Chain Benefits and Drawbacks
  41. SCHEDULING:High-Volume Systems, Load Chart, Hungarian Method
  42. SEQUENCING:Assumptions to Priority Rules, Scheduling Service Operations
  43. PROJECT MANAGEMENT:Project Life Cycle, Work Breakdown Structure
  44. PROJECT MANAGEMENT:Computing Algorithm, Project Crashing, Risk Management
  45. Waiting Lines:Queuing Analysis, System Characteristics, Priority Model