Bangalore 1 MBA, Semester II Operations Management Ms. Aarti Mehta Sharma.

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AMITY GLOBALBUSINESS SCHOOL Bangalore

MBA, Semester II

Operations Management

Ms. Aarti Mehta Sharma

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Operations Management

Semester 2

Module 2

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Location of FacilitiesOrganisation’s objectives, goals, priorities and strategies

location of facilities long term commitment very few qualitative and quantitative changes possible

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Situations • Location Choice for the first

time

• Location choice for an already established organisation with one or more facilities existing

• Global Location

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Location Choice for the first time eg: Micromax

- Cost economies - Marketing - Technology - Internal Organisational Strengths & Weaknesses - Availability of raw material - Business Environment ( Govt. Policy - Availability of Power / Transport Facilities - Suitability of Climate - Geographical Environment ( Nearness to the market)

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• Civic amenities for workers• Existence of complementary and competing industries• Finance and research Facilities• Availability of water and Fire Fighting Facilities• Momentum of an Early Start• Personal Factors• Receptivity of Community• Scenic location• Soil, Size and Topography• Disposal of waste

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GLOBAL LOCATION(Tangible Reasons)eg: aditya birla group – turkey, canada

• Market Presence in the country of customers

• Virtual Factory (BPO’s)

• Tax Advantages

• Cost of manufacturing is low

- lower labor costs

- lower raw material costs

- better infrastructural inputs (power, water, ores, metals)

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GLOBAL LOCATION (Intangible reasons)

• Customer Related

- customers feel more secure

- personal touch of firm

- Better customer feedback

- Discover potential customers

• Organisational Learning Related

- learn advanced technology

- learn from new competitors

- Learn from Suppliers abroad

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Strategic Reasons• Gain “local boy” psychological advantage

• Deterrent for competitors

• Avoid “political risk”

• Build alternative sources of supply

• Human Capital. Hire “best of best”

• Lowers market risk

• Exposure to different systems makes it easier to cope with change

• Build “BRAND” internationally

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Location / Relocation choice for an already established organisation (maharaja restaurants,

SIMBI, Amity)• Plants manufacturing distinct product lines covers entire market area new technology / old watch mfg / machine tools textile unit / chemical plant• Each plant supplying to a specific market area• Plants divided on the basis of the processes or stages in

Manufacturing• Plants Emphasizing Flexibility in adapting to constantly

changing Needs

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Decision regarding alternate sites• Methods

- Dimensional Analysis

- Factor Rating Method

- Point Rating Method

- Break Even Analysis

- Qualitative Factor Analysis

- Brown and Gibson Model for Site Location

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Evaluating Locations• Cost-Profit-Volume Analysis

– Determine fixed and variable costs

– Plot total costs

– Determine lowest total costs

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Factor Rating Method• List the most relevant factors in the location decisions

• Rate each from 1(very low) to 5 (very high)

• Rate each location ( 1 to 10 ) according to its merits on each factor

• Compute the product of ratings

• Add each

• Choose the location with the highest points

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AMITY GLOBALBUSINESS SCHOOL BangaloreIllustration

Factor Factor Rating

Location Rating Product Rating

Location A Location B A B

Tax Advantage

4 8 6 32 24

Suitability of labor skill

3 2 3 6 9

Proximity to customers

3 6 5 18 15

Proximiy to suppliers

5 2 4 10 20

Adequacy of Water

1 3 3 3 3

Receptivity of Community

5 4 3 20 15

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Quality of Educational System

4 1 2 4 8

Access to rail and air transportation

3 10 8 30 24

Suitability of Climate

2 7 9 14 18

Availability of Power

2 6 4 12 8

Total Score 149 144

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Break Even Analysis

• A calculation of the sales volume (in units) required to just cover costs. A lower sales volume would be unprofitable and a higher volume would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost (or cost per unit), and selling price (or selling price per unit).

Fixed Costs

• Cost that do not change when production or sales levels do change, such as rent, property tax, insurance, or interest expense. The fixed costs are summarized for a specific time period (generally one month)..

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• Variable Cost (Per Unit Cost)• Variable costs are costs directly related to production units.

Typical variable costs include direct labor and direct materials. The variable cost times the number of units sold will equal the Total Variable Cost. Total Variable costs plus Fixed costs make up the total cost of production

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Location Cost-Volume Analysis

• Assumptions

– Fixed costs are constant

– Variable costs are linear

– Output can be closely estimated

– Only one product involved

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Locational Break Even Analysis• When comparing locations on an economic basis (tangible

factors)

• Consider only those revenues and costs which differ from site to site

• Identify fixed costs and variable costs

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STEPS• Determine all relevant costs that vary with location

• Categorize into

- Annual Fixed Costs

- Variable cost per unit

- Total Cost = AC + VC

• Select the location with the lowest Annual cost at the expected production volume per annum.

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Q Potential locations A,B and C have the cost

structures shown for producing a product expected to sell at Rs.100 per unit. Find the most economical location for an expected volume of 2000 units/year . If the volume of prodn is increased which is the best location ?

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Location Fixed Cost/year (Rs.)

Variable Cost per unit (Rs.)

A 25,000 50

B 50,000 25

C 80,000 15

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• Total Cost =( Fixed cost + (Variable cost X (Quantity per annum) per annum) produced)

Total cost at location A, TCA = (FCA)+(VCA) X Q

TCA = 25,000+ 50 X 2,000

25,000+1,00,000=Rs.1,25,000

Similarly,

Total cost at location B, TCB = 50,000+25 X 2,000

50,000+50,000=Rs.1,00,000

Total cost at location C, TCC = 80,000+ 15 X 2,000

80,000+ 30,000=Rs.1,10,000

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Analytical MethodTo determine the range of annual volumes of production

at which each of the three locations would become most economical, it is necessary to determine the break even volumes.

Calculate the costs when Q = 1500, 2500 & 3000.

Show graphically.

Which is the best location now ?

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0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

500 1000 1500 2000 2500 3000

annual volume

an

nu

al

tota

l co

st

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QuestionA company has to select one location out of the five alternatives

considered for a new plant. The annual operating costs and other intangible factors are given on the following slide.

1. On the basis of annual operating factors, which site would you choose ?

2. Devise a method of quantifying the intangible factors and integrate them with the cost data into the overall evaluation. Which is best now ?

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factors Location

A B C D E

Economic (Rs.)Labour 120000 110000 160000 85000 75000Transportation 10000 8000 7000 12000 14000Local 17000 20000 25000 19000 17000Power 21000 29000 25000 18000 23000Others 16000 11000 12000 16000 18000Intangible Community attitude v.good Fair Good Fair v goodLabor Availability Good V good Fair outstandin

gAcceptable

Quality of Transport Fair acceptable outstanding acceptable Fair Quality of life acceptable Fair Good Very good outstanding

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On the basis of annual operating costs A B C D E

Total operating costs

184000 178000 229000 150000 147000

Rank 4 3 5 2 1

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Location E has lowest cost

Grade Point

Outstanding 5

Very Good 4

Good 3

Fair 2

Acceptable 1

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Ratings for Intangible Factors

A B C D E

Community attitude

4 2 3 2 4

Labor Availability

3 4 2 5 1

Quality of Transport

2 1 5 1 2

Quality of life 1 2 3 4 5

Total rating 10 9 13 12 12Rank 3 4 1 2 2

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• Which location is the best ?

Bangalore 1 MBA, Semester II Operations Management Ms. Aarti Mehta Sharma.

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