Om Module 2 Facility Location

8/2/2019 Om Module 2 Facility Location

1/31

AMITY GLOBAL

BUSINESS SCHOOL Bangalore

1

MBA, Semester II

Operations Management

Ms. Aarti Mehta Sharma


2/31

AMITY GLOBAL


2

Operations Management

Semester 2

Module 2


3/31

AMITY GLOBAL


3

Location of FacilitiesOrganisations objectives, goals, priorities and strategies

location of facilities

long term commitment

very few qualitative and quantitative changes possible


4/31

AMITY GLOBAL


4

Situations Location Choice for the first

time

Location choice for an

already established

organisation with one or

more facilities existing

Global Location


5/31

AMITY GLOBAL


5

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)


6/31

AMITY GLOBAL


6

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


7/31

AMITY GLOBAL


7

GLOBAL LOCATION(Tangible Reasons)

eg: aditya birla groupturkey, canada Market Presence in the country of customers

Virtual Factory (BPOs)

Tax Advantages

Cost of manufacturing is low

- lower labor costs

- lower raw material costs

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


8/31

AMITY GLOBAL


8

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


9/31

AMITY GLOBAL


9

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


10/31

AMITY GLOBAL


10

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 inManufacturing

Plants Emphasizing Flexibility in adapting to constantlychanging Needs


11/31

AMITY GLOBAL


11

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


12/31

AMITY GLOBAL


12

Evaluating Locations

Cost-Profit-Volume Analysis

Determine fixed and variable costs

Plot total costs

Determine lowest total costs


13/31

AMITY GLOBAL


13

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


14/31

AMITY GLOBAL


14

IllustrationFactor Factor

Rating

Location Rating Product Rating

Location A Location B A B

TaxAdvantage

4 8 6 32 24

Suitability oflabor skill

3 2 3 6 9

Proximity tocustomers

3 6 5 18 15

Proximiy tosuppliers

5 2 4 10 20

Adequacy of

Water

1 3 3 3 3

ReceptivityofCommunity

5 4 3 20 15


15/31

AMITY GLOBAL


15

Quality ofEducationalSystem

4 1 2 4 8

Access torail and airtransportation

3 10 8 30 24

Suitabilityof Climate

2 7 9 14 18

Availabilityof Power

2 6 4 12 8

Total Score 149 144


16/31

AMITY GLOBAL


16

Break Even Analysis

A calculation of the sales volume (in units) required to justcover costs. A lower sales volume would be unprofitable anda higher volume would be profitable. Break-even analysisfocuses 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 interestexpense. The fixed costs are summarized for a specific timeperiod (generally one month)..


17/31

AMITY GLOBAL


17

Variable Cost (Per Unit Cost)

Variable costs are costs directly related to productionunits. Typical variable costs include direct labor and directmaterials. The variable cost times the number of units sold will

equal the Total Variable Cost. Total Variable costs plus Fixedcosts make up the total cost of production


18/31

AMITY GLOBAL


18

Location Cost-Volume Analysis

Assumptions

Fixed costs are constant

Variable costs are linear

Output can be closely estimated

Only one product involved


19/31

AMITY GLOBAL


19

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


20/31

AMITY GLOBAL


20

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.


21/31

AMITY GLOBAL


21Q

Potential locations A,B and C have the coststructures shown for producing a product

expected to sell at Rs.100 per unit. Findthe most economical location for anexpected volume of 2000 units/year . If thevolume of prodn is increased which is thebest location ?


22/31

AMITY GLOBAL


22

Location Fixed Cost/year(Rs.)

Variable Costper unit (Rs.)

A 25,000 50

B 50,000 25

C 80,000 15


23/31

AMITY GLOBAL


23

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

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

TCA = 25,000+ 50 X 2,00025,000+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.1,00,000Total cost at location C, TCC = 80,000+ 15 X 2,000

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


24/31

AMITY GLOBAL


24

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 ?


25/31

AMITY GLOBAL


25

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

annualtota

lcost


26/31

AMITY GLOBAL


26

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 ?


27/31

AMITY GLOBAL


27

factors Location

A B C D EEconomic (Rs.)

Labour 120000 110000 160000 85000 75000

Transportation 10000 8000 7000 12000 14000

Local 17000 20000 25000 19000 17000

Power 21000 29000 25000 18000 23000

Others 16000 11000 12000 16000 18000

Intangible

Community attitude v.good Fair Good Fair v good

Labor Availability Good V good Fair outstanding Acceptable

Quality of Transport Fair acceptable outstanding acceptable Fair

Quality of life acceptable Fair Good Very good outstanding


28/31

AMITY GLOBAL


28

On the basis of annual operating costs

A B C D E

Totaloperatingcosts

184000 178000 229000 150000 147000

Rank 4 3 5 2 1


29/31

AMITY GLOBAL


29

Location E has lowest cost

Grade Point

Outstanding 5

Very Good 4

Good 3

Fair 2

Acceptable 1


30/31

AMITY GLOBAL


30

Ratings for Intangible Factors

A B C D E

Community

attitude

4 2 3 2 4

LaborAvailability

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 12

Rank 3 4 1 2 2


31/31

AMITY GLOBAL


31

Which location is the best ?

Om Module 2 Facility Location

Documents

Transcript of Om Module 2 Facility Location