Plant location

PRODUCTION AND
OPERATIONS MANAGEMENT
Prepared by
Prof. Jitendra Patel
Assistant Professor
Prestige Institute of Management and Research
Indore

2Plant Location and Facilities Layout
2.1 Definition
2.2 Steps in Location Selection
2.2.1 Deciding on Domestic or International Location
2.2.2 Selection Of Region
2.2.3 Selection of Community
2.2.4 Selection of Site
2.3 Locations Models
2.3.1 Factor Rating Model
2.3.2 Point Rating Model
2.3.3 Break Even Analysis
2.3.4 Centre of Gravity
2.3.5 Dimensional Analysis
2.3.6Brown and Gibson Method
Module 2
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Jitendra Patel, Assistant Professor, PIMR ,
Indore

Plant location is the function of determining
location for a plant for maximum operating
economy and effectiveness.
Plant Location
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Steps in Location Selection
 To be systematic, in choosing a plant location,
the entrepreneur would do well to proceed step
by step, the steps being;
1. Within the country or outside;
2. Selection of the region;
3. Selection of the locality or community;
4. Selection of the exact site.
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1. Deciding on Domestic or International Location
i. Political Stability
ii. Currency and Exchange Rate
iii. Cultural and Economic Peculiarities
iv. Natural Environment
2. Selection of Region
i. Availability of Raw Materials
ii. Nearness to the Market
iii. Availability of Power
iv. Transport Facilities
v. Suitability of Climate
vi. Government Policy
vii. Competition Between States
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3. Selection of Community
• Availability of Labour
• Civic Amenities for Workers
• Existence of Complementary and Competing
Industries
• Finance and Research Facilities
• Availability of Water and Fire-fighting
Facilities
• Local Taxes and Restrictions
• Momentum of an Early Start
• Personal Factors
4. Selection of the Site
i. Soil, Size and Topography
ii. Disposal of Waste
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Location Models
 Various models are available which help
identify a near ideal location. The most popular
models are:
1. Factor Rating Method
2. Point Rating Method
3. Break-even Analysis
4. Centre Of Gravity
5. Dimensional Analysis
6. Brown and Gibson Method
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Factor-Rating Method
Factor rating is used to evaluate alternative
Locations
Six steps in the method
1. Develop a list of relevant factors called critical 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. Recommend the location with the highest point score
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Advantage of Factor Rating
• Simplicity which facilitates communication
about why one location/site is better than
another
• Enables bringing diverse location
considerations into evaluation alternatives
• Foster consistency of Judgment about
location alternatives

Factor Rating Example
S.No Factor Factor Rating Location Rating Product of Rating
Location A Location B Location A Location B
1 Tax Advantage 4 8 6 32 24
2 Suitability of Labour Skill 3 2 3 6 9
3 Proximity to Customers 3 6 5 18 15
4 Proximity to Suppliers 5 2 4 10 20
5 Adequacy of water 1 3 3 3 3
6 Receptivity of
Community
5 4 3 20 15
7 Quality of Education 4 1 2 4 8
8 Access to rail and Air
Transportation
3 10 8 30 24
9 Suitability of Climate 2 7 9 14 18
10 Availability of Power 2 6 4 12 8
Total Score 149 144
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Point Rating Method
• In point rating Method company assign
relative weight to different objectives
• Each potential site is then evaluated with
respect to every factor a company is looking
for and point is assigned to each factor
• The site with highest total number of points is
considered superior to other site.
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Advantages of Point Rating Method
• Point rating system is relative importance of
tangible cost factors compared to intangible
factors.
• Points are usually assigned only to intangible
factors and evaluation is made to determine
whether the difference between the
intangible scores is worth the difference if any
between the tangibles costs of the competing
factors

Drawback of Point Rating Method
• The drawback of Point Rating Method is that
high score in any factor can overcome a low
score in any other factor.

Point Rating Method
Factors Rated Maximum
Possible Points
Points Assigned to Locations
Location A Location B
Future availability of fuel 300 200 250
Transportation flexibility and
growth
200 150 150
Adequacy of water supply 100 100 100
Labor availability 250 220 200
Pollution regulations 30 20 20
Site Topography 50 40 30
Living Conditions 150 100 125
Total 1080 830 875
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Location
Break-Even Analysis
Method of cost-volume analysis used for
industrial locations
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
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Location Break-Even Analysis Example
• Three Locations :
• Expected Volume : 18000 units
• Expected Sales Price: Rs700
City Fixed Cost Variable Cost Total Cost
Delhi Rs 30 Lacs Rs300 Rs 84 Lacs
Bangalore Rs 50 Lacs Rs 200 Rs 86 Lacs
Kolkata Rs 25 Lacs Rs 350 Rs 88 Lacs
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10
20
30
40
50
60
70
80
90
100
AnnualCostInLacs
0 2 4 6 8 10 12 14 16 18 20 22 24
Volume in thousand
Kolkata Lowest Cost Delhi Lowest Cost Bangalore Lowest Cost
Location Break Even Example
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Center-of-Gravity Method
Finds location of distribution center that
minimizes distribution costs
Consideration for Center of Gravity
Method
• Location of markets
• Volume of goods shipped to those
markets
• Shipping cost (or distance)
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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
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x - coordinate =
∑dixQi
∑Qi
i
i
∑diyQi
∑Qi
i
i
y - coordinate =
where dix = x-coordinate of location i
diy = y-coordinate of location i
Qi = Quantity of goods moved to or from location i
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Center Of Gravity Example
100
200
300
400
500
600
400300 500200100 600
A(75)
C(135)
D(60)
B(105)
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Centre Of Gravity Example
• X Coordinate:
• 200(75)+100(105)+250(135)+500(60)
75+105+135+60
= 238
Y Coordinate:
200(75)+500(105)+600(135)+300(60)
75+105+135+60
=444
Distribution Centre
Location
No of Tailor Load Transported from
every Location
A(200,200) 75
B(100,500) 105
C( 250, 600) 135
D (500,300) 60
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100
200
300
400
500
600
400300 500200100 600
A(75)
C(135)
D(60)
B(105)
Centre of Gravity(238,444)
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Dimension Analysis
• One of the methods of making an integrated
comparison of alternatives sites on the basis
of tangible and intangible costs is Dimensions
Analysis.
• This involves computing the relative merits
or cost ratios for each factors
• An appropriate weight age is given to each
cost factors and cost ratio is raised and
multiplying these weighted ratio in order to
arrive at the comprehensive figure on the
relative merits of the two sites
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Dimension Analysis
(i)C1
M, C2
M, C3
M,……….,CZ
M are the different costs associated with site M
(ii)C1
N, C2
N, C3
N,………., CZ
N are the different costs associated with site N
(iii)W1 , W2 , W3,……….,WZ are the weight ages given to these cost items
W1 W2 WZ
C1
M X C2
M X………………X CZ
M
C1
N C2
N CZ
N the relative merit of sites , M and N
Site having relative merit ratio more than unity is preferred
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Merit of Dimension Analysis
• It compares both tangible and intangibles costs
i.e. the objective and subjective factors(i.e.
Educational Facilities, Recreational facilities and
Health Facilities) helping decision maker to reach
integrated quantitative figure.
• By taking dimensionless ratios for each factor, it
can incorporates the actual costs for objectives
factors and at the same time use subjective
‘scores’ of costs for the factors for which costs
cannot be determined in rupee terms
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Example of Dimension Analysis
S.N
o
Factors Cost at Location
A
Cost at Location B Weightages
1 Transportation 5,30,000 8,10,000 1
2 Power 65 paise= 0.65 1.05 1
3 Tax 10,50,000 8,80,000 1
4 labor 115 101 1
5 Proximity to Market 8 10 2
6 Industrial Relation 10 8 1.5
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Solution
• Location A 530000 1.05 10,50,000 115 8 2 10 1.5
Location B 810000 X 0.65 8,80,000 101 10 8
Transport Power Tax Labor Proximity IR
=1.284
the location B is preferable to location A as the costs ratio of location A VS Location B is
significantly more than unity.
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BROWN AND GIBSON’S METHOD
• This Method also measure relative merit of the
sites in dimensionless format
• It start with identification of critical factors and
their availability
• If the critical factor is available at site the score is
one(1) otherwise zero(0)
• This method considers the total tangible costs
which are known as Objective Factors
• The total cost are converted into measures by
taking there reciprocal and comparing them with
the summation of these reciprocal for all eligible
site.
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Objective Factor Cost Formula
• The objective measure (OFM) is
• OFMi
= 1/OFCi ∑ 1/OFCi
• OFCi = Objective Factor cost for site ‘i’
• OFMi= Objective Factor measure for site ‘i’
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Subjective Factor Measure Formula
• This method also consider subjective factors such as
industrial relation, climate , recreational facilities and
educational facilities , proximity to the large city
• SFMi = ∑(SFWk
X SWik
)
where SFWk
= weight of subjective factor k relative to all subjective
factors(property weight)
SWik
= weight of site i relative to all potential sites for
subjective factor k (site weight)
the value of ‘Property Weight’ and ‘site weight’ are
determined through the Preference theory by paired
comparison
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Location Measure Formula
• LMi
= CFMi
X D X OFMi
+(1-D) SFMi
• CFMi= Critical factor measure for site I
• D= relative weight of objective factor
• LM= Location Measure
• Sites with higher locations measures are
preferred over the site with lower location
measure.
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BROWN AND GIBSON’S METHOD EXAMPLE
Site 1 2 3
Transport Costs(Rs) 165 Lakh 346.5Lakh 231Lakh
Labor Costs(Rs) 354.5Lakh 288.4Lakh 255.5Lakh
Energy Costs(Rs) 231 Lakh 182.5Lakh 197.1Lakh
Materials Costs (Rs) 495Lakh 629.6Lakh 766.5Lakh
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• Property (Qualitative Factor) Comparison (on Paired
Basis
Comparison I II III IV V VI Total Relative Weight,
SFWk
City Proximity 0 0 1 1 1/6
Industrial
Relations
0 0 0 0 0/6
Environmental
Problems
1 1 0 2 2/6
Government
Support
1 1 1 3 3/6
Total 6 1.00
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1. City Proximity
Site Comparison Total
Relativ
e
Weight
SWi1
1 1 1 2 2/4
2 0 1 1 1/4
3 0 1 1 1/4
total 4 1.00
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2. Industrial Relation
Relativ
e
Weight
SWi2
1 0 0 0 0/3
2 1 1 2 2/3
3 1 0 1 1/3
Total 3 1.00
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3. Environmental Problems
Relativ
e
Weight
SWi3
1 1 0 1 1/3
2 1 1 2 2/3
3 0 0 0 0/3
Total 3 1.00
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4. State Government Support
Relativ
e
Weight
SWi4
1 0 0 0 0/3
2 1 0 1 1/3
3 1 1 2 2/3
Total 3 1.00
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• Location Measure
• LM= CFM x [D x OFM+ (1-D)x SFM]
• D(objective Factor Decision weight) =1- 0.40=0.60
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BROWN AND GIBSON’S METHOD EXAMPLE
Site 1 2 3
Transport Costs(Rs) 165 Lakh 346.5Lakh 231Lakh
Labor Costs(Rs) 354.5Lakh 288.4Lakh 255.5Lakh
Energy Costs(Rs) 231 Lakh 182.5Lakh 197.1Lakh
Materials Costs (Rs) 495Lakh 629.6Lakh 766.5Lakh
Total OFC 1245.5Lakh 1447.0Lakh 1450.1Lakh
1/OFC 0.0008028 0.0006910 0.0006896
∑(1/OFC) 0.0021834
OFC x ∑(1/OFC) 2.7194247 3.1593798 3.1661483
OFM={OFC x
∑(1/OFC)}-1
0.3677248
=0.368
0.3165178
=0.316
0.3158412
=0.316
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SFWk
Calculation
• City Proximity 1/6
• Industrial Relation 0
• Environmental Problems 2/6
• State Government support: 3/6
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SFM for three Site
• Site 1:
(1/6).(2/4)+(0).(0)+(2/6).(1/3)+(3/6).(0)=0.194
• Site2:
(1/6).(1/4)+(0).(2/3)+(2/6).(2/3)+(3/6).(1/3)
=0.0417+0+0.2222+0.1667=0.431
• Site 3
(1/6).(1/4)+(0).(1/3)+(2/6).(0)+(3/6).(2/3)
=0.00417+0+0+0.3333=0.375
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LM Calculation for three Site
• Site 1
• LM= CFM x [D x OFM+ (1-D)x SFM]
= 1x[.60x 0.368+0.40 x0.194]
=0.2984
Site 2
= 1x[.60x 0.316+0.40 x0.431]
=0.3620
Site 3
=1x[.60x 0.316+0.40 x0.375]
=0.3396
Site 2 having highest Location Measure is preferred over other
two site.
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References
1. Aswathappa.K., & Bhat.K.S. (2011). Production and
Operations Management . Mumbai, India: Himalaya
Publishing House.
2. Chary.S.N.(2008). Theory and Problems in Production
and Operations Management. New Delhi, India: Tata
McGraw- Hill Publishing Company Limited
3. Prenhall(2011); “Location Analysis Techniques”
Retrieved from
http://www.prenhall.com/divisions/bp/app/russellcd/
PROTECT/CHAPTERS/CHAP09/HEAD06.HTM, last
visited on 31 July 2014.
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