AMITY GLOBAL BUSINESS SCHOOL

Bangalore

MBA, Semester II

Operations Management
Ms. Aarti Mehta Sharma

AMITY GLOBAL BUSINESS SCHOOL

Bangalore

Operations Management
Semester 2 Module 2

AMITY GLOBAL BUSINESS SCHOOL

Bangalore

Location of Facilities
Organisations objectives, goals, priorities and strategies
3

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

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Bangalore

Situations
Location Choice for the first time
Location choice for an already established organisation with one or more facilities existing Global Location
4

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Bangalore

Location Choice for the first time eg: Micromax - Cost economies
5

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

Bangalore

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Bangalore

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

7

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)

AMITY GLOBAL GLOBAL LOCATION (Intangible reasons) BUSINESS SCHOOL Bangalore

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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Bangalore

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
9

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Bangalore

Location / Relocation choice for an already established organisation (maharaja restaurants, SIMBI, Amity)
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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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Methods - Dimensional Analysis - Factor Rating Method - Point Rating Method - Break Even Analysis - Qualitative Factor Analysis - Brown and Gibson Model for Site Location

Bangalore

Decision regarding alternate sites

11

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Bangalore

Evaluating Locations
Cost-Profit-Volume Analysis

12

Determine fixed and variable costs

Plot total costs

Determine lowest total costs

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Bangalore

Factor Rating Method

List the most relevant factors in the location decisions 13 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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Factor Factor Rating

Illustration
Product Rating A 32 6 18 10 3 B 24 9 15 20 3 Location B 6 3 5 4 3

Bangalore

Location Rating Location A 8 2 6 2 3

Tax Advantage Suitability of labor skill Proximity to customers Proximiy to suppliers Adequacy of Water Receptivity of Community

4
3 3 5 1

14

20

15

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Quality of 4 Educational System Access to 3 rail and air transportatio n Suitability 2 of Climate Availability 2 of Power 1 10 2 8 4 30 8

Bangalore

15

24

7
6

9
4

14
12

18
8

Total Score

149

144

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Break Even Analysis

Bangalore

A calculation of the sales volume (in units) required to just 16 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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Bangalore

Variable Cost (Per Unit Cost) 17 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

AMITY GLOBAL BUSINESS SCHOOL

Bangalore

Location Cost-Volume Analysis

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Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved

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Bangalore

Locational Break Even Analysis

When comparing locations on an economic basis (tangible 19 factors) Consider only those revenues and costs which differ from site to site Identify fixed costs and variable costs

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Bangalore

STEPS
Determine all relevant costs that vary with location 20 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.

AMITY GLOBAL BUSINESS SCHOOL

Bangalore

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 ?
21

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Bangalore

Location

Fixed Cost/year (Rs.)

Variable Cost per unit (Rs.)

22

A
B C

25,000
50,000 80,000

50
25 15

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

Bangalore

23

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

AMITY GLOBAL BUSINESS SCHOOL

Bangalore

Analytical Method
To 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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180,000 160,000 140,000

Bangalore

25

annual total cost

120,000 100,000 80,000 60,000 40,000 20,000 0 500 1000 1500 2000 2500 3000 annual volume

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Bangalore

Question
A company has to select one location out of the five alternatives 26 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 110000 8000 20000 29000 11000 C 160000 7000 25000 25000 12000 D

Bangalore

E
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Economic (Rs.) Labour Transportation Local Power Others Intangible Community attitude Labor Availability
Quality of Transport

120000 10000 17000 21000 16000

85000 12000 19000 18000 16000

75000 14000 17000 23000 18000

v.good Good
Fair
acceptable

Fair V good
acceptable

Good Fair
outstanding

Fair
outstanding acceptable Very good

v good
Acceptabl e

Fair
outstanding

Quality of life

Fair

Good

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Bangalore

On the basis of annual operating costs

A B C D E
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Total 184000 178000 229000 150000 147000 operating costs

Rank

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Bangalore

Location E has lowest cost

Grade
Outstanding Very Good Good

Point
5 4 3

29

Fair
Acceptable

2
1

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Ratings for Intangible Factors

Bangalore

30

A Community attitude Labor Availability Quality of Transport Quality of life

4 3 2 1

2 4 1 2

3 2 5 3

2 5 1 4

4 1 2 5

Total rating
Rank

10 3

9 4

13 1

12 2

12 2

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Bangalore

31

Which location is the best ?