sVarious models are available which help to identify the ideal location.

Some of the popular models are:

Factor rating method

Weighted factor rating method

Load-distance method

Centre of gravity method

Break even analysis

Factor Rating Method for Location Planning

Factor Rating Method

The process of selecting a new facility location involves a series of following steps:

Identify the important location factors.

Rate each factor according to its relative importance, i.e., higher the ratings is indicative of prominent
factor.

Assign each location according to the merits of the location for each factor.

Calculate the rating for each location by multiplying factor assigned to each location with basic factors
considered.

Find the sum of product calculated for each factor and select best location having highest total score.

ILLUSTRATION 1:

Let us assume that a new medical facility, Health-care, is to be located in Delhi. The location factors,
factor rating and scores for two potential sites are shown in the following table. Which is the best
location based on factor rating method?

ILLUSTRATION 1

Solution:

ILLUSTRATION
The total score for location 2 is higher than that of location 1. Hence location 2, is the best choice.

Weighted Factor Rating Method

In this method to merge quantitative and qualitative factors, factors are assigned weights based on
relative importance and weightage score for each site using a preference matrix is calculated. The site
with the highest weighted score is selected as the best choice.

ILLUSTRATION 2:

Let us assume that a new medical facility, Health-care, is to be located in Delhi. The location factors,
weights, and scores (1 = poor, 5 = excellent) for two potential sites are shown in the following table.
What is the weighted score for these sites? Which is the best location?

ILLUSTRATION 2

SOLUTION:

The weighted score for this particular site is calculated by multiplying each factor’s weight by its score
and adding the results:

Weighed score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 × 5 = 75 + 100 + 75 + 15 + 50 = 315

Weighed score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15× 2 + 10 × 3 = 125 + 75 + 75 + 30 + 30 = 335

Location 2 is the best site based on total weighted scores.

Load distance method in Operations Management

Load-distance Method

The load-distance method is a mathematical model used to evaluate locations based on proximity
factors. The objective is to select a location that minimizes the total weighted loads moving into and out
of the facility. The distance between two points is expressed by assigning the points to grid coordinates
on a map. An alternative approach is to use time rather than distance.

DISTANCE MEASURES
Suppose that a new warehouse is to be located to serve Delhi. It will receive inbound shipments from
several suppliers, including one in Ghaziabad. If the new warehouse were located at Gurgaon, what
would be the distance between the two facilities? If shipments travel by truck, the distance depends on
the highway system and the specific route taken. Computer software is available for calculating the
actual mileage between any two locations in the same county. However, for load-distance method, a
rough calculation that is either Euclidean or rectilinear distance measure may be used. Euclidean
distance is the straight-line distance, or shortest possible path, between two points.

Distance between point A and point B

Distance between point A and point B

The point A on the grid represents the supplier’s location in Ghaziabad, and the point B represents the
possible warehouse location at Gurgaon. The distance between points A and B is the length of the
hypotenuse of a right triangle, or

dAB = Sqrt((XA–XB)2+(YA– YB)2)

where dAB = distance between points A and B

XA = x-coordinate of point A

YA = y-coordinate of point A

XB= x-coordinate of point B

YB = y-coordinate of point B

Rectilinear distance measures distance between two points with a series of 90° turns as city blocks.
Essentially, this distance is the sum of the two dashed lines representing the base and side of the
triangle . The distance travelled in the x -direction is the absolute value of the difference in x-
coordinates. Adding this result to the absolute value of the difference in the y -coordinates gives

DAB = |XA– XB| + |YA– YB|

CALCULATING A LOAD-DISTANCE SCORE

Suppose that a firm planning a new location wants to select a site that minimizes the distances that
loads, particularly the larger ones, must travel to and from the site. Depending on the industry, a load
may be shipments from suppliers, between plants, or to customers, or it may be customers or
employees travelling to or from the facility. The firm seeks to minimize its load- distance, generally by
choosing a location so that large loads go short distances.

To calculate a load-distance for any potential location, we use either of the distance measures and
simply multiply the loads flowing to and from the facility by the distances travelled. These loads may be
expressed as tones or number of trips per week. This calls for a practical example to appreciate the
relevance of the concept. Let us visit a new Health-care facility, once again.

ILLUSTRATION 3:

The new Health-care facility is targeted to serve seven census tracts in Delhi. The table given below
shows the coordinates for the centre of each census tract, along with the projected populations,
measured in thousands. Customers will travel from the seven census tract centers to the new facility
when they need health-care. Two locations being considered for the new facility are at (5.5, 4.5) and (7,
2), which are the centers of census tracts C and F. Details of seven census tract centers, co-ordinate
distances along with the population for each centre are given below. If we use the population as the
loads and use rectilinear distance, which location is better in terms of its total load- distance score?

ILLUSTRATION 3

SOLUTION:

Calculate the load-distance score for each location. Using the coordinates from the above table calculate
the load-distance score for each tract.

Using the formula DAB = |XA– XB| + |YA– YB|

load-distance score for each tract.

Summing the scores for all tracts gives a total load-distance score of 239 when the facility is located at
versus a load-distance score of 168 at location (7, 2). Therefore, the location in census tract F is a better
location.

Centre of Gravity

Centre of gravity is based primarily on cost considerations. This method can be used to assist managers
in balancing cost and service objectives. The centre of gravity method takes into account the locations of
plants and markets, the volume of goods moved, and transportation costs in arriving at the best location
for a single intermediate warehouse.

The centre of gravity is defined to be the location that minimizes the weighted distance between the
warehouse and its supply and distribution points, where the distance is weighted by the number of
tones supplied or consumed. The first step in this procedure is to place the locations on a coordinate
system. The origin of the coordinate system and scale used are arbitrary, just as long as the relative
distances are correctly represented. This can be easily done by placing a grid over an ordinary map. The
centre of gravity is determined by the formula.

CX = ∑Dix.Wi/∑Wi and CY = ∑Diy.Wi/∑Wi

where Cx = x-coordinate of the centre of gravity

Cy = y-coordinate of the centre of gravity

Dix = x-coordinate of location i

Diy = y-coordinate of location i

ILLUSTRATION 4:

The new Health-care facility is targeted to serve seven census tracts in Delhi. The table given below
shows the coordinates for the centre of each census tract, along with the projected populations,
measured in thousands. Customers will travel from the seven census tract centre s to the new facility
when they need health- care. Two locations being considered for the new facility are at (5.5, 4.5) and (7,
2), which are the centers of census tracts C and F. Details of seven census tract centers, coordinate
distances along with the population for each centre are given below. Find the target area’s centre of
gravity for the Health-care medical facility.

ILLUSTRATION 4

SOLUTION:

To calculate the centre of gravity, start with the following information, where population is given in
thousands.

ILLUSTRATION 4
Next we find Cx and Cy

Cx= 453.5/68 = 6.67

Cy= 205.5/68 = 3.02

The centre of gravity is (6.67, 3.02). Using the centre of gravity as starting point, managers can now
search in its vicinity for the optimal location.

Break Even Analysis

Break even analysis implies that at some point in the operations, total revenue equals total cost. Break
even analysis is concerned with finding the point at which revenues and costs agree exactly. It is called
‘Break-even Point’. The Fig. 2.3 portrays the Break Even Chart: Break even point is the volume of output
at which neither a profit is made nor a loss is incurred. The Break Even Point (BEP) in units can be
calculated by using the relation:

BEP=

Fixed Cost

Contribution per unit

Fixed Cost

Selling Price- Variable Cost per unit

S-V
The Break Even Point (BEP) in Rs. can be calculated by using the relation:

BEP=

Fixed Cost

PV Ratio

F Rs.

Units of output or percentage of capacity

Units of output or percentage of capacity

Plotting the break even chart for each location can make economic comparisons of locations. This will be
helpful in identifying the range of production volume over which location can be selected.

ILLUSTRATION 5:

Potential locations X, Y and Z have the cost structures shown below. The ABC company has a demand of
130,000 units of a new product. Three potential locations X, Y and Z having following cost structures
shown are available. Select which location is to be selected and also identify the volume ranges where
each location is suited?

ILLUSTRATION 5

SOLUTION:

Solve for the crossover between X and Y:

10X+ 150,000 = 8X + 350,000 2X = 200,000 X = 100,000 units

Solve for the crossover between Y and Z:

8X + 350,000 = 6X + 950,000 2X = 600,000 X = 300,000 units

Therefore, at a volume of 1,30,000 units, Y is the appropriate strategy. From the graph we can interpret
that location X is suitable up to 100,000 units, location Y is suitable up to between 100,000 to 300,000
units and location Z is suitable if the demand is more than 300,000 units.

BEP chart

BEP chart

Example- 6-1: Let us assume that a new medical facility, Health-care, is to be

located in Delhi. The location factors, factor rating and scores for two potential

sites are shown in the following table. Which is the best location based on factor

rating method?

1 st year / 2014-2015 / Principles of Industrial Eng. / Chapter 6 / Dr. May Kassir

SOLUTION:

The total score for location 2 is higher than that of location 1. Hence location 2, is

the best choice

Example 6-2: Let us assume that a new medical facility, Health-care, is to be located in Delhi. The
location factors, weights, and scores (1 = poor, 5 = excellent) for two potential sites are shown in the
following table. What is the weighted score for these sites? Which is the best location? 1 st year / 2014-
2015 / Principles of Industrial Eng. / Chapter 6 / Dr. May Kassir 8 SOLUTION: The weighted score for this
particular site is calculated by multiplying each factor’s weight by its score and adding the results: No.
Location factor Weight Scores Location 1 Location 2 1 Facility utilization 25 3 x 25= 75 125 2 Total patient
per month 25 4x 25= 100 75 3 Average time per emergency trip 25 75 75 4 Land and construction costs
15 15 30 5 Employee preferences 10 50 30 Total 315 335 Location 2 is the best site based on total
weighted scores.

Example 6-3: The new service facility is targeted to serve seven sell agencies in

Delhi. The table - shows the coordinates for the centre of each sell agency, along
with the projected populations, measured in thousands. Customers will travel from

the seven sell agencies centers to the new facility when they need that. Two

locations being considered for the new facility are at (5.5, 4.5) and (7, 2), which

are the centers of sell agency C and F. Details of seven sell agencies centers, coordinate

distances along with the population for each centre are given too. Use the

population as the loads and use rectilinear distance, which location is better in

terms of its total load-distance score?

1 st year / 2014-2015 / Principles of Industrial Eng. / Chapter 6 / Dr. May Kassir

10

No. # Sell agency Site ordinations (x,y) populations

1 A (2.5, 4.5) 2

2 B (2.5, 2.5) 5

3 C (5.5, 4.5) 10

4 D (5 , 2) 7

5 E (8, 5) 10

6 F (7, 2) 20

7 G (9, 2.5) 14

Solution:

Sell

agen

cy

Sites

coordination

(x,y)

popula

tions

Locate at ( 5.5, 4.5) Locate at ( 7, 2)

Distance
(d)

Load distance

Distance

(d)

Load distance

A (2.5, 4.5) 2 3 + 0 = 3 6 4.5 + 2.5

=7

14

B (2.5, 2.5) 5 3 + 2 = 5 25 4.5+0.5=

25

C* (5.5, 4.5) 10 0 +0 =0 0 1.5 + 2.5

=4

40

D (5 , 2) 7 0.5 + 2.5

=3

21 2 + 0 = 2 14

E (8, 5) 10 2.5 + 0.5

=3

30 1 + 3 = 4 40

F* (7, 2) 20 1.5 + 2.5

=4

80 0 + 0 = 0 0

G (9, 2.5) 14 3.5 + 2 =

5.5

77 2 + 0.5 =

2.5
35

Total 239 Total 168

Summing the scores for all centers gives a total load-distance score of 239 when

the facility is located at (5.5, 4.5) versus a load-distance score of 168 at location (7,

2). Therefore, the location in F is a better location

Question:

Ram Roy's firm has developed the following supply, demand, cost, and inventory data.

Supply Available

Period Regular Time Overtime Subcontract Demand Forecast

1 40 15 15 40

2 35 15 15 60

3 30 20 15 50

Initial inventory 20 units

Regular-time cost per unit $100

Overtime cost per unit $160

Subcontract cost per unit $200

Carrying cost per unit per month $4

Assume that the initial inventory has no holding cost in the first period and backorders are not
permitted.

Allocating production capacity to meet demand at a minimum cost using the transportation method, the
total cost is $_____ enter response as a whole number.

Cost:

The term cost refers to a combination of ordering cost, holding cost annual demand and many more.
The cost helps in finding the number of orders supply and purchased by the company for manufacturing
and distributing the goods.

Answer and Explanation:

Period Regular Time Overtime Subcontract Total Production Inventory left Total
Available

1 40 0 0 40 0 40

2 35 15 0 50 0 60

3 30 20 0 50 0 50

Calculation for total cost is:

Here,

g
u

e
r

RT=RegulartimeRC=RegularCostOC=OvertimeCostOT=Overtime

F
o

t
C

e
r

40

100

35

100

30

100

[
(

160

15

160

20

60

50

200

100

10500

+
(

2400

3200

210

10500

5600

210

16310

=∑(RC×RT)+∑(OC×OT)+((Forecast+Regular)+
(SubcontractCostperunit−RegulartimecostperUnit))=∑(40×100)+(35×100)+(30×100)+∑[(160×15)+(160×2
0)]+[(60+50)+(200−100)]=10500+(2400+3200)+210=10500+5600+210=16310

Working Note:

Calculation for Inventory Lefts is:

l
a

35

15

50

{QUESTION}

Bongo’s Pizzas has a service guarantee that promises you will not pay for your pizza if it isdelivered more
than 30 minutes from the order being placed. An investigation shows that 10 per cent of all pizzas are
delivered between 1 and !0 minutes from order" #0 per cent between !0and ! minutes from order" #0
per cent between ! and 30 minutes from order"  per cent between 30 and 3 minutes from order" 3
per cent between 3 and #0 minutes from order" and ! per cent over #0 minutes from order. $f the
average profit on each pizza delivered on time is %1and the average cost of each pizza delivered is %"
is the fact that Bongo’s does not charge for 10 per cent of its pizzas a significant problem for the
business& 'ow much e(tra profit per pizzawould be made if  minutes was cut from all deliveries&
{ANSWER}

)rder delivery time and percentage*

PercentageDelivery time (min)

10+1,!0#0+!0,!#0+!0,30After delivery time*

PercentageDelivery time (min)

+30,33+3,#0!+#0Profit of -0+ Pizza  %1%1/0.-  %0.-ost of Pizza  % %/0.-  %#.ree delivery

of Pizza  10+2o10+ or 0.10 / %  0.

H! m"c# e$tra %r&it %er %i''a !"l e mae i& * min"te+ !a+ c"t &rm all eliverie
Individual Assignment II: Term paper (25%)

Pick one from the ‘list of topics’ given below and prepare a term paper on it.
Try to read different articles on the topic you selected and prepare a term paper
under different subtitles. You may use the ‘template’ given for you to prepare
the term paper (NB: This is just to guide you how you organize your term paper
but it is not compulsory to follow the format in the template, i.e, you may use
your own format)
List of topics

 Historical evolution and current development of OM

 Product and service design
 Strategic capacity planning for products and services
 Process selection and facility layout
 Design of work systems
 Location planning and Analysis
 Total Quality Management (TQM)
 Continuous Improvement (KAIZEN)
 Quality Control
 Inventory management
 Aggregate production planning
 MRP and ERP
 JIT and lean Operations
 Operations Scheduling

Template for the Term-Paper

1.1 Background of the Study

1.2 Objectives of the study

1.3 Study Questions

1.4 Significance of the Study

1.5 Study Methodology

1.6 Presentation and Discussion of Results

1.7 Conclusion

References
LLUSTRATION 8:Custom
Furniture Co. currently has 100
employees and has
forecastquarterly demand as
shown in Table 8.11. The
historical average production rate
is 40 unitsper employee per
quarter, and the firm has a
beginning (safety stock)
inventory of 1,000units. The
hiring and training cost is Rs.
400 per employee, and the layoff
cost is Rs. 600 peremployee.
Inventory is carried at a cost of
Rs. 8 per unit per quarter. Use the
data to developan aggregate plan
that uses variable employment
and inventory to meet
demand.Table 8.11Quarterly demand
forecast for furniture
manufactureQuarter1234TotalDemand3,
5005,0004,0003,45015,950SOLUTIO
N:One alternative plan is shown
in Table 8.12. (Many others,
including better ones,
arepossible.) The planner has
chosen to build some extra
inventory in quarter 1 with the
workersalready on the payroll.
Producing at a rate of 40 units
per employee, the first quarter
production of4,000 units is 500
more than demand (3,500), so the
ending inventory equals the
beginning 1,000 plus500, or
1,500 units. This results in a
carrying cost of Rs.8 (1,500) =
Rs.12,000. Twenty employeesare
hired at the beginning of quarter
2 to help meet the larger demand
during the quarter. This resultsin
a hiring cost of Rs.400 (20) =
Rs.8,000. Employment is cut
back again at the beginning of
quarter3, as the firm dips into
safety stock, and employment is
restored to its original level at the
beginningof quarter 4. (Note:
This firm bases inventory cost on
ending inventory balance.) Table
8.12Aggregate plan for varying work
force and inventory levels(1)(2)(3)(4)(5)
(6)(7)(8)(9)(10)Qtr.Fcst. orNo.
ofChangeTotalCum.Cum.EndingInv.
costEmpl. chg costdemandempl.in
empl.prodn.prodn.demandinv.@Rs.8@
Rs.400 orRs. 60013,500100–
4,0004,0003,5001,50012,000–
25,000120+ 204,8008,8008,500–
1,30010,400.8,00034,00080–
403,20012,00012,500500.
4,00024,00043,450100+204,00016,000
15,9501,0508,4008,000Totals34,80040,
000The total (comparative) cost
for this is Rs. 34,800 + Rs.
40,000 = Rs. 74,800. Note that
inventoryand employment costs
are not well balanced, and
employment is the lowest during
quarter 3 whendemand is
relatively high. With some
additional trials, the planner
could undoubtedly develop a
planthat would result in a lower
total cost. Large fluctuations in
production often result in more
problems(and higher costs) than
more steady-state operations.