Module II

Strategic Decisions
 Facility Location

A manufacturing unit is a place where men, materials, money,

machinery and equipment, etc. are brought together for
manufacturing the products.

The selection of location for a manufacturing unit is an

important aspect for the success of an enterprise and requires
a thorough analysis. So, it is an important strategic level
decision making for an organization.
Facility location is a critical strategic decision.

Location activity has been very high in recent decades as a result of

technology improvements, economic growth, international expansion
and globalization, and corporate restructuring, mergers and
acquisitions.

The top five location factors for global companies are

i. cost,
ii. infrastructure,
iii. labour characteristics,
iv. government issues and
v. political issues.

The location factors are classified on the basis of

i. market,
ii. direct and indirect cost of production,
iii. material, etc.
Facility location is determined by four factors

1. Environment

2. Facilities

3. Clients

4. Objective Function
POSSIBLE MISTAKES IN SELECTING THE SITE
FACTORS INFLUENCING THE FACILITY LOCATION
• Proximity to customers
Locations are selected near the customers because the cost of
delivery of goods or services is reduced to a great extent and thus
competition is most in a better way.

• Business climate
Locations are more suitable if similar companies are already
operating in that region. In the case of international locations, the
presence of foreign companies increases the suitability as the
laws pertaining to that country make the overall business climate
conducive to the business.

• Quality of labour
The required education, skill and experience level of the labour is
another factor in deciding the locations of upcoming facilities.
• Free trade zone
These types of free trade zones are typically the closed facility,
where foreign goods can be brought and finished goods can be
dispatched, of course within the vigil of custom departments
without paying any customs or excise duties/levies.

• Political risk
The political scenario in many of the developing countries is
volatile and proper business climate is not available for smooth
operations of the organizations.

• Government barriers
After the liberalization of business operating conditions, the
barriers related to ban on export and import of certain goods, high
customs duties on import, etc. are being removed to open up the
economies, and better business conditions are available to
manufacturing and service organizations.
• Trading blocks
Free trade agreements such as European Union business
agreement, North America Free Trade Agreements (NAFTA), and
SAARC Nations agreement are deciding factors in the selection of
site for the business.

• Environmental regulations
The global consciousness about pollution control and
environmental regulations has limited the choice and scope of
choosing the business location.

• Host community
Religious feelings, cultural heritage, values and beliefs of local
communities where the business production functions are to be
connected are very important in the selection of business sites.
• Competitive advantage
The important aspect for multinational and global companies is
the home base for any business. The competitive advantage is
created at a home base, where the company is already operating
with its own product mix and process technology. The company
should select a country to move its home base, which can be
conducive for the innovation and best business environment to
secure competitive advantage.

• Total cost
The integration of cost of production, incoming distribution cost,
outgoing distribution cost, land, construction, taxes, labour,
utilities and energy cost should be minimum in selecting the site
among various locations. Here, the aspect of hidden costs, which
are difficult to measure, also comes into picture.
• Infrastructure
The required linkage between the facility and the outside world,
i.e. appropriate link through rail, road, sea and air for the
transportation of goods must be available.

• Supplies
The input of materials is very vital for the success of an
organization. The supplier base to provide good quality material at
nominal price is the first pre-requisite for the viability of any
business.

• Other Facilities
If the organization has other plants, warehouses or distribution
channels in the vicinity of any location to be decided, then the
facility location decision becomes easy.
FACTORS INFLUENCING THE FACILITY LOCATION
• Proximity to customers
• Business climate
• Quality of labour
• Free trade zone
• Political risk
• Government barriers
• Trading blocks
• Environmental regulations
• Host community
• Competitive advantage
• Total cost
• Infrastructure
• Supplies
• Other Facilities
 Sequential
procedure for
facility location
based on certain
parameters
 LOCATION SELECTION METHODS

Quantitative Techniques in Facility Location

The quantitative factor analysis covers those methods which are based
on mathematical tools and models and have certain objective criteria.

• Factor Rating Method

• Centre of Gravity Method
• Load Distance Method
• Median Method
 Factor Rating Method
Factor-rating systems simply consist of a weighted list of the factors a
company considers the most important and a range of values for each
factor.
• Factor-rating system is the most commonly used technique for
choosing a location, as it analyses diverse factors quite easily.
• A factor-rating system involves a weighted list of the factors a
company considers the most important and a range of values for
each factor.
• To use this technique, a company can rate each site with a value
from the range based on the costs and benefits offered by the
alternative locations and multiply this value by the appropriate
weight.
• When such number are summed up then an overall “factor
rating” is obtained. Now, alternative sites can be compared on
the basis of factor rating.
• It helps the company choose a location systematically based on
best rating.
In given Table, there are three locations A, B and C. These locations
have been evaluated on different factors and each factor has separate
weightage according to its relative importance in a project. Assign
ratings to these factors for the different locations respectively, ranging
from 0 to 100 and multiply these ratings with their assigned weight.
Compute the sum of factor-rating of these locations.

In Table, location B has got the highest factor-rating, i.e. 73, so, location
B is the best location among the three alternatives.
 The Centre of Gravity

The Centre of Gravity is used mostly for locating distribution warehouses.

• The Centre of Gravity method can be used for determining an

individual location by considering existing locations, the distances
between them, and the volume of products to be shipped.
• It is generally used for locating distribution warehouses.
• In this technique, companies plot their existing locations on a grid
with a coordinate system.
• The main purpose is to identify the relative distances between
locations.
• After the existing locations are placed on the grid, the centre of
gravity is determined by calculating the X-and Y-coordinates for the
lowest transportation costs, by the following relations:
 Break-Even Analysis

• Break-even analysis is based on certain assumptions such as all

products produced will be sold at the same (constant) price (per unit
volume produced), regardless of location.
• In this method, the various locations are evaluated on the basis of
total cost which is to be borne by the company to set up the factory
and the cost of production which includes both fixed and variable
cost.
• As shown in the Fig., the comparison between two locations at a time
is made and the cut off volume decides which location is to be
selected.
• In Fig., below volume V1-2, location 2 is selected and beyond V1-2,
location 1 is selected. Similarly, the comparison between location 2
and 3 and location 1 and 3 has been shown in Fig.
 Load Distance Method

Matrix Manufacturing is considering where to locate its warehouse in

order to service its four Ohio stores located in Cleveland, Cincinnati,
Columbus, Dayton. Two sites are being considered; Mansfield and
Springfield, Ohio. Use the load-distance model to make the decision.
Calculate the rectilinear distance: dAB = 30 − 10 + 40 − 15 = 45 miles
Multiply by the number of loads between each site and the four cities
Calculating the Load-Distance Score for Springfield vs. Mansfield

Computing the Load-Distance Score for Springfield

City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)

Computing the Load-Distance Score for Mansfield

City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

The load-distance score for Mansfield is higher than for Springfield.

The warehouse should be located in Springfield.
Median Method
 Decision trees

Useful when demand is uncertain and sequential decisions

are involved

• Decision Trees are schematic models of available alternatives and

possible consequences
• Decision Trees are useful with probabilistic events and sequential
decisions.
• Conditional payoffs for each possible alternative-event
combination shown at the end of each combination
• Draw the decision tree from left to right
• Calculate expected payoff to solve the decision tree from right to
left
After drawing a decision tree, we solve it by working from
right to left, calculating the expected payoff for each of its
possible paths

1. For an event node, we multiply the payoff of each event

branch by the event’s probability and add these products to
get the event node’s expected payoff

2. For a decision node, we pick the alternative that has the

best expected payoff
 Facility Layout

A facility layout is an arrangement of the space and facilities

according to the type and size of activities to be carried out,
convenience of operations, efficiency, productivity, economy and
safety for the users of the facilities.

The basic purpose of facility layout is to establish ideal relationship

among output, floor area and manufacturing process.
Facility Layout objectives
 Inputs/Factors to Facility Layout
Facility layout always depends on certain inputs and factors to achieve the above
mentioned objectives. These factors may vary from product to product and place to
place, but, generally, dictate the layout more or less for each facility.
Principles of Facility Layout
 Importance of Facility Layout

The better is the layout, the better is the ambience and efficiency at
any working place.
This underlines the importance of systematic planning of the
elements of the system at any facility for production of goods and
services.

An efficient layout can increase the efficiency of human resources

upto 20–25 percent and can be helpful in increasing the
productivity by 30–35 percent by reducing the travelling distance of
job, worker and faster dissemination of information along with
reducing idle waiting of job, machinery and worker.
Efficient layout designs play an important role as explained below.
TYPES OF FACILITY LAYOUT
Facility Layout: ALB (Assembly line Balancing)
 Facility Layout: Block Diagramming

Block diagraming is one way to visualize the amount of movement

that occurs between departments.
• Each block represents one department of a facility.
• Blocks can be moved around in order to minimize the distance
traveled between them.
 Project Management: (PERT/ CPM)

• Project management can be understood as a systematic way of

planning, scheduling, executing, monitoring, controlling the
different aspects of the project, so as to attain the goal made at
the time of project formulation.
• PERT and CPM are the two network-based project management
techniques, which exhibit the flow and sequence of the activities
and events.
• Program (Project) Management and Review Technique (PERT) is
appropriate for the projects where the time needed to complete
different activities are not known.
• The Critical Path Method or CPM is apt for the projects which are
recurring in nature.
 Definition of PERT
PERT is an acronym for Program (Project) Evaluation and Review
Technique, in which planning, scheduling, organizing, coordinating
and controlling uncertain activities take place. The technique studies
and represents the tasks undertaken to complete a project, to identify
the least time for completing a task and the minimum time required
to complete the whole project. It was developed in the late 1950s. It
is aimed to reduce the time and cost of the project.

PERT uses time as a variable which represents the planned resource

application along with performance specification. In this technique,
first of all, the project is divided into activities and events. After that
proper sequence is ascertained, and a network is constructed. After
that time needed in each activity is calculated and the critical path
(longest path connecting all the events) is determined.
 Definition of CPM
Developed in the late 1950s, Critical Path Method or CPM is an
algorithm used for planning, scheduling, coordination and control of
activities in a project. Here, it is assumed that the activity duration is
fixed and certain. CPM is used to compute the earliest and latest
possible start time for each activity.
The process differentiates the critical and non-critical activities to
reduce the time and avoid the queue generation in the process. The
reason for the identification of critical activities is that, if any activity
is delayed, it will cause the whole process to suffer. That is why it is
named as Critical Path Method.
In this method, first of all, a list is prepared consisting of all the
activities needed to complete a project, followed by the computation
of time required to complete each activity. After that, the
dependency between the activities is determined. Here, ‘path’ is
defined as a sequence of activities in a network. The critical path is
the path with the highest length.