Facility Location / Facility Layout

By
H.S.Pundle
 Facilities Location
Integral part of Supply Chain
 Location decision pertains to the choice of an appropriate geographical
site for locating various manufacturing and/or service facilities of an
organization
 At one extreme, is a single location in which all the facilities could be located
(Aerospace manufacturers such as Boeing and Airbus are examples of this category)
 At the other extreme, many facilities are located in as many markets (Automobile
manufacturers such as Ford and Toyota are examples of this category)
 Location Decisions are important
 Recent controversy surrounding the Tata Nano project in Singur Special Economic
Zone (SEZ) in West Bengal
 Location decisions integral part of a supply chain
 It determines the flow of materials from raw material suppliers to the factories and
finally to the customers
Facilities Location
Growing importance

 Factors promoting globalization of operations

 Regulatory & economic reforms
 Factor Cost Advantages
 Expanding markets in developing countries
 Location issues have become more prominent in
recent years due to globalization
 Location decision pertains to the choice of
appropriate geographical site for locating
manufacturing & service facilities of an organization
Facility Location
 Applicable to both Manufacturing as well as
Service Organizations.
 Location of bank branch, retail store.. etc.
 Long-term decision taken after detailed
analysis.
 Plant location process:
 General territory selection.
 Community selection.
 Site selection.
 Location Strategy
 Infrequent decision based on:
 Demand outgrowing existing capacity.
 Local changes in labor productivity, exchange
rates, costs, local attitudes.
 Shifts in demographics and customer demands.
 Location options:
 Don’t move, expand an existing facility.
 Maintain current sites, add another facility.
 Close an existing facility and move to another
location.
Factors That Affect Location
Decisions
 General factors.
 Global Region or Country decision.
 Sub-region or state decision.
 Community/site decision.
 General Factors
 Globalization.
 Market (customer) proximity
 High population areas, close to JIT partners
 Suppliers proximity
 Transportation costs, perishability, bulk
 Labor proximity and productivity
 Proximity—local wage rates, unions, special skills
availability
 Productivity—low cost may be linked to low productivity
and vice versa)
 Competitor proximity
 Clustering—due to a major resource in the area).
 Global Region or Country
 Key Considerations
 Political/legal concerns.
 Cultural issues (including business).
 Infrastructure: supplies, communication, utilities.
 International trade issues.
 Exchange rates.
 Market access issues.
 Labor availability, attitudes, productivity, costs.
 Quality-of-life issues.
 Sub-region or State
 Key factors:
 Government incentives.
 Corporate desires
 Market and demographic factors.
 Proximity to raw materials and customers
 Attractiveness of region (culture, taxes, climate, etc.)
 Environmental regulations of state and town.
 Economic conditions.
 Costs of key inputs and advertising media.
 Cost and availability of utilities.
 Labor availability, costs, attitudes towards unions.
 Community/Site
 Factors:
 Financial incentives.
 Site size and cost.
 Transportation options and costs.
 Utility options and costs.
 Nearness of services/supplies needed.
 Legal climate and community receptiveness.
 Zoning restrictions
 Environmental concerns.
 Significant trends:
 Moving to the suburbs
 Industrial parks
 Moving closer to end user (JIT)
 Location Analysis Methods
 Analysis should follow 3 step process:
 Step 1: Identify dominant location factors
 Step 2: Develop location alternatives
 Step 3: Evaluate locations alternatives
 Factor rating method
 Load-distance model
 Center of gravity approach
 Break-even analysis
 Transportation method
Issues in Facility Location
 Proximity to Customers
 Business Climate
 Total Costs
 Infrastructure
 Quality of Labor
 Suppliers
 Other Facilities
Issues in Facility Location
 Free Trade Zones
 Political Risk
 Government Barriers
 Trading Blocs
 Environmental Regulation
 Host Community
 Competitive Advantage
Factors Influencing Plant Location
 1) Proximity to Market
 Particularly important when:
 Product is fragile.
 Susceptible to spoilage.
 Prompt service is required.
 Product is relatively in-expensive &
transportation adds significantly to cost.
 E.g. Bread, Soap manufacturing units.
Factors Influencing Plant Location
 2) Proximity to Source of Raw Material.
 Particularly important when:
 Raw material is perishable in nature.
 Expensive to transport.
 Weight is substantially reduced during
process.
 E.g. Sugar, Cement, Steel manufacturing
units.
Factors Influencing Plant Location
 3) Infrastructure:
 Availability of Power, Water.
 Disposal of Waste.
 Particularly important:
 Power for Aluminum Plant.
 Disposal of waste for leather hides.
 Water for paper pulp.
Factors Influencing Plant Location
 4) Transport facilities:
 Rail, Road, Air, Sea, Pipe line.
 5) Labour & Wages:
 Easy availability of required labour.
 E.g. IT Industry.
 Productivity of labour.
 E.g. West Bengal or Kerala.
 Wage pattern & Industrial relations.
Factors Influencing Plant Location
 6) Legislation & Taxation:
 Issues relating to Licensing, Environmental
clearances.
 Octroi, Sales Tax, Subsidies.
 7) Climatic Condition:
 Textile mills in humid climate.
 Relatively less important these days; due
to climate control/ Air-conditioning.
Factors Influencing Plant Location
 8) Industrial & Labour Attitude.
 9) Safety Requirement
 Particularly important for:
 Nuclear Power plants.
 Explosive factories.
 10) Community Facility (Social
Infrastructure):
 Education, Entertainment, Transport,
Accommodation, Hospital.. Etc.
Factors Influencing Plant Location
 11) Community Attitude:
 Helpful, Co-operative or otherwise towards
entrepreneurs. ( e.g. Anti Hindi).
 12) Supporting Industries & services:
 Ancillary Industry for Auto manufacture.
 13) Suitability of Land:
 Availability, Cost.
Site Selection
 Ideal location is one where cost of
obtaining material & processing them
into finished product
PLUS
 cost of distribution of finished product
to customer is minimum.
Site Selection - Steps
 1. Prepare list of all relevant factors.
 2. Estimate expense on material, transport,
wage, power.. Etc. for each location.
 3. Collect data on intangible factors.
 4. Analyze the tangible data & calculate rate
of return on investment.
 5. Select site provisionally based on financial
data.
 6. Compare intangible data & select optimal
location.
Plant Location Methodology: Factor Rating
Method Example
Two refineries sites (A and B) are assigned the following range of
point values and respective points, where the more points the
better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
150 100
Power availability and reliability 0 to 200 54 63
Labor climate 0 to 100 24 96
Living conditions 0 to 100 45 50
4 5
Transportation 0 to 50 8 4
Water supply 0 to 10 5 50
Climate 0 to 50 5 20
Supplies 0 to 60
Tax policies and laws 0 to 20 Best
BestSite
Site
isisBB
Total pts. 418 544
 Plant Location Methodology: Transportation
Method of Linear Programming

 Transportation method of linear

programming seeks to minimize costs
of shipping n units to m destinations
or its seeks to maximize profit of
shipping n units to m destinations
 Plant Location Methodology:
Centroid Method
 The centroid method is used for locating
single facilities that considers existing
facilities, the distances between them, and the
volumes of goods to be shipped between them
 This methodology involves formulas used to
compute the coordinates of the two-
dimensional point that meets the distance and
volume criteria stated above
 Plant Location Methodology:
Centroid Method Formulas

C

dd VV
ix ii 
dd VV
iy ii
Cxx == ix
C
Cyy ==
iy

VV ii 
VV ii

Where:
Cx = X coordinate of centroid
Cy = X coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from
ith
 Plant Location Methodology:
Example of Centroid Method
 Centroid method example
 Several automobile showrooms are located
according to the following grid which represents
coordinate locations for each showroom
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)

D A 1250
(250,580)

D 1900
A
(100,200)
Q 2300
(0,0) X

Question:
Question:What
Whatis
isthe
thebest
bestlocation
locationfor
foraanew
newZ-Mobile
Z-Mobile
warehouse/temporary
warehouse/temporarystorage
storagefacility
facilityconsidering
consideringonly
only
distances
distancesand
andquantities
quantitiessold
soldper
permonth?
month?
Plant Location Methodology: Example of Centroid Method
(Continued): Determining Existing Facility Coordinates
Y
To
Tobegin,
begin,you
youmust
mustidentify
identifythe
the Q
existing
existingfacilities
facilitieson
onaatwo-
two- (790,900)

dimensional
dimensionalplane
planeor
orgrid
gridand
and D
(250,580)
determine
determinetheir
theircoordinates.
coordinates.
A
(100,200)

(0,0) X

S ho wro o m No o f Z-Mo b ile s

You
Youmust
mustalso
alsohave
havethethe s o ld p e r mo nth
volume
volumeinformation
informationon onthe
the
business A 1250
businessactivity
activityatatthe
the
existing
existingfacilities.
facilities. D 1900

Q 2300
Plant Location Methodology: Example of Centroid
Method (Continued): Determining the Coordinates of
the New Facility
You
Youthen
thencompute
computethe
thenew
newcoordinates
coordinatesusing
usingthe
theformulas:
formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000
CCx == 100(1250) + 250(1900) + 790(2300) == 2,417,000 == 443.49
443.49
x 1250
1250 ++ 1900
1900 ++ 2300
2300 5,450
5,450
200(1250) + 580(1900) + 900(2300) 3,422,000
CCy == 200(1250) + 580(1900) + 900(2300) == 3,422,000 == 627.89
627.89
y 1250
1250 ++ 1900
1900 ++ 2300
2300 5,450
5,450
You
Youthen
thentake
takethe
thecoordinates
coordinatesand
andplace
placethem
themon
onthe
themap:
map:
Y
New S ho wro o m No o f Z-Mo b ile s
Q New
location s o ld p e r mo nth
(790,900)
locationof of
ZZ facility
facilityZZ
D
(250,580) about
about A 1250
(443,627)
(443,627)
A D 1900
(100,200)

(0,0) X Q 2300
Site selection In Rs ,000

Site A Site B Site C

Total Investment 400 550 525
Total Expected sale 500 600 500
Cost of raw Matl 145 150 170
Cost of utilities 80 60 50
Cost of distribution 75 80 150
Salary & wages 40 50 40
Site selection
Site A Site B Site C

Attitude of local Indifferent Eager Indifferent

Labour welfare Poor Poor Normal

activities
Housing Facility poor Good Normal

Cost of living Low Normal Normal

Site selection
Site A Site B Site C

1)Total Investment 400 550 525

2)Total Expected sale 500 600 500

3)Cost of raw Matl 145 150 170

4)Cost of utilities 80 60 50

5)Cost of distribution 75 80 150

6)Salary & wages 40 50 40

7)Total expenses (3 to 6) 340 340 410

8)Rate of return (2-7)/1 160/400 260/550 90/525

Capacity Management
 Capacity planning
 Capacity is the maximum output rate of a
production or service facility
 Capacity planning is the process of establishing
the output rate that may be needed at a facility:
 Capacity is usually purchased in “chunks”

 Strategic issues: how much and when to spend

capital for additional facility & equipment

 Tactical issues: workforce & inventory levels, &

day-to-day use of equipment

Strategic Capacity Planning
 Decisions taken with respect to
 The amount of capacity that an operating unit has
 The manner in which the existing capacity is put to use
 will lead to loss of productivity & overall reduction in
the profitability of the operating system
 Examples
 Excessive delay and waiting in service systems such as
a teller counter in a bank
 Some factories working with near 100 percent
utilization of their resources
 Issues in Capacity Planning
 Do I have adequate number of resources to meet the
demand?
 If I need to add some extra resources where should I add?
 What is the utilization of my resources?
 If I need to increase the capacity of my system how
should I modify the process?
 Should I add some more resources?
 What will the cost of my operation?
 One can find answers to the above questions by
Capacity Planning/Process analysis.
 Capacity Utilization
Capacity used
Capacity utilization rate 
Best operating level

 Where
 Capacity used
 rate of output actually achieved
 Best operating level
 capacity for which the process was designed
 How Much Capacity Is Best?
 The Best Operating Level is the output than results in
the lowest average unit cost
 Economies of Scale:
 Where the cost per unit of output drops as volume of output
increases
 Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
 Diseconomies of Scale:
 Where the cost per unit rises as volume increases
 Often caused by congestion (overwhelming the process with too
much work-in-process) and scheduling complexity
Best Operating Level and Size
 Implementing Capacity
Decisions
 Capacity flexibility
 Plant, process, workers, outsourcing
 Amount of capacity cushion
 important in -to-order and services
 Timing the capacity change
 Leading [proactive]
 Concurrent [neutral]
 Lagging [reactive]
 Size of the capacity increment
Timing the Capacity Change
 Example of Capacity Utilization
 During
During one
one week
week of
of production,
production, aa plant
plant
produced
produced 83 83 units
units of
of aa product.
product. ItsIts historic
historic
highest
highest oror best
best utilization
utilization recorded
recorded was
was 120
120
units
units per
per week.
week. What
What is is this
this plant’s
plant’s capacity
capacity
utilization
utilization rate?
rate?

 Answer:
Answer:
Capacity
Capacityutilization
utilizationrate
rate== Capacity
Capacityused
used . .
Best
Bestoperating
operatinglevel
level
==83/120
83/120
=0.69
=0.69or
or69%
69%
The As
Asplants
plantsproduce
producemore
moreproducts,
products,they
they
Experience gain
gainexperience
experiencein
inthe
thebest
bestproduction
production
methods
methodsandandreduce
reducetheir
theircosts
costsper
perunit
Curve unit

Yesterday

Cost or Today
price Tomorrow
per unit

Total accumulated production of units

Capacity Flexibility

 Flexible plants

 Flexible processes

 Flexible workers
 Capacity Planning: Balance
Unbalanced
Unbalancedstages
stagesof
ofproduction
production

Units
per Stage 1 Stage 2 Stage 3
month
6,000 7,000 5,000
Maintaining System Balance: Output of one stage is
the exact input requirements for the next stage
Balanced
Balancedstages
stagesof
ofproduction
production

Units
per Stage 1 Stage 2 Stage 3
month
6,000 6,000 6,000
 Capacity Planning

 Frequency of Capacity Additions

 External Sources of Capacity

 Determining Capacity Requirements

 1. Forecast sales within each

individual product line

 2. Calculate equipment and labor

requirements to meet the
forecasts

 3. Project equipment and labor

availability over the planning
horizon
Example of Capacity Requirements
A manufacturer produces two lines of mustard, FancyFine and
Generic line. Each is sold in small and family-size plastic bottles.

The following table shows forecast demand for the next four years.

Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
Example of Capacity Requirements (Continued):
Product from a Capacity Viewpoint
 Question:
Question: Are
Are we
we really
really producing
producing two
two
different
different types
types ofof mustards
mustards from
from the
the
standpoint
standpoint ofof capacity
capacity requirements?
requirements?
 Answer:
Answer: No,
No, it’s
it’s the
the same
same product
product just
just
packaged
packaged differently.
differently.
 Example of Capacity Requirements (Continued) :
Equipment and Labor Requirements

Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
•Three 100,000 units-per-year machines are available for
small-bottle production. Two operators required per machine.

•Two 120,000 units-per-year machines are available for

family-sized-bottle production. Three operators required per
machine.
 55
Question:
Question:What
Whatare
arethe
theYear
Year11values
valuesfor
forcapacity,
capacity,machine,
machine,
and
andlabor?
labor?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6
150,000/300,000=50%
At 1 machine for 100,000, it takes
Small 1.5 machines for 150,000
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00 At 2 operators for 100,000,
it takes 3 operators for
Family-size
150,000
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88 ©The McGraw-Hill Companies, Inc., 2004
 56
Question:
Question:What
Whatare
arethe
thevalues
valuesfor
forcolumns
columns2,
2,33and
and44in
inthe
thetable
tablebelow?
below?

Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6

Small
Percent capacity used 50.00% 56.67% 66.67% 80.00%
2.00 2.40
Machine requirement 1.50 1.70 4.00 4.80
3.40
Labor requirement 3.00
Family-size
Percent capacity used 47.92% 58.33% 70.83% 83.33%
1.17 1.42 1.67
Machine requirement 0.96 3.50 4.25 5.00
Labor requirement 2.88
©The McGraw-Hill Companies, Inc., 2004
Capacity Analysis Issues for MTS
 From a process and capacity analysis perspective MTS is
related to mass production systems. Therefore the
relevant questions for process and capacity analysis are:
 What is the productive capacity of my process per shift or per
day?
 Where is the bottleneck for this process?
 If I need to increase the capacity of the process at which stage of
the process should I invest?
 Can I improve the productive capacity by other means than
investing in new resources?


Performance Metrics
 Throughput time: Throughput time (TPUT) is the elapsed
time from the first stage of the process to the last stage
of the process. It is also known as lead time.
 Cycle Time: Cycle time is the elapsed time between two
successive output from a process that is continuously
operating in a given period of time.
 Bottleneck: That stage of the process that dictates the
output of a process is the bottleneck.
 TPUT is a relevant measure for MTO systems.
 Measures such as Cycle Time and Bottleneck are relevant
in the case of MTS systems.
Capacity Analysis
Toy Manufacturing
Graphical Analysis of Capacity
Example of a Decision Tree Problem

AAglass
glassfactory
factoryspecializing
specializingin
incrystal
crystalis
isexperiencing
experiencingaa
substantial
substantialbacklog,
backlog,and
andthe
thefirm's
firm'smanagement
managementis is
considering
consideringthree
threecourses
coursesof ofaction:
action:

A)
A) Arrange
Arrangefor
forsubcontracting
subcontracting
B)
B) Construct
Constructnew
newfacilities
facilities
C)
C) Do
Donothing
nothing(no
(nochange)
change)

The
Thecorrect
correctchoice
choicedepends
dependslargely
largelyupon
upondemand,
demand,which
which
may
maybebelow,
low,medium,
medium,ororhigh.
high. By
Byconsensus,
consensus,management
management
estimates
estimatesthetherespective
respectivedemand
demandprobabilities
probabilitiesas
as0.1,
0.1,0.5,
0.5,
and
and0.4.
0.4.
Example of a Decision Tree Problem
(Continued): The Payoff Table
The
The management
management alsoalso estimates
estimates the
the profits
profits
when
when choosing
choosing from
from thethe three
three alternatives
alternatives (A,
(A,
B,
B, and
and C)
C) under
under the
the differing
differing probable
probable levels
levels of
of
demand.
demand. These
These profits,
profits, in
in thousands
thousands ofof dollars
dollars
are
are presented
presented in
in the
the table
table below:
below:
0.1 0.5 0.4
Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
Example of a Decision Tree Problem (Continued):
Step 1. We start by drawing the three decisions

A
B

C
Example of Decision Tree Problem (Continued):
Step 2. Add our possible states of nature,
probabilities, and payoffs

High demand (0.4) Rs90k

Medium demand (0.5) Rs50k

Low demand (0.1) Rs10k

A High demand (0.4) Rs200k

B Medium demand (0.5) Rs25k

Low demand (0.1) -Rs120k

C
High demand (0.4) Rs60k

Medium demand (0.5) Rs40k

Low demand (0.1) Rs20k

Example of Decision Tree Problem (Continued):
Step 3. Determine the expected value of each
decision

High Rs90k
Highdemand
demand(0.4)
(0.4) Rs90k
Medium Rs50k
Rs50k
Mediumdemand
demand(0.5)
(0.5)
Rs62k
Rs62k Low
Lowdemand
demand(0.1)
(0.1)
Rs10k
Rs10k

AA

EV
EVAA=0.4(90)+0.5(50)+0.1(10)=Rs62k
=0.4(90)+0.5(50)+0.1(10)=Rs62k
Example of Decision Tree Problem (Continued):
Step 4. Make decision
High demand (0.4) Rs90k

Medium demand (0.5) Rs50k

Rs62k Low demand (0.1) Rs10k

A High demand (0.4) Rs200k

Rs80.5k Rs25k
B Medium demand (0.5)
Low demand (0.1) -Rs120k
C
High demand (0.4) Rs60k
Rs40k
Rs46k Medium demand (0.5)
Low demand (0.1) Rs20k

Alternative
AlternativeBBgenerates
generatesthe
thegreatest
greatestexpected
expectedprofit,
profit,so
so
our
ourchoice
choiceis
isBBor
orto
toconstruct
constructaanew
newfacility
facility
 Planning Service Capacity vs.
Manufacturing Capacity
 Time: Goods can not be stored for later use
and capacity must be available to provide a
service when it is needed
 Location: Service goods must be at the
customer demand point and capacity must
be located near the customer
 Volatility of Demand: Much greater than in
manufacturing
 Capacity Utilization &
Service Quality
 Best operating point is near 70% of
capacity

 From 70% to 100% of service

capacity, what do you think happens
to service quality?
Capacity Planning
Generic Premises
 Three generic planning premises are in use in
operations management
 Make-to-Stock (MTS): more amenable for systems with
fewer product varieties and high production volume as in the
case of continuous and streamlined flow systems
 Assemble-to-order (ATO): useful for intermittent flow
systems catering to the mid-volume mid- variety situations
 Make-to-order (MTO): organizations typically belong to
manufacturer of high product variety (jumbled flow process
systems) use this planning process
 Improving a Banking System
Problem Context
 Consider a branch of the State Bank of India in a centrally located
place that has observed an increase in the waiting time of the
customers
 We want to understand the impact of alternative operational
choices to address this problem:
 Adding two more counters
 Increasing the service rate by deploying some technology choices
 Adding some waiting spaces and
 Resorting to other mechanisms of reducing the demand placed on the servers
 In order to analyze these alternatives we need to build a model of
the system and study its behavior with respect to key performance
metrics such as waiting time