02-02-2023

Operations Management:
An Introduction

Consumer Behaviour Consumer Behaviour

 An average business never hears from 96 % of its unhappy  Of the customers that make a complaint, 56 to 70% will do
customers. For every complaint received, the average company business again when matter is resolved and if matter is resolved
has approximately 26 customers with problems. quickly the figure goes up to 95%.

 Complainers (not non-complainers) are more likely to do  On an average customer with problem will tell 9-10 people and
business again with the company that upsets them, even if the the customers with complaints satisfactorily resolved shall tell
problem is not satisfactorily resolved. an average 5 people about the treatment they received.

What Is Operations Management? Topics of Discussion

Production is the creation of goods and services  Operations Function

 What Do Operations Managers Do?

Operations management (OM) is the set of activities that
creates value in the form of goods and services by  Evolution of Operations Management
transforming inputs into outputs
 Operations Strategy

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What Do Operations Managers Do? Operations = Transformation Process

 What is Operations?  Inputs

 a function or system that transforms inputs into outputs of greater  5 Ms: Management, Methods, Material, Machines, Maintenance
value  Also: Personnel , information & energy
 What is a Transformation Process?
 Transformation/conversion process
 a series of activities along a value chain extending from supplier to
Cutting, machining, storing, transporting, investing, analyzing
customer.
 activities that do not add value are superfluous and should be  Output
eliminated Goods/services
 What is Operations Management?
 design, operation, and improvement of productive / service systems Value-added The difference between the cost of inputs
and the value or price of outputs.

Transformation Process Operations as a Transformation

 Physical: as in manufacturing operations Process
 Locational: as in transportation operations
 Exchange: as in retail operations INPUT
•Material
 Physiological: as in health care •Machines TRANSFORMATION OUTPUT
•Goods
 Psychological: as in entertainment •Labor PROCESS
•Services
•Management
 Informational: as in communication •Capital

Feedback

Operations are managed for both Production and Services

Some more examples?????
Food processing Plant

Inputs Process Outputs

PRODUCTION

• Raw vegetables • Cleaning

• Metal sheets • Making cans
Canned Vegetables  Car Assembly Plant
• Water • Cutting
• Energy • Cooking Result is
• Labor • Packing
• Building • Labeling
TANGIBLE OUTPUT
• Equipment  Airline

Inputs Process Outputs

 University
SERVICE
Hospital

• Doctors, nurses • Examination

Treated Patients
• Hospital • Surgery
• Medical supplies • Monitoring
•
•
Equipment
Laboratories
•
•
Medication
Therapy Result implies
 Retail Shop
an ACT

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Goods-Service Continuum
Example: BMT 216
Inputs Processing Outputs
Steel production Home Auto Repair Maid Service Teaching
Automobile remodeling Appliance Manual car Lawn
• Knowledge Lecturing Future
fabrication Retail sales repair wash mowing
• Text Book Tutoring operations
• Lecture Notes Assignment managers
High percentage goods
• Handouts Exam Low percentage goods

• Course CD Low percentage service High percentage service

• ……

Teaching Evaluation

Continuum from Goods to Services Characteristics of Goods

 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer interaction

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of
Service Operations (Boston: Allyn Bacon, 1978), p.11.

Manufacturing vs. Service

Characteristics of Service
Characteristic Manufacturing Service
 Intangible product Output Tangible Intangible
 Produced and consumed at Uniformity of output High Low
same time Uniformity of input High Low
 Often unique Labor content Low High
 High customer interaction Measurement of productivity Easy Difficult
Customer contact &
 Inconsistent product Participation in product
definition Low High
design
 Often knowledge-based Opportunity to correct quality High Low
problems before delivery
High Low
Mechanization

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Scope of Operations Management

 Operations Management includes:
 Forecasting
 Planning the Facilities Location
What does Operations  Planning the Facilities Layout
 Scheduling the Jobs
Manager Do?  Managing inventories
 Capacity planning
 Assuring quality, Motivating employees
 And more . . .

The Critical Decisions The Critical Decisions

 Design of goods and services  Process and capacity design
 What good or service should we offer?  What process and what capacity will these products
 How should we design these products and services? require?
 Managing quality  What equipment and technology is necessary for
these processes?
 How do we define quality?
 Who is responsible for quality?  Location strategy
 Where should we put the facility?
 On what criteria should we base the location
decision?

The Critical Decisions The Critical Decisions

 Layout strategy  Supply chain management
 How should we arrange the facility?  Should we make or buy this component?
 How large must the facility be to meet our plan?  Who are our suppliers and who can integrate into our
e-commerce program?
 Human resources and job design
 How do we provide a reasonable work environment?
 Inventory, material requirements planning, and
JIT
 How much can we expect our employees to produce?
 How much inventory of each item should we have?
 When do we re-order?

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Responsibilities of Operations Manager

The Critical Decisions Planning Organizing
– Capacity
– Degree of centralization
 Intermediate and short–term scheduling – Location
– Process selection
– Products & services
Staffing
 Are we better off keeping people on the payroll – Make or buy
– Hiring/laying off
during slowdowns? – Layout
– Use of Overtime
– Projects
 Which jobs do we perform next? Directing
– Scheduling
– Incentive plans
 Maintenance Controlling/Improving
– Inventory – Issuance of work orders
 Who is responsible for maintenance? – Quality – Job assignments

 When do we do maintenance? – Costs

– Productivity

Reasons to Study Operations Management

Organizational Charts
 Operations Management activities are at the core of all business Commercial Bank
organizations.
Operations Finance Marketing
 50% or more of the jobs in industry are operations management-related: Teller Investments Loans
 Customer Service Scheduling Security Commercial
 Quality Assurance Check Clearing Real estate Industrial
 Production/ service Planning Collection Financial
 Scheduling / queuing Transaction Accounting Personal
processing
 Inventory Management Facilities Mortgage
 Logistics design/layout
Auditing
Vault operations
 All Other Functional Areas are interrelated with Operations Maintenance
Trust Department
Management Security

Organizational Charts Organizational Charts

Manufacturing
Airline
Operations Finance/ Marketing
Operations Finance/ Marketing Facilities accounting Sales
accounting Construction; maintenance Disbursements/ promotion
Ground support Traffic Production and inventory control credits Advertising
equipment Accounting administration Scheduling; materials control Receivables Sales
Maintenance Payables Reservations Quality assurance and control Payables
Receivables Schedules General ledger Market
Ground Operations Supply chain management research
General Ledger Tariffs (pricing) Funds Management
Facility Manufacturing
maintenance Finance Sales Tooling; fabrication; assembly Money market
Catering Advertising International
Cash control Design exchange
Flight Operations International Product development and design
exchange Detailed product specifications Capital requirements
Crew scheduling Industrial engineering Stock issue
Flying Efficient use of machines, space, Bond issue
Communications and personnel and recall
Dispatching Process analysis
Management science Development and installation of
production tools and equipment

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Strategy Formulation
1. Define a primary task
Chapter - 2 2. Assess core
competencies
3. Determine order winners & order qualifiers
Operations Strategy 4. Positioning the firm

Purpose / mission??? Core competency??

 University  Operations Management Decisions

 Bank  Focus of any organization

 Manufacturer

 Television network

Operations Wal-Mart
Four Steps for Strategy Formulation
Strategy at
Mission Provide value for our customers
Wal-Mart  Defining a primary task
 What is the firm in the business of doing?
Competitive Low prices, everyday
Priority  For a Hospital it can be “To provide a healing environment providing family-
centered care with compassion, comfort and respect.....when it matters most”
Operations
Low inventory levels
Strategy Short flow times
 Assessing core competencies
 What does the firm do better than anyone else?
Operations Linked communications between Fast transportation
Structure stores system
 For a service it can be experience differentiation, cost leadership, or response
(rapid, flexible and reliable)
Enabling Process EDI/satellites Cross-docking Focused locations
and Technologies

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Strategy Formulation………
 Determining order winners and order qualifiers
 What wins the order?
 What qualifies an item to be considered for purchase/ visit?

 Positioning the firm

 How will the firm compete? SWOT Analysis

Competitive Priorities:
Competitive Priorities
Experience Differentiation
 Experience Differentiation  Engage the customer through imaginative use of the five
 Cost senses, so that the customer experiences the product.
 Quality
 Response:
Rapid, Flexible and reliable.  Enhancing the potential value of the product for the customer.

Competitive Priorities: Quality

Competitive Priorities: Cost
Conformance & Performance
 Low cost leadership: entails achieving maximum value as Providing The Right Service Right The First Time Every Time
defined by your customer
 Holding down costs hospital costs:  Experienced/trained personnel.
 Competitive pricing,  Reputation within Industry.
 reducing inventories,  Ability to offer overall consistent and reliable quality customer care
 holding down inpatient costs,  Undertaking new technology to
 assessing costs of service rendered, and  Improve customer satisfaction.
 considering costs when undertaking new technology  Improve customer outcomes

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Competitive Priorities: Response Operations Strategy:

Flexible, Reliable and Quick Products and Services
 Make-to-order
 The FLEXIBILITY construct deals with management’s emphasis to  products and services are made to customer specifications after an order has been
quickly respond to changes in the business, political, competitive, or received.
community health environment.  Most Professional services: medical, legal and financial

 The DELIVERY of service by being accessible to our markets through  Make-to-stock

extending and expanding services, and by availability and promptness of
health services  Assemble-to-order

Production Strategy:
Product-Process Matrix
Processes and technology
 Project
 one-at-a-time production of a product to customer order
 Batch production
 systems process many different jobs at the same time in groups (or
batches)
 Mass production
 large volumes of a standard product for a mass market
 Continuous production
 used for very high volume commodity products

Continuous Production
Service Strategy:
A paper manufacturer produces a
continuous sheet paper from wood Processes and Technology
pulp slurry, which is mixed, pressed,
dried, and wound onto reels.  Professional service
Mass Production
 highly customized and very labor intensive
Here in a clean room a worker performs
quality checks on a computer assembly line.
 Service shop
 customized and labor intensive
Batch Production
At Martin Guitars bindings on the guitar frame are  Mass service
installed by hand and are wrapped with a cloth
webbing until glue is dried.  less customized and less labor intensive
Project  Service Factory
Construction of the aircraft carrier USS Nimitz was a huge  least customized and least labor intensive
project that took almost 10 years to complete.

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Service-Process Matrix
Service Factory
Electricity is a commodity available
continuously to customers.

Mass Service
A retail store provides a standard array of
products from which customers may choose.

Service Shop
Although a lecture may be prepared in advance, its
delivery is affected by students in each class.

Professional Service
A doctor provides personal service to each patient based
on extensive training in medicine.

Decision Making
 Strategic  A decision on how many hours has to be allotted for preventive
maintenance of machines.
 To set up a new hospital or change the location of the
hospital Tactical Decision

 Tactical  MNITJ management deciding to open a new campus at Dubai.

 A new Dental / ENT OPD being opened Strategic level Decision.
 Operational
 To make the duty sheet of the hospital staff  Acme Motors Co. Ltd., deciding to reinvest a part of profits for
developing a new technology or a new product.
Strategic level Decision.

Productivity Challenge
 Productivity is the ratio of outputs (goods and services)
 To rework the quality check rejects of the first shift in the factory
in the last shift. divided by the inputs (resources such as labor and
Tactical level decision capital)

 Making a new layout design to manufacture a new model of a

trouser in a company named GA Apparels The objective is to improve productivity!
Strategic Level Decision
Important Note!
 A travel company deciding the crew for the next cruise. Production is a measure of output
Operational Level Decision. only and not a measure of efficiency

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Productivity Service Productivity

 Typically labor intensive
Units produced
Productivity =  Frequently focused on unique individual attributes or
Input used desires

 Measure of process improvement  Often an intellectual task performed by professionals

 Represents output relative to input  Often difficult to mechanize

 Only through productivity increases can our  Often difficult to evaluate for quality
standard of living improve

Productivity at Taco Bell Productivity at Taco Bell

Improvements: Improvements:
 Revised the menu
Results:
 Designed meals for easy preparation
 Revised the menu  Shifted some preparationtime
 Preparation to suppliers
cut to 8 seconds
 Designed meals for easy preparation  Efficient layout and automation
 Management span of control
 Training and employee empowerment
 Shifted some preparation to suppliers increased from 5 to 30
 Efficient layout and automation  In-store labor cut by 15 hours/day
 Stores handle twice the volume with
 Training and employee empowerment half the labor
 Fast-food low-cost leader

The Changing Corporation Summing Up

20TH CENTURY 21ST CENTURY
CHARACTERISTIC CORPORATION CORPORATION
 Transformation Process
Style Structures Flexible
Source of strength Stability Change  Characteristics and differences between manufacturing and
Resources Physical assets Information
Products Mass production Mass customization
service
Reach Domestic Global
Financials Quarterly Real-time
Inventories Months Hours
 Historical development of OM
Strategy Top-down Bottom-up
Leadership Dogmatic Inspirational
 Strategy formulation
Job expectations Security Personal growth
Improvements Incremental Revolutionary
Quality Affordable best No compromise 59

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Design and Effective Capacity

Capacity Planning  Design capacity is the maximum theoretical output of a
system
 Normally expressed as a rate
 Effective capacity is the capacity a firm expects to
achieve given current operating constraints
 Often lower than design capacity

Design and Effective Capacity Utilization and Efficiency

 Utilization is the percent of design capacity
 Effective Capacity= Designed Capacity* Utilization achieved
Utilization = Actual output/Design capacity
 Efficiency is the percent of effective capacity
achieved
Efficiency = Actual output/Effective capacity

Recommended Readings Problem

1. Heizer, J.; Render, B. and Rajashekhar, J., “Operations  A piece of equipment is designed for working for a eight
Management”, Pearson Education.
hours shift and can produce 100 units an hour, but 10%
2. Russel and Taylor, “Operations Management along the
Supply Chain”,Wiley Student Edition. of time is needed for maintenance and set-up. In one
3. Chase, Jacobs, Aquilano and Agarwal, “Operations particular week (5 day week) due to breakdowns and
Management for Competitive Advantage”, TMH. defective outputs, only 3000 units were manufactured.
4. Martinich, J. S. (2008), “Production and Operations What measures can be found from the above
Management: An Applied Modern Approach”,Wiley India
Edition, John Wiley and Sons. information.
5. Mahadevan, B. (2010), “Operations Management: Theory and
Practice”, 2nd Edition, Pearson Education.

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A bottling hall has three distinct parts: Three bottling machines

each with a maximum throughput of 200 liters a minute, and
average maintenance of one hour a day; Three labelling
Managing Demand
machines each with a maximum throughput of 6000 bottles an  Demand exceeds capacity
hour, and planned stoppages averaging 60 minutes a day; A
packing area with a maximum throughput of 20,000 cases a  Curtail demand by raising prices, scheduling longer lead time
day. The hall is set to fill one liter bottles and put them in cases  Long term solution is to increase capacity
of 8 bottles during a 8-hour working day.  Keep spare in stock
 Capacity exceeds demand
 What is the designed capacity of the hall?
 What is the effective capacity of the hall?  Stimulate market
 If the bottling hall works at its effective capacity, what is the  Product changes
utilization of each operation?  Adjusting to seasonal demands
 If the line develops a fault which reduces output to 70,000
 Produce products with complementary demand patterns
bottles, what is the efficiency of the operation?

Tactics for Matching Capacity to Demand Demand and Capacity Management in the Service Sector
1. Making staffing changes  Demand management
2. Adjusting equipment  Appointment, reservations, FCFS rule
 Purchasing additional machinery
 Selling or leasing out existing equipment
 Capacity
management
3. Improving processes to increase throughput
 Full time,
4. Redesigning products to facilitate more throughput temporary,
5. Adding process flexibility to meet changing product part-time
preferences staff
6. Closing facilities

Design and Effective Capacity Capacity Planning

Time _ available _ in _ a _ year
 Designed Capacity = Time _ to _ make _ one _ unit  Time Available should always be more than required for
capacity planning
= N *H *S *D units a year
M / 60 i.e. P*M < N*H*S*D*U*60
 Effective Capacity= Designed Capacity* Utilization P*M
OR N >
H * S * D *U * 60

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Approaches to Capacity Expansion

A company wants to make 1000 units of a product per
(b) Leading demand with one-
 (a) Leading demand with
incremental expansion
step expansion

week. The product is made on equipment which has a

New
New capacity
capacity Expected
designed capacity of 10 units an hour.The company

Demand
Expected demand

Demand
demand

currently works a single eight-hour shift during weekdays,

but could move to double shifts or work at weekends. If
the equipment has an expected utilization of 80%, how (c) Capacity lags demand with (d) Attempts to have an average capacity
much equipment does the company need? incremental expansion with incremental expansion
New
capacity New
Expected capacity Expected

Demand

Demand
demand demand

Best Operating Level Economies of scale

 Percent of capacity that minimizes the average unit cost.  Fixed cost spread over larger number of units
 Capacity Cushion: percentage of capacity kept in reserve  Production cost do not change linearly with output levels
unexpected occurrences.  Quantity discounts
 Learning curves: Operating efficiency as workers gain
experience.

Best Operating Level for a Hotel Diseconomies of Scale

 Distribution

 Bureaucracy

 Confusion

 Vulnerability

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Economic Analysis Break-Even Analysis

 Payback period  Technique for evaluating process and equipment
alternatives
 Net Present Value  Objective is to find the point in dollars and units at
which cost equals revenue
 Internal Rate of Return  Requires estimation of fixed costs, variable costs, and
revenue

Already Covered:
Revision Self Study

Break-Even Analysis Break-Even Analysis

–
Total revenue line Assumptions
900 –

800 –
 Costs and revenue are linear functions
Break-even point Total cost line
700 – Total cost = Total revenue  Generally not the case in the real world
Cost in dollars

600 –

500 –
 We actually know these costs
400 – Variable cost  Very difficult to accomplish
300 –
 There is no time value of money
200 –

100 – Fixed cost

|– | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)

Break-Even Analysis
BEPx = break-even point in units x = number of units produced
BEP$ = break-even point in
dollars TR = total revenue = Px Fixed costs = $10,000 Material = $.75/unit
P = price per unit (after all F = fixed costs
discounts) V = variable cost per unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
TC = total costs = F + Vx

BEP$ = BEPx P
= F P Profit = TR - TC
P -V = Px - (F + Vx)
= F
= Px - F - Vx
(P - V)/P
F = (P - V)x - F
=
1 - V/P

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BEP Break-Even Analysis

Fixed costs = $10,000 Material = $.75/unit Multiproduct Case

Direct labor = $1.50/unit Selling price = $4.00 per unit
BEP$ =
F

∑
F $10,000
BEP$ = = Vi
1- x (Wi)
1 - [(1.50 + .75)/(4.00)] Pi
1 - (V/P)
$10,000
= = $22,857.14 where V = variable cost per unit
0.4375 P = price per unit
F $10,000 F = fixed costs
BEPx = = = 5,714 W = percent each product is of total dollar sales
P -V 4.00 - (1.50 + .75) i = each product

Multiproduct Example
Fixed costs = $3,500 per month; working for 6 days in a week Fixed costs = $3,500 per month
Annual Forecasted Annual Forecasted
Item Price Cost Sales Units Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000 Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000 Soft drink .80 .30 7,000
Baked potato 1.55 .47 5,000 Baked potato 1.55 .47 Annual 5,000 Weighted
Tea .75 .25 5,000 Tea Selling Variable .75 .25 Forecasted 5,000
% of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00 3,000 Salad bar 2.85 1.00 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
1. Find the break Even sales in dollars Baked 1.55 .47 .30 .70 7,750 .167 .117
2. Daily Sales in Dollars potato
3. Break even point for number of sandwiches Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625

Capacity cushion
F
BEP$ =
∑ V
1 - i x (Wi)
Pi  The capacity cushion is the amount of reserve capacity that a
Fixed costs = $3,500 per month
$3,500 x 12
firm maintains to handle sudden increases in demand or
Annual Forecasted
Item Price Cost
=
.625
= $67,200
Sales Units temporary losses of production capacity.
Sandwich $2.95 $1.25 7,000
Soft drink .80 Daily
.30 $67,200
7,000
Baked potato 1.55 .47
=
sales Annual
312 days
= $215.38
5,000 Weighted  It measures the amount by which the average utilization (in terms
Tea Selling Variable .75 .25 Forecasted 5,000
% of Contribution
of effective capacity) falls below 100 percent.
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00
.446 x $215.383,000
Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6  33
.446 .259
$2.95 sandwiches
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 per day.117  Capacity cushion = 100% - Utilization rate (%)
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625

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SERVICE CAPACITY PLANNING SERVICE CAPACITY PLANNING

Service capacity planning can present a number of challenges  Time: Inability to store services for later consumption. Capacity must be
related to: available to provide a service when it is needed (capacity must be matched
with the timing of demand)
The inability to store services
The need to be near customer  Location: Need to be near customers for convenience. Capacity and location
are closely tied. Service goods must be at the customer demand point and
The degree of demand volatility capacity must be located near the customer
 Volatility of Demand: (Much greater than in manufacturing)
 Volume and timing of demand

 Time required to service individual customers

CAPACITY UTILIZATION & As plants produce more products, they gain

experience in the best production methods and
SERVICE QUALITY THE EXPERIENCE/ reduce their costs per unit

 Best operating point is near 70% of capacity LEARNING CURVE

Yesterday
 From 70% to 100% of service capacity, what do you think Cost or Today
happens to service quality? price Tomorrow
per unit

Total accumulated production of units

TYPES OF FACILITIES
 Heavy-manufacturing facilities
 large, require a lot of space, and are expensive
 Light-industry facilities
 smaller, cleaner plants and usually less costly
 Retail and service facilities
 smallest and least costly

FACILITIES LOCATION

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Some factors influencing the location of

sites MARKET REQUIREMENTS
Resource Required
costs service level  Suitability of Site: Manufacturing/ Service
Land and Suitability
facilities
investment
of site
 Image of the location: Important for Services

OPERATIONS Location of MARKET

RESOURCES sites REQUIREMENTS  Service Level:
 Type of service: Emergency; High contact/ Low contact facility
Resource Image of
availability location  Speed; Dependability: Customer/ Supplier

Community
factors

OPERATIONS REQUIREMENTS FACTORS IN HEAVY MANUFACTURING LOCATION

 Land and facilities investment:  Construction costs
 Infrastructure support needed  Land costs
 Resource Costs:  Raw material and finished goods shipment modes
 Labour  Proximity to raw materials
 Energy
 Utilities
 Transportation
 Labor availability
 Community Factors: social, political and economic environment

FACTORS IN LIGHT INDUSTRY LOCATION FACTORS IN RETAIL LOCATION

 Transportation costs  Proximity to customers
 Proximity to markets  Location is everything
 Frequency of delivery required by customer

 Land costs

 Easily accessible geographic region

 Education and training capabilities

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ALTERNATIVES TO LOCATING NEW FACILITIES ALTERNATIVE FOR RELOCATION

 Licensing/ Franchising  Same Location

 Exporting  Original keep, open new

 Local warehousing and sales  Shut Down, open new

 Local assembly/ finishing

 Full local production

GLOBAL LOCATION FACTORS REGIONAL LOCATION FACTORS

 Raw material availability  Government stability  Labor (availability, education,  Modes and quality of
 Number and proximity of  Government regulations cost, and unions) transportation
suppliers
 Political and economic  Proximity of customers  Transportation costs
 Transportation and distribution systems
system  Number of customers  Community
 Labor cost and education  Economic stability and  Construction/leasing costs government Local
growth business regulations
 Available technology  Land cost
 Commercial travel  Exchange rates  Government services
 Technical expertise  Culture (e.g., Chamber of
 Cross-border trade regulations  Climate Commerce)
 Group trade agreements  Export import
regulations, duties and
tariffs

REGIONAL LOCATION FACTORS (CONT.) LOCATION INCENTIVES

 Business climate  Infrastructure (e.g.,  Tax credits
 Community services roads, water, sewers)  Relaxed government regulation
 Incentive packages  Quality of life
 Job training
 Government regulations  Taxes
 Infrastructure improvement
 Environmental regulations  Availability of sites
 Money
 Raw material availability  Financial services

 Commercial travel  Community

 Climate
inducements
 Proximity of suppliers
 Education system

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LOCATIONAL
BREAK-EVEN ANALYSIS LOCATIONAL BREAK-EVEN ANALYSIS EXAMPLE
 Method of cost-volume analysis used for industrial locations
A company as to make a choice between three locations with the
 Three steps in the method fixed costs and variable costs as given in the table below. The
1. Determine fixed and variable costs for each location company plans to sell the produce at $120 per unit. Find the best
2. Plot the cost for each location location for the unit, if the expected demand for the product is 2000
3. Select location with lowest total cost for expected production volume units. Fixed Variable Total
City Cost Cost Cost
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

LOCATIONAL BREAK-EVEN ANALYSIS LOCATION ANALYSIS TECHNIQUES

EXAMPLE
 Location rating factor
–
$180,000 –
–
$160,000 –
 Center-of-gravity
$150,000 –
–
$130,000 –
–  Load-distance
Annual cost

$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
Akron Chicago
$30,000 – lowest Bowling Green lowest cost
– cost
lowest cost
$10,000 –
| | | | | | |
–
Figure 8.2 0 500 1,000 1,500 2,000 2,500 3,000
Volume

LOCATION FACTOR RATING: EXAMPLE LOCATION FACTOR RATING

SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3 WEIGHTED SCORES

Labor pool and climate .30 80 65 90 Site 1 Site 2 Site 3

Proximity to suppliers .20 100 91 75 24.00 19.50 27.00
Wage rates .15 60 95 72 Site 3 has the
20.00 18.20 15.00
Community environment .15 75 80 80 highest factor rating
9.00 14.25 10.80
Proximity to customers .10 65 90 95 11.25 12.00 12.00
Shipping modes .05 85 92 65 6.50 9.00 9.50
Air service .05 50 65 90 4.25 4.60 3.25
2.50 3.25 4.50
Weighted Score for “Labor pool and climate” for 77.50 80.80 82.05
Site 1 = (0.30)(80) = 24

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CENTER-OF-GRAVITY TECHNIQUE GRID-MAP COORDINATES

 Locate facility at center of geographic area y n n

 Based on weight and distance traveled establish grid-map of area  xiWi  yiWi
2 (x2, y2), W2 i=1 i=1
 Identify coordinates and weights shipped for each location y2 x= n y= n
 Wi  Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of new facility
3 (x3, y3), W3 at center of gravity
y3 xi, yi = coordinates of existing
facility i
Wi = annual weight shipped from
facility i

x1 x2 x3 x

CENTER-OF-GRAVITY TECHNIQUE: EXAMPLE

 The Burger Doodle restaurant chain purchases ingredients from four different (CONT.)
food suppliers. The company wants to construct a new central distribution
centre to process and package the ingredients before shipping them to their
various restaurants. The supplies transport ingredient items in 40-foot truck n
trailers, each with a capacity of 38,000 lb. The locations of four suppliers A, B, C  xW
i i
and D and the annual number of trailer loads that will be transported to the i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
x= = = 238
distribution centre are shown in the following table: n 75 + 105 + 135 + 60
 W
i
i=1
A B C D

X – coordinate 200 100 250 500 n

Y – coordinate 200 500 600 300  yW
i i
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
Annual no. of trailer loads 75 105 135 60 y= = = 444
n 75 + 105 + 135 + 60
that will be transported  W
i
i=1

 Using centre of gravity method, determine a possible location for the distribution
centre

CENTER-OF-GRAVITY TECHNIQUE: EXAMPLE (CONT.) LOAD-DISTANCE TECHNIQUE

y A B C D  Compute (Load x Distance) for each site
700 x 200 100 250 500  Choose site with lowest (Load x Distance)
C y 200 500 600 300
600 (135)  Distance can be actual or straight-line
B Wt 75 105 135 60
500 (105)
Center of gravity (238, 444)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles

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LOAD-DISTANCE CALCULATIONS  The management of Burger doodle was not convinced with location
obtained in Part (a). Hence they further analysed and identified
n three new sites. Now, they want to evaluate these three different
sites it has identified for its new distribution centre relative to the
LD = ld i i four suppliers A,B,C and D mentioned above. The coordinates of
the new sites under consideration are as follows
i=1
where,
LD = load-distance value
Site 1 Site 2 Site 3
li = load expressed as a weight, number of trips or units
being shipped from proposed site and location i
di = distance between proposed site and location i X - coordinate 360 420 250
di (straight line) = √ (xi - x)2 + (yi - y)2
Y – coordinate 180 450 400
where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility  Identify the best site based on the load distance method.
di (rectilinear distance) = (xi – x) + (yi – y)

LOAD-DISTANCE: EXAMPLE LOAD-DISTANCE: EXAMPLE

Potential Sites Suppliers Potential Sites Suppliers
Site X Y A B C D Site X Y A B C D
1 360 180 X 200 100 250 500 1 360 180 X 200 100 250 500
2 420 450 Y 200 500 600 300 2 420 450 Y 200 500 600 300
3 250 400 Wt 75 105 135 60 3 250 400 Wt 75 105 135 60

Compute distance from each site to each supplier

Site 1 dA = (xA - x1)2 + (yA - y1)2 = (200-360)2 + (200-180)2 = 161.2

dB = (xB - x1)2 + (yB - y1)2 = (100-360)2 + (500-180)2 = 412.3

dC = 434.2 dD = 184.4

LOAD-DISTANCE: EXAMPLE (CONT.)

Site 2 dA = 333 dB = 323.9 dC = 226.7 dD = 170  A manufacturer of a certain industrial component is interested in
locating a new facility in a target market and would like to know the
Site 3 dA = 206.2 dB = 180.3 dC = 200 dD = 269.3 most appropriate place in the target market. There are four supply
points: A, B, C and D in the locality that will provide key inputs to the
Compute load-distance
new facility, which are located at the following coordinates: (125, 550),
(350, 400), (450, 125) and (700, 300) respectively. Similarly, the annual
n supply from these four points to the proposed facility is 200, 450, 175 and
LD =  ld i i

150 respectively.
Show them in a two dimensional grid and identify the location based on
i=1 the centre of gravity method. Unfortunately, the location identified from
the above method is not feasible. Hence to locate the new facility, the
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063 manufacturer has identified four possible alternative locations: 1, 2, 3,
and 4. the coordinates for them are (300, 500), (200, 500), (500, 350) and
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789 (400, 200) respectively. Represent the whole in a two-dimensional grid
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555* and identify the best location for the proposed new facility using a
suitable location decision method. Make necessary assumptions and
* Choose site 3 highlight the same

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LOCATING MULTIPLE FACILITIES

1. Transportation Problem: Advised to do this

topic by yourself.

SINGLE MEDIAN PROBLEM 10

6
8
 Calculate the minimum distance between nodes and put these in a 6
distance matrix
 Multiply each column, i, of this matrix by the demand in the town
5 20
10
i. 1 4 6
4
15
 Add all the terms in each row

 The single median is identified by the row with the smallest sum. 3 2
5 4 3

30 10
3 2
5

SET COVERING ALGORITHM

1. Calculate the minimum distance between nodes and put them in a distance  The following table shows a matrix of travel times between
matrix
2. Create a coverage matrix, this is made up of zeros and ones with: possible locations for ambulance stations and areas in a city.
 element=1 if the distance is less than specified Government policy suggests that ambulance station must be at
 element=0 if the distance is more than specified most 30 minutes away from all population areas. Find the best
3. If there is one column with all zeros, stop. No feasible solution exists, try to
increase the limit or increase locations locations for achieving this.
4. If there is only a single “1” in a column than the row containing that should
surely have a facility. Add the row to list of facilities and eliminate the row and
columns with “1’s” in that row. A B C D E F G
5. If any row is dominated by another (entry ≤ the entries in another row) remove Possible
the dominated row V 5 11 20 33 27 36 33
Locations
6. If any column is dominating another (entry ≥ the entries in another column) W 33 35 17 10 53 41 18
remove the dominating column.
X 18 39 41 12 33 22 37
7. Repeat steps 4-6 until:
 The coverage is completed: optimal solution found Y 13 6 43 25 38 33 20
 No rows or columns are eliminated during a pass- obtain a solution by inspection.
Z 35 47 41 44 15 51 43

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LOCATION STRATEGIES
SERVICE LOCATION STRATEGY
Service/Retail/Professional Location Goods-Producing Location
1. Purchasing power of customer-drawing area Revenue Focus Cost Focus
2. Service and image compatibility with demographics of the Volume/revenue Tangible costs
customer-drawing area Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
3. Competition in the area Energy and utility cost; labor; raw
material; taxes, and so on
4. Quality of the competition
Physical quality
Parking/access; security/lighting;
5. Uniqueness of the firm’s and competitors’ locations appearance/image Intangible and future costs
Attitude toward union
6. Physical qualities of facilities and neighboring businesses Cost determinants Quality of life
Rent Education expenditures by state
7. Operating policies of the firm Management caliber Quality of state and local government
8. Quality of management Operations policies (hours, wage rates)

LOCATION STRATEGIES LOCATION STRATEGIES

Service/Retail/Professional Location Goods-Producing Location Service/Retail/Professional Location Goods-Producing Location

Techniques Techniques Assumptions Assumptions
Regression models to determine Transportation method Location is a major determinant of Location is a major determinant of cost
importance of various factors Factor-rating method revenue Most major costs can be identified
Factor-rating method Locational break-even analysis High customer-contact issues are critical explicitly for each site
Traffic counts Costs are relatively constant for a given Low customer contact allows focus on
Demographic analysis of drawing area area; therefore, the revenue function is the identifiable costs
Purchasing power analysis of area critical Intangible costs can be evaluated
Center-of-gravity method
Geographic information systems

Sources/ $/Ton Mile Tons Coordinates

Markets Fn Dn xn yn

Buffalo 0.90 500 700 1200

Sources
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Atlanta 1.50 225 600 500

Boston 1.50 150 1050 1200

Markets Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975

New York 1.50 300 1000 1080

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