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Kumkum Sultana 26th Batch, Management, CU

Chapter 5: Location and Layout of Facilities

Facility Location
• A facility (plant) is a place where men, materials, money, machinery and equipment, etc.,
are brought together for manufacturing product.
• Facility Location is the right location for the manufacturing operations. It is also known as
factory location in production organizations.
• Facility location refers to selection of specific site for establishment of the physical unit of
production process.
• The success of the organization is also depends on the decision of facility location. It is a
strategic decision of an organization.

Need for location decision:

The need for location selection may arise under any of the following conditions:
1. When a business is newly started.
2. Marketing Strategy: Firms such as banks, fast-food chains, supermarkets, and retail
stores view locations as part of marketing strategy, and they look for locations that will
help them to expand their markets. Basically, the location decisions in those cases reflect
the addition of new locations to an existing system.
3. Cost of Doing Business: When costs of doing business at a particular location reach a
point where other locations begin to look more attractive.
4. Growth: When an organization experiences a growth in demand for its products or
services that cannot be satisfied by expansion at an existing location, the addition of a
new location to complement an existing system is often a realistic alternative. Thus, if the
organization wants to expand and diversify its activities, it has to search for a new facility
location for setting up its new business unit.
5. Discovery of raw-material: Generally, a facility must be located at a place where raw-
material is available. For example, if oil and gas are found at some place, then a new
petrochemical plant has to be set up there for processing purpose.
6. Depletion of Resources: Some firms face location decisions through depletion of basic
inputs. For example, fishing and logging operations are often forced to relocate due to the
temporary exhaustion of fish or forests at a given location.
7. Existing organization may need facility location to change in availability of resources,
shift of demand, to expand new target market, development of new technology etc.
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*****Why does an organization emphasize on facility location? (5, 4) Or,

Why location decision is important for an organization? (4)
Why is appropriate selection of location facilities important? (3)
Strategic Importance of Location Decisions
Facility locations involve numerous aspects, such as the location of manufacturing plants,
assembly locations as well as distribution centers. Location decisions have impact on
investments, revenues, and operations.
An organization emphasize on facility location for the following reasons:
1. Facility location requires large investment that cannot be recovered in short time.
2. Selection of the location is long term decision of organization, once makes mistakes
difficult to overcome
3. A poor choice of location might result in low profit margin, high cost of production, poor
production efficiency, excessive transportation costs, a shortage of qualified labor, loss of
competitive advantage, inadequate supplies of raw materials, or some similar condition
that is detrimental to operations. For services, a poor location could result in lack of
customers and/or high operating costs. On the other hand, successful facility location
decisions may lead to drastic cost reductions as well as an improvement in the customer
service levels.
4. Location decisions are closely tied to an organization's strategies. For example,
- A strategy of being a low-cost producer might result in locating where labor or material
costs are low, or locating near markets or raw materials to reduce transportation costs.
- A strategy of increasing profits by increasing market share might result in locating in
high-traffic areas, and a strategy that emphasizes convenience for the customer might
result in having many locations where customers can transact their business or make
purchases (e.g., branch banks, ATMs, service stations, fast-food outlets).
5. Additional facilities: Appropriate facility location can improve the quality of work, meet
rising demands, etc.

General Procedure for Making Location Decisions

The general procedure for making location decisions usually consists of the following steps:
1. Decide on the criteria to use for evaluating location alternatives, such as increased
revenues or community service.
2. Identify the location factors that are dominant for the business, such as location of
markets or raw materials.
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3. Develop location alternatives that satisfy the selected factors:

a. Identify the general region for a location.
b. Identify a small number of community alternatives.
c. Identify site alternatives among the community alternatives.
4. Evaluate the alternatives and make a selection:
After a set of location alternatives have been identified, managers evaluate them and make a
final selection. This is not easy because one location may be preferred based on one set of
factors, whereas another may be better based on a second set of factors.

Location Decision Factors

Regional Factors
The primary regional factors involve raw materials, markets, and labor considerations.
Location of raw materials: Firms locate near or at the source of raw materials for three
primary reasons: necessity, perishability, and transportation costs.
- Mining operations, farming, forestry, and fishing fall under necessity. Obviously; such
operations must locate close to the raw materials.
- Firms involved in canning or freezing of fresh fruit and vegetables, processing of dairy
products, baking, and so on, must consider perishability when considering location.
- Transportation costs are important in industries where processing eliminates much of the
bulk connected with a raw material, making it much less expensive to transport the
product or material after processing. Examples include aluminum reduction, cheese
making, and paper production.
Location of markets: Profit-oriented firms frequently locate near the markets they intend to
serve as part of their competitive strategy, whereas nonprofit organizations choose locations
relative to the needs of the users of their services.
Labor factors Primary labor considerations are the cost and availability of labor (with
general and specific skills), age distribution of workforce, work attitudes, union or nonunion,
labor productivity, wage scales, and unemployment and compensation laws.
Climate and Taxes: Climate and taxes sometimes play a role in location decisions.
- For example, unusual severe cold in northern states may cause some firms to seriously
consider moving to a milder climate, especially if delayed deliveries and work disruptions
caused by inability of employees to get to work have been frequent.
- Similarly, the business and personal income taxes in some states reduce their
attractiveness to companies seeking new locations.
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Community Considerations
• Many communities actively try to attract new businesses, offering financial and other
incentives, because they are viewed as potential sources of future tax revenues and new
job opportunities. However, communities do not, as a rule, want firms that will create
pollution problems or otherwise lessen the quality of life (schools, churches, shopping,
housing, transportation, entertainment, recreation, cost of living) in the community.
• From an organization’s standpoint, a number of factors determine the desirability of a
community as a place for its workers and managers to live. They include:
- Facilities for education, shopping, recreation, transportation, religious worship, and
entertainment;
- The quality of police, fire, and medical services;
- Local attitudes toward the company; and
- The size of the community.
• Other community-related factors are
- The cost and availability of utilities,
- Environmental regulations, taxes (state and local, direct and indirect),
- Development support (bond issues, tax abatement, low cost loans, grants etc.).

Site Related Factors

The primary considerations related to sites are:
• Land (Land cost, degree of development required, soil conditions, load factors, drainage
rates, room for expansion, parking space etc.)
• Transportation (access roads, rail spurs, the size and proximity of the airport or train
station as well as travel connections).
• Environmental/Legal: Zoning restrictions

****Factors affecting location of service operation

1. Proximity to customer and market: Customers usually look about how close a service
facility is, particularly if the process requires considerable customer contact.
2. Transportation facilities and costs: Transport includes the cost of getting inputs into the
business and also the cost of services delivered to customers. A business needs to be close
to its source of supply if the cost of transporting inputs is high or difficult.
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For many businesses the cost of distributing to customers is not a significant issue. Delivery
firms might carry out the transportation (for which the customer pays)- e.g. restaurants provide
home delivery. In many cases the customer comes to the business – e.g. in a hotel
3. Location of competitors: Locating near competitors may advantageous such as fast- food
chains. Several competing firms clustered in one location attract more customers.
4. Residential density: High residential density ensures more business (nighttime and weekend
business) when the population in the area fits the firm’s competitive priorities and target market
segment.
5. Visibility of site: Visibility involves distance from the street and size of nearby buildings and
signs. E.g. a luxury restaurant or hotel needs to be located somewhere that customers find
attractive – not in the middle of a trading estate.
6. Image of the area: E.g. A restaurant situated beside the lake might enjoy a better perceived
reputation.
Other:
- Proximity to support service
- Local ordinance
- Community attitude
- Law and order situation
*****Reasons for relocation of existing facilities
1. Changes in availability of input resources
2. Shift in the structure of market:
- To establish a presence in a new market.
3. Move closer to a large segment of their market.
4. Get access a better or larger labor pool
- Local community may no longer supply a work force in sufficient numbers
and quality.
5. Undesirable labor situation
- A facility may have a bad experience with unions- e.g. recent strikes.
6. Relocation of various associates industries
7. Demolition, compulsory, purchase of premises or national legislation
8. Merges of companies may result in redundant facility, some if which must be phased out.
9. Change in regulation and law
10. Scientific discovery/development of new fields of technology,
11. Increasing competition etc.
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Different method of selecting best location/ Analysis of facility location

1. Location Cost-Profit Volume Analysis:

The economic comparison of location alternatives is facilitated by the use of cost-profit volume
analysis. The analysis can be done numerically or graphically. The graphical approach
indicates the ranges over which one of the alternatives is superior to the others.

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

i. Determine the fixed and variable costs associated with each location alternative.
ii. Plot the total-cost lines for all location alternatives on the graph.
iii. Determine which location have the lowest total cost for the expected level of output.
Alternatively, determine which location have the highest profit.

The method assumes the following:

- Fixed costs are constant for the range of probable output.

- Variable costs are linear for the range of probable output.
- The required level of output can be closely estimated.
- Only one product is involved.

2. Factor Rating Method

• Factor rating is a technique to evaluate multiple location alternatives based on a number of

selected factors.
• A wide variety of factor can be included in the analysis.
• The process of selecting a new facility location involves a series of following steps
i. Identify the important location factors
ii. Rate each factor according to its relative importance, i.e., higher ratings is and
indicator of prominent factor.
iii. Assign each location according to the merits of the location for each factor.
iv. Calculate the rating for each location by multiplying factor assigned to each
location with basic factors considered.
v. Find the sum of product calculated for each factor and select best location having
highest total score.
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Center of Gravity Method

• The center-of-gravity is method to determine the location of a distribution center that will
minimize distribution costs.
• The objective is to determine a central location for a new facility (based on weight and
distance) serving several destinations.
• The method considers location of existing destinations (Example: Markets, retailers etc.),
volume to be shipped and shipping distance (or cost).

• The distribution cost is treated as a liner function of the distance and the quantity shipped.
• The quantity to be shipped to each destination is assumed to be fixed.

Center of Gravity formulas:

Load Distance Method

• In load-distance method, various locations are evaluated using a load-distance value that
is a measure of weight and distance.
• The location with the lowest value would result in the minimum transportation cost and
thus would be preferable.
• In load-distance method, either Rectilinear or Euclidean distance measure may be used.

Rectilinear Distance: When distance between two facilities is measured along path that is
orthogonal to each other, then that distance is termed as rectilinear distance.
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Euclidean Distance: When distance is measured along straight-line path between the two
facilities, then that distance is termed as
Euclidean distance.

The Transportation Model

• Transportation costs can stem from the movement of either raw materials or finished
goods.
• When shipment of goods from multiple sending points (sources) to multiple receiving
points (destinations), and a new location (sending or receiving point) is to be added to the
system, the organization should use transportation model.
• The objective of the transportation model is to determine the minimum transportation cost
that would result if a potential new location are to be added to an existing system.
• It also can be used if a number of new facilities are to be added or if an entire new system
is being developed.

Facility Layout

• A facility layout is an arrangement of everything needed for production of goods or delivery

of services.
• It is the configuration of departments, work centers, equipment, machineries, employees,
and other resources within a facility with particular emphasis on movement of work
(customers or materials) through the system.

Layout decisions are important for three basic reasons:

1. They require substantial investments of money and effort.

2. They involve long-term commitments, which makes mistakes difficult to overcome; and
3. They have a significant impact on the cost and efficiency of operations.

Objectives of Layout Design

• The basic objective of layout design is to facilitate a smooth flow of work, material, and
information through the system.
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• Supporting objectives generally involve the following:

1. To facilitate attainment of product or service quality.
2. To use workers and space efficiently.
3. To avoid bottlenecks.
4. To minimize material handling costs.
5. To eliminate unnecessary movements of workers or materials.
6. To minimize production time or customer service time.
7. To design for safety.

The most common reasons for redesign of layouts include:

o Inefficient operations (e.g., high cost, bottlenecks),

o Accidents or safety hazards,
o Changes in the design of products or services,
o Introduction of new products or services,
o Changes in the volume of output or mix of outputs,
o Changes in methods or equipment,
o Changes in environmental or other legal requirements, and
o Morale problems (e.g., lack of face-to-face contact).

Basic Layout Types:

The three basic types of layout are product, process, and fixed-position.

- Product layouts are most conducive to repetitive processing,

- Process layouts are used for intermittent processing, and
- Fixed-position layouts are used when projects require layouts.

There is another type of layouts, called hybrid layouts, which are combinations of these pure
types. These include cellular layouts and flexible manufacturing systems.

Repetitive Processing: Product Layouts

• In product layout, machinery is arranged in one line as per the sequence of production
operations. Materials are maintained into the first machine and finished products come out
of the last machine.
• Also called line layout as it forms a line like the one depicted in Figure.
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• In manufacturing environments, the lines are referred to as production lines or assembly

lines, depending on the type of activity involved.
 Production line: Standardized layout arranged according to a fixed sequence of
production tasks.
 Assembly line: Standardized layout arranged according to a fixed sequence of
assembly tasks.

In service processes, the term line may or may not be used.

• Product layouts are used to achieve a balanced and rapid flow of large volumes of goods
or customers through a system, which is made possible by highly standardized goods or
services that allow highly standardized, repetitive processing.
• The work is divided into a series of standardized tasks, permitting specialization of
equipment and division of labor.

Advantages Disadvantages
1. A high rate of output 1. The intensive division of labor usually creates dull,
2. Low unit cost due to high volume. The high repetitive jobs that provide little opportunity for
cost of specialized equipment is spread over advancement and may lead to morale problems and to
many units. repetitive stress injuries.
3. Labor specialization reduces training cost and 2. Poorly skilled workers may show little interest in
time, and result in wide span of supervision maintaining equipment or in the quality of output.
4. Low material handling cost per unit as units 3. The system is fairly inflexible in response to changes
follow the same sequence of operation. in the volume of output or changes.
Material handing is often automated. 4. The system is highly vulnerable to shutdowns caused
5. A high utilization of labor and equipment. by equipment breakdowns or excessive absenteeism as
6. Routing and scheduling are established in the workstations are highly interdependent.
initial design of the system. They do not 5. Preventive maintenance, the capacity for quick repairs,
and spare-parts inventories are necessary expenses.
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require much attention once the system is 6. Incentive plans tied to individual output are
operating. impractical.
7. Accounting, purchasing, and inventory
control are fairly routine.

Non-repetitive Processing: Process layout

• Process layouts are designed to process items or provide services that involve a variety of
processing requirements.
• Also called functional layout or batch production layout.
• The process layouts feature departments (functional groupings) in which similar kinds of
activities are performed.
• A manufacturing example of a process layout is the machine shop, which departments for
milling, grinding, drilling, and so on Items that require those operations are frequently
moved in lots or batches to the departments in a sequence that varies from job jo job.
• The use of general-purpose provides the flexibility necessary to handle a wide range of
processing requirements.
• Process layouts are quite common in service environments. Examples include hospitals,
colleges and universities, banks, auto repair shops, airlines, and public libraries.

For instance, hospitals have departments or other units that

specifically handle surgery, maternity, pediatrics,
psychiatric, emergency, and geriatric care. And universities
have separated departments that concentrate on one area of
study such as business, engineering, science, or math.

Advantages Disadvantages
1. Systems can handle a 1. In-process inventory costs can be high if batch processing is used in
variety of processing manufacturing systems.
requirements. 2. Routing and scheduling pose continual challenges.
2. Systems are not vulnerable 3. Equipment utilization rates are low.
to equipment failures 4. Material handling is slow and inefficient and more costly per unit than in
3. General-purpose equipment product layouts.
is often less costly than the
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specialized equipment used 5. Job complexities often reduce the span of supervision and result in higher
in product layouts. Also supervisory product layouts costs than with product layouts.
easier and less costly to 6. Special attention necessary for each product or customer (e.g., routing,
maintain. scheduling, machine setups) and low volumes result in higher unit costs
4. It is possible to use than with product layout.
individual incentive 7. Accounting, inventory control, and purchasing are much more involved
systems than with product layouts.

Fixed Position Layouts:

• In fixed position layouts, the items being worked on remains stationary. Worker, materials,
and equipment are brought to the location as needed. Fixed position layout is used for a
product that are too large, heavy or fragile to move to a location for completion.

Advantages: 1. Material movement is reduced as the production process is located in one

location for its entire manufacturing. Damage or cost of moving also minimized. 2. Flexibility
for change in design, operation sequence, labor availability, etc., exists in this layout.

3. Fixed-position layouts are suited in large construction projects (buildings, power plants, and
dams), shipbuilding, and production of large aircraft, as well as, in farming, firefighting, road
building, home building, remodeling and repair, and drilling for oil.

Disadvantages:

1. Personnel and equipment movement is increased as it is necessary to brought many

equipment from storage to the process location and moved to the warehouse. Movement of
people and equipment to and from the work site may be expensive.
2. May result in duplicate equipment.
3. Lack of storage space, which may cause material handling problems. For example,
construction sited in crowded urban locations layouts.
4. The administrative burden is higher for fixed-position layouts as many diverse activities
carried out on large projects. The span of control can be narrow, and coordination difficult.

Combined or Hybrid Layout:

The three basic layout types may be altered to satisfy the needs of a particular situation. Many
situations call for a mixture of the three main layout types. These mixtures are commonly called
combination or hybrid layouts.
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For instance, supermarket layouts are essentially process layouts, and yet use fixed-path
material-handling devices such as roller-type conveyors in the stockroom and belt-type
conveyors at the cash registers.

Cellular Layouts:

A cellular layout is an equipment layout configured to support cellular production.

Cellular Production: is a type of layout where work stations/ machines are grouped according
to the operations needed to perform for a set of similar items (part families) that require similar
processing requirements. These groups are called cells. The cells become miniature versions
of products layouts.

Group Technology: Group technology involves identifying item with similar design
characteristics or manufacturing characteristics, and grouping them into part families.

Design characteristics include size, shape, and function. Whereas manufacturing or processing
characteristics include type of processing required, available machinery that performs this type
of process, and processing sequence.

BENEFITS OF GROUP TECHNOLOGY*****

1. One of the biggest cost advantages of GT is that it increases labor productivity, as each
workstation is specially designed for a definite operation on a specific component.
2. Tooling, fixtures, and setups are standardized. By scheduling parts of the same "family" on
the same (or similar) machine tool, much of the setup and fixture time can be cut.
3. Material handling is reduced ad GT reduces the number and variety of parts by grouping.
4. Process planning and production scheduling are simplified.
5. Work-in-process and manufacturing lead time are reduced

PROBLEMS IN GROUP TECHNOLOGY

1. Identifying the part families is the biggest problem. If the plant makes 10,000 different
parts, reviewing all of the part drawings and grouping the parts into families is a substantial
task.
2. Rearranging production machines in the plant into the appropriate machine cells. It takes
time to plan and accomplish this rearrangement, and the machines are not producing during
the changeover
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Cellular layout Vs. Functional Layout

In the cellular layout, machines are arranged to handle all of the operations necessary for group
(family) of similar parts. Thus, all parts follow the same route although minor variations (e.g.
skipping an operation) are possible. In contrast, the functional layout involves multiple paths
for parts. Moreover, there is little effort or need to identify part families.

Product Layout vs. Process Layout:*****

Product Layout POD Process Layout

Layout that uses standardized processing Definition Layout that can handle varied processing
operations to achieve balanced, rapid, high- requirements.
volume flow.
Specialized equipment are used in product Equipment General-purpose equipment are used in
layouts. process layout which are often less expensive,
easier to use and less costly to maintain.
Incentive plans tied to individual output are Incentive Plans It is possible to use individual incentive
impractical. systems
The system is highly vulnerable to Vulnerable Or Systems are not vulnerable to equipment
shutdowns caused by equipment Not? failures
breakdowns or excessive absenteeism as
workstations are highly interdependent.
A high utilization of labor and equipment. Utilization Equipment utilization rates are low.
Rate
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Routing and scheduling are established in Routing And Routing and scheduling pose continual
the initial design of the system. They do not Scheduling challenges. Special attention necessary for
require much attention once the system is each product or customer (e.g., routing,
operating. scheduling, machine setups).
Accounting, purchasing, and inventory Accounting, Accounting, inventory control, and
control are fairly routine. Purchasing, purchasing are much more involved than with
And Inventory product layouts.
Control
Low material handling cost per unit as units Material Material handling is slow and inefficient and
follow the same sequence of operation. Handling more costly per unit than in product layouts.
Material handing is often automated.

Low unit cost due to high volume. Unit Cost Low volumes result in higher unit costs than
with product layout.

Labor specialization reduces training cost Span Of Job complexities often reduce the span of
and time, and result in wide span of Control supervision and result in higher supervisory
supervision product layouts costs than with product
layouts.

Figure

Designing Product Layout

Line Balancing is the process of assigning tasks to workstations in such a way that the
workstations have approximately equal time requirements.

Cycle time is the maximum time allowed at each workstation to complete its set of tasks on a
unit.

Operating Time per Day

CT = cycle time =
Desired Output Rate