Operations and Supply Chain Management: Dr. Monica Bhatia

Operations
and
Supply Chain
Management
Dr. Monica Bhatia

2
Facility Location
Facility location may be defined as a place where the facility will be
set up for producing goods or services.
It is the process of determining a geographic site for a firm’s operations.
The need for location selection may arise under any of the following
conditions:
 When a business is newly started.
 When the existing business unit has outgrown its original facilities
and expansion is not possible; hence a new location has to be found.
 When the volume of business or the extent of market necessitates
the establishment of branches.
 When the lease expires and the landlord does not renew the lease.
 Other reasons.
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Factors affecting location decisions

 Availability of power
 Transportation
 Suitability of climate
 Government policy
 Competition between states
 Availability of labour
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Issues in Facility Location

 Proximity to Customers
 Business Climate
 Total Costs
 Infrastructure
 Quality of Labor
 Suppliers
 Political Risk
 Government Barriers
 Environmental Regulation
 Competitive Advantage
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Characteristics of Location decisions

 Long-term decisions
 Very difficult to reverse
 Affect fixed & variable costs
 Transportation cost
 Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of location to firm

6
Steps in location decision

Decide on the criteria for evaluating location alternatives
Identify important factors
Develop location alternatives
Evaluate the alternatives
Make a decision and select the location

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Location decision sequence
Country
Region/Community
Site
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Country decision
 Government
 Culture & economy
 Market location & size
 Labor
 Productivity
 Cost
 Skills
 Infrastructure
 Exchange rate
 Incentives
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Region / Community Decision

 Corporate desires
 Attractiveness
 Labor
 Utility costs
 Local government incentives
 Proximity to customers & suppliers
 Land/construction
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Site decision
 Site size
 Site cost
 Transportation in/out
 Proximity of services
 Environmental impact
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 Manufacturing Location
 Cost focus • Revenue varies little between locations
 Location is a major cost factor • Affects shipping &
production costs (e.g., labor) • Costs vary greatly
between locations
 Service Location
 Revenue focus • Costs differences among locations
are relatively less important
 Location is a major revenue factor • Affects amount
of customer contact • Affects volume of business
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Techniques…
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Factor rating method

 Most widely used location technique
 Useful for service & manufacturing locations
 Rates locations using factors
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Factor Rating Method

Steps:
 Identify the important location factors.
 Rate each factor according to its relative importance, i.e.,
higher the ratings is indicative of prominent factor.
 Assign each location according to the merits of the
location for each factor.
 Calculate the rating for each location by multiplying factor
assigned to each location with basic factors considered.
 Find the sum of product calculated for each factor and
select best location having highest total score.
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Example: Let us assume that a new medical facility,

Health-care, is to be located in Delhi. The location
factors, factor rating and scores for two potential
sites are shown in the following table. Which is the
best location based on factor rating method?
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Centre of gravity method

 The centre of gravity method takes into account the
locations of plants and markets, the volume of goods
moved, and transportation costs in arriving at the
best location for a single intermediate warehouse.
 The centre of gravity is defined to be the location
that minimizes the weighted distance between the
warehouse and its supply and distribution points,
where the distance is weighted by the number of
tones supplied or consumed.
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 The first step in this procedure is to place the

locations on a coordinate system. The origin of the
coordinate system and scale used are arbitrary, just
as long as the relative distances are correctly
represented.
 The centre of gravity is determined by the formula.
CX = ∑Dix.Wi/∑Wi and CY = ∑Diy.Wi/∑Wi

where Cx = x-coordinate of the centre of gravity
Cy = y-coordinate of the centre of gravity
Dix = x-coordinate of location i
Diy = y-coordinate of location i
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Example : The new Health-care facility is targeted

to serve seven census tracts in Delhi. The table given
below shows the coordinates for the centre of each
census tract, along with the projected populations,
measured in thousands. Customers will travel from
the seven census tract centre s to the new facility
when they need health- care. Details of seven census
tract centers, coordinate distances along with the
population for each centre are given below. Find the
target area’s centre of gravity for the Health-care
medical facility.
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 Cx= 453.5/68 = 6.67

Cy= 205.5/68 = 3.02
 The centre of gravity is (6.67, 3.02). Using the centre of gravity as
starting point, managers can now search in its vicinity for the
optimal location.
Q. Three mobile showrooms Greenfield, Z Town, and Parkcity are
located on the following coordinates which represents coordinate
locations for each showroom. Monthly demand of Z-Mobiles at
each showroom is also given below.
What is the best location for a new Z-Mobile warehouse/temporary
storage facility considering only distances and quantities sold per
month?
Location Coordinates Monthly
demand
Greenfield 1, 2 1250
Z Town 2.5, 5.8 1900
Parkcity 7.9, 9 2300

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Dimensional analysis
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Q. A telecom company has decided to set up an electronic

switching systems factory for producing 10,000 EPBXs in
Konkan region of Maharashtra. The choice is between
Romani and Tulsan, the latter being nearer to Mumbai.
Transportation costs are estimated at Rs. 5,30,000 per year
as against Rs. 8,10,000 for the factory (if) located at
Romani.
The cost of power, an important input, is 65 paise per unit
in Romani and Rs. 1.05 in Tulsan. Also units at Romani enjoy
a higher tax concession that those at Tulsan as it is
estimated that at the volume of production contemplated,
taxes payable by industries at Romani would amount to Rs.
8,80,000 as compared to Rs. 10,50,000 by those at Tulsan.
Again labor is more expensive at Tulsan than at Romani, the
average cost at Tulsan being estimated at Rs. 115 per unit
compared to Rs.101 per unit at Romani. …
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…
Finally, the proximity to Mumbai, which offers a
definitive advantage in many terms, weighs heavily in
the mind of selectors. A quantitative weightage given
to this qualitative factor is 10-8 in favor of Tulsan.
Romani is preferable in terms of industrial relations
with a rough estimate of 10-8 in its favor.
The weightages given for transport, power, tax, labor,
proximity to Mumbai and industrial relations are 1, 1,
1, 1, 2 and 1.5 respectively.
Which location should be chosen by the telecom
company?
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Operations

Dr. Monica Bhatia

Factors affecting location decisions

Issues in Facility Location

Characteristics of Location decisions

Objective: Maximize benefit of location to firm

Steps in location decision

Identify important factors

Develop location alternatives

Evaluate the alternatives

Make a decision and select the location

Location decision sequence

Region / Community Decision

Factor rating method

Factor Rating Method

Example: Let us assume that a new medical facility,

Centre of gravity method

 The first step in this procedure is to place the

CX = ∑Dix.Wi/∑Wi and CY = ∑Diy.Wi/∑Wi

Example : The new Health-care facility is targeted

 Cx= 453.5/68 = 6.67

Z Town 2.5, 5.8 1900

Parkcity 7.9, 9 2300

Q. A telecom company has decided to set up an electronic

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