Determining Location of a Plant

Views:
 
     
 

Presentation Description

This presentation deals with the process of determination of a suitable plant location.

Comments

Presentation Transcript

Locating a Plant:

Locating a Plant Presented By: Anupam Kumar Reader SMS Varanasi E mail: anupamkr@gmail.com

Need for Locating a Plant:

Need for Locating a Plant It arises when: The business in newly started The expansion to the existing plant is not possible A firm wants to establish new branches The landlord does not renew the existing lease Economic or social reasons like: Inadequate power supply Government regulations, etc.

Importance of the Right Location:

Importance of the Right Location Location Decision is a long term decision Location Decision is difficult to revise or reverse The location of plant fixes the production technology. Options between labour intensive or capital / machine intensive production technologies.

Importance of the Right Location:

Importance of the Right Location The location of plant fixes the cost structure. It affects the fixed and variable costs. At times transportation costs are almost 25% of the price of product. Location of a facility affects the company’s ability to serve its customers quickly and conveniently. Location determines the nature and size of the business

Factors Affecting Location Decisions:

Factors Affecting Location Decisions Market Proximity Integration with other parts of the organization Availability of Labour and Skills Site Cost Availability of Amenities Availability of Transport Facilities Availability of Inputs Availability of Services Suitability of Land and Climate Regional Regulations Room for Expansion Safety Requirements Political Cultural and Economic Situations Regional Taxes, Special Grants and Import / Export Barriers.

Factors Affecting Plant Location:

Factors Affecting Plant Location Controllable Factors Market Supply of Raw Material Transport Infrastructure Availability Labour and Wages Uncontrollable Factors Government Policy Climatic Conditions Supporting Industries Community Social Network

Need for Locating a Plant:

Need for Locating a Plant The need for locating a plant can broadly be divided into 2 types. Location Choice for Existing Organization Plants Manufacturing Distinct Products Plants Supplying to a Specific Market Area Plants Based on the Process or Stage of Manufacturing Plant Emphasizing Flexibility (Increase in Operations) Location Choice for New Organizations Identification of Region Choice of Site with a region Selecting a Site

Location Evaluation Methods:

Location Evaluation Methods There are various methods for evaluating the ideal Location for a Plant. Some of them are: Factor Rating Method Point Rating Method Locational Break-Even Analysis Center of Gravity Method Transportation Model

Factor Rating Method:

Factor Rating Method Most widely used location technique Useful for service & industrial locations Rates locations using factors Intangible (qualitative) factors Example: Education quality, labor skills Tangible (quantitative) factors Example: Short-run & long-run costs

Factor Rating – Selection Criteria:

Factor Rating – Selection Criteria Labor costs; including wages, unionization, productivity Labor availability; including attitudes, age, distribution and skills Proximity to raw materials and suppliers Proximity to markets State and local government fiscal policies; including incentives, taxes, unemployment compensation Utilities; including fuel, electricity, Water costs Site costs; including land, expansion, parking, drainage

Factor Rating – Selection Criteria:

Factor Rating – Selection Criteria Quality-of-life issues; including all levels of education, cost of living, health care, sports, cultural activities, transportation, housing, entertainment, religious facilities Foreign exchange; including rates and stability Transportation availability; including rail, air, water and interstate roads Quality of government; including stability, honesty, attitudes toward new business - whether overseas or local

Factor Rating Method:

Factor Rating Method List relevant factors Assign importance weight to each factor (0 - 5) Develop scale for each factor (1 - 10) Score each location using factor scale Multiply scores by weights for each factor & total Select location with maximum total score

Factor Rating Method - Illustration:

Factor Rating Method - Illustration Factor Factor Rating Location A Location B Tax Advantage 4 8 6 Suitability of labour Skill 3 2 3 Proximity to customers 3 6 5 Adequacy of Water 1 3 3 Receptivity of community 5 4 3 Quality of Education System 4 1 6 Access to rail and Air transport 3 10 8 Suitability of climate 2 7 9 Availability of Power 2 6 4 139 140

Point Rating Method:

Point Rating Method While selecting a location, companies have several objectives, But not all are of equal importance To overcome this issue, in Factor Rating Method, each objective is given a Factor Rating depending upon the mutual importance of the various objectives. The Point Rating Method takes into consideration a hypothetical ideal location and tries to fix the maximum points for each of the objectives. Now all the available locations are given points after considering the maximum possible points as per the ideal site.

Point Rating Method - Illustration:

1100 1130 Factor Rated Maximum Possible Points Location X Location Y Future Availability of Fuel 300 200 290 Transportation, Flexibility & Growth 250 200 95 Adequacy of Water Supply 150 100 140 Labour Availability 250 210 200 Pollution Regulations 300 250 280 Site Topography 50 40 30 Living Conditions 150 100 135 Point Rating Method - Illustration

Point Rating Method:

Point Rating Method The drawback of this method is that high score in any factor can overcome a low score in other factor. To overcome such extreme deviations, any site which does not have at least a specified number of points for those essential factors are excluded from further consideration.

Point Rating Method - Illustration:

Point Rating Method - Illustration Factor Rated Maximum Possible Points Location X Location Y Future Availability of Fuel 300 200 290 Transportation, Flexibility & Growth 250 200 95 Adequacy of Water Supply 150 100 140 Labour Availability 250 210 200 Pollution Regulations 300 250 280 Site Topography 50 40 30 Living Conditions 150 100 135 1100 1130

Point Rating Method:

Point Rating Method Point Rating Method helps in comparing the tangible factors with the intangible factors. Points are assigned only to the intangible factors. Evaluation is made to determine whether the difference between the intangible scores is worth the difference between the tangible costs (if any) of the competing locations.

Point Rating Method:

Point Rating Method If two alternative locations are found to be equally attractive by comparing costs based on tangible factors then These two alternative potential locations may further be evaluated, based on the intangible factors using the Point Rating Method.

Locational Break-Even Analysis:

Locational Break-Even Analysis Method of cost-volume analysis used for industrial locations Steps Determine fixed & variable costs for each location Plot total cost for each location Select location with lowest total cost for expected production volume Must be above break-even

Locational Break-Even Analysis - Illustration:

Locational Break-Even Analysis - Illustration You’re an analyst for ACC Cement. You’re considering a new manufacturing plant in Aurangabad, Bhubaneswar, or Coimbatore. Fixed costs per year are Rs. 11Cr., Rs. 6Cr., & Rs.3Cr. respectively. Variable costs per case are Rs. 250 , Rs.450 , & Rs.750 respectively. The price per bag is Rs. 1200 . What is the best location for an expected volume of 200,000 bags per year? Would your decision change if the expected volume is more than 5 Lakh bags or less than 1 Lakh bags ?

Locational Break-Even Analysis:

Locational Break-Even Analysis Sr. No. Place Fixed Cost (in INR) ‘000s Variable Cost (in INR) Tota l Cost (at 0 Unit production) ‘000s Variable Cost ( at 2 Lac unit production) ‘000 s 1. Aurangabad 110000 250 110000 50000 2. Bhubaneswar 60000 450 60000 90000 3. Coimbatore 30000 750 30000 150000 Back to Question Sr. No. Place Fixed Cost (in INR) ‘000s Variable Cost (in INR) Variable Cost (at 1 Lac Unit production) ‘000s Variable Cost ( at 5 Lac unit production) ‘000 s 4. Aurangabad 110000 250 25000 125000 5. Bhubaneswar 60000 450 45000 225000 6. Coimbatore 30000 750 75000 375000

Locational Break-Even Analysis – Illustration Chart:

Locational Break-Even Analysis – Illustration Chart 0 500 1000 1500 2000 0 5 10 15 20 25 30 Volume (in ‘00) Annual Cost (in ‘00) C A B C lowest cost B lowest cost A lowest cost

Locational Break-Even Analysis:

Locational Break-Even Analysis Godavari Electricals Ltd. Wanted to set up its new plant for manufacturing of heaters. The management of Godavari identified three potential areas whose fixed and variable costs are as below. The product is expected to be sold at Rs. 1050 per unit and the existing demand in the market is likely to be 600 units per year. Calculate the most profitable location for Godavari under the current conditions. What is the minimum quantity that Godavari should target to break even its costs in Hyderabad? Location Fixed Cost / Year Variable Cost / Unit Kakinada Rs. 2,00,000.00 325 Vijayawada Rs. 2,50,000.00 285 Hyderabad Rs. 3,00,000.00 265

Center of Gravity Method:

Center of Gravity Method Finds location of single distribution center serving several destinations Used primarily for services Considers Location of existing destinations Example: Markets, retailers etc . Volume to be shipped Shipping distance (or cost) Shipping cost/unit/mile is constant

Center of Gravity Method Steps:

Center of Gravity Method Steps Place existing locations on a coordinate grid Grid has arbitrary origin & scale Maintains relative distances Calculate X & Y coordinates for ‘center of gravity’ Gives location of distribution center Minimizes transportation cost

Center of Gravity Method:

Center of Gravity Method

Transportation Model:

Transportation Model Finds amount to be shipped from several sources to several destinations Used primarily for industrial locations Type of linear programming model Objective: Minimize total production & shipping costs Constraints Production capacity at source (factory) Demand requirement at destination

For further details …:

For further details … Contact Anupam Kumar Reader School of Management Sciences, Varanasi. Email: anupamkr@gmail.com

Bibliography:

Bibliography Buffa, E.S. and Sarin, R.K., “Modern Production/Operations Management,” Eighth Edition. Singapore: John Wiley & Sons (Asia). 1994. Martinich, J.S., “Production and Operations Management: An Applied Approach”, Singapore: John Wiley & Sons (Asia), 2003. Monks, J.G., “Theory and Problems of Operations Management”, Second Edition, New Delhi: Tata McGraw Hill, 2004. Chary, S.N., “Productions and Operations Management,” Third Edition, New Delhi: Tata McGraw Hill, 2004 Kumar, S.A., and Suresh, N., “Production and Operations Management”, Second Edition, New Delhi: New Age, 2008. Goel, B.S., “Production Operations Management”, Twenty Second Edition, Meerut, U.P.: Pragati Prakashan, 2010. Kachru, U. “Production and Operations Management: Text and Cases,” New Delhi: Excel Books, 2007. Rama Murthy, P., “Production and Operations Management,” New Delhi: New Age International, 2012. Chunawalla, S.A., and Patel, D.R., “Production and Operations Management,” Mumbai: Himalaya Publishing House, 2006. Jauhari, V. and Dutta, K., “Services: Marketing Operations and Management,” New Delhi: Oxford University Press, 2010. Verma, H.V., “Services Marketing: Text and Cases,” New Delhi: Dorling Kindersley, Pearson Education, 2009

authorStream Live Help