BUSINESS ADMINISTRATION

DEPARTMENT

COURSE INSTRUCTOR:
SHAGUFTA SALEEM SHAIKH

OPERATIONS MANAGEMENT (BBA 2K21) BY: SHAGUFTA SALEEM SHAIKH

Operations Management

OPERATIONS MANAGEMENT (BBA 2K21) BY: SHAGUFTA SALEEM SHAIKH

Introduction
▶ Location is termed as a specific site
where organizations set up their business
or manufacturing plant and location
planning includes selecting an optimum
or ideal location after considering different
possible alternatives.
Location Strategy
▶ Identifying manufacturing plant location
(site selection) for producing goods or
services is considered one of the
important decisions that any organization
takes from a strategy point of view.

▶ Both planning and managing the plant or

site location comes under such a decision.
Location Strategy Conti…
▶ The selection of the right location can be
achieved by formulating a location
strategy.

▶ Through the location strategy, an

organization can determine its market,
product offering, demand forecast,
appropriate manufacturing, and service
setup place for easy customer access.
Location Planning
▶ There are different reasons that push
organizations to get involved in making
decisions for location planning.
▶ For example, supermarkets, banks, retail and
fast food chains, etc.
▶ consider location planning as an integral aspect
of their marketing strategy and plan their
locations to gain the advantage of market
expansion in their relevant industry.
Location Planning Conti..

▶ Wrong or ill choice while making the

decision of location, may result in less
qualified labor, an increase in
transportation costs, an insufficient supply
of raw materials, loss of customers, etc.
Location Planning Conti..
▶ At the time of making decision-related to plant location, an
organization must consider the below-mentioned
forecasting needs for the long-term:

▶ The plan and policy of an organization to meet

expansion needs
▶ Plans for product diversification
▶ Fluctuating market conditions
▶ Dynamic sources of raw materials
▶ Different other factors that may affect the decision
of choosing the location
Factors That Affect Location
Decisions
▶ Market economics
▶ Communication
▶ Rapid, reliable transportation
▶ Ease of capital flow
▶ Differing labor costs
▶ Identify key success factors (KSFs)
Factors That Affect
Location Decisions
► Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
► Costs
► Tangible - easily measured costs such as
utilities, labor, materials, taxes
► Intangible - less easy to quantify and include
education, public transportation, community,
quality-of-life
Factors That Affect
Location Decisions

► Political risk, values, and culture

► National, state, local governments attitudes

toward private and intellectual property,
pollution, employment stability may be in flux

► Globally cultures have different attitudes

towards punctuality, legal, and ethical issues
Location Decisions
Country Decision Key Success Factors
1. Political risks, government
rules, attitudes
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
risks
Location Decisions
Region/ Key Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
MN
3. Labor availability and costs
WI 4. Costs and availability of utilities
MI 5. Environmental regulations
IL IN
OH 6. Government incentives and fiscal
policies
7. raw materials and customers
8. Land/construction costs
Location Decisions
Site Decision Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. services/ supplies needed
5. Environmental impact
issues
Rating Methods
▶ Location can be determined by giving rating and
appropriate weightage to these factors. These
methods include:

▶ Method of Rating Plan

▶ Method of Factor Rating
▶ Break-even Analysis Method
▶ Centre of Gravity Method
1. Method of Rating Plan
▶ In this method, the rating is given to
different factors that influence the plant
location decisions.
▶ This rating is based on the management’s
perception.
▶ Once all factors have been given rating,
then the location obtaining the highest
rating is considered for locating a
manufacturing unit.
Method of Rating Plan Conti..
▶ For example, a car manufacturing company
wants to start its manufacturing unit in Pakistan.
▶ For this, it selects four appropriate cities i.e.
Larkana, Karachi, Lahore, and Islamabad. To
choose the best location for its manufacturing
plant, the company adopts a rating plan method
according to its business requirements.
▶ For this, the company made a list of important
factors of its business requirement. The same is
shown in the table given below:
Rating Plan Method Example
TABLE
Proportio
Factors nal Value Larkana Karachi Lahore Islamabad
%

Labor availability .20 15 10 20 5

Source of raw
.20 10 15 20 10
material
Closeness to
.15 10 10 15 10
markets

Site Visibility .10 10 10 10 5

Government
.10 5 5 5 10
Policies
Infrastructure
facility for 15 10 10 5 15
workforce
Possibilities of
10 5 10 10 5
expansion
Total 100 65 70 85 60
2. Factor-Rating Method
▶ These methods are considered the most common
methods for selecting the location of a plant as it is
easy to analyze different factors through this
method.
▶ The factor rating method includes rating each factor
of location. It also considers ratings given to
competitive locations.
▶ After determining these ratings, products of rating
are calculated by multiplying factor rating with
location rating. Finally, that location will be selected
which receives the maximum product of rating.
Factor-Rating Method Conti.
► Popular because a wide variety of factors
can be included in the analysis
► Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Make a recommendation based on the highest
point score
Factor-Rating Example
TABLE Weights, Scores, and Solution

SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK

Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude

People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3

Education and
.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
health
Totals 100 70.4 68.0
3. Locational
Cost-volume Analysis
OR Break-even Analysis
▶ This is considered a technique to evaluate the
choices of location from the economic aspect.
▶ Break-even analysis explains that the break-
even point is the one where total revenue and
total cost are the same.
▶ So, this method is related to locating the point
where both revenue and costs are equal.
▶ This point is termed as a break-even point. In
other words, the break-even point is a no-profit
and no-loss situation.
Locational
Cost-volume Analysis
▶ An economic comparison of location
alternatives.

► Three steps in the method

1. Determine fixed and variable costs for each

location

2. Plot the cost for each location

3. Select location with lowest total cost for

expected production volume
Locational
Cost-volume Analysis
Three locations:
Selling price = $120
Expected volume= 2,000 units
Fixed Variable Total
City Cost Cost Cost
Athens $30,000 $75 $180,000 60,000
Brussels $60,000 $45 $150,000 90,000
Lisbon $110,000 $25 $160,000 80,000

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

Brussels is best
Break-even Analysis
Over what range of output is each
location preferred?
Crossover point – Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000

Crossover point – Brussels/Lisbon

60,000 + 45(x) = 110,000 + 25(x)

20(x) = 50,000
(x) = 2,500

Athens is best over range at 1000 .

Brussels is best over range 1000 & 2500
Lisbon is best over range at 2500
Break-even Analysis Conti..
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
Annual cost

–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 – Athens Lisbon
Brussels
lowest lowest
– cost
lowest cost
cost
$10,000 –
|
– | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
4. Center-of-Gravity Method
► The Center of Gravity Method is an approach
that seeks to compute geographic coordinates
for a potential single new facility that will
minimize costs. It’s an approach where the main
inputs that it considers are the following:
► Location of markets
► Volume of goods shipped to those markets
► Shipping cost
This method is beneficial because it’s (1) Simple to compute,
(2) Considers existing facilities, (3) and Minimizes costs.
How to use Center-of-Gravity
Method

Step 1:
 Place existing locations on a coordinate grid
 Place the grid on an ordinary map.
 The relative distances must be noted.
Center-of-Gravity Method/Formula
Step 2: Then, using the formula below:

åd Q ix i åd Q iy i
cx = i
cy = i
åQ i åQ i
where i
i
cx = Value of X coordinate of the center of gravity
cy = Value of Y coordinate of the center of gravity
dix = x-coordinate of existing location
diy = y-coordinate of existing location
Qi = Quantity of goods moved to or from location i

Step 3:
Once you have obtained the X and Y coordinates place that location on the
map.
Center-of-Gravity Method
Quain’s Discount Department Stores, has store location
shown in below table: they are currently being supplied
out of an old and inadequate warehouse in Pittsburgh,
site of first store. The firm wants to find a “central”
location to build a new warehouse. We want to apply
center-of-gravity method to determine this new location.

TABLE Demand for Quain’s Discount Department Stores

NUMBER OF CONTAINERS
STORE LOCATION SHIPPED PER MONTH
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000
Center-of-Gravity Method
North-South Figure 8.3

New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –

60 – d1x = 30
d1y = 120
30 – Q1 = 2,000
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
LOCATION Quantity Coordinates (X,Y)
Chicago 2,000 (30, 120)
Pittsburgh 1,000 (90, 110)
New York 1,000 (130, 130)
Atlanta 2,000 (60, 40)
The formula for calculating X and Y is as under:

åd Q ix i åd Q iy i
= i
= i
cx åQ i
cy åQ i
i i

Calculation of dx and dy
LOCATION Coordinates (X,Y) Quantity (Q) Qx or ∑ Qi Xi Qy or ∑ Qi Yi
Chicago (30, 120) 2,000 60,000 240,000
Pittsburgh (90, 110) 1,000 90,000 110,000
New York (130, 130) 1,000 130,000 130,000
Atlanta (60, 40) 2,000 120,000 80,000
Total 6000 400,000 560,000
▶ So, the value of center of gravity will be:

åd Q ix i
400,000
cx = i

åQ
= = 66.7
i
6000
i

åd Q iy i 560,000
cy = i = = 93.3
åQ i
6000
i

▶ So, the center of gravity is (66.7, 93.3)

Center-of-Gravity Method
North-South
New York (130, 130)
Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 – + Center of gravity (66.7, 93.3)

60 –

30 –
Atlanta (60, 40)

–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Practice
Problems
Problem 1
Thomas Green College is contemplating opening a European Campus where students from the main campus could go
to take course for 1 of the 4 college years. At the moment, it is considering five countries: Holland, Great Britain, Italy,
Belgium, and Greece. The college wishes to consider eight factors in its decision. All the factors have equal weight. the
following table illustrate its assessment of each factor for each country.

Factor Factor Description Holland Great Britain Italy Belgium Greece

Stability of government 5 5 3 5 4
1
Degree to which the population 4 5 3 4 3
can converse in English
2
Stability of the monetary system 5 4 3 4 3
3
Communications infrastructure 4 5 3 4 3
4
Transportation infrastructure 5 5 3 5 3
5
Availability of historic cultural 3 4 5 3 5
6 sites
Import restrictions 4 4 3 4 4
7
Availability of suitable quarters 4 4 3 4 3
8
a) In which country should Thomas Green College Choose to setup its European campus?
Problem 2
A location analysis for Temponi Controls, a small manufacturer of parts for high technology cable
systems, has been narrowed down to four locations. Temponi will need to train assemblers,
testers, and robotics maintainers in local training centers. Cecilia Temponi, the president, has
asked each potential site to offer training programs, tax breaks, and other industrial incentives.
The critical factors, their weights, and the ratings for each location are shown in the following
table.

Factor Weight Akron Biloxi Carthage Denver

Labor availability .15 90 80 90 80

Technical School Quality .10 95 75 65 85
Operating Cost .30 80 85 95 85
Land and Construction Cost .15 60 80 90 70
Industrial incentives .20 90 75 85 60
Labor cost .10 75 80 85 75

a) Compute the composite weighted average factor rating for each location
b) Which site would you choose?
Problem 3
The following table gives the map coordinates and the shipping loads for a set of
cities that we wish to connect through a central hub.

City Map Coordinate (X,Y) Shipping Load

A (5,10) 5
B (6,8) 10
C (4,9) 15
D (9,5) 5
E (7,9) 15
F (3,2) 10
G (2,6) 5

A) Near which map coordinates should the hub be located?

Problem 4
Let’s suppose your company wants to expand its logistics network and locate a facility
within a network of three existing facilities. Given the following assumptions below, what
are the coordinates for the new potential location?

Let’s assume the following:

 Warehouse/Location 1 has a daily outbound goods volume of 2,500 units
 Warehouse/Location 2 has a daily outbound goods volume of 1,300 units
 Warehouse/Location 3 has a daily outbound goods volume of 5,000 units
And the current coordinates of the existing facilities:

Location 1 (200, 50)

Location 2 (300, 100)
Location 3 (100, 150)
Problem 5
Figure shows the X and Y coordinates of seven retail locations of a retail chain.
Information regarding the quantity to be shipped to each of the seven locations is given
below. Using the center of gravity method, identify the coordinates of the optimal
location for the warehouse.

Retail X Y Volume
Outlet

A 4 10 80

B 3.5 15 100

C 4 6 120

D 10 2 130

E 16 6 100

F 8 5 150

G 14 13 90
Problem 6
Ice Factory Location
Annual demand= 3000 units
Selling Price /unit = Rs 300/unit

Sites Fixed Cost Variable Cost

Karachi 50,000 135

Lahore 100,000 110

Islamabad 120,000 120

Calculate Cost volume analysis with break-even, also select at what range it should be selected.
Thank You 