Bangalore 1 MBA, Semester II Operations Management Ms. Aarti Mehta Sharma

Bangalore 2 Operations Management Semester 2 Module 2

Bangalore 3 Location of Facilities Organisation’s objectives, goals, priorities and strategies location of facilities long term commitment very few qualitative and quantitative changes possible

Bangalore 4 Situations Location Choice for the first time Location choice for an already established organisation with one or more facilities existing Global Location

Bangalore 5 Location Choice for the first time eg: Micromax - Cost economies - Marketing - Technology - Internal Organisational Strengths & Weaknesses - Availability of raw material - Business Environment ( Govt. Policy - Availability of Power / Transport Facilities - Suitability of Climate - Geographical Environment ( Nearness to the market)

Bangalore 6 Civic amenities for workers Existence of complementary and competing industries Finance and research Facilities Availability of water and Fire Fighting Facilities Momentum of an Early Start Personal Factors Receptivity of Community Scenic location Soil, Size and Topography Disposal of waste

Bangalore 7 GLOBAL LOCATION(Tangible Reasons) eg: aditya birla group – turkey, canada Market Presence in the country of customers Virtual Factory (BPO’s) Tax Advantages Cost of manufacturing is low - lower labor costs - lower raw material costs - better infrastructural inputs (power, water, ores, metals)

Bangalore 8 GLOBAL LOCATION (Intangible reasons) Customer Related - customers feel more secure - personal touch of firm - Better customer feedback - Discover potential customers Organisational Learning Related - learn advanced technology - learn from new competitors - Learn from Suppliers abroad

Bangalore 9 Strategic Reasons Gain “local boy” psychological advantage Deterrent for competitors Avoid “political risk” Build alternative sources of supply Human Capital. Hire “best of best” Lowers market risk Exposure to different systems makes it easier to cope with change Build “BRAND” internationally

Bangalore 10 Location / Relocation choice for an already established organisation (maharaja restaurants, SIMBI, Amity) Plants manufacturing distinct product lines covers entire market area new technology / old watch mfg / machine tools textile unit / chemical plant Each plant supplying to a specific market area Plants divided on the basis of the processes or stages in Manufacturing Plants Emphasizing Flexibility in adapting to constantly changing Needs

Bangalore 11 Decision regarding alternate sites Methods - Dimensional Analysis - Factor Rating Method - Point Rating Method - Break Even Analysis - Qualitative Factor Analysis - Brown and Gibson Model for Site Location

Bangalore 12 Evaluating Locations Cost-Profit-Volume Analysis – Determine fixed and variable costs – Plot total costs – Determine lowest total costs

Bangalore 13 Factor Rating Method List the most relevant factors in the location decisions Rate each from 1(very low) to 5 (very high) Rate each location ( 1 to 10 ) according to its merits on each factor Compute the product of ratings Add each Choose the location with the highest points

Bangalore 14 Illustration Factor Rating Location RatingProduct Rating Location ALocation BAB Tax Advantage Suitability of labor skill Proximity to customers Proximiy to suppliers Adequacy of Water Receptivity of Community

Bangalore 15 Quality of Educational System Access to rail and air transportatio n Suitability of Climate Availability of Power Total Score149144

Bangalore 16 Break Even Analysis A calculation of the sales volume (in units) required to just cover costs. A lower sales volume would be unprofitable and a higher volume would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost (or cost per unit), and selling price (or selling price per unit). Fixed Costs Cost that do not change when production or sales levels do change, such as rent, property tax, insurance, or interest expense. The fixed costs are summarized for a specific time period (generally one month)..

Bangalore 17 Variable Cost (Per Unit Cost) Variable costs are costs directly related to production units. Typical variable costs include direct labor and direct materials. The variable cost times the number of units sold will equal the Total Variable Cost. Total Variable costs plus Fixed costs make up the total cost of production

Bangalore 18 Location Cost-Volume Analysis Assumptions –Fixed costs are constant –Variable costs are linear –Output can be closely estimated –Only one product involved

Bangalore 19 Locational Break Even Analysis When comparing locations on an economic basis (tangible factors) Consider only those revenues and costs which differ from site to site Identify fixed costs and variable costs

Bangalore 20 STEPS Determine all relevant costs that vary with location Categorize into - Annual Fixed Costs - Variable cost per unit - Total Cost = AC + VC Select the location with the lowest Annual cost at the expected production volume per annum.

Bangalore 21 Q Potential locations A,B and C have the cost structures shown for producing a product expected to sell at Rs.100 per unit. Find the most economical location for an expected volume of 2000 units/year. If the volume of prodn is increased which is the best location ?

Bangalore 22 LocationFixed Cost/year (Rs.) Variable Cost per unit (Rs.) A25,00050 B50,00025 C80,00015

Bangalore 23 Total Cost =( Fixed cost + (Variable cost X (Quantity per annum) per annum) produced) Total cost at location A, TC A = (FC A )+(VC A ) X Q TC A = 25, X 2,000 25,000+1,00,000=Rs.1,25,000 Similarly, Total cost at location B, TC B = 50, X 2,000 50,000+50,000=Rs.1,00,000 Total cost at location C, TC C = 80, X 2,000 80, ,000=Rs.1,10,000

Bangalore 24 Analytical Method To determine the range of annual volumes of production at which each of the three locations would become most economical, it is necessary to determine the break even volumes. Calculate the costs when Q = 1500, 2500 & Show graphically. Which is the best location now ?

Bangalore 25

Bangalore 26 Question A company has to select one location out of the five alternatives considered for a new plant. The annual operating costs and other intangible factors are given on the following slide. 1.On the basis of annual operating factors, which site would you choose ? 2.Devise a method of quantifying the intangible factors and integrate them with the cost data into the overall evaluation. Which is best now ?

Bangalore 27 factorsLocation ABCDE Economic (Rs.) Labour Transportation Local Power Others Intangible Community attitudev.goodFairGoodFairv good Labor AvailabilityGoodV goodFair outstanding Acceptabl e Quality of Transport Fair acceptableoutstandingacceptable Fair Quality of life acceptable FairGood Very goodoutstanding

Bangalore 28 On the basis of annual operating costs ABCDE Total operating costs Rank43521

Bangalore 29 Location E has lowest cost GradePoint Outstanding5 Very Good4 Good3 Fair2 Acceptable1

Bangalore 30 Ratings for Intangible Factors ABCDE Community attitude Labor Availability Quality of Transport Quality of life Total rating Rank 34122

Bangalore 31 Which location is the best ?