OPERATIONS MANAGEMENT: REPORT ON

LOCATION PLANNING &

ANALYSIS

Presented by : SANKET N DOSHI

Roll No. 18 Div : A MMS

Date Of Submission : 17/11/2010

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MEANING:

Site selection is an important activity which decides the fate of the business. A good location
may, reduce the cost of production and distribution to a considerable extent. The reduction
of cost of production and distribution helps in elevating either the competitive strength or
the profit margin of the business.

Locating a business involves a large, relatively permanent investment. If the site selection is
not proper all the money spent on factory building, machinery, and their installation will go
in waste and the owner has to suffer a great loss. Therefore, the site for the factory should
be selected very carefully.

NEED FOR LOCATION

The need for a facility location decision results from three possible scenarios, each resulting
in different priorities location they are:

 A location for a business that must relocate.

 A location for a new business.
 During the expansion of an existing location.

FACTORS AFFECTING LOCATION

The Factors Of Localisation can be divided into the following categories:

Primary Factors
 Supply Of Raw Materials : It is necessary to consider the adequate supply of raw
materials and the nature of raw materials. The cost of raw materials is an important
element of the total cost of production. If the supply of raw materials is not regular
it may result into frequent stoppages and breakages in the production Nearness to
the source of raw materials reduces the cost of transportation.
 Nearness to Market: Every producer wants to sell his product in the market.
Nearness to market is important from the point of view of his control over the
market. Locating a plant near the market is preferred when:
- The Product is fragile
- The product is perishable
- The product is heavy or bulky which would increase transport costs
- Prompt service is required

 Infrastructure Facilities: The selected site should have adequate infrastructure

facilities. Without proper infrastructure facilities it would be difficult to undertake
operations effectively and efficiently. Some of the important facilities include:
- Transport
- Banking Facilities

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 - Communication. Etc.
 Supply Of Labour: A good number of industries require skilled workforce such as
engineers, computer programmers, management experts etc. A business firm should
consider the availability of competent and skilled workforce.
 Power: Power is necessary for the process of production and for transporting
finished goods and raw materials. Power may be electrical, diesel and atomic energy.
All types of power are localised and mobile. Power shortages lead to tremendous
losses due to the stoppage of machinery. Therefore, industries must have sufficient
and regular supply of power if continuity in production is to be maintained.

SECONDARY FACTORS

 Natural Factors: Land, water, climate ,etc. are some natural factors which are
important for some industries like cotton textiles, sugar and jute. These industries
depend on a good climate and source of natural raw materials.
 Social Infrastructure: There is a need for social infrastructure not only for the
employees but also for the development of their families. There must be suitable
social infrastructure such as
- Educational Institutions.
- Hospitals and Health Centres.
- Recreation Facilities such as theatres, clubs, etc.
 Miscellaneous Factors: The Following factors also play a part in the location of an
industrial unit.
- Disposal of Waste.
- Location of similar units.
- Suitability of Soil.
- Places of Worship.
- Political Factors.

METHODS USED IN LOCATION PLANNING

In setting up industries, previous precedents have importance. At times, the location

is governed by personal preference. Though very common in practice the approach
is not professional. In case of certain industries, there are dominant factors which
influence the location decision (refinery near the crude oil source). For evaluating
these qualitative factors, ranking or rating methods are used.
(1) EQUAL WEIGHTS METHOD

In this method, equal weights are assigned to different factors (F) and the sites (S) are
evaluated among the factor scale. For instance a manufacturer of Automobile Spares chose

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three factors to rate the four sites. The sites were assigned ratings between 0 - 10 points
against each factor. The sum of the site ratings was used to compare it with the other sites.

Potential Sites
Factors S1 S2 S3 S4

F1 3 6 8 2

F2 4 5 9 3

F3 7 2 6 3

Sum of site ratings 14 13 23 8

From the table, we can say that site 3 has the highest rating (23) and therefore deserves to
be selected.

(2) VARIABLE WEIGHTS METHOD

In the equal weights method, just as equal weights were assigned to all the factors, in this
method, variable weights are assigned to each factor and sites are evaluated along the
factor scale. For instance factor F1 may take 400 points, factor F2 300 points and factor F3
100 points. The scope of each site is jotted, out of maximum possible points assigned for
that factor.

Potential Sites
Factors Maximum Points S1 S2 S3 S4

F1 400 300 350 350 200

F2 300 150 200 150 100

F3 100 50 75 80 40

Sum of ratings
500 625 580 340

From the table, it is clear that site 2 has the highest rating 625, and hence is chosen.

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Factor rating method

The factor rating method is explained below by an example of deciding the best site out of
the three proposed sites.

 To evaluate these alternative sites we identify five factors such as raw material,
market, land cost, community attitude, and transportation facility.
 Provide the weights to each factor. Suppose we allocate 10 points to market and raw
material, 8 points to land cost, 7 points to community attitude, and 6 points to
transportation facilities.
 Rate each alternative for each factor on a scale of 10. Suppose, for factor raw
material the A alternative gets 9 points, B alternative gets 10 points and C alternative
gets 8 points.
 Tabulate all the above information as given in the following table.
 Repeat the same procedure (step 3 and 4) for other factors.
 Multiply the weights of each factor with the rating of each alternative and record on
the lower half of the rectangle under each alternative.
 Add the score of each alternative and record in front of Total.
 The best alternative is that alternative which has the maximum score. If two or more
alternatives have the maximum score, then those alternatives should be selected
and a separate evaluation should be made for those alternatives only.

Table 1: Factor Rating Chart

Factors Weights Location Location B Location C

A
Raw material 10 9 10 8

90 100 80
Market 10 8 8 9

80 80 90
Land cost 8 7 8 8

56 64 64
Community 7 10 9 10
attitude
70 63 70
Transportation 6 8 7 10
facilities
48 42 60
Total 347 349 364*

* Best Alternative is Location C

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 (3) COMPOSITE MEASURE METHOD

Comparative appraisal of various plant sites with reference to the qualitative and
quantitative factors affecting locational decisions:

Consider the following example, for location of an engineering plant three sites A,B and C
are considered. The costs of various factors and other relevant aspects in respect of each
site are listed below.

Quantitative Factors Site ‘A’ Site ‘B’ Site ‘C’

Cost of Land 50000 49000 45000

Buildings 450000 420000 480000
Power 10000 9000 10000
Freight 50000 85000 92000
Water 5000 1000 3000
Labour Charges 40000 25000 32000
Taxes 5000 2000 4000

Total Operating Cost 610000 591000 666000

Qualitative Factors
Cost of living Very High Low Moderate
Housing facilities Excellent Poor Good
Community Facilities Excellent Poor Good
Community Attitude Good Good Indifferent

The observation of quantitative factors and qualitative factors overall reveal that Site ‘A’ is
best suited for location of the engineering plant despite being costly than Site ‘B’ because
qualitative factors of site A are more preferable.

(4) TRANSPORTATION METHOD

The transportation method is concerned with the distribution of goods or services from
various sources to various destinations. The transportation method can be formulated as a
linear programming problem. The total transportation cost at various locations can be
calculated and the location with the least total transportation cost can be chosen.

 Based on Linear Programming.

 It does not solve all the problems of the multiple facility location.
 It only finds the best shipping pattern between plants and warehouses for a
particular set of plant locations with a given capacity.
 The manager or logistics analyst must try a variety of location-capacity combinations
and use this to find the optimal distribution for each alternative.

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 Distribution costs (variable shipping and possible variable production costs) are
important inputs in evaluating a particular location allocation combination.
 Investments costs and other fixed costs are also considered.
 Qualitative factors (like land and construction cost against annual profits) are also
included in the analysis for each location capacity combination.

CONCLUSION

The selection of location is of vital importance for a business enterprise. Every firm
wants to achieve its primary objective of maximizing profit by increasing sales and
lowering costs. Therefore, proper location of a unit helps a firm to achieve not only
its primary objectives but also its secondary objectives.

Therefore, a strategically located plant can help a firm to:

- Reduced the costs of production
- Increase the sales
- Expand and grow
- Face competition effectively
- Reduce Employee Turnover.

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