Practical workbook

Industrial Organization and Management

(PP-310)

Prepared by:
Engr. Amina Israr

Reviewed & Approved by

Prof. Dr. Kausar Ali Syed

Department of polymer and petrochemical

NED University of Engineering and Technology
Karachi-75270, Pakistan
Certificate
Certified that Mr. /Mis_________________________________________________
Student of class _____________________, Batch_____________________________
bearing Roll No. _________________ has completed his/her course work in the
subject of ______________________________ as prescribe and approved by board of
review of polymer and petrochemical department. His/her performance is reflected by
index of his/her practical workbook. The overall performance of the student is
excellent /good/Satisfactory/Not Satisfactory.

___________________________

Course teacher
 INDEX

S. No. DATE OBJECTS Signature

To study the classic and EOQ inventory management
1 models; also determine the Economic Order Quantity for the
given data.
To calculate the recorder point for an EOQ model and
2 otherwise (using stock).

To study quantity discount models.

3

To study the project management techniques using POM for

4 Windows.

To study the PERT model using POM for Windows software.

5

To study the concept of project crashing and using POM

6 software, determine solution to the given problem.

To study the assembly line balancing models and to solve the

7 problem by Largest Candidate Rule and Ranked Positional
Weight method, using POM for Windows.
To evaluate the most feasible facility / plant location using
8 the location strategic models available in POM software.
(Location Breakeven Analysis)
To evaluate the most feasible facility / plant location using
9 the location strategic models available in POM software.
(Factor Rating Method)
To evaluate the most feasible facility / plant location using
10 the location strategic models available in POM software.
(Centre of Gravity Method)
https://wps.pearsoned.co.uk/ema_ge_krajewski_opsmgmt_9/140/35881/9185617.cw/index.html
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 1

OBJECT:
To study the classic and EOQ inventory management models; also, determine the Economic Order
Quality for the given data.

INVENTORY:
Inventory is a list of movable items required for manufacturing the product and to maintain plant
facility in working condition. It is investment in the form of raw material, tools, gages, supplies etc.

There are four factors of inventories:

 Raw material
 Work in process
 Maintenance ,Repair and Operating Materials
 Finished goods

INVENTORY CONTROL:
Inventory control means making the desired items, required quality and in scientifically determine
quantity to meet the production demands, available to various departments when needed.

High inventory  Problem of storage/maintenance/damage/pilferage/held up capital

Low inventory  Chances of stoppage of production/idle machine hours

CLASSIC INVENTORY MODEL:

Q= Order Quantity or Max. Inventory Level
Q/2= Avg. Inventory Level
R= Reorder Point
L= Lead Time
A= Annual Demand

ECONOMIC ORDER QUANTITY MODEL:

ASSUMPTIONS:

 Demand is known, constant and independent.

 Lead time (time b/w placement and receipt of order) is known and constant.
 The receipt of inventory is instantaneous.
 Quantity discounts are not possible.
 Stock outs are avoided completely.
 Costs include:
a. Setup/ Order cost
b. Holding & Carrying cost

TRC = (Q/2) * Ch + (A/Q) * CP + PA

√𝟐∗𝑨∗𝑪𝑷
Q* =
𝑪𝒉

TRC= Total Annual Cost

CH= Holding Cost unit per year
CP= Setup cost per order
A= Annual Demand
P= Commodity cost per year
QUESTION 1:

A company that markets painless hypodermic needles to hospitals would like to reduce its
inventory cost by determining the optimal number of needles to obtain per order. The annual
demand is 1000 units; commodity cost per unit is $10; the setup or ordering cost is $10 per
order and the holding cost per unit per year is $0.50. Using these data, calculate:

1. Economic order quantity

2. Expected number of order
3. Annual setup cost
4. Annual holding cost
5. Total annual cost
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 2

OBJECTIVE
To calculate the reorder point for an EOQ model and otherwise (using safety stock).

REORDER POINT:
The two most important inventory questions are: How much to order and When to order. Simple
inventory models assume that receipt of inventory is instantaneous; i.e. the assumption is:

(1) That a firm will place an order when the inventory level reaches zero, and
(2) That it will receive the ordered items immediately.

However, the time between placement of order and receipt of order, called lead time can be short as
hours or as long as months. Therefore, the When-to-order decision is usually expressed in terms of a
reorder point (ROP) ---the inventory level at which an order should be placed that the order will
arrive just as the firm’s stock is depleted.

SAFETY STOCK
An important assumption for an EOQ model is that the demand rate and lead time are both known
and constant.

However, there may be situations wherein any of the two values may vary; i.e. Variances are caused
by changes in demand rates and lead times. To meet the average demand during lead time,
additional inventory is needed, in order to protect against uncertainties in demand or lead time. The
additional inventory is referred to as safety shock. When holding safety stock (SS), the average
inventory level is:

Average Inventory Level = (Q/2) + SS

QUESTION 1
An electronic assembler company has a demand for 8000 VCRs per year. The firm operates a 250-
day working year. On average, delivery of an order takes 3 working days. Keeping the cost data
same as practical 1, calculate the Reorder point when an EOQ model is assumed without any safety
stock.

QUESTION 2
Calculate the reorder point for the above given data considering that the firm policy is to maintain
inventory levels (safety stock) at 10 units. Compare the cost results, and draw reorder point graph for
each of the two questions.
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 3
OBJECTIVE
To study the quantity discount model.

QUANTITY DISCOUNT:
A quantity discount is simple a reduced price for an item when it is purchased in large quantity.

The overall objective of any inventory model is to minimize the total cost. However, for a quantity
discount model, even with the greatest discount price, the large order quantity might not minimize
the cost. All discount quantity goes up, the product cost goes down. On the other hand holding cost
increases with the increase in order quantity. Therefore, the major trade-off when considering
quantity discount is between reduced product cost and increased holding cost.

Total Inventory cost= Setup cost+ holding Cost+ Product Cost

Steps to determine the order quantity

1-For each discount, calculate a value for optimal order size Q*, using the following equation.

2 × 𝐴 × 𝐶𝑝
𝑄 ∗= √
𝐼𝑃
Where

Ch=Holding cost per unit per year

Cp=Setup cost per order
A= annual demand
P= commodity cost per year
I=Percentage of cost
(IP)= Holding cost—expressed in terms of percentage of unit price.

2-For any discount, if the order quantity is low to qualify for the discount, adjust the order
quantity upwards to the lowest quantity that will qualify for the discount.

3-Using the total cost equation, compute the total cost for each of the computed order quantity

4-Select the Q* that has the lowest cost value as computed in step 3 . this will be the quantity that
will minimize the total inventory costs, determining whether the quantity discount should be
availed or not.
QUESTION # 1
Wohl discount store stock toy race cars. Recently the store has been given a quantity discount
schedule for these cars. The normal cost for toy race cars is $ 5.00, for order between 1000-1999
units the cost drop to $ 4.8, for order of 2000 units or above the unit cost is only $4.75 . Furthermore
ordering cost is $49.0 per order. Annual demand is 5000 race cars and inventory charges as a
percentage of cost is I= 20

What order quantity will minimize the cost?

QUESTION # 2
Haier computer purchases integrated chips at cost $350 per chip. The ordering cost is $120 per order
and the demand is 400 per month. The computer supplier decided an offer price concession in order
to attract large orders the price structure is shown below. Haier computer wishes to use a 10 %
holding cost, what is the optimal order quantity and what is the optimal cost
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 4
OBJECTIVE:
To study the project management techniques using POM for windows.

PROJECT MANAGEMENT

Project management involves planning and controlling a project, its goal is to ensure that the
project’s objective are achieved on time and within budget
PERT = Program Evaluation and Review Technique and
CPM = Critical Path Method
are technique used by managers to plan, schedule and control the execution of large and complex
engineering project

Important Terminology:
Activity: A task or subproject in CPM or PERT network that occurs between two
events.
Event: An instant that marks the start or completion of task or activity in a network.

Network: A graphically representation of logical and sequentially connected arrows and

notes
representing activity and events of a project

Networking approaches:
Activity on Node (AON):- Network diagram in which nodes designated activities.
Activity on Arrow (AOW):- Network diagram in which arrows designate
activities.

Path: An unbroken chain of activity arrows connecting initial event to sum other event.

Critical Path: The computed longest time path(s) through the network.

Slack Time: The amount of time by which an individual activity in a network can be delayed
without
delaying the entire project.

Dummy: Activities having no time, inserted into the network to show dependency i.e.
maintain
the logic of the network
Critical Path Method:
Critical path method, commonly known as CPM is a network technique based on assumptions that
activity times are known with certainty and hence, uses only one time factor activity. This
conveniently enables managers to schedule, monitor and control large and complex projects.
Critical Path Analysis:

The objective of critical path analysis is to determine the following quantities for each activity.

ES: Earliest activity starts time. In forward pass, predecessor activities must be completed before an
activity can be started. The ending time of the predecessor activity is the earliest time an activity can
be started.

EF: Earliest activities finish time.

LS: Latest activities start time. In backward pass, all following activity must be completed without
delaying the project; that is the latest time at which an activity can be started without delaying the
entire project.

LF: Latest activities finish time.

S: activity slack time, which is equal to (LS-ES) or (LF-EF).

Once these quantities are known for each activity, the overall project can be analyzed. Typically, this
analysis includes examination of the following:

The Critical Path------ the group of activities in the project that have a zero slack time. This path is
critical, because a delay in any activity along it would delay the entire project.

Project time----the total project completion time, calculated by adding the expected time values of
those activities on the critical path.
Question #1:

Given the following information, develop the precedence diagram/Network diagram to determine
critical path; also find ES, EF, LS, LF and slack for each activity.

Activity Immediate Activity Time

Predecessor (Days)
A --- 0
B A 3
C B 6
D B 5
E A 5
F D 2
G E 8
H C,F,G 6
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 5

OBJECTIVE:
To study the PERT model using POM for windows software

PERT:

Program Evaluation and Review Technique (PERT) is a technique to enable managers to schedule,
monitor and control large and complex engineering projects by employing 3 time estimate for each
activity. It allows randomness in activity completion times as the activities are subjected to
considerable degree of uncertainty ,the activity time estimate for PERT are probabilistic

Activity Time Estimates

For each activity in PERT , the following three time estimates must be specified.

Optimistic Time (a)-- The best activity completion time that could be obtained in PERT. It
is generally the shortest time in which an activity can be completed.

Most Probable Time (m)—the most likely time to complete an activity in PERT. It is the
completion time having the highest probability

Pessimistic Time (b)—The worst activity time that could be expected PERT network. It is the
longest time that an activity may require

PERT assumes a beta Probability distribution for the time estimates. For a beta distribution, the
expected time for each activity can be approximated using the following weighted average

Expected Time = (a + 4m +b)/6

To calculate the variance for each activity completion time, if three standard deviation times were
selected for the optimistic and pessimistic times, then there are six standard deviations between them,
so the variance is given by :

Variance = [(b – a)/6]^2

QUESTION # 1

Develop the precedence diagram, and compute the result for the following data using PERT
networking model.

Activity time

Activity Optimistic time Most likely time Pessimistic time Immediate

predecessors

A 01 01 01 -

B 5 6 7 A

C 2 5 8 A

D 6 7 14 B

E 1 2 3 C

F 3 3 3 D,E

G 6 8 10 C

H 1 4 7 F

I 4 5 6 G,H
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 6

OBJECTIVE:
To study the concept of project crashing and using POM software, determine solution to the given
problem.

Crashing:

Additional resource allocation to shorten critical activity times in a network to reduce the total
project completion time is referred to as Crashing. These resources might be additional labor, more
equipment, etc.

Significance of Crashing:
Crashing or reducing activity times can be expensive. However, doing so might be worthwhile, in the
following cases.

• If a company faces costly penalties for being late with a project, using additional resources to
complete the project on time might be economical.

• Also, there may be fixed costs every day the project is in process. Therefore, it might be profitable-
to allocate extra resources to shorten the overall project time and save some of the daily fixed costs

• Crashing is especially important when contracts for projects include bonuses or penalties nor early
or late finishes.

Optimizing Crashing Decision:

The objective of crashing is to reduce the ensure project completion time by a certain amount at the
least cost. For each activity there exists a reduction in activity time and the cost incurred for the time
reduction i.e. additional resource allocation incur some additional costs.

For simplicity, it is assumed that costs increase linearly as the activity time is reduced from its
expected to its crash value.

Normal Time = Expected time for an activity

Crash Time = Shortest possible time for an activity

Normal Cost = Cost of completing the activity in normal time

Crash Cost = Cost of completing the activity in crash time

 Crash cost per time period = Crash cost — Normal cost
----------------------------------------
Normal time — Crash tune

With the above given formula, the least cost for least expensive method) of reducing the project
completion time can easily be determined.

Two or more critical paths may exist after performing project crashing. Thus, for two critical
paths, critical activities on both should be crashed to reduce the project completion time
QUESTION #1
Development of a new deluxe version of a particular software product is being considered by a
software house. The activities necessary for the completion of this are listed as follows:

Activities Normal Crash Normal Crash Immediate

time time cost cost predecessor
A 0 0 0 0 -
B 4 3 2000 2600 A
C 2 1 2200 2800 A
D 3 3 500 500 A
E 8 4 2300 2600 B
F 6 3 900 1200 C
G 3 2 3000 4200 D
H 4 2 1400 2000 E,F,G

1. What is the project completion time?

2. What is the total cost required for completing this project on normal time?
3. If the project is to be reduced by 1 week, which activity should be crashed, and how much
will this increase the total project cost.

QUESTION # 2
Cole Builder manufactures steel storage sheds for the commercial us. The activities necessary to build an
experimental model are related data are given in the accompanying table.

Activities Normal time Crash time Normal cost Crash cost Immediate
predecessor

A 0 0 0 0 -
B 3 2 1000 1600 A
C 2 1 2000 2700 A
D 1 1 300 300 A
E 7 3 1300 1600 B
F 6 3 850 1000 C
G 2 1 4000 5000 D
H 4 2 1500 2000 E,F,G

1. What is the project completion time?

2. What is the total cost required for completing this project on normal time?
3.
4. PERFORMANCE EVALUATION RUBRIC – EXERCISE # __
5. Course Learning Objective # ___
6. Cognitive Domain – Level ___
 Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 7

OBJECTIVE

To study the assembly line balancing models and to solve the problem by largest Candidate Rule and
Ranked positional Weight method, using POM for windows.

Assembly Line:

A manual assembly line is a production line that consists of a sequence of workstations where
assembly tasks are performed by human workers. Products are assembled as they move along. At
each station, a portion of the total work is performed on each unit. The production rate of an
assembly line is determined by its slowest station.

Terminology:
Assembly Workstation:-

A workstation on a manual assembly line is designated location along the work flow path at which
one or more work elements represent small portions of the total work that must be accomplished to
assemble the product.

Movement of work units along manual assembly line may be accomplished in two ways:

 Manually
 By a mechanized system
1. Continuous---comprises of a continuously moving conveyor that operates at a constant
velocity.
2. Synchronous—also known as intermittent transfer, all work units are moved simultaneously
between stations with a quick discontinuous motion and then positioned at their respective
stations.
3. Asynchronous---a work unit leaves a given station when the assigned task has been
completed and the worker releases the unit.

Line pacing:

A manual assembly line operates at a certain cycle time which is established to achieve the required
production rate of the line. Each worker must complete the assigned task at his station within this
cycle time or else the required production rate will not be achieved.Assembly lines can be designed
to deal with differences in assembled products. The three assembly line types are:-

 Single model
 Batch model
 Mixed model
 RC=1/TC
TS=TC+TR
RC=Production Rate (parts/minutes)
TC=Cycle Time (minute/part)
Ts=Allowalble Services Time Per station(minutes)
Tr=Respositioning Time (minutes)

LINE BALACING ALGORITHMS:

LARGEST CANDIDATE RULE:

1. The work elements are arranged in descending order according to their Tek valus.
2. Assign elemetns to the worker at the first workstation by starting at the top pf the list
and selecting the first element that satisfies the precedence requirements and does not
cause the total sum of Tek at the station to exceed the allowable Ts.
3. When no more elements can be assigned without exceeding Ts, then proceed to the
next station.
4. Repeat steps 2 ans 3 until all element have been assigned.

RANKED POSITIONAL WEIGHT METHOD:

The ranked positional weight method (RPW) takes into account both the Tek value and its position in
the precedence diagram.

1) RPWk is calculated by summing Tek and all other times for elements that follow Tek in thye
arrow chain of precedence diagram.
2) Elements are compiled into a list according to their descending order of RPW values.
3) Assign elements to the worker at the first workstation by starting at the top of the list and
selecting the first element that satisfies the precedence requirements and does not cause the
total sum of Tek at the station to exceed the allowable Ts.
4) When no more elements can be assigned without exceeding Ts , then proceed to the next
station.
5) Repeat steps 3 and 4 until all elements have been assigned.
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 8

OBJECTIVE:
To evaluate the most feasible facility / plant location using the location strategic
models available in POM Software. (Location breakeven analysis)

Location Strategies:
Selection of the plant location is an important and complex strategic decision, as plant
location greatly affects both, the fixed and variable costs. Location is a significant cost
driver that requires location decisions to be made only after careful considerations; as
once setup, an industry cannot be shifted to another location unless it is inevitable to
do so.

Location decisions depend upon the type of business. For industrial location decisions,
the strategy is usually minimizing costs. Whereas, for retail and professional service
organizations, the strategy focus is on maximizing revenue. In general, the objective of
location strategy is to maximize the benefit of location to the firm.

1) Expanding an existing facility instead of moving it.

2) Maintaining current sites while adding another facility elsewhere.
3) Closing the existing facility and moving to another location.
Factors affecting location decisions:
Selecting a facility location has become more complex with the globalization of the
workplace. Reasons for globalization include:-

 Development of market economics.

 Better international relations.
 More rapid, reliable travelling and shipping.
 Ease of capital flow between countries.
 High differences in labor cost.

Factors affecting location decisions come under the general jurisdiction of the
following titles:-

 Selection of country.
 Selection of region / community
 Selection of site.
Location Decision Models:

1) Location breakeven analysis model

2) Factor rating method
3) The centre of gravity model
4) Transportation model

Location Break-Even Analysis:

Location break-even analysis is the use of cost-volume analysis to make an economic
comparison of location alternatives. To determine the most economical location for an
expected production volume, fixed and variable costs must be identified and graphs
are to be plotted for each location alternative. Location breakeven analysis can be
conducted in two ways --- either mathematically or graphically. Only the graphic
approach has the advantage of providing the range of volume over which each location
is preferable.

Steps:
 Determine the fixed and variable costs for each location.
 Plot the costs for each location, with costs on the vertical axis and annual
volume on the horizontal axis of the graph.
 Select the location that has the lowest total cost for the expected production
volume.
Question:
The fixed and variable cost for four potential plant sites for ski equipment
manufacturer are shown below:

Site Fixed cost per year ($) Variable cost per unit
($)
Karachi 125,000 4
Lahore 75,000 7
Islamabad 100,000 5
Peshawar 50,000 12

1. Graph the total cost for the four potential sites.

2. Using graph, determine over what range of annual volume is each location the
preferable one?
3. If expected volume of the ski equipment is 5000 units, which location will be
the most economic one?
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 9

OBJECTIVE:
To evaluate the most feasible facility/plant location using the location strategy model available in POM
software (Factor Rating Method)

Factor Rating Method:

It is a location method that instills the objectivity into the person of identifying hard to evaluate cost. This is
carried out by assigning weight to various quantitative and qualitative factors affecting the location decision.

Steps:

1. Develop a list of relevant factors.

2. Assign a weight to each factor reflecting its relative importance to the firm.
3. Develop a rating scale for the factors.
4. Score each location on each factor based on the scale.
5. Multiply the scores by the weights for each factor and total the weighted scores for each
location.
6. Make a recommendation based on the minimum points score, considering the result of
quantitative approaches as well.
Question
Beth Spenser Retailer is attempting to decide upon a location for a new retail outlet.
At the moment, the firm has three alternatives—the company has selected four factors
listed in the following table as the basis for evaluation and has assigned weight as
shown:

Factors Factors Descriptions Weight

1 Average community income 0.3
2 Community growth potential 0.15
3 Availability of public transportation 0.2
4 Labor availability, attitude and cost 0.35

Spencer has rated each location for factor on a 100 point basis. These rating are given
below:

Location
Factors Present Location Newbury hyderPark
1 40 60 50
2 20 20 80
3 30 60 50
4 80 80 50
 PERFORMANCE EVALUATION RUBRIC – EXERCISE # __

Course Learning Objective # ___

Cognitive Domain – Level ___

Attainment Level
Criteria Unsatisfactory Fair Good Excellent
(1-5) (6-7) (8-9) (10)
Complete
No Understanding Understanding
understanding
Problem understanding of of some aspects of major aspects
of all aspects of
Understanding the problem of the problem of the problem
the problem
20% statement statement statement
statement

Ability to
No ability to Marginal ability properly Perfect
Problem Data properly to properly articulate data articulation of
Articulation & articulate data articulate data from problem data from the
Formulation from problem from problem statement with problem
30% statement statement minor statement
shortcomings

Exact solution
methodology
Solution
Problem No proper Understandable followed with
methodology
Solution solution solution proper
apparent to a
Methodology methodology methodology statement and
certain extent
30% validation of
assumptions

A generic result
without the Unique and
Final Result No result Incorrect Result
setup of valid applicable result
20%
assumptions

Total (%)
 PRACTICAL 10

Objective:
To evaluate the most feasible facility/ Plant Location using the location strategic
models available in POM software (Center of gravity method)

Centre of gravity method:

The centre of gravity method is a mathematical technique used for finding the location of a
distribution centre that will minimize distribution cost. It takes into account the location of market
volume of goods shipped to those market and shipping cost in finding the largest location
distribution centre.

Step:

Centre of gravity method works of location placed on arbitrary coordinates system wherein the
relative distance are to be represented correctly. The centre of gravity is given by:

Cx is the X (horizontal axis) coordinate for the new facility.

Cy is the Y (vertical axis) coordinate for the new facility
dix is the X coordinate of the existing location,
diy is the Y coordinate of the existing location
Vi is the volume of goods moved to or from the ith location

Since the number of containers shipped each month affects cost, distance alone should not be the principal
criterion. The center of gravity method assumes that cost is directly proportional to both distance and volume
shipped. The ideal location is that which minimizes the weighted distance between the warehouse and its retail
outlets , whrere the distance is weighted by the number of container shipped.
Question 1

The following table gives the map coordinates and the shipping load for the set of
cities that are to be connected through a central hub. Using the center of gravity
method, identify near which location coordinates should the hub be collected?

City Map Coordinates 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