Production & Operation Management

1. CHAPTER 30: Location of Facilities
Responses to Questions
1. Facilities location decision is a long-term and strategic decision. Proximity of
markets, supply sources, knowledge sources etc is governed by the location
of facilities. The flexibility and agility to respond to customers is significantly
dependent upon the location of plants, service centres, communication
centers and offices of the firm.
2. It all depends upon ‘what is critical?’, ‘what is the bottleneck?’ and ‘what is the
strategy?’
3. In today’s world, a country has to guard itself against (i) enemy attack and (ii)
terrorist attack on the nuclear power stations. Hence, national safety is of
paramount importance in a nuclear power plant’s location. Of course, the
connectivity to national power grid, the ecological aspects and the proximity to
required resources (e.g. cooling water, nuclear material) are also taken into
consideration.
4. Provide adequate infra-structure i.e. power, water, roads, transport, rail and
telecommunication. Also, develop an internationally competitive export
processing zone (Then, it does not have to depend on markets in the metros
or big cities).
5. GOI has to first ‘allow’ more FDI or even other foreign investments as a
policy. It has to remove various restrictive ceilings. Next, it has to provide all
the critical infrastructure as mentioned in response to the previous question.
Tax incentives and subsidies are other measures – but, to be used with care.
Basic thing is to allow a free flow of capital and provide conducive
environment for the foreign firms to grow and generate adequate returns.
6. The important objectives behind the location decision would be different in all
these cases.
Industry : market/supplies proximity
Govt. Hospital : proximity to currently unserviced population
Fire station : minimum response time in case of a fire
Railway station : serving a maximum number of currently unserviced
population on the available rail route.
Higher Primary School: proximity to (reachability by foot or bicycle or other
commonly affordable transport) young children in
hitherto unserviced areas.

2. 2
7. Brown & Gibson method filters out locations by considering ‘Critical factors.’
Then, it gets into an elaborate comparison of locations on objective and
subjective dimensions. Dimensional analysis is more simplistic.
8. The methods of Brown & Gibson and the Dimensional Analysis rely much on
quantification. For one, not much of soft data enters into their analysis. Even if
they do so, the soft data is used/converted into quantitative figures which
distort these soft data. Moreover, many strategic considerations cannot be
converted into a usable form and thus incorporated into these methods.
9. After all, the products and services are being produced for the people i.e. the
society at large. Manufacturing’s products, by-products and effluents impact
the society and the environment. What is good and bad is decided by the
society and is based on the prevailing social values. Similarly in service
industry, what services need to be provided and what by products of the
service are acceptable is dependent on the social values. For instance, some
TV shows may not be acceptable to certain societies.
10.Would people like to commute long distances to work in the manufacturing
plant? Would they accept the presence of certain manufacturing facility in
their vicinity?
Would customers go to the other end of the town to buy items from a
supermarket? Or, would they prefer to buy goods of lower quality from nearby
their homes? What supermarket ‘ambience’ or ‘experience’ would they like to
have? These are all queries regarding the behavioural dimension in planning
the location of facilities.
Speaking about low cost housing, not all poor people like to shift from their
existing social surroundings. Moreover, they would prefer housing nearer to
their place of work. These are important considerations.
11.When transport technology and communication technology advance, it
becomes less and less important as to how far (or in which country) the
location of the production facility is from the user location.
12. Location problems can be put in a Linear Programming format with an
Objective that is to be either minimized or maximized, with constraints over
capacities, etc.
13. New Bombay or Navi Mumbai has now developed into a parallel metropolis
and has managed to take off some pressure for residential accommodation
from the main Mumbai. However, the corporate offices have remained in the
main city and people still commute to main Mumbai everyday for work.
Mumbai, in the meanwhile, has grown more as a financial capital than in its
earlier renown for manufacturing industries in textiles and chemicals. Industry

3. 3
was reluctant to shift to Navi Mumbai as the infrastructure grew slowly – it
followed the growth rather than leading it. Government’s planning has not
shown much vision, forethought and bold steps. For a long time the twin cities
project remained tentative.
14. First let us consider only the quantified costs. For 5,00,000 units production
per annum the costs at various sites are:
Costs Site 1 2 3 4 5
Transport
Power
Land
Buildings
Equipment
Taxes
Wages
5,00,000
6,25,000
7,50,000
19,50,000
12,50,000
10,00,000
4,50,000
7,50,000
3,25,000
5,25,000
16,50,000
14,00,000
8,00,000
5,00,000
6,70,000
5,25,000
6,00,000
18,00,000
10,00,000
12,00,000
7,00,000
8,25,000
6,00,000
3,00,000
10,50,000
15,00,000
9,00,000
4,50,000
8,50,000
3,75,000
4,50,000
15,00,000
22,50,000
20,00,000
4,00,000
Total Quantifiable
Cost (Rs.)
65,25,000 59,50,000 65,00,000 56,25,000 78,25,000
Therefore at a volume of 5,00,000 units, site No. 4 is preferred as it has the
lowest total cost.
At a volume of 7,00,000 units per annum the costs are:
Costs Site 1 2 3 4 5
Transport
Power
Land
Buildings
Equipment
Taxes
Wages
7,00,000
8,75,000
7,50,000
19,50,000
17,50,000
10,00,000
6,30,000
10,50,000
4,55,000
5,25,000
16,50,000
19,60,000
8,00,000
7,00,000
9,45,000
7,35,000
6,00,000
18,00,000
14,00,000
12,00,000
9,80,000
11,55,000
8,40,000
3,00,000
10,50,000
21,00,000
9,00,000
6,30,000
11,90,000
5,25,000
4,50,000
15,00,000
31,50,000
20,00,000
5,60,000
Total Quantifiable
Cost (Rs.)
76,55,000 71,40,000 76,60,000 69,75,000 93,75,000
Therefore, even with an increased production volume i.e. 7,00,000 units, the
preferred site is still No. 4. However, it should be noted that the margin of
difference between sites 4 and 2 has reduced.
Now, if the subjective factors are also to be taken into consideration, the
choice of the site may or may not remain the same. We can use Brown and
Gibson’s method by converting the given ratings for subjective factors into
preference ratings in a paired comparison.

4. 4
Critical Factor Measure for all sites is taken as 1, i.e. all sites have the
necessary desired critical factors. Because, no site has been categorically
ruled out in the given problem.
Objective Factor Costs are as follows at a volume of production of 5,00,000
units.
Costs Site 1 2 3 4 5
Transport
Power
Land
Building Construction
Equipment Depreciation
Location Taxes
Wages
5,00,000
6,25,000
7,50,000
1,50,000
12,50,000
10,00,000
4,50,000
7,50,000
3,25,000
5,25,000
16,50,000
14,00,000
8,00,000
5,00,000
6,75,000
5,25,000
6,00,000
18,00,000
10,00,000
12,00,000
7,00,000
8,25,000
6,00,000
3,00,000
10,50,000
15,00,000
9,00,000
4,50,00
0
8,50,000
3,75,000
4,50,000
15,00,000
22,50,000
20,00,000
4,00,000
OFCi 65,25,000 59,50,000 65,00,000 56,25,000 78,25,000
65.25 lakh 59.50 lakh 65 lakh 56.25 lakh 78.25 lakh
1/OFCi = 0.01533 0.01681 0.01538 0.01778 0.01278
(units:(lakh)-1
) ∑ 1/ OFCi = 0.07808
(OFCi X ∑ 1/ OFCi ) = 5.09472 4.64576 5.0752 4.3920 6.10976
OFM i = ( OFCi X ∑ 1/ OFCi ) –1
= 0.1963 0.2153 0.1970 0.2277 0.1637
The weights of the subjective factors are all taken to be the same, i.e. 0.20
each, since no such information is furnished. The weight of a site relative to all
other sites for a subjective factor is calculated as follows:
Industrial Relations Factor
Site No. Comparisons Preference Weights
1 1 1 1 1 4 4/12
2 0 1 1 0 2 2/12
3 0 0 1 0 1 1/12
4 0 0 1 0 1 1/12
5 1 1 1 1 4 4/12
Total 12 1.00
Skills availability Factor
Site No. Comparisons Preference Weights

5. 5
1 0 0 1 0 1 1/12
2 1 0 1 1 3 3/12
3 1 1 1 1 4 4/12
4 1 0 0 0 1 1/12
5 1 1 0 1 3 3/12
Total 12 1.00
Quality of Life
Site No. Comparisons Preference Weights
1 1 1 0 0 2 2/12
2 0 0 0 0 0 0/12
3 1 1 0 0 2 2/12
4 1 1 1 1 4 4/12
5 1 1 1 1 4 4/12
Total 12 1.00
Geographic Climate
Site No. Comparisons Preference Weights
1 1 0 0 0 1 1/14
2 1 0 0 0 1 1/14
3 1 1 1 1 4 4/14
4 1 1 1 1 4 4/14
5 1 1 1 1 4 4/14
Total 14 1.00
SFM1 = 0.25 X 4 + 0.20 X 1 + 0.20 X 2 + 0.20 X 1
12 12 12 14
= 0.25 (0.5833333 + 0.0714285)
= 0.6547618 x 0.25 = 0.16369
SFM2 = 0.25 2 + 3 + 0 + 1 = 0.12202
12 12 12 14
SFM3 = 0.25 1 + 4 + 2 + 4 = 0.21726
12 12 12 14
SFM4 = 0.25 1 + 1 + 4 + 4 = 0.25 (0.7857) = 0.19643
12 12 12 14
SFM5 = 0.25 4 + 3 + 4 + 4 = 0.25 (1.20237) = 0.30059
12 12 12 14
The objective and subjective factor decision weights are taken as 0.5 and 0.5, since no
specific information is furnished:

6. 6
LM1 = 1 X (0.5 X 0.1963 + 0.5 X 0.16369) = 0.179995
LM2 = 1 X (0.5 X 0.2153 + 0.5 X 0.12202) = 0.16866
LM3 = 1 X (0.5 X 0.1970 + 0.5 X 0.21726) = 0.20713
LM4 = 1 X (0.5 X 0.2277 + 0.5 X 0.19643) = 0.21207
LM5 = 1 X (0.5 X 0.1637 + 0.5 X 0.30059) = 0.23215
The highest location measure is for site 5 and so it is preferred over the other alternatives.
This is an interesting conclusion in the light of our earlier decision arrived at by using only
objective factor costs. In fact, site 5 had the highest (objective) costs, whereas after the
inclusion of subjective factors in the analysis, the tables have completely turned in favour of
site 5.
Let us now consider an increased production volume, viz. 7,00,000 and attempt the analysis
using both objective an subjective factors, and taking the figures from factor costs computed
earlier:
Site No. 1 2 3 4 5
OFCi (Rs.lakh) 76.55 71.40 76.60 69.75 93.75
1/OFCi (lakh)
-1
0.01306 0.01401 0.01305 0.01434 0.01067 ∑1/OFCi=0.06513
(1/OFCi X ∑1/OFCi) 4.9857 4.6503 4.9889 0.2202 6.1059
(OFCi X ∑1/OFCi)
-1
0.2006 0.2150 0.2004 0.2202 0.1638 : OFMi
The location Measures (LMi) are now computed considering both objective and subjective
factors. As before, the objective and subjective factor decision weights are taken as 0.5 and
0.5, i.e. both the objective and subjective factors are given equal importance in the decision.
LM1 = 1 X (0.5 X 0.2006 + 0.5 X 0.16369) = 0.1821
LM2 = 1 X (0.5 X 0.2150 + 0.5 X 0.12202) = 0.1685
LM3 = 1 X (0.5 X 0.2004 + 0.5 X 0.21726) = 0.2089
LM4 = 1 X (0.5 X 0.2202 + 0.5 X 0.19642) = 0.2083
LM5 = 1 X (0.5 X 0.1638 + 0.5 X 0.30059) = 0.2322
The highest location measure is still for location 5 which is our chosen location. The
increased volume has made some difference in the values (both upwards and downwards)
of location measures for all locations, but in this problem the changes are still not very
significant. All the same, the volume of production is an important consideration for making
location decisions.
15. Solve it as a Transportation Problem or as an LP with Indore in one case and
Kanpur in the second case. For these two cases, find out the total costs for
optimal flows between warehouses and factories. The case which gives lower
total costs is to be chosen.
16. For as IT industry telecommunication is of paramount importance. For a
Biotech firm, a site away from large residential population may be preferred.
However, as both industries need input of highly qualified engineers and
scientists, and a frequent visit of foreign customers and consultants, good
roads and good offices and residences are also important.

7. 7
A CEO of a city should make the city attractive to highly educated and highly paid
technology workforce. It should be highly attractive even to the foreign investors who
relocate these facilities from their countries to countries like India where costs are
lower. The city should fit the image of a hi-tech city with all modern amenities but
having a work force available at lower wages.
17. Countries in EU or USA or Canada outsource many business processes because
these are much cheaper in India or such other countries. Low cost is the obvious
merit. The other merit is: they can free their capital for higher value-adding activities
and thus move further up the value chain.
If they do not move up the value chain, then the obvious result is a loss of jobs in
their home country and a back-lash from their local labour unions and politicians.
Outsourcing should be done for generating more profits and using the same for high
value creating activities.
18 By setting up facilities in the USA: (1) The firm is closer to its customers and is able
to provide better service. (2) The firm becomes a ‘local’ firm and gets local benefits.
(3) The firm can lobby more effectively with the US government and local state
governments. (4) The firm can network with many advanced technological
institutions and move to high-tech products/services. (5) US can be a gateway to
markets in Latin America, Canada and other countries.
By being in China similar benefits are obtained. A large dormant market is awaiting
to be offered service. The firm can have ‘First Mover’ advantage by being in China
now.
The demerits are: (1) The uncertainties that need to be tackled. (2) Directly exposed
to political wrath of governments / people. (3) In USA, the operating costs are high.
The merits and demerits, in principle, are the same for all types of industries. But,
some industries have high local labour content (e.g. engineering industry or
pharmaceutical industry) and higher ‘bolted down’ investments (plants / machinery).
These are prone to either love or hate. Intercultural management is a very important
aspect.
19. This means a ‘reverse’ flow of capital – from India to USA. The returns from
investments in the US should look extremely attractive to the Indian investors. The
merits have been mentioned in the earlier response (Q.18). These merits need to be
explained through workshops, seminars for various targeted industries. US should be
shown as a gateway to opportunities elsewhere in the world – e.g. South America.

8. 8
CHAPTER 30: Location of Facilities
Objective Questions
1. Location decision for a government hospital would involve the criterion of:
a. Maximize utilization of the facility
b. Minimize distance to the facility
√c. a & b
d. none of the above
2. Location decision for a fire station would involve the criterion of:
a. minimize operating costs
b. minimize number of personnel
√c. minimize response time
d. maximize equipment utilization
3. In order to attract foreign direct investment, a country would offer:
a. lower tariffs
b. lower non-tariff barriers
√c. lower taxes
d. all of the above
4. Strategic reason in location decision includes:
a. deriving first mover advantage
b. learning advanced technology
c. deterring the entry of competitors
√d. all of the above
5. A BPO firm in India is the foreign client’s:
a. business associate
b. virtual service factory
√c. a & b
d. none of the above
6. The dimensionless indices in Brown & Gibson model are the :
√a. objective factor measure
b. subjective costs
c. a & b
d. none of the above
7. With 4 factors, we have the following number of paired comparisons:
a. 4
√b. 6
c. 8
d. 10
8. The maximum value of a Critical Factor Measure in the Brown & Gibson model is:
√a. 1

9. 9
b. 2
c. 3
d. none of the above
9. In Dimensional Analysis (for Location decision), the relative merit is judged for:
a. one site
√b. two sites
c. multiple sites
d. none of the above
10. Which of the following departments is not directly affected by the facilities location
decision?
a. Production / Operations
b. Marketing
c. Personnel & HR
√d. None of the above
11. A location that is good for a mass manufacturing factory may not be good for:
a. job-shop production
b. cellular production
c. a & b
√d. none of the above