Operations Management.

Plant Location-Cases/models

Location Models (Facility location)

Nelson Group of Industries would like to establish a production unit at one of the locations proposed at
site A, B and C. The table given below shows the various factor considered for location decision and the
factor rating assigned to each factor based on its importance for location decision.

Q. As a project consultant, suggest the best alternative out of location A, B and C

It can be analysed by:
1. Factor Rating Method
2. Point Rating Method
3. Location Break-even Analysis
1. Factor Rating Method:
The steps involved are:

List the most relevant factors in the location decision.

Rate each factor ( say from 1for every low and to 5for very high ) according to its relative
importance, i.e. a factor rating is given to each factor, based on its importance, the higher the
ratings the more important is the factor.
Rate each location (say 1 for very low and to 10 for very high) according to its merits on each
factor.
Compute the product of ratings multiplying the factor rating by the location rating for each
factor.
Compute the sum of the product of ratings for each location.

Table: Factor Ratings and Location Ratings for Location Alternatives.

FACTORS
1.
2.
3.
4.

TAX ADVANTAGE
SUITABILITY
OF LABOUR SKILL
PROXIITY
TO CUSTOMERS
PROXIMITY TO
SUPPLIERS

FACTOR
RATING

LOCATION RATING

LOCATION
A
8

LOCATION
B
6

LOCATION
C
3

5.

ADEQUACY OF WATER

6.

RECEPTIVITY OF
COMMUNITY
QUALITY OF
EADUCATIONAL
SYSTEM
ACCESS TO RAIL AND
AIR TRANSPORTATION
SUITABILITY OF
CLIMATE

10

10. POWER AVAILABILITY

7.
8.
9.

PRODUCT OF RATINGS
LOCATION
A

LOCATION
B

LOCATION
C

Total Score
DECISION: Since the total score for location __ is the highest than that of __& __Hence location__is the choice.
Dr..Nitin Kubde

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Operations Management.

Plant Location-Cases/models

2. Point Rating Method:

After evaluating the potential sites A, B & C by comparing costs, the company management decided to
evaluate on the basis of intangible factors for the locations by using the point rating method.
Comparative rating assigned to major intangible location factors to determine the relative importance
for each factor and the points assigned to each location alternative for each of the factors are given
below.
Location Factors
Future availability of fuel
Ease of transportation & growth
Adequacy of water supply
Labour availability
Pollution regulations
Site topography
Living conditions

Points assigned to locations

Maximum Possible
Points
Location A
Location B
Location C
300
200
250
200
200
150
150
150
100
100
100
100
200
170
150
100
50
40
40
50
50
40
30
30
100
50
75
70
Total Score out of 1000
750
795
700

DECISION: - From the table, it is seen that location B has slight advantage over location A & C.
3. Location Break-even Analysis:
In comparing several potential locations on an economic basis, (i.e., intangible and tangible factors) only the
revenue and costs that needs to be evaluated which varies from one location to another. If revenue per unit is
the same, regardless of where the goods are produced the total revenue can be eliminated from consideration. An
economic comparison of location can be made by identifying the fixed costs and the variable costs . It can be
shows by analytical or graphical method.
The potential locations A, B and C have the cost structures shown for producing a product expected to sell at
Rs.100 per unit.

Q1.Find the most economical location for an expected volume of 2000 units/year.
Q2.Also determine the range of annual volume of production for which, each of the
location A, B and C would be most economical.
Location

fixed
cost/year

Variable
unit

A
B
C

Rs.25000
Rs.50000
Rs.80000

Rs.50
Rs.25
Rs.15

Dr..Nitin Kubde

cost

per

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Plant Location-Cases/models

Solution (a)
To determine the most economical location for an expected annual volume of production of 2000 units, calculate
the total cost of production at each of the locations for the annual production volume Q= 2000 units.
(TC=FC+VC * Q)
1)
2)
3)
DECISION: By comparing the total costs at each of the three locations, it is seen that location ___ is the most
economical location for the volume of production of 2000 nos. per year.
Solution (b)
To determine the range of annual volume of production at which each of the three locations would become most
economical, it is necessary to determine the break-even volumes either by analytical method or graphical method .
Analytical Method
To determine the break even volume between locations A and & B, the total cost for producing the break even
quantity say Qab at each of location A & B are equated.
25000 + 50Qab = 50000 + 25Qab
Qab =
To determine the break even volume between locations B & C, the total cost for producing the break even
quantity say Qbc at each of location B and C are equated.
50000 + 25Qbc = 80000 + 15Qbc
Qbc =
To determine the break even volume between locations A & C, the total cost for producing the break even quantity
say Qac at each of location A and C are equated.
25000 + 50Qac = 80000 + 15Qac
Qac =

Graphical Method: The above break even quantities are shown graphically below.

Dr..Nitin Kubde

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Plant Location-Cases/models

Annual Total Cost

Operations Management.

Location A
Location B

80000

Location C

50000
25000

500

1000 1500 2000 2500 3000

Annual Volume (Unit) (Q)

(CLASS ROOM ASSIGNMENT):

4. Qualitative factor analysis method:
If economic criteria are not sufficiently influential to decide the location alternatives, a system of weighing the criteria might
be useful in making a plant location decision.
XYZ Company is evaluating 4 locations for a new plant and has weighted the relevant scores as given below. Scores have
been assigned with higher values indicative of preferred conditions. Using these scores, develop a qualitative factor
comparison for the 4 locations.
RELEVANT FACTORS
PRODUCTION COST

Dr..Nitin Kubde

ASSIGNED
WEIGHT
0.35

SCORES FOR LOCATION

A
B
C
50
40
60

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Plant Location-Cases/models

RAW MATERIAL SUPPLY

0.25

70

80

80

60

LABOUR AVAILABILITY
]
COST OF LIVING

0.20

60

70

60

50

0.05

80

70

40

80

ENVIORMENT

0.05

50

60

70

90

MARKETS

0.10

70

90

80

50

TOTAL

1.00

Solution
FACTORS

WEIGHTED SCORES FOR LOCATION

A
B
C

PRODUCTION COST
RAW MATERIAL SUPPLY
LABOUR AVAILABILITY
]
COST OF LIVING
ENVIORMENT
MARKETS
TOTAL
Location ____ is preferred because of highest weighted score.

THANKS:
.

Dr..Nitin Kubde

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