Production and Operations Management Systems

1. Production and Operations Management Systems Chapter 10: Long-Term Planning (Facilities, Location and Layout) Sushil K. Gupta Martin K. Starr 2014

2. After reading this chapter, you should be able to: • Explain the four distinct parts of facilities planning. • Discuss who is responsible for doing facilities planning. • Describe the nature of facilities planning models. • Explain why planning for the design of facilities requires the systems approach. • Describe the application of the transportation model for location decisions. • Apply the transportation model to solve location decision problems.

3. After reading this chapter, you should be able to (continued) • Determine the relative advantages of renting, buying, or building. • Show how to use scoring models for facility selection decisions. • Describe what doing facility layout entails. • Explain how job design and workplace layout interact. • Evaluate the use of quantitative layout rules (algorithms). • Use load-distance matrices to design and evaluate layouts. • Discuss the use of heuristics to improve layouts of plants and offices.

4. Facilities Planning Facilities are the plant and the office within which P/OM does its work. There are four main components of facilities planning and they strongly interact with each other. • Location of plant, or the branch, or the warehouse. • Specific structure and site. • Layout. • Furniture, lighting, decorative features, and equipment. In the global world of international production systems, international markets, and rapid technological transfers, facilities planning requires a team effort.

5. Location Six factors that can affect location decisions are: • Process inputs. • Process outputs. • Process requirements. • Personal preferences. • Governmental issues. • Site and plant availabilities. • Service industries locate close to their customers. • Extractors like to be close to their raw materials. • Fabricators like to be close to their raw materials and customers. • Assembly plants try to keep their component suppliers close-by. Best location is related to the function of the facility and the characteristics of its products and services.

6. Models for Facility Location Location decision models use measures of costs and preferences. These models include: • Transportation models • Scoring models use combinations of costs and preferences. • Breakeven analysis • Center of gravity model (not discussed in this presentation) Columbus, Ohio, is a popular distribution center because a circle around it within a 600-mile radius encloses a large percentage of U.S. retail sales. 61% of the US population and 63% of US manufacturing facilities lie within 600 miles of Columbus Ohio. Such a large market cannot be reached from any other state (www.conway.com/oh/distribution/ohiobody.htm). www.conway.com/oh/distribution/ohiobody.htm

7. Structure and Site Selection • Location, sites and structure decisions can be made both sequentially and simultaneously. • Work configuration influences structure decisions. • Flow shop • Job shops • Service industries are often associated with particular kinds and shapes of structures. Airports, hospitals, theaters, and educational institutions typify the site-structure demands for service specifics.

8. Structure and Site Selection (continued) The facility elements to be considered include: Is there enough floor space? Are the aisles wide enough? How many stories are desirable? Is the ceiling high enough? Are skylights in the roof useful? Roof shapes permit a degree of control over illumination, temperature, and ventilation. What are the maintenance requirements for roofs? External appearance and internal appearance. Company services should be listed: Capacities of parking lots, cafeterias, medical emergency facilities, male and female restrooms—in the right proportions—must be supplied. Adequate fire and police protection must be defined. Rail sidings, road access, and ship-docking facilities should be specified in the detailed facility-factor analysis. Access to the Internet and various telecom services is no longer considered an extra advantage; it is a necessity in almost all cases.

9. Rent, Buy or Build • The costs of land, construction, rental rates, and existing structures have to be compared with a suitable model. • Location, structure, and site come as a package of tangible and intangible conditions that have costs listed below. • The opportunity cost of not relocating. • The costs of location and relocation studies. • The costs of moving may include temporary production stoppage costs. • The cost of land—often an investment. Renting, buying, or building has different tax consequences.. • The costs of changing lead times for incoming materials and outgoing products as a result of different locations. • Power and water costs differ markedly according to location. • Value-added taxes are used in many European countries. VAT is proportional to the value of manufactured goods.

10. Rent, Buy or Build (continued) • Insurance rules and costs are location sensitive. • Labor scarcities can develop that carry intangible costs. • Union-management cooperation is an intangible cost factor. • The intangible cost of community discord (or the benefit of community harmony) can be significant. • Legal fees and other costs of specialists and consultants are location sensitive, especially for small- and medium-sized organizations. • Workmen’s compensation payments and unemployment insurance costs differ by location. • The costs of waste disposal, pollution and smoke control, noise abatement, and other nuisance-prevention regulations differ by locations.

11. Rent, Buy or Build (continued) • Compliance with environmental protection rules differs by location (especially different countries). • The costs of damage caused by natural phenomena are affected by location • Costs of reducing disaster probabilities—such as using raised construction to reduce flood damage risk. • Normal weather conditions produce costs associated with location. • Extreme weather conditions cause facilities to deteriorate faster than in normal weather conditions. Scoring models provide a satisfying means for organizing and combining estimates and hard numbers.

12. Location– Scoring Models Location Factors and Weights • The scoring model of facility location provides a relative weight to each factor that affects the location decision. • The objective is to choose the location considering all relevant factors. • A six step process for using the scoring model for the hypothetical data given in the table on RHS is described below. • Step 1: List all factors that affect the location decisions. • Step 2: Assign a weight to each factor. • Step 3: Identify alternative locations. Chile, Mexico, Honduras and Brazil are identified are the potential locations for this problem.

13. Location– Scoring Models (continued) • Step 4: Each alternative is evaluated and is given a score on a ten point scale (it could be a 100 point scale) for each alternative. • Step 5: The total score for each location is calculated by multiplying the weight of each factor by the points it earned (weight x score) and then adding this number for all factors. • Step 6: The total score for each location is calculated and then the location with the highest score is selected. For this problem, the scores are: Chile (5.31), Mexico (5.51), Honduras (4.64) and Brazil (6.52). Therefore, Brazil is the most attractive location based on these factors.

14. Location– Scoring Models (continued) Evaluation of Various Location Sites • The score for each location and for each factor is given in the table on RHS. • For example, for labor productivity, Chile scored 8 points, Mexico scored 7 points, Honduras scored 3 points and Brazil scored 6 points. • Illustration of calculations for total score for Chile are given below. • Score for Chile = 5.31 • = (0.15 x 8) + (0.18 x 4) + (0.25 x 3) + (0.12 x 7) + (0.08 x 6) + (0.08 x 5) + (0.03 x 9) + (0.02 x 3) + (0.04 x 6) + (0.05 x 7).

15. Location - Transportation Model Transportation costs include the combined costs of moving raw materials to the plant and of transporting finished goods from the plant to one or more warehouses. Example: • A doll manufacturer has identified Missouri and Ohio as the potential states for locating its manufacturing plant. • Several sites in the two regions have been identified. • Two cities have been chosen as candidates. • These are St. Louis, Missouri, and Columbus, Ohio. • Real-estate costs are about equal in both. • The problem is to select one of the two cities. • The decision will be based on the shipping (transportation) costs.

16. Location - Transportation Model (continued) • Origins and Destinations • In Transportation Model terminology, shippers are called sources or origins. Those receiving shipments are called destinations. • Sources of components are the origins and the two factories (located at Columbus and St. Louis) are the destinations. • In turn, for finished products, the two factories are the origins and the market is the destination. • The configuration of origins and destinations are shown in the figure below.

17. Location - Transportation Model (continued) The average cost of shipping (also known as the cost of distribution or cost of transportation) are as follows: Sources of the components to: Columbus, Ohio: $6 per production unit. St. Louis, Missouri: $ 3 per production unit. From production plants to market: Columbus to the market: $2 per unit. St. Louis, Missouri to the market: $4 per unit.

18. Location - Transportation Model (continued) • Total transportation costs to and from Columbus plant are $6 + $2 = $8 per unit; • Total transportation costs for St. Louis are $3 + $4 = $7 per unit. • Other things being equal, the company should choose St. Louis. The problem becomes more complex when there are a number of origins competing for shipments to a number of destinations. We will illustrate the complexity of the problem and its solution using the example of Rukna Auto Parts Manufacturing Company.

19. Rukna Auto Parts • Rukna Auto Parts manufacturing company has three plants located in Miami, Tempe and Columbus. • There are four distributors MKG, Inc., ASN, Inc., GMZ, Inc. and Akla Inc. • Due to expected increase in demand, Rukna wants to add one more plant. • Two alternative locations under considerations are Dallas and Chicago. • Table below shows the capacity of the existing and proposed plants, demands at the four distributors and the transportation cost per unit from a plant to a distributor.

20. Rukna Auto Parts (continued) • The objective is to minimize the total cost of transportation. • The problem will be solved in two parts – once for each new site. The problems are defined as follows. • Problem 1: Find the optimal distribution strategy and the corresponding cost for shipping auto parts from Miami, Tempe, Columbus and Chicago to the four distributors. • Problem 2: Find the optimal distribution strategy and the corresponding cost for shipping auto parts from Miami, Tempe, Columbus and Dallas to the four distributors. • The transportation model (TM) of linear programming can be used to solve this problem. • The TM model finds the optimal distribution strategy that specifies the number of units to be shipped from each plant to each distributor so as to minimize the total cost of transportation.

21. Rukna Auto Parts (continued) • The Table below shows the optimal solution where Chicago is chosen as the new plant’s site. • This table shows the number of units to be shipped from each plant to each distributor. • The total transportation cost is $254,830 which is obtained by first multiplying the total number of units shipped and the cost of transportation per unit for each combination of the plant and distributor. • These costs are then added together to get the total cost. • For example, the transportation cost between Tempe and Akla, Inc. is • = $95,200 = 23,800 (units shipped) x $ 4.00 (unit transportation cost). Optimal Distribution Strategy – Chicago Plant

22. Rukna Auto Parts (continued) • If Dallas is chosen as the new site, the optimal quantities to be shipped from each plant to each distributor are given in the table below. • The total cost of distribution in this case $ 219,770. • Since adding Dallas to the current set of existing plants gives a smaller total distribution cost (as compared to Chicago), Dallas is the chosen site. Optimal Distribution Strategy – Dallas

23. Location Decisions Using Breakeven Models How many units of throughput need to be sold in order to recover costs (variable and fixed) and breakeven? Variable (Direct) Costs Variable (direct) costs per unit are the costs of input resources that tend to be fully chargeable and directly attributable to each unit of the product. Total variable costs, TVC = C*Q, where C is variable cost per unit and Q is the number of units produced.  Fixed (indirect) Costs Fixed costs have to be paid, whether one unit is made or thousands. These costs are bundled together as overhead costs. Revenue Total revenue, TR = P*Q, is the volume Q multiplied by the price per unit P.

24. Location Decisions Using Breakeven Models (continued) Example: • Musuk Spices Company (MSC), Delhi, India, plans to set up a new plant at one of the following two locations: Bhopal and Agra in India. • The fixed costs per year will be $ 450,000 and $ 300,000 per year for Bhopal and Agra respectively. • The variable costs per pound are expected to be $ 10/lb. for Bhopal and $ 14/lb. for Agra respectively. • The selling price is expected to be $ 30/lb. • Breakeven Point (BEP) = Fixed Cost/(Selling Price – Variable Cost) • BEP (Bhopal) = 450,000/(30-10) = 22,500 lbs. • BEP (Agra) = 300,000/(30- 14) = 18,750 lbs.

25. Location Decisions Using Breakeven Models (continued) • Bhopal will generate profits only if the volume of demand is more than 22,500 lbs. • Agra will start generating profits if the volume is more than 18,750. • If demand is likely to be about 20,000, then Agra is chosen. Say demand will exceed 25,000, which plant should be selected? • Find the point of indifference. • Find revenue if Q lbs. of spices are produced and sold by each plant. Revenue (Bhopal) = Q (30-10) - 450,000 = 20 Q - 450,000 Revenue (Agra) = Q (30-14) - 300,000 = 16 Q - 300,000 Equate the two revenues to find the point of indifference – the value of Q. Q = (450,000 – 300,000)/ (20-16) = 150,000/4 = 37,500.

26. Location Decisions Using Breakeven Models (continued) The indifference point Q = 37,500. Plant at Bhopal is more desirable if the expected volume of sales is more than 37,500. If the expected sales are less than 37,500 then Agra is more desirable. Either one of them can be chosen if the sales are exactly 37,500. Forecasts have an important role to play in this example.

27. Facilities Layout • Layout is the physical arrangement of facilities within a manufacturing plant or a service facility. • The layout of a plant/service facility specifies where various machines, equipment and people will be placed. • Layout affects the productivity and costs of transportation (materials handling) within the plant. Layout is an interior design problem that strongly interacts with structure and specific site selection and equipment choice.

28. Facilities Layout (continued)Opportunity Costs for Layout Improvement Proper workplace layout design can provide: • Product and process quality improvements (QI) • Throughput and cost benefit productivity improvements (PI) • Health benefits (HB) for employees. The layout design improvement should be made if: CPI < OC (QI + PI + HB), where CPI = Cost of layout plan improvement. • OC = Opportunity costs incurred for not having used the best possible layout. • OC(QI) = Opportunity costs for quality improvements. • OC (PI) = Opportunity costs for improved productivity • OC(HB) = Opportunity costs for health benefit savings

29. Facilities Layout (continued) There are at least the following five basic types of layouts: • Job shop process layouts. • Product-oriented (Flow shop) layout.  • Cellular layout. • Group technology layout.   • Hybrid (mixed layouts) - combinations of product and process layouts Change in technology and even in purpose should lead to reexamination of layout decision.

30. Layout Criteria Seven measures of layout effectiveness include the following: • Capacity—throughput rate. Goal: Maximize total output volumes and throughput rates. • Balance—for perfect balance, the throughput rates of consecutive operations are 100% aligned and synchronized. Goal: Perfect balance. • Amount of investment and operating costs. Goal: Minimum expenditures. • Flexibility to change layouts. Goal: Maximize ease of change. • Amount of work in process (WIP). Goal: Minimize units of inventory. • Distance that parts travel; saving an inch traveled thousands of times per day sums to sizeable savings. Goal: Minimize total travel time and distance. • Storage for WIP and how much handling equipment is required to move parts from one place in the facility to another. Goal: Minimize space used for storage and minimize moving equipment.

31. Layout Models • Floor Plan Models (drawings) are graphic methods of trial and error that are used by interior decorators. • Load-distance models examine alternative layout plans to minimize cost of moving material on the shop floor. Some considerations while designing layouts include: • Job shops and the batch production environment are subject to major changes in the product mix. • A few order types may dominate the job shop that may require a mix of product layouts (for dominating jobs) with process layouts for other jobs. • If the character of the batch work changes a great deal over time, it is best to go for the most general form of process layout. • Flexibility is desirable but expensive and disruptive to keep moving equipment around the plant. Modular office layouts have remarkable flexibility for making quick changes.

32. Load-Distance Models • Load-distance models examine alternative layout plans in terms of the frequency with which certain paths are used. • Usually, the highest frequency paths are assigned the shortest plant floor path distances to travel. • The objective is to minimize the total unit distances traveled. • The physical space is divided into areas that conform to floor layouts including different work areas, stairs, elevators, rest rooms, etc. • Distance between departments is calculated and is included in a distance matrix. • The amount of materials or the number of trips between the various work centers that different jobs entail over a period of time say monthly, quarterly etc. needs to be determined.

33. Load-Distance Models (continued) Example: • The floor space locations are designated as A, B, C, D, and E in the following figure. • There are five work centers designated as 1, 2, 3, 4, and 5. • Problem: Determine which work center is to be assigned to which location so that the total distance traveled is minimized. One possible assignment is: A(1), B(2), C(3), D(4) and E(5) (See Layout 1 below). Layout-1 (with Areas A, B, C, D, and E, and Work Centers 1 through 5 assigned to the Areas)

34. Distance Matrix • The average distance that must be traveled between areas A, B, C, D, and E are shown in the table below. • This table is called a distance matrix. • This matrix is symmetric so the distance from A to D (32 feet) is the same as the distance from D to A. • However, symmetry does not always hold because of one-way passages, escalators, conveyor belts, and gravity feed delivery systems. Distance Matrix – Distances in Feet between Locations

35. Load Matrix • The Table below gives the number of units that move between work centers. For example, 100 units move from work center 1 to work center 2 and 60 units move from work center 1 to work center 3. • This matrix is not symmetrical. • The word “Load” is a generic term. It may represent the number of units moved, weight or volume of the product that is moved, or the number of trips that are made between departments. • A discussion of finding the Load Matrix is included later in the presentation. Load Matrix – Number of Units Being Moved Between Work Centers

36. Load-Distance Matrix – Layout 1 • The load and distance matrices are combined into a load-distance matrix given in the table below. • In the load-distance matrix the distance and load for each combination of the work center and the location area are multiplied. • The total number of unit-feet traveled in this layout is 23,025. For example, 100 units move from work center 1 (located at A) to work center 2 (located at B) for a distance of 10 feet (distance between location A and B). Look for the cell combination A(1) (the row number) and B(2) (the column heading) in the table below. The total distance traveled by all items that move from A(1) to B(2) is, therefore, 1,000 unit-feet. Similarly, total distances traveled from A(1) to C(3), A(1) to D(4) and A(1) to E(5) are 1,200, 2,560 and 800 unit-feet respectively. In this way the distances traveled between each combination of work centers can be calculated. Load – Distance Matrix for the Layout-1

37. Load-Distance Matrix – Layout 2 • Is Layout-1the best layout? • There are 120 (5!) possible assignments of five work centers to five locations. • The table below shows the load-distance matrix for the following assignment: A(1), B(4), C(5), D(3), and E(2). Call it Layout-2. • The total number of unit-feet traveled in this layout is 21,725 which is a decrease of 1,300 (6% improvement). • Evaluating all possible layouts (120 in this case) is not feasible. • Heuristics rules are used to develop a reasonably good (not necessarily the optimal) layout. Load – Distance Matrix for the Layout-2

38. Heuristic Rules • The heuristic methods are logical, sensible, and clever rules for finding good solutions to complex problems. • Two heuristics (rules of thumb) that can be used for improving layout include: • Assign work centers with large unit flow rates between them to locations as close as possible. • Assign work centers with small unit flow rates between them to locations as distant as possible. • These rules were used in moving from the original layout to the revised layout (Layout-2). • Trial and error with the improved matrix can be used to test further shifts.

39. Finding the Load Matrix • To find the load matrix, the processing sequence of each job and the number of units produced (load) need to be specified. See the table below. • There are five jobs and six work centers (A, B, C, D, E and F). • For example, 200 units of Job 2 are to be produced and these units move through the following sequence of the work centers: C-A-B-D-B-E-F-D. • Instead of the number of units, this could have been the number of trips between various work centers. Load and Processing Sequence for a Five-job Problem

40. Finding the Load Matrix (continued) • The load matrix for this problem is given in the table below. • Consider, for example work centers A and B. • The movement from A to B occurs for the following jobs. • Job 1 (100 units), after first operation in work center A goes to work center B. • Job 2 (200 units), after second operation in work center A goes to work center B. • Job 3 (300 units), after third operation in work center A goes to work center B. • Job 5 (150 units), after first operation in work center A goes to work center B. • Job 4 never goes from work center A to B. • Therefore, the total number of units that go from work center A to work center B is 750 (= 100 + 200 + 300 + 150). Load Matrix

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