MMIM, Maharishi Markandeshwar

(Deemed to be University) Mullana

Production and Operation Management-

UNIT 2
Plant Location and Plant Layout

Presented by:
Dr. Komal
Bhardwaj
 Plant Location
Plant location refers to the choice of
region and the selection of a particular
site for setting up a business or factory
after considering cost and benefits of
different alternative sites.
It is a strategic decision that cannot be
changed once taken. If at all changed only
at considerable loss, the location should
be selected as per its own requirements
and circumstances.
 IDEAL LOCATION
An ideal location is one where the cost of the
product is kept to minimum, with a large
market share, the least risk and the maximum
social gain.
It is the place of maximum net advantage or
which gives lowest unit cost of production
and distribution.
For achieving this objective, small-scale
entrepreneur can make use of locational
analysis for this purpose.
 NEED FOR SELECTING A
SUITABLE LOCATION
When starting a new organisation, i.e.,
location choice for the first time.
In case of existing organisation.
In case of Global Location
 In Case of New Organisations
Identification of region: marketing, technology,
internal organisational strengths and
weaknesses, region specific resources and
business environment, legal-governmental
environment, social environment and
geographical environment.
Choice of a site within a region: Evaluation of
alternative sites for their tangible and
intangible costs will resolve facilities-location
problem.
Dimensional analysis: Both tangible and
intangible costs need to be considered for a
selection of a site, dimensional analysis is used.
 For Existing Organisation
Plant manufacturing distinct products.
Manufacturing plant supplying to specific
market area.
Plant divided on the basis of the process or
stages in manufacturing.
Plants emphasizing flexibility.
 In Case of Global Location
VIRTUAL PROXIMITY
VIRTUAL FACTORY
 REASONS FOR A GLOBAL/FOREIGN
LOCATION: Tangible
Reaching the Customers
The host country may offer substantial tax
advantages compared to the home country.
The costs of manufacturing and running
operations may be substantially less in that
foreign country.
The company may overcome the tariff
barriers by setting up a manufacturing plant
in a foreign country rather than exporting the
items to that country.
REASONS FOR A GLOBAL/FOREIGN
LOCATION: Intangible
Customer-related Reasons: Security,
Better understanding, Personal touch,
Discover potential customers
Organisational Learning-related
Reasons: advanced technology, Strong
customer base, modern management
methods and new trends in business
worldwide
Other Strategic Reasons: lobbying with
the government, political risk, alternative
source of Supply, hunt for human capital
and lower the market risks
 LOCATIONAL ANALYSIS
Demographic Analysis: total population (in no.),
age composition, per capita income, educational
level, occupational structure etc.
Trade Area Analysis: geographic area that provides
continued clientele to the firm, feasibility of
accessing the trade area from alternative sites.
Competitive Analysis: judge the nature, location,
size and quality of competition in a given trade
area.
Traffic analysis: Number of potential customers
passing by the proposed site,
Site economics: Alternative sites are evaluated in
terms of establishment costs and operational costs
under this.
Plant layout
It refers to the physical arrangement of
production facilities. It is the configuration of
departments, work centres and equipment in
the conversion process. It is a floor plan of the
physical facilities, which are used in
production.

According to Moore “Plant layout is a plan of

an optimum arrangement of facilities including
personnel, operating equipment, storage space,
material handling equipment and all other
supporting services along with the design of
best structure to contain all these facilities”.
 Objectives of Plant Layout
1. Streamline the flow of materials through the plant.
2. Facilitate the manufacturing process.
3. Maintain high turnover of in-process inventory.
4. Minimise materials handling and cost.
5. Effective utilisation of men, equipment and space.
6. Make effective utilisation of cubic space.
7. Flexibility of manufacturing operations and
arrangements.
8. Provide for employee convenience, safety and comfort.
9. Minimize investment in equipment.
10. Minimize overall production time.
11. Maintain flexibility of arrangement and operation.
12. Facilitate the organizational structure.
 Principles of Plant Layout
1. Principle of integration
2. Principle of minimum distance
3. Principle of cubic space utilisation
4. Principle of flow
5. Principle of maximum flexibility
6. Principle of safety, security and
satisfaction
7. Principle of minimum handling
 TYPES OF LAYOUT
1. Process layout
2. Product layout
3. Combination layout
4. Fixed position layout
 Process layout
In this type of layout machines of a similar
type are arranged together at one place.
E.g. Machines performing drilling operations
are arranged in the drilling department,
machines performing casting operations be
grouped in the casting department. Therefore
the machines are installed in the plants,
which follow the process layout.
It evolved from the handicraft method of
production.
 Advantages
1. In process layout machines are better utilized and
fewer machines are required.
2. Flexibility of equipment and personnel is possible in
process layout.
3. Lower investment on account of comparatively less
number of machines and lower cost
of general purpose machines.
4. Higher utilisation of production facilities.
5. A high degree of flexibility with regards to work
distribution to machineries and workers.
6. The diversity of tasks and variety of job makes the job
challenging and interesting.
7. Supervisors will become highly knowledgeable about
the functions under their department.
 Limitations
1. Backtracking and long movements may occur in
the handling of materials thus, reducing material
handling efficiency.
2. Material handling cannot be mechanised which
adds to cost.
3. Process time is prolonged which reduce the
inventory turnover and increases the in process
inventory.
4. Lowered productivity due to number of set-ups.
5. Throughput (time gap between in and out in the
process) time is longer.
6. Space and capital are tied up by work-in-
process.
 Product layout
Under this, machines and equipments are
arranged in one line depending upon the
sequence of operations required for the
product.
The materials move form one workstation to
another sequentially without any
backtracking or deviation.
Special purpose machines are used which
perform the required function quickly and
reliably.
Product A

Product
B

Product C
 Advantages
1. The flow of product will be smooth and logical in flow lines.
2. In-process inventory is less.
3. Throughput time is less.
4. Minimum material handling cost.
5. Simplified production, planning and control systems are
possible.
6. Less space is occupied by work transit and for temporary
storage.
7. Reduced material handling cost due to mechanised handling
systems and straight flow.
8. Perfect line balancing which eliminates bottlenecks and idle
capacity.
9. Manufacturing cycle is short due to uninterrupted flow of
materials.
10. Small amount of work-in-process inventory.
11. Unskilled workers can learn and manage the production.
 Limitations
1. Breakdown of one machine will hamper the
whole production process.
2. A change in product design may require
major alterations in the layout.
3. The line output is decided by the bottleneck
machine.
4. Comparatively high investment in
equipments is required.
5. Lack of flexibility. A change in product may
require the facility modification.
 Combination layout
A combination of process and product layouts
combines the advantages of both types of
layouts.
A combination layout is possible where an
item is being made in different types and
sizes.
Here machinery is arranged in a process
layout but the process grouping is then
arranged in a sequence to manufacture
various types and sizes of products.
It is to be noted that the sequence of
operations remains same with the variety of
products and sizes.
Fixed Position Layout
This is also called the project type of
layout. In this type of layout, the
material, or major components remain in a
fixed location and tools, machinery, men and
other materials are brought to this location.
This type of layout is suitable when one or a
few pieces of identical heavy products are to
be manufactured and when the assembly
consists of large number of heavy parts, the
cost of transportation of these parts is very
high.
 Advantages
1. Helps in job enlargement and upgrades the
skills of the operators.
2. The workers identify themselves with a
product in which they take interest and pride
in doing the job.
3. Greater flexibility with this type of layout.
4. Layout capital investment is lower.
 Inventory Management
Inventory management is the practice
overseeing and controlling of the ordering,
storage and use of components that a
company uses in the production of the items
it sells.
A component of supply chain management,
inventory management supervises the flow of
goods from manufacturers to warehouses and
from these facilities to point of sale.
Significance of holding inventory
To ensure smooth running of the production process
To reduce the ordering cost of inventory
To take advantage of quantity discount
To avoid opportunity loss on sales
To utilize and optimize the plant capacity
 To reduce the overall price.
However, the concept of Just In Time (JIT) is
becoming popular which is an inventory strategy
companies employ to increase efficiency and
decrease waste by receiving goods only as they are
needed in the production process, thereby reducing
inventory costs. This method requires producers to
forecast demand accurately.
Objectives of Inventory Management
Operating objectives: They are related to the
operating activities of the business like
purchase, production, sales etc.
 To ensure continuous supply of materials.
 To ensure uninterrupted production process.
 To minimize the risks and losses incurred due to

shortage of inventory.
 To ensure better customer services.
 Avoiding of stock out danger.
Financial Objectives:
 To minimize the capital investment in the inventory.
 To minimize inventory costs.
 Economy in purchase.

Other Objectives:
 Unnecessary investment of funds and reduction in
profit.
 Increase in holding costs.
 Loss of liquidity.
 Deterioration in inventory.
Factors affecting the level of inventory
Nature of business
Inventory turnover
Nature of type of product
Economies of production
Inventory costs
Financial position
Period of operating cycle
Attitude of management
Techniques of inventory control
• ABC Analysis
• Economic Ordering Quantity (EOQ)
• Order Point Problem
• Two Bin Technique
• VED Classification
• HML Classification
• SDE Classification
• FSN Classification
• Order Cycling System
• Just In Time (JIT)
 ABC Analysis
CATEGO NO. OF ITEM MANAGEM
RY ITEMS(%) VALUE(%) ENT
CONTROL
A 15 70 MAXIMUM
(HIGHEST)

B 30 20(MODERA MODERATE
TE)

C 55 10(LEAST) MINIMUM

TOTAL 100 100

Economic Ordering Quantity (EOQ)
Level of Inventory at which

Total Cost* of Inventory is MINIMUM

*(Ordering and Carrying Cost)
 EOQ MODEL

Q = Economic Order Quantity

U = Annual usage/demand
P = Cost of Placing an order
S = Storage cost per unit per order
* Where Storage cost is given in % , it is always
calculated by multiplying the % with the purchase
price of raw material per unit, i.e Storage cost = % X
Purchase price of raw material
BEHAVIOUR OF INVENTORY RELATED COSTS

Costs
Total costs

Carrying costs

Ordering costs
Quantity ordered
EOQ- Example
• A firm’s annual inventory is 1,600 units. The cost of
placing an order is Rs 50, purchase price of raw
material/unit is Rs.10 and the carrying costs is
expected to be 10% per unit p.a. Calculate EOQ?

U=1600, P= Rs. 50, S= .10 x Rs.10=Rs.1

EOQ = 2 x 1600 x 50
1

= 400 units
Order Point Problem
• The re-order point is that level of inventory when a fresh
order should be placed with suppliers. It is that inventory
level which is equal to the consumption during the lead time
or procurement time.
• Re-order level = (Maximum Consumption rate × Maximum
Lead time)
• Minimum inventory Level + (Average Consumption Rate ×
Average Lead Time)
• Minimum level = Re-order level – (Average Consumption
Rate × Average Lead Time)
• Maximum level = Reorder level – (Minimum Consumption
rate × Minimum Lead time) + Re-order quantity.
• Average stock level = Minimum level + (Re-order
quantity/2).
Two Bin Technique
Control of Category ‘C’ inventories
Two Bins/Groups
First Bin- just enough to last from the date a
new order is placed until it is received for
inventory.
Second Bin- enough to meet current demand
over the period of replenishment.
VED Classification
Specifically used for Classification of
SPARE PARTS

V- part is VITAL( high stock level)

E- part is ESSENTIAL (moderate stock

level )

D- part is DESIRABLE (minimum stock

HML Classification
Material classified on the basis of UNIT
VALUE

 H- HIGH VALUE
 M- MEDIUM VALUE
 L – LOW VALUE
FSN Classification
Inventory is classified based on the
MOVEMENT OF INVENTORIES from stores
Inventory technique used to AVOID
OBSOLESCENCE
 F- Fast moving
 S- Slow moving
 N- Non moving
ORDERING CYCLING SYSTEM
Periodic reviews are made of each item of
inventory & orders are placed to restore
stock to a prescribed stock level
 JUST-IN-TIME (JIT) INVENTORY CONTROL
• The JIT control system implies that the firm should
maintain a minimal level of inventory and rely on
suppliers to provide parts and components ‘just-in-
time’ to meet its assembly requirements.

• JIT also known as Zero Inventory Production

Systems(ZIPS), Zero Inventories(ZIN), Materials as
Needed(MAN), or Neck of Time(N0T)
Materials Requirement Planning
(MRP) is a type of informational system for
production planning, software is used for
organizing all inventories, to make sure that
all the products and materials are in place
and in perfect order.
It plays an important role for any kind of
company which uses an assembly line or
makes product(s) which requires a lot of
different pieces.
 Basic components of materials
requirement planning:
Assurance that all products and materials are
in line, for successful production.
Make sure that the organization has very low
inventory. The organization should be able to
produce product whenever needed, and should
not have too much in excess in case the
product fails to sell. It represents the concept
of supply and demand.
Plan the manufacturing scheme. It means
there should be complete knowledge about
what exactly is getting produced and where
exactly it is being shipped to.
 Objectives of MRP
To make sure that materials and components are
available for production and final products are ready
on time for delivery.
To maintain the level of inventory as low as possible.
Planning of manufacturing activities, delivery
schedules and purchasing activities.
The minimum inventory to be maintained should be of
right item, at right time, of right quantity, in order to
make right products at appropriate time.
Machines and Work Centre must be loaded with the
materials for first priority orders.
Assignment of jobs on different machines should
properly be balanced and idle time or waiting time
should be minimized.
 Merits of MRP
Guiding production managers to keep minimum
inventory levels
Minimum associated carrying costs
Easy to track materials requirement
Determining the most economical lot sizes for orders
Determining quantities needed for safety stock
Allocating production time among various products
Planning of future capacity needs
The information provided by MRP system, as an
information system, is useful in other areas such as
production planners use MRP, production managers
and plant foremen and supervisors depend on MRP
output.
Demerits of MRP
Not Reliable
Time Consuming and Costlier Method
The problems could also be caused by
missing parts, excessive order quantities,
schedule delays and missed delivery dates.
An effective MRP system must have an
accurate master production schedule, good
lead time estimates and correct inventory
records; otherwise the whole system can give
wrong and untimely output.
Training and education for all affected
employees
Factors Affecting MRP Implementation
Acceptability of Management
Participation of MRP using Personnel
Training of Personnel involved
Decision about Selection of MRP System
Accuracy of Data
Practical Orientation of MPS
Problems Faced during Designing,
Managing and Using MRP Systems
Integrity and accuracy of the data
Specification of Time Duration
Organize inventory and needs of individual factory
Systems in the organization function effectively
ERP system should respond appropriately
No consideration of capacity
Market uncertainties.
Software of MRP may be incompetent and inadequate.
MRP system design may be inaccurate.
Manpower may not be highly competent to handle MRP
system.
High level of training is required to handle MRP system
at all levels.