Operations Analytics PDF

OPERATIONS ANALYTICS By Dr. Rajesh Chouksey Tuesday, November 19, 2024 1 The Need for Location Decisions Location decisions arise for a variety of reasons: Addition of new facilities As part of a marketing strategy to expand markets Growth in demand that cannot be satisfi...

OPERATIONS ANALYTICS By Dr. Rajesh Chouksey Tuesday, November 19, 2024 1 The Need for Location Decisions Location decisions arise for a variety of reasons: Addition of new facilities As part of a marketing strategy to expand markets Growth in demand that cannot be satisfied by expanding existing facilities Depletion of basic inputs requires relocation Shift in markets Cost of doing business at a particular location makes relocation attractive Location Decisions: Strategically Important Closely tied to an organization’s strategies Low-cost Convenience to attract market share Effect capacity and flexibility Represent a long-term commitment of resources Effect investment requirements, operating costs, revenues, and operations Impact competitive advantage Importance to supply chains Location Decisions Country Decision Key Success Factors 1. Political risks, government rules, attitudes, incentives 2. Cultural and economic issues 3. Location of markets 4. Labor talent, attitudes, productivity, costs 5. Availability of supplies, communications, energy 6. Exchange rates and currency risks Location Decisions Region/ Key Success Factors Community Decision 1. Corporate desires 2. Attractiveness of region MN 3. Labor availability and costs WI 4. Costs and availability of utilities MI 5. Environmental regulations IL IN OH 6. Government incentives and fiscal policies 7. Proximity to raw materials and customers 8. Land/construction costs Location Decisions Site Decision Key Success Factors 1. Site size and cost 2. Air, rail, highway, and waterway systems 3. Zoning restrictions 4. Proximity of services/ supplies needed 5. Environmental impact issues 6. Customer density and demographics Location Decisions: Objectives Location decisions are based on: Profit potential or cost and customer service Finding several acceptable locations from which to choose Position in the supply chain End: accessibility, consumer demographics, traffic patterns, and local customs are important Middle: locate near suppliers or markets Beginning: locate near the source of raw materials Web-based retail organizations are effectively location independent Location: Options Existing companies generally have four options available in location planning: 1. Expand an existing facility 2. Add new locations while retaining existing facilities 3. Shut down one location and move to another 4. Do nothing PLANT STRATEGY 11 Multiple Plant Manufacturing Strategies Product plant strategy Entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market Market area plant strategy Plants are designated to serve a particular geographic segment of the market Plants produce most, if not all, of a company’s products Multiple Plant Manufacturing Strategies Process plant strategy Different plants focus on different aspects of a process automobile manufacturers – engine plant, body stamping plant, etc. Coordination across the system becomes a significant issue General-purpose plant strategy Plants are flexible and capable of handling a range of products Geographic Information System (GIS) GIS A computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps Aids decision makers in Targeting market segments Identifying locations relative to their market potential Planning distribution networks Portraying relevant information on a map makes it easier for decision makers to understand Service and Retail Locations Considerations: Nearness to raw materials is not usually a consideration Customer access is a Prime consideration for some: restaurants, hotels, etc. Not an important consideration for others: service call centers, etc. Tend to be profit or revenue driven, and so are Concerned with demographics, competition, traffic volume patterns, and convenience Clustering Similar types of businesses locate near one another Evaluating Location Alternatives 1. Locational cost-volume-profit analysis 2. Factor rating 3. Center of gravity method 4. Load Distance method 5. Transportation model Locational Cost-Profit-Volume Analysis Locational Cost-Profit-Volume Analysis Technique for evaluating location choices in economic terms Steps: 1. Determine the fixed and variable costs for each alternative 2. Plot the total-cost lines for all alternatives on the same graph 3. Determine the location that will have the lowest total cost (or highest profit) for the expected level of output Locational Cost-Profit-Volume Analysis Assumptions 1. Fixed costs are constant for the range of probable output 2. Variable costs are linear for the range of probable output 3. The required level of output can be closely estimated 4. Only one product is involved Locational Cost-Profit-Volume Analysis For a cost analysis, compute the total cost for each alternative location: Total Cost = FC + v  Q where FC = Fixed cost v = Variable cost per unit Q = Quantity or volume of output Example: Cost-Profit-Volume Analysis Fixed and variable costs for four potential plant locations are shown below: Fixed Cost Variable Cost Location per Year per Unit A 250,000 11 B 100,000 30 C 150,000 20 D 200,000 35 Example: Cost-Profit-Volume Analysis Plot of Location Total Costs Example: Cost-Profit-Volume Analysis Range approximations Total Cost of C = Total Cost of B B Superior (up to 4,999 units) 150,000 + 20Q = 100,000 + 30Q 50,000 = 10Q Q = 5,000 C Superior (>5,000 to 11,111 units) Total Cost of A = Total Cost of C 250,000 + 11Q = 150,000 + 20Q 100,000 = 9Q Q = 11,111.11 A superior (11,112 units and up) Illustration A farm implements dealer is seeking a fourth warehouse location to complement three existing warehouses. There are three potential locations: Charlotte, NC; Atlanta, GA; and Columbia, SC. Charlotte would involve a fixed cost of $4,000 per month and a variable cost of $4 per unit; Atlanta would involve a fixed cost of $3,500 per month and a variable cost of $5 per unit; and Columbia would involve a fixed cost of $5,000 per month and a variable cost of $6 per unit. Use of the Charlotte location would increase system transportation costs by $19,000 per month, Atlanta by $22,000 per month, and Columbia by $18,000 per month. Which location would result in the lowest total cost to handle 800 units per month? 23 Illustration A manufacturer of staplers is about to lose its lease, so it must move to another location. Two sites are currently under consideration. Fixed costs would be $8,000 per month at site A and $9,400 per month at site B. Variable costs are expected to be $5 per unit at site A and $4 per unit at site B. Monthly demand has been steady at 8,800 units for the last several years and is not expected to deviate from that amount in the foreseeable future. Assume staplers sell for $6 per unit. Determine which location would yield the higher profit under these conditions. 24 Factor Rating General approach to evaluating locations that includes quantitative and qualitative inputs Procedure: 1. Determine which factors are relevant 2. Assign a weight to each factor that indicates its relative importance compared with all other factors. Weights typically sum to 1.00 3. Decide on a common scale for all factors, and set a minimum acceptable score if necessary 4. Score each location alternative 5. Multiply the factor weight by the score for each factor, and sum the results for each location alternative 6. Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score Example: Factor Rating A photo-processing Scores (Out of 100) company intends to open a new branch Factor Weight Alt 1 Alt 2 store. The following Proximity to existing source.10 100 60 table contains information on two Traffic volume.05 80 80 potential locations. Rental costs.40 70 90 Which is better? Size.10 86 92 Layout.20 40 70 Operating Cost.15 80 90 1.00 Example: Factor Rating A photo-processing company intends to open a new branch store. The following table contains information on two potential locations. Which is better? Scores (Out of 100) Weighted Scores Factor Weigh Alt 1 Alt 2 Alt 1 Alt 2 t Proximity to.10 100 60.10(100) = 10.0.10(60) = 6.0 existing source Traffic volume.05 80 80.05(80) = 4.0.05(80) = 4.0 Rental costs.40 70 90.40(70) = 28.0.40(90) = 36.0 Size.10 86 92.10(86) = 8.6.10(92) = 9.2 Layout.20 40 70.20(40) = 8.0.20(70) = 14.0 Operating Cost.15 80 90.15(80) = 12.0.15(90) = 13.5 1.00 70.6 82.7 Center of Gravity Method Method for locating a distribution center that minimizes distribution costs Treats distribution costs as a linear function of the distance and the quantity shipped The quantity to be shipped to each destination is assumed to be fixed The method includes the use of a map that shows the locations of destinations The map must be accurate and drawn to scale A coordinate system is overlaid on the map to determine relative locations Center of Gravity Method If quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity by finding the average of the x-coordinates and the average of the y-coordinates x=  x i n y=  y i n where xi = x coordinate of destinatio n i yi = y coordinate of destinatio n i n = Number of destinatio ns Center of Gravity Method a) Map showing destinations b) Coordinate system added c) Center of gravity Example: Center of Gravity Method Suppose you are attempting to find the center of gravity for the problem depicted in Figure below Destination x y D1 2 2 x=  x i = 18 = 4.5 n 4 D2 3 5 D3 5 4 y=  y i = 16 =4 D4 8 5 n 4 18 16 Here, the center of gravity is (4.5,4). This is slightly west of D3 Center of Gravity Method When the quantities to be shipped to every location are unequal, you can obtain the coordinates of the center of gravity by finding the weighted average of the x-coordinates and the average of the y-coordinates x=  xQ i i Q i y=  yQ i i Q i where Qi = Quantity t o be shipped to destinatio n i xi = x coordinate of destinatio n i yi = y coordinate of destinatio n i Center-of-Gravity Method Demand for Quain's Discount Department Stores NUMBER OF CONTAINERS STORE LOCATION SHIPPED PER MONTH Chicago 2,000 Pittsburgh 1,000 New York 1,000 Atlanta 2,000 Center-of-Gravity Method North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) 90 – 60 – x1 = 30 y1 = 120 30 – Q1 = 2,000 Atlanta (60, 40) – | | | | | | East-West 30 60 90 120 150 Arbitrary origin Center-of-Gravity Method (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) x-coordinate = 2000 + 1000 + 1000 + 2000 = 66.7 (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) y-coordinate = 2000 + 1000 + 1000 + 2000 = 93.3 Center-of-Gravity Method North-South New York (130, 130) Chicago (30, 120) 120 – Pittsburgh (90, 110) 90 – + Center of gravity (66.7, 93.3) 60 – 30 – Atlanta (60, 40) – | | | | | | East-West 30 60 90 120 150 Arbitrary origin Illustration Suppose the shipments for the problem depicted in Figure 8.1a are not all equal. Determine the center of gravity based on the following information. Weekly Destination x y Quantity D1 2 2 800 D2 3 5 900 D3 5 4 200 D4 8 5 100 18 16 2,000 Example: Center of Gravity x=  xQ i i = 2(800) + 3(900) + 5(200) + 8(100) 6,100 = = 3.05 Q i 2,000 2,000 y=  yQ i= i 2(800) + 5(900) + 4(200) + 5(100) 7,400 i = = 3.7 Q i 2,000 2,000 The coordinates for the center of gravity are (3.05, 3.7). You may round the x-coordinate down to 3.0, so the coordinates for the center of gravity are (3.0, 3.7). This is south of destination D2 (3, 5). Example: Center of Gravity Load Distance Method Enables a location planner to evaluate two or more potential candidates for locating a proposed facility vis-à-vis the demand (or supply) points Provides an objective measure of total load-distance for each candidate Notations Number of demand (or supply) points in the grid map: n Index used for demand (or supply) points: i Co-ordinates of demand (or supply) point i in the grid map: (xi,yi) Quantum of shipment between demand (or supply) point i and proposed facility: Wi Number of candidates for the proposed facility: m Index used for the candidates for the proposed facility: j Co-ordinates of candidate j in the grid map: (Xj,Yj) Load Distance Method Distance measure for Cartesian coordinates between demand (or supply) point i and a candidate j for the proposed facility: Dij Dij = ( xi − X j ) + ( yi − Y j ) 2 2 The load – distance for candidate j for the proposed facility: LDj n LD j = D i =1 ij *Wi Example A manufacturer of certain industrial component is interested in locating a new facility in a target market and would like to know the most appropriate place in the target market to locate the proposed facility. The manufacturer feels that there are no location constraints in the target market (i.e. any point in the target market is good enough). There are four supply points A, B, C and D in the locality that will provide key inputs to the new facility. A two-dimensional grid map of the target market in which we would like to locate a new facility with distance coordinates of the four supply points is available. The annual supply from these four points to the proposed facility is 200, 450, 175 and 150 tonnes respectively. The situation is graphically shown in the two-dimensional plot in the figure. While the coordinates in the parentheses show the distance from the origin of the target map of each of the supply point, the number that follows is the annual shipment (in tonnes) from these points to the proposed facility. Identify the most appropriate point in the grid map to locate the new facility. Solution to Example Centre of Gravity 600 Distance in Kilometres A (125,550), 200 500 B (350,400), 450 400 300 D (700,300), 150 200 C (450,125), 175 100 100 200 300 400 500 600 700 Distance in Kilometres Example Consider example 6.2 Suppose the manufacturer came to know that there are constraints in locating the new facility. Based on an initial survey of possible sites for the proposed facility, the manufacturer identified four candidates. The figure has the location coordinates of the four candidates (numbered 1 to 4). What is the best location for the proposed new facility? Existing Supply Points Candidates for proposed facility xi yi Wi Xj Yj A 125 550 200 1 300 500 B 350 400 450 2 200 500 C 450 125 175 3 500 350 D 700 300 150 4 400 200 Solution to Example 6.3 DA1 = ( x A − X 1 ) 2 + ( y A − Y1 ) 2 = (125 − 300 ) 2 + (550 − 500 ) 2 = (175 2 + (50 ) 2 = 182.00 Dij values 1 2 3 4 A 182.00 90.14 425.00 445.11 B 111.80 180.28 158.11 206.16 C 403.89 450.69 230.49 90.14 D 447.21 538.52 206.16 316.23 LDj values 1 2 3 4 224474.41 258801.57 227410.05 245000.8 Solution to Example Grid Map Candidate for proposed facility Existing Demand (or supply) point 600 Distance in Kilometres A (125,550), 200 500 1 (300,500) B (350,400), 450 400 2 (200,500) 3 (500,350) 300 D (700,300), 150 200 4 (400,200) C (450,125), 175 100 100 200 300 400 500 600 700 Distance in Kilometres Numerical Existing Supply Points Candidates For Proposed Facility Xi Yi Wi Xj Yj A 250 325 400 1 200 300 B 150 465 200 2 100 400 C 325 140 500 3 400 100 D 700 400 100 4 400 300 Transportation Model ► Finds amount to be shipped from several points of supply to several points of demand ► Solution will minimize total production and shipping costs ► A special class of linear programming problems Multi-facility location problem : Transportation Model Locating distribution centers for nation-wide distribution of products is one typical example belonging to this category Decisions variables in a multiple location – multiple candidate problem Identifying k out of n candidates for locating facilities Which of the demand points will be served by each of these locations and to what extent the problem is one of managing network flows of satisfying a set demand points using a combination of supply points The transportation model is ideally suited for solving this combinatorial optimization problem Multi-facility location problem : Transportation Model Market 1 Market 2 Market 3 Market 4 Market 5 Supply 100 70 50 30 40 Warehouse A 2900 Problem 30 95 40 125 50 Warehouse B 2300 75 20 65 40 30 Warehouse C 3700 20 40 95 85 80 Warehouse D 1100 Demand 2000 1500 1200 2800 2500 10000 Market 1 Market 2 Market 3 Market 4 Market 5 Supply 70 40 10 0 0 Warehouse A 2900 2800 100 0 65 0 95 10 Warehouse B 2300 Solution using 2000 300 Vogal’s Approximation 55 0 35 20 0 Warehouse C 3700 Method (VAM) 400 900 2400 0 20 65 65 50 Warehouse D 1100 1100 Demand 2000 1500 1200 2800 2500 10000 Service Location Strategy 1. Purchasing power of customer-drawing area 2. Service and image compatibility with demographics of the customer-drawing area 3. Competition in the area 4. Quality of the competition 5. Uniqueness of the firm’s and competitors’ locations 6. Physical qualities of facilities and neighboring businesses 7. Operating policies of the firm 8. Quality of management Service Location Strategy Location Strategies – Service vs. Goods-Producing SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING REVENUE FOCUS COST FOCUS Volume/revenue Tangible costs Drawing area; purchasing power Transportation cost of raw Competition; advertising/pricing material Shipment cost of finished goods Physical quality Energy and utility cost; labor; raw Parking/access; security/lighting; material; taxes, and so on appearance/ image Intangible and future costs Cost determinants Attitude toward union Rent Quality of life Management caliber Education expenditures by state Operation policies (hours, wage Quality of state and local rates) government Worldwide Distribution of Volkswagens and Parts Thank You! 54