CHAPTER THREE - DESIGN OF THE OPERATION SYSTEM

3.1 Product and service design

3.2 Process selection
3.3 Strategic Capacity Planning
3.4 Facility Location & layout
3.1. PRODUCT /SERVICE DESIGN AND DEVELOPMENT
 Product and Service Design together form the very basis of design aspect of
operations. Note that, Products and services are found in combination and a service
organization can also provide products or a manufacturing organization can also
provide a service.
 Thus, when a firm is trying to design a product it has to give attention to its service
too. Put in mind the following two major frameworks in design before discussing any
thing in this topic:
 Design aspect requires strategic planning and may fall under the domain of
Organizational strategy and senior management also.
 Design aspect requires the existing system to be improved or replaced by a better
system for this you should always focus on the word Productive. This word reflects the
idea of adding value either to the manufacturing or the services System or to be more
precise improving the operation system.

June 26, 2024 By: Teferi Mengesha (MBA) 1

What is Design?
Design is the process of structuring component parts/activities of a product so that as a unit it
can provide specified value for the one who purchase it. The product will be designed in terms
of size, color, and other related dimensions.

Objectives of Product and Service Design

The objective of product service design may vary somewhat from situation to situation.
Generally, however, the objectives are:
to bring new or revised products or services to the markets as quickly as possible
to design products and/or services that have customer appeal
to increase the level of customer satisfaction
to increase quality
to reduce costs
 In competitive environment, getting new or improved products or services to the market
ahead of competitors gives an organization a competitive advantage that can lead to increased
profits as well as increased market share, and can create an image of the organization as a
leader.
In the not for profit sector, getting new or improved products or services to the market as
quickly as possible enables organizations to increase their level of customer service.
 Successful product design must reflect a creative and intimate knowledge of the market
environment.
June 26, 2024And the processes used to
By:produce or deliver
Teferi Mengesha (MBA) them must make effective use of
2 the
 Notice here that, production/operation is not the sole responsibility of operations
department or division. What to produce is rather an interactive decision of marketing,
finance, engineering, purchasing/procurement and further involves customers,
suppliers, creditors, and other related parties.
A. PRODUCT DESIGN PROCESS
 Design has a tremendous impact on the quality of a product or service. Poor designs
may not meet customer needs or may be so difficult to make that quality suffers. Costly
designs can result in overpriced products that lose market share.
 If the design process is too lengthy, a competitor may capture the market by being
the first to introduce new products, services, or features. However, rushing to be first to
the market can result in design flaws and poor performance, which totally negate first-
mover advantages. Design may be an art, but the design process must be managed
effectively. An effective design process:
• Matches product or service characteristics with customer requirements,
• Ensures that customer requirements are met in the simplest and least costly manner,
• Reduces the time required to design a new product or service, and
• Minimizes the revisions necessary to make a design workable.
 Product design defines the appearance of the product, sets standards for
performance, specifies which materials are to be used, and determines dimensions and
tolerances. Figure outlines the design process from idea generation to product launch.
Let’sJune
examine
26, 2024 each step in detail. By: Teferi Mengesha (MBA) 3
 Figure3.1.: Product design process

June 26, 2024 By: Teferi Mengesha (MBA) 4

I. Idea generation
 The design process begins with understanding the customer and actively identifying
customer needs. Ideas for new products or improvements to existing products can be
generated from many sources, including a company’s own R&D department, customer
complaints or suggestions, marketing research, suppliers, and salespersons in the field,
factory workers, and new technological developments. Competitors are also a source of
ideas for new products or services.
 Perceptual maps, benchmarking, and reverse engineering can help companies learn
from their competitors.
Perceptual maps compare customer perceptions of a company’s products with
competitors’ products. It is a visual method of comparing customer perceptions of
different products or services.
 Benchmarking refers to finding the best-in-class product or process, measuring the
performance of your product or process against it, and making recommendations for
improvement based on the results.
 The benchmarked company may be in an entirely different line of business. For
example, American Express is well known for its ability to get customers to pay up
quickly; Disney World, for its employee commitment; Federal Express, for its speed;
McDonald’s, for its consistency; and Xerox, for its benchmarking techniques.

June 26, 2024 By: Teferi Mengesha (MBA) 5

Reverse engineering refers to carefully dismantling and inspecting a competitor’s product to
look for design features that can be incorporated into your own product. Ford used this
approach successfully in its design of the Taurus automobile, assessing 400 features of
competitors’ products and copying, adapting, or enhancing more than 300 of them, including
Audi’s accelerator pedal, Toyota’s fuel-gauge accuracy, and BMW’s tire and jack storage.
For many products and services, following consumer or competitors’ leads is not enough;
customers are attracted by superior technology and creative ideas.
II. Feasibility study
Marketing takes the ideas that are generated and the customer needs that are identified from
the first stage of the design process and formulates alternative product and service concepts.
The promising concepts undergo a feasibility study that includes several types of analyses,
beginning with a market analysis.
Most companies have staffs of market researchers who can design and evaluate customer
surveys, interviews, focus groups, or market tests. The market analysis assesses whether
there’s enough demand for the proposed product to invest in developing it further.
 If the demand potential exists, then there’s an economic analysis that looks at estimates of
production and development costs and compares them to estimated sales volume. A price range
for the product that is compatible with the market segment and image of the new product is
discussed.
Quantitative techniques such as cost/benefit analysis, decision theory, net present value, or
internal rate of return are commonly used to evaluate the profit potential of the project. The
data used in the analysis are far from certain. Estimates of risk in the new product venture and
the company’s
June 26, 2024 attitude toward risk are By:
also considered.
Teferi Mengesha (MBA) 6
III. Rapid Prototyping
Designers take general performance specifications and transform them into a physical
product or service with technical design specifications. The process involves building a
prototype, testing the prototype, revising the design, retesting, and so on until a viable
design is determined.
Rapid prototyping, as the name implies, creates preliminary design models that are
quickly tested and either discarded (as fast failures) or further refined. The models can be
physical or electronic, rough facsimiles or full-scale working models. The iterative process
involves form and functional design, as well as production design.
There are the three types of concurrent designs: form, functional, and production design.
Form design refers to the physical appearance of a product—its shape, color, size, and
style. Aesthetics such as image, market appeal, and personal identification are also part of
form design. In many cases, functional design must be adjusted to make the product look or
feel right.
For example, the form design of Mazda’s Miata sports car went further than looks—the
exhaust had to have a certain “sound,” the gearshift lever a certain “feel,” and the seat and
window arrangement the proper dimensions to encourage passengers to ride with their
elbows out. Apple products have great form and functional design.
Functional design is concerned with how the product performs. It seeks to meet the
performance specifications of fitness for use by the customer. Three performance
characteristics considered during this phase of design are reliability, maintainability, and
usability.
June 26, 2024 By: Teferi Mengesha (MBA) 7
 Production design is concerned with how the product will be made. Designs that are
difficult to make often result in poor-quality products. Engineers tend to overdesign
products, with too many features, options, and parts. Lack of knowledge of
manufacturing capabilities can result in designs that are impossible to make or require
skills and resources not currently available.
 Many times, production personnel find themselves redesigning products on the
factory floor. Late changes in design are both costly and disruptive. An adjustment in
one part may necessitate an adjustment in other parts, “unraveling” the entire product
design. That’s why production design is considered in the preliminary design phase.
Recommended approaches to production design include simplification,
standardization, modularity, and design for manufacture.

June 26, 2024 By: Teferi Mengesha (MBA) 8

IV. Final design and process plans
In the preliminary design stage, prototypes are built and tested. After several iterations,
a pilot run of the process is conducted. Adjustments are made as needed before the final
design is agreed on. In this way, the design specifications for the new product have
considered how the product is to be produced, and the manufacturing or delivery
specifications more closely reflect the intent of the design.
 This should mean fewer revisions in the design as the product is manufactured and
service provided. Design changes, known as engineering change orders (ECOs), are a
major source of delay and cost overruns in the product development process.
The final design consists of detailed drawings and specifications for the new product
or service. The accompanying process plans are workable instructions for manufacture,
including necessary equipment and tooling, component sourcing recommendations, job
descriptions and procedures for workers, and computer programs for automated machines.
 Good design is aided by the use of technology. New products for more segmented
markets have proliferated over the past decade. Changes in product design are more
frequent, and product lifecycles are shorter. The ability to get new products to the market
quickly has revolutionized the competitive environment and changed the nature of
manufacturing.
Part of the impetus for the deluge of new products is the advancement of technology
available for designing products. It begins with computer-aided design (CAD) and
includes related technologies such as computer-aided engineering (CAE), computer-aided
manufacturing
June 26, 2024 (CAM), and collaborative product
By: Teferi design (CPD).
Mengesha (MBA) 9
B. SERVICE DESIGN
 Service Operations Design: Service is the dominant economic force in the
industrialized world today, and growth projections indicate this trend will continue. Yet,
service production receives far too little emphasis in operations Management courses
and business course in general.
 Service Definition: Service is an intangible product, which is produced and
consumed simultaneously. Therefore, a service never exists, only the results of the
service can be observed. If you get a haircut, the effect is obvious, but the service itself
was produced and consumed at the same time.
 Simultaneous production and consumption is a critical aspect of service, because it
implies that the customer must be in the production system while production takes
place. The simultaneity of production and consumption indicate that service cannot be
stored or transported; it must be produced at the point of consumption.
 For operations this means that capacity must be located at or near the customer’s
location and that the service cannot be produced now and placed into inventory for
later consumption.
Service consists of acts and interactions that are social contacts. The interaction
between the producer and customer at the time of production is a critical attribute of
service. There are professional services such as medicine, law, education and
architecture; and capital-intensive services; such as airlines, electric utilities; mass
services such as retailing, wholesale, and fast food.
June 26, 2024 By: Teferi Mengesha (MBA) 10
 Phases in Services Design Process
 Conceptualization
 Identify service package component
 Determine performance specification and translate in to design specification
 Translate potential design specification to delivery specification
 Services that are allowed to just happen rarely meet customer needs. World-class
services that come to mind—McDonald’s, Nordstrom, Federal Express, Disney World
—are all characterized by impeccable design. Service design is more comprehensive
and occurs more often than product design.
 The inherent variability of service processes requires that the service system be
carefully designed. Figure shows the service design process beginning with a service
concept and ending with service delivery.
 The service concept defines the target customer and the desired customer
experience. It also defines how our service is different from others and how it will
compete in the marketplace. Sometimes services are successful because their service
concept fills a previously unoccupied niche or differs from the generally accepted
mode of operation.

June 26, 2024 By: Teferi Mengesha (MBA) 11

 Service design process

June 26, 2024 By: Teferi Mengesha (MBA) 12

 From the service concept, a service package is created to meet customer needs. The
package consists of a mixture of physical items, sensual benefits, and psychological
benefits. For a restaurant the physical items consist of the facility, food, drinks,
tableware, napkins, and other touchable commodities.
 The sensual benefits include the taste and aroma of the food and the sights and
sounds of the people. Psychological benefits are rest and relaxation, comfort, status,
and a sense of well-being.
 Effective service design recognizes and defines all the components of a service
package. Finding the appropriate mix of physical items and sensual and psychological
benefits and designing them to be consistent with each other and the service concept is
also important.
 From the service package, service specifications are developed for performance,
design, and delivery. Performance specifications outline expectations and requirements
for general and specific customers. Performance specifications are converted into
design specifications and, finally, delivery specifications.
 Design specifications must describe the service in sufficient detail for the desired
service experience to be replicated for different individuals at numerous locations. The
specifications typically consist of activities to be performed, skill requirements and
guidelines for service providers, and cost and time estimates. Facility size, location, and
layout, as well as equipment needs, are also included.
June 26, 2024 By: Teferi Mengesha (MBA) 13
Delivery specifications outline the steps required in the work process, including the work
schedule, deliverables, and the locations at which the work is to be performed.
3.2. PROCESS SELECTION DECISION
Process Selection plays an important part in over all design of production and operations
management systems. Process Selection allows an organization to offer a safe and reliable
product and service through pragmatic design and effective capacity planning. With the help
of process selection we can understand the different types of processing including manual,
rigid, and flexible as well as various automated approaches to processing.
 Process selection allows an operations manager to better understand the need for
management of technology. Together with capacity planning it helps an organization to
develop different approaches to meet the irregular demand pattern of the customers.
Process Selection refers to the way an organization chooses to produce its good or services.
It takes into account selection of technology, capacity planning, layout of facilities, and design
of work systems. Process selection is a natural extension after selection of new products and
services. Process decision affects the costs, quality, delivery, flexibility of operation. One
scholar pointed out, process selection decisions tend to bind the firm with equipment,
facilities, and a particular type of labor force. This, in turn, tends to limit strategic options.
Types of Operation
The degree of standardization and the volume of output of a product or service influence the
way production are organized. Output can range from high volume, highly standardized, to
low volume, highly customized. There are three types of product flows: line/continuous,
intermittent/job-shop and project. In manufacturing, product flow is the same as material flow,
By: Teferi Mengesha (MBA)
sinceJune
materials
26, 2024 are being converted into a product. 14
 In pure service industries, there is no physical product flow, but there is,
nevertheless, a sequence of operations performed in delivering the service. This
sequence of service operations is considered as the “product flow” for service
industries.

June 26, 2024 By: Teferi Mengesha (MBA) 15

a) Continuous Production Process/Line flow – it is a system that produces highly
uniform products or continuous services, often performed by machines. It is
characterized by:
 A linear sequence of operations used to make the product or service.
 The product is well standardized and must flow from one operation or workstation to
the next in a prescribed sequence.
 The individual work tasks are closely coupled and should be balanced so that one
task should not delay the next
 There may be side flow which impinges on this line, but they are integrated to
achieve a smooth flow
 It usually yields a lower unit cost for the product or service being produced due to
economies of scale
 Storage costs per unit are usually lower, as the raw materials are stored only briefly
and work in progress inventories move through the plant very rapidly.
 The time required for production is very shorter
 Fixed path materials handling equipments like conveyers, chutes and rails are mostly
used
 It requires large investment because it uses special purpose machines, etc.
 The marketing effort focuses on developing distribution channels for the large
volume of output and persuading customers to accept standardized products.
 Example: refineries, paper plants, By:
chemical plants, automobile industries, flour milling,
Teferi Mengesha (MBA)
June 26, 2024 16
b) Mass Production: Manufacture of discrete parts or assemblies using a continuous
process are called Mass Production. This production system is justified by very large
volume of production.
 The machines are arranged in a line or product layout. Product and process
standardization exists and all outputs follow the same path. Mass Production is
characterized by
 Standardization of product and process sequence.
 Dedicated special purpose machines having higher production capacities and output
rates.
 Large volume of products.
 Shorter cycle time of production.
 Lower in process inventory.
 Perfectly balanced production lines.
 Flow of materials, components and parts is continuous and without any back
tracking.
 Production planning and control is easy.
 Material handling can be completely automatic.
 Similar equipment & skills are organized

June 26, 2024 By: Teferi Mengesha (MBA) 17

c) Intermittent processing – it is a system that produces lower volumes of items or
services with a grater variety of processing requirements. Volume is much lower than in
continuous system.
 Intermittent systems are characterized by general purpose equipment that can satisfy
variety of processing requirement, semiskilled or skilled workers who operate the
equipment, and narrow span of supervision than for most continuous system.
 Thus investment requirement is low. Equipment and labor are organized into work
centers by similar types of skills and/or knowledge or equipment. A product or job will
then flow only to those work centers that are required and will skip the rest. This results
in a jumbled flow pattern. There are two major types of intermittent processing: batch
processing and job shop.
I Batch processing – is an intermittent processing system used to produce moderate
volumes of similar products. Food processors (example, bakeries, and canneries)
typically produce in batches.
 The processing requirement and equipment are the same, but some of the
ingredients vary from one batch to the next. Batch output can be standardized
(example: paint, ice cream, canned vegetables) or customized (example: printing
– magazines, newspapers, textbooks, user manuals).

June 26, 2024 By: Teferi Mengesha (MBA) 18

 ii) Job shop – it is an intermittent processing system designed to handle a
greater variety of job requirements than batch processing. It is a system that
renders unit or small lot production or service with varying specification,
according to customer needs.
 It maintains the ability to perform certain types of operations but generally
nor responsible for specific products. Instead, it performs to customer
specification; jobs tend to vary according to the needs of customers. Examples
of job shops are organizations that do repair work (example, appliances, and
automobiles), health care, tool and die shops and so on.
 Lot sizes vary from large to small, even a single unit. What distinguishes
the job shop operation from batch processing is that the job requirements often
vary considerably from job to job.
 This means that the sequence of processing steps and the job content of the
steps also vary considerably. Difference in job processing requirements add
routing and scheduling complexities, as well as a frequent need to adjust
equipment settings or make other alterations for successive jobs. Processing
cost per unit is generally higher than it is under continuous processing.

June 26, 2024 By: Teferi Mengesha (MBA) 19

d) Project production process – it is a system where by non repetitive set of activities
directed toward a unique goal with a limited time frame. It is
 Used to produce a unique product such as a work of art, a concert, a building or
a motion picture
 Producing a single item of each unit of products
 Strictly speaking, there is no product flow for a project; but, there is still a
sequence of product operations. In this case, all individual operations or tasks
should be sequenced to contribute to the final project objective
 A significant problems in project management is the planning, sequencing and
controlling of the individual tasks leading to completion of the entire project.
 Used when there is a greater need for creativity and uniqueness
 Automation is difficult in the case of projects as they are done only once.
 Projects involve high cost and difficulty in managerial planning and control as it
is hard to define initially with a great probability of changes in the meantime.

 Examples; include construction buildings, movies, ships, commercial paintings,

etc.

June 26, 2024 By: Teferi Mengesha (MBA) 20

3.3. CAPACITY PLANNING
 Capacity is the upper limit or ceiling on the load (demand for a product or service)
that an operating unit can handle. Capacity is the rate of output that can be achieved
from a process. This characteristic is measured in units of output per unit of time.
Design capacity is the rate at which a firm would like to produce under normal
circumstances and for which the system was designed.
 Maximum capacity is used to describe the maximum output rate that could be
achieved when productive resources are used to their maximum. However, at this
maximum level, utilization of resources may be inefficient (for example, increasing
energy costs, the need for overtime, higher maintenance costs, etc.).
 An Operations Manager is supposed to identify tactics and formulate a strategy in
order to answer the basic questions with respect to capacity handling. These questions
are:
 What kind of capacity is needed?
 How much is needed?
 When is it needed?

June 26, 2024 By: Teferi Mengesha (MBA) 21

 Importance of Capacity Decisions
Capacity decisions impacts ability to meet future demands & affects operating costs. These
decisions often act as a major determinant of initial costs, as they involve long-term
commitment. These decisions affect competitiveness and gives ease of management. Capacity
Decisions focus on globalization as it is more complex and impacts long range planning.
 Impacts ability to meet future demands - Capacity essentially limits the rate of possible
output. Having capacity to satisfy demand can allow a company of taking advantage of
tremendous opportunities. An international automobile manufacturer of good repute increased
its production by working on its capacity decision after its quality product received a lot more
demand than it was originally anticipated.
Affects operating costs - We already know that estimated or forecasted demand differs from
actual demand, so the ideal concept of capacity matching demand is untrue. Organizations
should be willing to take a critical decision to balance the cost of over and under capacity.
Overcapacity reflects overkill of resources and under capacity shows a weak management
philosophy to make best use of an available market.
Acts as a major determinant of initial cost - It is typical to see that the greater the capacity
of a productive unit, the greater would be the cost. This does not mean it is advocating a one
to one relationship for higher capacity for production to costs; in fact larger units tend to cost
proportionately less than smaller units. E.g. Kallitie Steel Mill at Addis Ababa is one good
example, where higher costs are misunderstood as the mills capacity is not being fully utilized
 Involves long-term commitment - Once long term commitments of resources have been
taken, the difficulty of reversing would cost more. Indicating a capacity increase or decrease
for anJuneorganization
26, 2024 set up would meanBy:additional costs.
Teferi Mengesha (MBA) 22
Affects competitiveness - This is very critical, if a firm has an excessive capacity or
can quickly add capacity, which fact may serve as a barrier against entry by other firms.
 Affects ease of management - Capacity increase or decrease decisions involves
management to answer the question of operating the organization as well as an increase
or decrease in the plant capacity.
 Globalization adds complexity - Capacity decision often involves making a decision
in a foreign country which requires the management to know about the political,
economic and cultural issues.
 Impacts long range planning - Capacity decisions extend beyond 18 months and
thus get classified as long term in nature.
 Organizations often end up making use of monetary amount in order to show their
capacity ceiling. This unfortunately needs a constant updating due to changes in price
of raw materials as well as utilities. A simple way out is to reflect the load or capacity
in terms of unit produced but this has the limitation that its only good for a single unit
and fails in case of multiple types , designs of units being produced.
 A preferred type of capacity measurement is to identify capacity in terms of
availability of input units. Example: like hospitals are identified to have a capacity of
200 beds, a workshop by its man-hours and so on and so forth.

June 26, 2024 By: Teferi Mengesha (MBA) 23

 Factors affecting Capacity
Operations Manager often focus on determinants of effective capacity by taking into account
both macro and micro levels. At the macro levels the managers look for Supply chain and
External factors, while at the micro level they look for operational factors including facilities
and man and machine resources. There are 7 determinants of effective capacity namely:-
Facilities - The design of facilities includes the size as well as the provision of expansion.
Other important factors that are necessary include transportation costs, distance to market, labor
supply, energy supply sources and the ease and smoothness with which work can be performed.
Product and service factors can have a tremendous influence on capacity. E.g. when items are
similar, the ability of the system to produce those items is generally much greater than when
successive items are different and unique. The idea is more uniformity in the final
product/service output the greater capacity.
Process factors refer to the quantity and quality requirements of a process. Quantity always
refers to capacity. Another added feature is quality of output. If quality of output does not match
the standard requirements it would generate inspection and possible reworks.
Human factors include skill, craftsmanship, training and qualification to handle any job it also
includes the motivational factors.
 Operational factors with respect to effective capacity always refer to scheduling, late
deliveries, acceptability of purchased materials, parts, quality inspection, control procedures and
inventory problems. Scheduling issues arise when an organization has a difference in equipment
capabilities for development of alternative capacities. Inventory problems have a negative
impact on capacity
June 26, 2024 By: Teferi Mengesha (MBA) 24
 Supply chain factors relate to any short coming to suppliers, warehouse processing,
operational hick up or distribution issues.
 External factors include product standards, safety regulations, unions and pollution
control standards. At times organizations have experienced shutting down of their facility if
they could not provide support to government regulations of pollution control.
Measures of capacity
The capacity of a process is its maximum output. However, most operations do not work
at their full capacity, as this tends to strain the resources and put stress on the people.
Instead they work at a lower level so that they can sustain over time. We can arrow for
these effects by defining several types of capacity as follows:
Design (theoretical/ideal) capacity – is the maximum rate of output achieved under ideal
condition. In other words, it is planned (engineered) rate of output of goods or services
under normal or full scale operating conditions with out any restrictions.
Effective capacity – is the maximum possible output given a product mix, problems in
scheduling and balancing operations, machine maintenance, quality factor, and so on (it
considers some planned problems). It also includes lunch breaks and coffee breaks. It is
typically less than or equal to the designed capacity.
Actual capacity – the actual output of a system at a given point in time. It is even less
than effective capacity, for it is affected by short-range factors such as actual demand,
equipment breakdowns, absenteeism, shortage of raw materials, productivity, and other
factors that are outside the control of the operations manager (tries to consider unplanned
problems). By: Teferi Mengesha (MBA)
June 26, 2024 25
 Capital intensive processes depend on physical facilities, plant and equipment.
Short-term capacity can be modified by operating these facilities more or less
intensively than normal. In labor intensive processes short-term capacity can be
changed by laying off or hiring people or by giving overtime to workers. The strategies
for changing capacity also depend upon how long the product can be stored as
inventory. Major short-term capacity strategies are based on inventories, employment
(hiring and firing), subcontracting, process design, etc.

June 26, 2024 By: Teferi Mengesha (MBA) 26

Economies of scale
Economies of scale
 If the output rate is less than the optimal level, increasing output rate results in
decreasing average unit costs
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results
in increasing average unit costs

June 26, 2024 By: Teferi Mengesha (MBA) 27

3.4. FACILITY/PLANT LOCATION DECISION
Facility/plant location decisions are among the strategic operations decisions areas. It is
the process of determining a geographical site for a company’s operations. Location is
very important decision for two basic reasons:
Location decision is somewhat irreversible due to its expensiveness or impossibility.
Once a plant location is chosen, a company usually remains in that location for many
years. Thus errors in plant location often lead to long term problems which are very
difficult to overcome.
 It affects the cost of production (such as costs of resources i.e. direct material, labor,
overhead, energy, etc.) and the effectiveness of marketing. If expansion is impossible, the
potential for satisfying the market from this location cannot be fulfilled.
 Thus, the plant location decision is of vital importance in production system design. It is
because:
It affects the costs of shipping raw materials and finished products
It affects the cost of operations, including labor, raw materials, taxes, constructions, land,
utilities, power and many other factors.
It affects expansion potential in the future.
It affects the marketing effectiveness of the firm
 These effects, in some situations, can spell out the difference between the company’s
success and failures in the long-run. Thus, plant location decisions must involve long
range forecasting and an analysis of By:
theTeferi
current relationships of the factors involved in the
Mengesha (MBA)
June 26, 2024 28
The operation mangers of a business firm, when confronted with problems leading to a
decision on plant location, have several alternatives:
Continuing operating on the present location and subcontract for the additional demand. It
applies mostly on hotel, warehouse and transportation. It is because the demand is not stable.
Expand the present plant on the present site provided that there is available site.
Keeping the present plant and at the same time build new plant/plants elsewhere.
Sell the present plant and relocate the entire operation.
Steps in making location decisions
If the decision is to build new plants elsewhere, then a complex analysis is necessary. Such
analysis should start with the gathering of data concerning the location requirements of the
firm. The way an organization approaches location decision often depends on its size and the
nature or scope of its operations. The general procedure for making location decisions usually
consists of the following the steps:
Decide on the criteria that will be used to evaluate location alternatives, such as increased
revenues or community services.
Identify the factors that are important, such as location of markets of raw materials.
Develop location alternatives:
 Identify the general region for location
 Identify a small number of community alternatives
 Identify a particular site alternatives
 Evaluate the alternatives and make a selection
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Considerations in facility/plant location decisions
 The problem of plant/facility location is common to new and existing businesses.
This planning is critical to company’s eventual success. There are certain stages to be
followed for the initial phase of the plant-location decision, during which management
is involved in selecting the region or general area, then the community with in the
region, and finally the particular site at which the plant should be located.
A. Regional consideration factors
 The following important regional factors must be taken into account when the
operations managers would like to make decisions concerning the region where to
locate a plant
 Proximity to markets – possible reason to locate plants near their market can
be:
When the products to be produced is perishable
 Fragility of products (risk of log shipment)
 The fact that the product’s volume, bulk, fragility, and perish ability
increase when it is processed further. Example, soft drinks.
 The fact that the nature of the product needs large transportation space.
 When the product is a service. Example, restaurants, gasoil stations

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  When the company deals with custom-made products.
 When the product is inexpensive but involves high transportation cost i.e., large
perc entage of transportation cost from the total cost. Example, bricks, cements,
etc.
 Proximity to materials – relates to the location of raw materials, supplies, semi-
finished goods, parts, equipment, tools, etc. Possible reason to locate near source of
raw materials can be:
 When the weight or bulk of the product largely decreases by further processing.
Example, sugar cane is the raw material but when production process completed,
we find crystallized sugar.
 When the perish ability of products decrease by further processing. Example,
freezing, canning, pasteurizing ----
 If the product needs a number of raw materials, the location decision regarding
materials is made at a place that reduces the cost of transporting these materials.
 Adequate transportation facilities – are essential for the economical operations of
production systems. Operation managers must study the characteristics of the raw
materials and finished products in regard to their transportation need and search for
the location that provides facilities of transportation with a reasonable cost. There are
different types of transportation facilities: water, railroad, road, pipelines, and airlines
transports.

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Labor supply – one of the important inputs in production systems is labor. When
a firm considers a new location, several labor related questions requires answer:
The availability of potential employees
The level of skill and education of potential employees
 Productivity of potential employees
 Their unionization
 Costs of labor (including fringe benefits)
 Cost of living as related to labor costs
 Climate – favorable climate is important in order to acquire and maintain
productive work force. Certain industries like agriculture business require specific
climatic conditions.

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B. Community consideration
Choice of community includes the following considerations:
 Managerial preference: relates to the personal preference of owners and
mangers
 Community facilities – is concerned with the availability of schools, churches,
medical facilities, residential housing, recreational opportunities, police and fire
protection, highways, etc.
 Community attitudes – in order to assure the log term existence in that
community, it is mandatory to win the interest, enthusiasm, and cooperation of the
society. Otherwise, poor relations with local government, labor, customers etc, will
result in putting the survival of the organization under question mark.
 Community government and taxation – it is important to assess the current
situation and attempt to predict the future situation in regard to the policies of the
government. In general, stable, competent, honest and cooperative government
officials are great assets to a newly located company.
 Availability and cost of sites – relates to the consideration of the availability of
sites and building. Selecting communities without assessing the availability and
costs of sites often leads to a mistake.

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C. Site consideration/factors
After identifying the community based on the already chosen region, our final step is
to screen out the best site out of the possible ones. The following are some of the
considerations:
Size of the site: the size of the site must be large enough to satisfy some
requirement such as employee parking requirement, future expansion plan, etc.
Drainage and soil condition: poor drainage leads to accumulation of water
around the plant which may be harmful for some organizations. Some similarly, if
the load bearing capacity of the soil is low, it will be difficult to establish sound
building foundations.
 Water supply: even though the amount may differ for different organizations, all
enterprises require getting access to safe and pure water. Some organizations like
breweries need water even with some extraordinary quality.
 Utilities: costs of acquiring and using utilities like electricity, natural gas, water,
etc. must be analyzed
 Transportation facilities: relates to getting access to highways, railroads, pipe
lines, water, and air transport as the case may be.
 Land and development costs: costs related to excavation, grading, filling,
construction f roads, siding etc.

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  Waste disposal and environment consideration: as part of discharging some
social responsibilities a business and deteriorations. It has to say its part by
preventing and reducing population and environmental degradation and
deteriorations. Accordingly it has to take care while disposing its wastes by going
for sites that quality for “economical” disposal facility.
Location Analysis Techniques
Linear programming
 Location factor rating
 Center-of-gravity technique
 Load-distance technique
A. Location factor rating
In the location factor rating system, factors that are important in the location
decision are identified and selected based on the weightage of factors and the score
obtained by each location.
The advantage of this technique is that the decision of location is taken by
accommodating all possible factors of location.
Example of Location factor rating:
The Dynaco Manufacturing Company is going to build a new plant to manufacture
ring bearings (used in automobiles and trucks). The location selection team is
evaluating three sites, and they have
June 26, 2024
scored
By: Teferi the(MBA)
Mengesha important factors for each as follows.
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June 26, 2024 By: Teferi Mengesha (MBA) 36
 Factor rating method : Factor ratings are frequently used to evaluate location
alternatives because:
 their simplicity facilitates communication about why one site is better than another
 they enable mangers to bring diverse location consideration into the evaluation
process .
 Then faster consistency and judgment about location alternatives.
Procedures:
List the most relevant factors in the location decision
 Assign a weigh to each factors that indicates its relative importance compared with
all other factors. The weight sum should be 1.00
 Decide on a common scale for all factors. Each factors should be rated, say form 1
(very low ) to 5 (very high) , according to its relative importance
Score rate each location alternative (1-100)or (1-10)
Multiply factor weight or rate by the score (location rate for each factor , and sum
the results for each location alternatives
 Choose the location that has the highest composite score. The score indicates
alternative locations are most promising.

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2. Center of gravity method:
For locating single facilities that considers the existing facilities, the distance
between them, and the volumes of goods that need to be shipped.
 It is used to locate intermediate or distribution warehouses.
 This method begins by locating the existing locations on a coordinate grid system.
The purpose is to establish relative distance between locations. The center of gravity is
found by calculating the X and Y coordinates that will result is the minimal
transportation cost. This is given by the following weighted formula.

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X and Y coordinate are approximately 308 and 217 respectively. Therefore, the location of the
intermediate holding facility should be at (x, y) = (308 217). On the map it is represented by point C.
3. Load-distance technique
A variation of the center-of-gravity method for determining the coordinates of a facility location is
the load-distance technique.
In this method the selection of a location is based the available options of locations and these
available options could be selected by using other techniques

3.5. FACILITIES/PLANT LAYOUT

Facilities layout corresponds to configuration of departments, sections, work centers, equipment
with focus being on movement of goods or services or works. A traveler making use of the railway
platform, or bus station or airport would be a good example of work being moved through a facility. It
is one of the most important aspects of production system design is the layout of facilities. It involves
the determination of the arrangements of machines, personnel, materials and to supply services in
order to maximize the value that is intended to be created.

Basic Types of Layout of Manufacturing Industry: The common Basic Layout Types are
 Product/Service layout - A layout that uses standardized processing operations to achieve
smooth, rapid, high-volume flow
 Process layout - A Layout that can handle varied processing requirements
 Fixed Position layout - A Layout in which the product or project remains stationary, and
workers, materials and equipment are moved as needed
 Hybrid/Combination - A Layout that makes use of the combination of Product, Process or
Fixed
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2024 layout. By: Teferi Mengesha (MBA) 42
 A. Product/Production Line/assembly line/flow-shop layouts
The equipment here is laid out according to the sequence in which it is used for
making the product. This layout is usually suitable for assembling operations, for
example in the automobile industry. Since a machine is assigned for each operation,
the number of equipments in a Product layout is much more as compared to the
Process layout.
Therefore; the utilization of the equipment has to be sufficiently high to justify the
higher level of capital investment necessary in a Product layout. This means, the
volume of production should be large and the variety of products should be low so
that there is very little time lost in setting up the machinery.
However, if two types of products are to be made, it may call for two separate
layouts. Doing multiple jobs on the same equipment with the same men to save time is
usually not the characteristic of a Product layout. Each Line layout caters only to one
product.
The principles of minimum distance moved (each operation adjacent to the previous
operation) and of congruence flow of materials and sequence of equipments are very
well satisfied in a Line layout.
But, this can only be true when there is only one standard product to be made, day in
and day out. If there is another type of product to be made, then the present line-up of
equipment may not correspond with the 'flow' of this new product, resulting in high
costsJune
due to excessive material movement
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and (MBA)
By: Teferi Mengesha excessive idle-times of machinery
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and
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B. Process/job-shop/ Layout or Layout by Function
 This is typical of the job-shop type of production where the equipment performing
similar operations is grouped together. For instance, grinding machines could be
grouped together to form a work area, milling machines could be grouped together;
drilling machines could be grouped together, etc.
 Such a layout is particularly useful where the volume of manufacture is low and the
variety of jobs is great (in a job-shop every customer order is unique). Here, the layout
should provide tremendous flexibility in the sequence of operations because, the
sequence of operation for one job different from that of another job. For this reason, in
all job-shop types of production, work areas are grouped together.
 Why is a process layout suited to job-shop type production? Job-shop type
production is characterized by a large variety of jobs, which are distinct from each
other. If the machines performing similar operations are grouped together, the idle
times of machines and operators can be better controlled and better time-shared thereby
increasing machine and labor utilization.

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C. Fixed Position Layout
In this layout, the material remains in a fixed position, but the machinery,
tools, workmen, etc. are brought to the material. Such a layout may be
preferred when the equipment and the machinery is small in number and size,
and where the workmen are highly skilled to perform the various small jobs on
the product:
For instance, such a layout is sometimes used in the manufacture of
automotive batteries where 20--30 battery cases are fixed in position and the
workman keeps moving from one battery to another, each time fixing certain
components such as the electrodes, the chemicals, etc. into the main skeleton of
the battery. This type of layout makes sense when the product is particularly
massive or difficult to move like a ship, a highway, a bridge, a house, dam, etc.
The advantage of this layout include: provides pride for workers as they can
apply their high level skill to complete the job, highly flexible, and easy to alter
the sequence of operations when tools, materials or supplies do not arrive on
time. It has however, is not without disadvantage. Just to mention major
limitations: lack of efficiency, difficulty in scheduling and communicating with
widely dispersed resources, andBy:aTeferi
potential for significant cost overruns and
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Service layouts
 Service layouts are also concerned with the allocation of space to departments, the
location of special displays, the efficiency of checkout procedures, and protection from
pilferage. Space allocation is determined by evaluating the sales per square foot of a
product or product line versus the willingness of a vendor to pay for product
placement. Queuing analysis is a quantitative technique for improving waiting lines
that often form at checkouts.
 Industry-specific recommendations are available for layout and display decisions.
Computerized versions, such as SLIM (Store Labor and Inventory Management) and
COSMOS (Computerized Optimization and Simulation Modeling for Operating
Supermarkets), consider shelf space, demand rates, profitability, and stockout
probabilities in layout design.
 Finally, services may have both a back office (invisible to the customer) and a front
office (in full view of the customer) component. Back offices can be organized for
efficiency and functionality, while front office layouts must be aesthetically pleasing as
well as functional. For that reason, service layouts are often considered part of the
service design process.

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 THE END
THANK YOU

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