Page 132 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes taking place, transportation costs alone can total as much as 25% of the selling price. That is one-
fourth of the total revenue of a firm may be needed just to over freight expenses of the raw
materials coming in and the finished product going out. Other costs that may be influenced by
location include taxes, wages and raw material costs. The choice of locations can alter total
production and distribution costs by as much 10%. Lowering costs by 10% of total production
costs through optimum location selection may be the easiest 10% savings management ever
makes.
Once an operations manager has committed an organisation to a specific location, many costs
are firmly in place and difficult to reduce. For instance, if a new factory location is in a region
with high energy costs, even good management with an outstanding energy strategy is starting
at a disadvantage. The same is true of a good human resource strategy if labour in the selected
location is expensive, ill-trained, or has a poor work ethic. Consequently, hard work to determine
an optimal facility location is a good investment.

Types of Facilities

The various types of facilities are briefly described below:

Heavy Manufacturing

Heavy manufacturing facilities are primarily plants that are relatively large and require a lot of
space and as a result, are expensive to construct.

Example: Automobile plants, steel mills and oil refineries.
Important factors in the location decision for plants include construction costs, modes of
transportation for shipping heavy manufactured items and receiving bulk shipments of raw
materials, proximity to raw materials, utilities, means of waste disposal and labour availability.
Sites for manufacturing plants are normally selected where construction and land costs can be
kept at a minimum and raw material sources are nearby in order to reduce transportation costs.
Access to rail-roads is frequently a major factor in locating a plant. Environmental issues have
increasingly become a major factor in plant location decisions. Plants can create various forms
of pool pollution and traffic pollution. These plants must be located where the harm to the
environment is minimised. Although proximity to customers is an important factor for some
facility types, it is less so for manufacturing plants.

Light Industry

Light industry facilities are typically perceived as smaller, cleaner plants that produce electronic
equipment and components, parts used in assemblies, or assembled products.

Example: Making stereos, TVs, or computers, tool and die shop, breweries, or
pharmaceutical firms.
Several factors are important for light industry. Land and construction costs are not generally as
crucial, because the plants tend to be smaller and require less engineering. It is not as important
to be near raw materials, since they are not received in large bulk quantities, nor is storage
capacity required to as great a degree. As a result, transportation costs are somewhat less
important. Many parts and material suppliers fall into this category and as such, proximity to
customers can be an important factor. Alternatively, many light industries ship directly to
regional warehouses or distributors, making it less important to be near customers.
Environmental issues are less important in light industry, since burning raw materials is not

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