Introduction to Industrial Engineering

By Jane M. Fraser

Chapter 6

Design or improve a production system

Return to the Table of Contents.

6.2 Where in the world should the organization put these assets?

During the 1921 flood in Pueblo (this photo shows the water at Union Station), the Arkansas River overflowed its banks and prevented people on the north side of the River from reaching the only hospital, located on the south side of the River. In 1923, six doctors founded Parkview Hospital so residents north of the River would have access to a hospital.

In 1881, Colorado Fuel and Iron built a steel mill in Pueblo to be close to the sources of iron ore and to be close to its customers, the companies that were building new rail lines in the Western United States. Transporting ore over large distances is very costly, so the mill located near the sources. Transporting the final product is still costly, but the tonnage to be transported has been reduced by the manufacturing process. For this reason, most plants that process some type of ore or mineral are located near the source.

In 2006, Nissan moved its North American headquarters from Gardena, California, (in the Los Angeles area) to Franklin, Tennessee (south of Nashville). According to an an article by Lou Ann Hammond at, the state of Tennessee provided incentives (tax breaks, for example) amounting to about $200 million over 20 years, the new headquarters building will cost about $100 million and will be ready in 2008, and "Almost 60 percent of Nissan employees quit rather than move from California to Tennessee."

An organization should consider three types of factors in locating a new production facility:

  1. The location of customers who will buy the product or service,
  2. The costs to manufacture the product or provide the service in that location, and
  3. The cost to move raw material to the production location and the cost to move the product or service to the customers.

Sometimes one of these factors greatly dominates the other two. For example, in locating a restaurant, factor 1, locating near desired customers, is the dominant consideration. J.C. Melaniphy lists Principles of Restaurant Site Selection, which includes this statement:

One of the tricks in the food business is to locate your units within the existing travel patterns of a majority of people in an area. This will permit you to intercept consumers without requiring them to change their patterns.

Similarly, locating a retail store near competitors can be good, for example, in a shopping mall, since each organization benefits from customers attracted by the ability to shop efficiently.

Factor two has many costs. The cost to manufacture the product or to produce the service in a given location has many components:

Global outsourcing of service is occurring because companies are focusing on the second factor; for example, the cost of providing a computer service call center is much lower in India than in the United States. Since calls from customers can be transferred from any location around the world at low cost (cost factor three), the location of demand (cost factor one) almost doesn’t matter. The issue being raised by some is whether the service provided is of the quality that customers demand.

"An Analytical Approach to the Outsourcing Decision,” by Korn available from MMS Online, argues that

“there can be damaging consequences for companies that focus too intently on the cost of labor. When outsourcing work, manufacturers run the risk of losing proprietary information, receiving parts that don’t meet quality requirements and waiting for delayed shipments.”

The article describes how Innovative Turbo Systems, a manufacturer of after-market auto turbochargers in Simi Valley, California, competes on the basis of innovative design and that “the key is to keep that intellectual property within the company.” A relentless focus on making its in house processes efficient has reduced its methods below the cost of outsourcing.

Global outsourcing of manufacturing occurs because in some countries the cost of raw materials and wages are so low that they compensate for added costs in moving the goods to final markets. Some analysts argue that some costs are often neglected in that calculation. Also, security concerns are causing some companies to reconsider their overseas manufacturing locations. C-TPAT (Customs-Trade Partnership Against Terrorism) is a voluntary US program in which companies certify that they can account for the security of goods at all time from manufacture to entry into the US. Worthen predicts that C-TPAT will be made mandatory, adding costs to overseas manufacturing. Rosenbaum argues that

C-TPAT is the price of offshoring. It is the price of the risk you assume when you go out into an increasingly hostile and insecure world to harvest all those cheap materials and all that cheap labor. It is a hidden cost but no less real for that.

Some companies create long term relationships with suppliers so the suppliers will locate a manufacturing facility near by and provide supplies on a JIT basis. Factor three, the cost to move product to the supplier, dominates here, but also the ability to easily provide Just In Time deliveries.

An organization that makes many products might have several production facilities, but it might choose to have one location for the production of all its products, allowing smoothing of production and allowing other economics, but at the cost of having to transport products further to reach all markets. The organization could have several small production facilities located closer to markets with each producing the entire range of products. Or the organization could have plans that specialize in certain types of products or in certain components or assemblies that go into various products. When the organization chooses a site, it should consider its plans to handle growth.

The location of public facilities is a special case that often attract attention, for example, the location of a new firehouse. Community colleges are usually located close to where the students are since students at community colleges often have strong ties to their community through family and employment that prevent them from moving to obtain education.

In getting products to consumers many retail store chains use distribution centers. Suppliers deliver products to the distribution center where the shipments are broken apart and reaggregated for shipment to retail stores. Distribution centers are usually located so they are close to manufacturers and to stores and have good access to transportation systems such as air, rail, and highways. Target operates 14 distribution centers located in Albany, OR; Huntsville, AL; Indianapolis, IN; Kalamazoo, MI; Little Rock, AR; Los Angeles, CA; Minneapolis, MN; Oconomowoc, WI; Pueblo, CO; Sacramento, CA; Stuarts Draft, VA; Tifton, GA; Tyler, TX; and Wilton, NY.

While the distribution of goods from manufacturers to retail locations often use distribution centers, recycling requires the location of sorting centers. As described in Schultmann et al. the European Community requires manufacturers to take back electrical and electronic equipment, used cars, and spent batteries. Sorting centers for batteries must be located close to consumer collection sites but also close to sites that use or dispose of the batteries.

Sometimes an organization’s mission defines where the organization is located, in fact, the organization was created to serve that area. For example, the Boys and Girls Clubs / Girls, Inc. of Pueblo County and Lower Arkansas Valley serves youth in Pueblo and Otero Counties. However, even an organization with a mission to serve a particular area has to decide where to locate facilities within their service area. The Pueblo Area Boys and Girls Clubs has centers at Risley Middle School on the east side of Pueblo, on East Orman in the center of Pueblo, at Freed Middle School on 20th Street, and in Avondale and Rocky Ford.

Siting multiple locations can be a very difficult problem and IEs who are specialists in operations research (the subject of Chapter 10 of this book) have developed sophisticated mathematical methods to solve such problems.

Schlumberger RMS provides a service to remotely read electrical meters and transmit the information to a central database. Receivers are placed on poles owned by the electric company. The goal is to minimize the number of receivers used to be able to read all the meters. The company found that solving by hand even a small problem (4,208 meters to be read and 2,393 possible poles for the location of receivers) took almost 4 weeks and could not be easily redone if errors in the data were found. Also, the solution process did not incorporate limits on receiver capability. An integer programming formulation was solved with the specialized computer package GAMS to efficiently allocate receivers for an electric company in Illinois; the problem involved 116,600 meters and 20,636 poles. This method saved the time of planners and also generated an improved solution over what would have been achieved by manual methods. [source]

In 2002 UPS “averaged more than 1.1 million package deliveries a night” in its next day delivery service (Armacost et al, page 15). Packages received at ground centers are delivered by trucks to airports. Planes fly the packages to one of seven hubs (perhaps making an intermediate stop to pick up more packages). After sorting the packages, the process is reversed with the same planes delivering packages back to airports, perhaps taking a different return routes. Packages are then delivered by truck. Since late in 2000, UPS has used a large computer program called VOLCANO to help its planners develop a network of aircraft routs and to select aircraft to assign to each route in order to meet forecasted flow of packages. The program has helped UPS reduce its operating costs by using aircraft more efficiently and has helped UPS reduce its need to purchase more very expensive planes (Armacost et al, 2004).

The following simple example shows a method for locating a new facility to minimize transportation costs. Existing facilities at X, Y, Z (rows) and markets at A, B, C, D. Matrix gives costs and existing flows. Should new plant go at L or M?

After locations are chosen, an organization must then lay out each facility, that is, decisions must be made about where to locate each function, each department, and each machine within the facility. Layout example. Give flows From and To. Give square foot requirements for each department.

Generally, four types of layouts can be considered:

A restaurant for sit down dining tends to have a kitchen with a process layout, with stations for grilling, baking, frying, etc. Different products (meals) require the cook to move from station to station. However, a fast food restaurant kitchen tends to have a product layout, with a dedicated area for each product, for example one area includes equipment to make fries and then to place them into serving containers. A fast food restaurant makes fewer different products than a sit down restaurant, so it should use a product layout.

In Chapter 4 we read the article Setup Reduction: At the Heart of Lean Manufacturing from MMS Online, which describes how Richards Industries, a manufacturer of specialty valves, reduced its setup times and batch sizes. The first step in achieving those reductions was to group the machines into four cells for production of the four very distinct product lines.

“In this arrangement, machines [in a cell] could share common setup areas, tool storage and fixturing items.”

Boeing Auburn Machine Fabrication made a similar change from a process layout to a layout based on cells for each product.

A Radically Different Production Plant from MMS Online describes the process layout used for a machining center at C&A Tool in Churubusco, Indiana: “this 110,000 square foot factory is full of unexpected features -- self-contained areas dedicated to milling, turning, grinding and automatic machining; a central service corridor; a strategically located material handling area; a centralized metrology lab.”

I listed four types of layouts above, using the terms product layout, process layout, fixed layout, and cell layout, but others use other categorizations and other labels. For example, NetMBA describes these layouts:

Creating a good layout involves considering how material moves through the facility. For small layout problems, you may be able to find a good solution by hand. Try it with this example of a process layout. You can move the locations of the 6 departments (Paper Storage, Design, Binding & Handwork, Printing, Customer Service, and Packaging & Shipping) to minimize the Total Distance traveled. Use the Trips Matrix to guide your thinking.

Larger problems require the sophisticated methods of operations research. Systematic Layout Planning (SLP, developed by Richard Muther) is a systematic method for creating an appropriate layout. It has three steps:

  1. Relationships. Collect, organize, and display information on the flow of material and relationships between functions.
  2. Space. Collect, organize, and display information on the space needed by each function and on the space available.
  3. Adjustment. Create a preliminary layout and then adjust it. Continue to evaluate and adjust layouts until a satisfactory solution is reach.

From/to chart; string diagram; layout.

Software is available to help the IE find a good layout.

Designing a new layout is a difficult task, but redesigning an existing layout can be even more difficult and very frustrating. The existing layout may have grown up by pieces and may have obvious flaws, but the cost and time involved in stopping production to redo the layout often means that the organization just lives with the existing layout or, at best, makes small improvements in the layout or makes improvements in layouts only within a department.