Concept of Plant Location Planning in

Operations Management
April 4, 2019 Questions Answers

Plant Location Planning

OBJECTIVES:

After studying this unit, the student should be able to understand:

 The concept of plant location

 The importance of the theories of plant location
 The new theory of industrial location

STRUCTURE:

 Objectives
 Introduction
 Importance of Plant Location
 Location of choice for first time
 Strategies to determine plant location
 Theories of Location
 Factors affecting plant location
 Summary
 Review questions

8.9    References

INTRODUCTION:

The performance of any manufacturing unit is considerably affected by its location. The location
of the industry is as important as the choice of location for a Business or a retail outlet. Selection
of location for the operations, involves a long-term commitment about the geographical factors
that affect any industry.

IMPORTANCE OF PLANT LOCATION:

The selection of location is an important factor for the success of an enterprise. It is equally
important for both new as well as already established enterprises. The location choice is vital to
any new firm because some changes and adjustments in capacity, qualitatively and
quantitatively, at the initiation stage are always possible. However, one should note that it is not
easy to change the location of the operation base once such a base has been established.
Two different situations under which location decision are made are: –

1. Location choice for the first time

2. Location choice for an already established organization with one or more existing
facilities

LOCATION CHOICE FOR THE FIRST TIME:

The physical factors associated with the location of an enterprise can have a significant impact
on the operations of an enterprise and its cost structure. These factors can be qualitative as well
as quantitative.

According to Dr. Visweswarayya, the decision of plant location should be based on the ‘Nine
M’s’ namely, Money, Material, Manpower, Market, Motivational power, Management,
Machinery, Means of communication and Momentum to early start. In particular, the choice of
the plant location should be based on the following conditions:

1. Availability of Raw Materials: An ideal location is one where the main raw material
required to manufacture the product is adequately available. This will ensure regular
supply of raw material and will also reduce the transport cost, for example, the location
of textile mills at Mumbai and Ahmadabad, iron and steel industries at Jamshedpur and
jute mills in Kolkata.
2. Nearness to a Potential Market: If the plant is located near the market, the management
can keep in close touch with the changes in the market environment and formulate its
production policies accordingly. Now-a-days, with the expansion of markets, both at the
national and the international levels, this aspect is becoming secondary. The transport and
other overheads are likely to increase with the increase in distance between the plant and
the market. Also, in case of a factory being near to the market, the risk of damage during
transportation, loss of demand due to change in fashions, etc., are also reduced, for
example, the glass industry as well as the chemical and drug factories.
3. Nearness to power source: Some industries require continuous and adequate supply of
power. For example, nylon and fiber plants. Availability of low cost electricity may be
more important for industries in such a case the location of the plant near to power
stations will provide cheap electricity.
4. Supply of Labour: Labour is one of the most important inputs in an industrial enterprise.
There should be regular and cheap supply of labour, especially unskilled labour. This is
vital for labour based industries.
5. Transport and Communication Facilities: Transport is very important for bringing raw
material and fuel from different places and for marketing the finished goods, etc. The
region well connected with rail, road, water and air transport systems is considered to be
more appropriate for the location of plants. Similarly, good communication facilities like
postal and telecommunication links play a significant role in the success of an enterprise.
6. Integration with other establishments in a group of companies: A new enterprise
owned or operated by a single group of companies should be located such that its work
can be integrated with the work of the associated establishments.
 7. Suitability of land and climate: The subsoil of the location should be able to support the
load likely to be placed on it. Similarly, the climatic conditions like humidity,
temperature and other atmospheric conditions should be favourable for the plant, for
example, a very damp climate may not favour the textile and cotton industries. The
climatic conditions also determine the heating and ventilation requirements for the
industry.
8. Availability of housing, other amenities and services: A good housing facility with
adequate number of shops, theatres, restaurants, local transport system and sufficient
supply of gas and water as well as provision for drainage and disposal of waste, etc., can
easily attract good staff.
9. Local building and planning regulations: The proposed location should not infringe
local regulations and by-laws for the construction of buildings, local taxes, etc.
10. Safety requirements: Industries like nuclear power stations using processes that are
explosive in nature and chemical process likely to pollute the atmosphere should be
located in remote areas, on the outskirts of a city or village, away from the residential
areas.

1. Apart from the above, other factors that affect the selection of site for industry may
be:

low interest on loans, special grants, political situations, low rentals, other benefits to encourage
investment attitude of residents towards the industry, living standards, etc.

STRATEGIES TO DETERMINE PLANT LOCATION

A.  Plants manufacturing distinct products or product lines:

Each plant services the entire market area of the organization. A strategy is required where the
needs of the technological and resource inputs are specialized differently for different product
lines. For example, product lines requiring different levels of precision ideally should not be
located in the same plant. Such a situation would lead to too much confusion regarding processes
and policies. For example, a watch manufacturing unit and a machine tools unit, a textile unit
and a sophisticated organic chemical unit. All these pairs are distinctively different in
technological sophistication, in process and in the relative stress on certain aspects of
management.

B.  Manufacturing plants each supplying to market area:

Here, each plant manufactures almost the company’s entire product range. This type of strategy
is useful where market proximity is the factor that is considered primarily and where the
resources and technology considerations are secondary. This strategy requires a great deal of
consideration on the part of the corporate office.

C.  Plants divided on the basis of process or stage in manufacturing:

Each production process or stage of manufacturing may require distinctly different equipment
capabilities, labour skills, technologies, managerial policies and different levels of emphasis
since the product of one plant is fed into the other plant. This strategy requires much centralised
coordination of the manufacturing activities from the corporate office and a deep understanding
of the various technologies and resources being used in all the plants.

 
Location Planning:

Every firm must use location planning techniques. There are many options for location planning.
Corporations choose from expanding an existing location, shutting down one location and
moving to another, adding new locations while retaining existing facilities, or doing nothing.
There are a variety of methods used to decide the best location or alternatives for the corporation.
Methods such as identifying the country, general region, small number of community
alternatives, and site alternatives.

Several factors that influence location positioning include the location of raw materials,
proximity to the market, climate, and culture. Models for evaluating whether a location is best
for an organization consist of cost-profit analysis for locations, the center of gravity model, the
transportation model, and factor rating.

If you are planning on moving or acquiring a new facility, there are many factors to consider: the
size, the geographic area, culture, transportation costs and others. After a location or locations
have been chosen a cost-profit-volume analysis is done.

The main factors that affect location decisions include regional factors, community
considerations, and site-related factors. Community factors consist of quality of life, services,
attitudes, taxes, environmental regulations, utilities, and development support.
Factor Rating Method:

This method involves qualitative and quantitative inputs, and evaluates alternatives based on
comparison after establishing a composite value for each alternative. Factor Rating consists of
six steps:

1. Determine relevant and important factors.

2. Assign a weight to each factor, with all weights totaling 1.00.
3. Determine common scale for all factors, usually 0 to 100.
4. Score each alternative.
5. Adjust score using weights (multiply factor weight by score factor); add up scores for
each alternative.
6. The alternative with the highest score is considered the best option.

2. Center of Gravity Method:

This technique is used in determining the location of a facility which will either reduce travel
time or lower shipping costs. Distribution cost is seen as a linear function of the distance and
quantity shipped. The Center of Gravity Method involves the use of a visual map and a
coordinate system; the coordinate points being treated as the set of numerical values when
calculating averages. If the quantities shipped to each location are equal, the center of gravity is
found by taking the averages of the x and y coordinates; if the quantities shipped to each location
are different , a weighted average must be applied (the weights being the quantities shipped).

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, a single set of location coordinates is not
identified. Instead, various locations are evaluated using a load-distance value that is a measure
of weight and distance. For a single potential location, a load-distance value is computed as
follows:

where

LD = the load-distance value

li = the load expressed as a weight, number of trips, or units being shipped from the proposed site
to location i

di = the distance between the proposed site and location i

The distance did in this formula can be the travel distance, if that value is known, or can be
determined from a map. It can also be computed using the following formula for the straight-line
distance between two points, which is also the hypotenuse of a right triangle:.

Where

(x, y) = coordinates of proposed site

(xi, yi) = coordinates of existing facility

The load-distance technique is applied by computing a load-distance value for each potential
facility location. The implication is that the location with the lowest value would result in the
minimum transportation cost and thus would be preferable.

As per the above calculation, the location factor is exactly one, which suggests that the iron, and
steel industry contributes a share which is equal to that of the other industries in that region. If
the factor is higher than one it means that the iron and steel industry is contributing a share
higher than that of the other industries in the eastern region.

 CALCULATING THE COEFFICIENT OF LOCALISATION

Let us now take the following figures with a distribution over four regions namely, Western,
Northern, Eastern and Southern as under, in the iron and steel industry.
Suppose the total number of employees in all the industries is 30,00,00,000. The regionwise
distribution is as under:

Western Region = 9,28,00,000 persons

Northern Region = 8,02,00,000 persons
Eastern Region = 2,40,00,000 persons
Southern Region = 10,30,00,000 persons
All India Total = 30,00,00,000 persons

The share of the iron and steel industry is =

Western Region = 1,03,00,000 persons

Northern Region = 56,00,000 persons

Eastern Region = 2,40,00,000 persons
Southern Region = 2,01,00,000 persons
All Iron and Steel
Industry total = 6,00,00,000

The above classified figures make it clear that the 2,40,00,000 employees coming from the
Eastern Region are entirely engaged in the activities of the iron and steel industry. This means
that in the other regions, that is, North, South and West, there are employees partly engaged in
the iron and steel industry.

The following percentages and deviations are calculated to arrive at the Coefficient of Location.

TABLE INDICATING CALCULATIONS

Percentage      of
Regional percentage of employees in
iron and steel industry    in    the
REGIONS employees        in region in Deviati
region to all the employees in the
relation to all       the
iron and     steel industry
employees in the country.
Northern Region, 26.74% 06.98% + 09.76
Eastern Region,      

Southern Region, 08.00% 100.00% -92.00%

Western Region , 34.33% 16.13% + 18.20
Total 30.93% 11.09% + 19.84
100.00% ??? + 57.80

 
The sum total of deviations works out to + 57.80%.

Therefore, coefficient of location is equal to =        0.578 = 0.578

100.00%

This clearly indicates that the iron and steel industry is highly concentrated in the Eastern
Region.

CALCULATING LOCATIONAL FACTOR

1. The percentage of workers in the iron and steel industry in the eastern region with respect
to all the employees in the eastern region :

= 2,40,00.000 persons =100 = 40%

6,00,00,000 persons

1. The percentage of employees in the eastern region to the total number of industries in the
country

= 12,00,00,000 persons = 100= 40%

30,00,00,000 persons

From the above analysis, it is quite evident that Sargent Florence’s investigation on the basis of
statistical tools helps in finding whether an area is known for the concentration of a particular
industrial activity or not. However, it fails to explain as to why there is concentration in that
region only. In his analysis, the vital aspects of investment in terms of various inputs and other
non- physical factors are not given weight age at all. In spite of these severe limitations, the
study of location dynamics strengthens the hands of planners at the regional level and, hence,
also at the national level.

THE THEORY OF LOCATION OF ANDREAS PREDOHL

Mr. Andreas Predohl, was a German economist (associated with the universities of Muenster and
Kiel) who made a name for himself in German economics in the fields of international trade and
trade policy as well as location and transportation economics. As a result of his suggestion to
view the industrial location problem as part of production theory and the problem of substitution
[See his own publication in English of 1928]. He tried to provide an alternative to the theory of
Alfred Weber. However, his systematic analysis throws light on relocation of existing plants and
explains why they shift to new areas or places in terms of added merits or reduced demerits.
Thus, it fails to explain the factors that force an entirely new unit to locate to a particular region,
area or site. That means, his theory is not an alternative to that of Alfred Weber. It is an
additional solution for finding the solutions to the problems arising out of relocation. The unit
must exist first and work for several years. The problem of relocation arises only when the unit is
not happy with the present location. Therefore, his theory is of no use in finding the plant
location in case of units entering an industry.

Andreas Predohl, in his attempt to find out an alternative to the theory given by Alfred Weber,
suggested that every change of location of an industry involves a change in the combination of
means of production. He was of the opinion that an industry shifts from one place to another
because of certain added advantages at the new location. Andreas Predohl’s approach suffers
from one very important limitation of not explaining the factors determining the location of a
new industrial unit, and, hence, does not hold much ground.

NEW THEORY OF INDUSTRIAL LOCATION: The decision with regard to the location of
a plant at a particular point is a long-term one and is a stepwise process of thinking and acting
accordingly. According to Bethel, Atwater and Smith, the vital managerial decision on location
involves three major steps namely, selection of a region, selection of a community and selection
of the exact site. Thus, the promoters or the entrepreneurs are the first to decide whether their
plant will be located in the North, South, East or West of the country. While deciding the region,
certain factors need to be considered. After selecting the region, the next step is to go in for a
particular community where again many factors are to be taken into account and after selecting a
particular community, the final step is to select the right site or spot where the plant or
establishment will be situated. The selection of a site also requires that some factors be given due
weight age.

FACTORS AFFECTING PLANT LOCATION

Selection of Region Selection of a Community Selection of a Site

1.Availability of Raw materials 1. Labour Supply 1.The price of land
 
   
2.Supplementary    and complementary
2. Proximity to fuel and power  
industrial units
3. Means of Transportation
3. Banking and credit facilities 2.The type of soil
4.Marketplace
 
 
4.   Local    taxes,    rent rates and insurance
 
5.Meteorological conditions and charges
Topography
 
5. Water supply
  3.  Ease in waste disposal
6.    Momentum    of    an early start  
7.      Personal factors  
 8.      Historical factors

9.      Political Stability

4.  Potentiality for future expa
10.  Extent of State assistance
5.  Existence of commercial s
amenities

6.      Health of the site

 

A.  SELECTION OF A REGION:

Selection of a region depends upon the following factors:

1. Availability of Raw materials

2. Proximity to Fuel and Power
3. Means of Transportation
4. Market place
5. Meteorological Conditions and Topography

Thus, these five factors guide the promoters in selecting a particular region. In our diagram, we
have selected the southern region as the total advantage works out highest and the south has been
counted as the most preferred region.

B.  SELECTION OF A PARTICULAR COMMUNITY

Once the entrepreneurs have selected a particular region as the best from their angles, they are to
proceed to select a particular community. Here, “Community” stands for the “locality.” Selection
of a particular community depends on the influence of at least ten factors, among other things.
These important deciders are :

1. Availability of Labour
2. Existence of Supplementary and Complementary Industrial Units
3. Availability of Banking and Credit Facilities
4. Local taxes, Rents, Rates and Insurance Charges
5. Water Supply
 6. Momentum of an Early Start
7. Personal Factors of the Entrepreneur
8. Political Stability
9. The Extent of State Assistance.

C.  SELECTION OF AN EXACT PLANT SITE

The third and final round of selection of plant location is its exact site in different localities.
Once, the team of experts selects a locality, a lot of many points is to be taken into account while
selecting the exact site of plant. The crucial factors that govern such selection are as follows:

1. The Price of the Land

2. The Type of Soil
3. Ease of Waste Disposal
4. Potentiality for Future Expansion
5. Existence of Commercial Services and Amenities
6. The Health of the Site
7. Statutory Restrictions
8. The Peoples’ Attitudes
9. Existence of Religious and Social Institutions

In a nutshell, the decision with regard to the location is not easy to make. The industrialists move
from regions to communities and from communities to a site. One thing is sure that almost all
points that are essential and desirable might not be fulfilled while moving down from a region to
a site. The decision-makers must be objective, open-minded, impartial, and dispassionate
because such a vital decision should be based on an acid test of cold facts. Here, the decision is
to be taken with a sound judgment, sharp vision and courage of conviction.

D.  SELECTION OF MOST SUITABLE OR OPTIMUM SITE

The selection of an optimum site for locating a plant is a decision that can be based on a cost-
benefit analysis. Veteran authors Kimball and Kimball Jr. in their celebrated title ‘Principles of
Industrial Organization’, state that the ‘most advantageous location is that at which the cost of
gathering or collecting the material and

fabricating it plus the cost of distributing the finished product to the consumers will be the
minimum.’ Let us structure a diagram on this basis to get a better grip over the above statement
and its implications.

Let us imagine X and Y as the sources of raw material supplies and Z as the marketplace and let
O represent the point of ideal or optimum location.

This is based on taking half the angle range of a triangle where ‘O’ gives optimum point and
accordingly the costs of production and distribution are the least.