PLANT LOCATION

Outline

Introduction and Meaning

Need for Selecting a Suitable Location
Factors Influencing Plant/Facility Location
Location Theories
Location Models
Locational Economics

Introduction

Plant location or the facilities location problem is an important strategic level decision
making for an organisation. One of the key features of a conversion process (manufacturing
system) is the efficiency with which the products (services) are transferred to the customers.
This fact will include the determination of where to place the plant or facility. The selection of
location is a key-decision as large investment is made in building plant and machinery. It is not
advisable or not possible to change the location very often. So an improper location of plant
may lead to waste of all the investments made in building and machinery, equipment. Before a
location for a plant is selected, long range forecasts should be made anticipating future needs
of the company. The plant location should be based on the company’s expansion plan and
policy, diversification plan for the products, changing market conditions, the changing sources
of raw materials and many other factors that influence the choice of the location decision. The
purpose of the location study is to find an optimum location one that will result in the greatest
advantage to the organization.

The need for selecting a suitable location arises because of three situations.

Need for Selecting a Suitable Location

I. When starting a new organisation, i.e., location choice for the first time.
II. In case of existing organisation.
III. In case of Global Location.

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I. In Case of Location Choice for the First Time or New Organisations
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organisational objectives. The following are the
factors to be considered while selecting the location for the new organisations:

1. Identification of region: The organisational objectives along with the various long-
term considerations about marketing, technology, internal organisational strengths and
weaknesses, region specific resources and business environment, legal-governmental
environment, social environment and geographical environment suggest a suitable
region for locating the operations facility.
2. Choice of a site within a region: Once the suitable region is identified, the next step
is choosing the best site from an available set. Choice of a site is less dependent on the
organisation’s long-term strategies. Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem. The problem of location of a
site within the region can be approached with the following cost-oriented non-
interactive model, i.e., dimensional analysis.
3. Dimensional analysis: If all the costs were tangible and quantifiable, the comparison
and selection of a site is easy. The location with the least cost is selected. In most of the
cases intangible costs which are expressed in relative terms than in absolute terms.
Their relative merits and demerits of sites can also be compared easily. Since both
tangible and intangible costs need to be considered for a selection of a site, dimensional
analysis is used. Dimensional analysis consists in computing the relative merits (cost
ratio) for each of the cost items for two alternative sites. For each of the ratios an
appropriate weightage by means of power is given and multiplying these weighted
ratios to come up with a comprehensive figure on the relative merit of two alternative
sites.

II. In Case of Location Choice for Existing Organisation

In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:

1. Plant manufacturing distinct products.

2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
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 4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:

1. Plants manufacturing distinct products: Each plant services the entire market area
for the organization. This strategy is necessary where the needs of technological and
resource inputs are specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with
other product-line requiring little emphasis on precision. It may not be proper to have
too many contradictions such as sophisticated and old equipment, highly skilled and
semi-skilled personnel, delicates processes and those that could permit rough handlings,
all under one roof and one set of managers. Such a setting leads to much confusion
regarding the required emphasis and the management policies. Product specialization
may be necessary in a highly competitive market. It may be necessary to exploit the
special resources of a particular geographical area. The more decentralized these pairs
are in terms of the management and in terms of their physical location, the better would
be the planning and control and the utilization of the resources.

2. Manufacturing plants supplying to a specific market area: Here, each plant

manufactures almost all of the company’s products. This type of strategy is useful
where market proximity consideration dominates the resources and technology
considerations. This strategy requires great deal of coordination from the corporate
office. An extreme example of this strategy is that of soft drinks bottling plants.
3. Plants divided on the basis of the process or stages in manufacturing: Each
production process or stage of manufacturing may require distinctively different
equipment capabilities, labour skills, technologies, and managerial policies and
emphasis. Since the products of one plant feed into the other plant, this strategy requires
much centralized coordination of the manufacturing activities from the corporate office
that are expected to understand the various technological aspects of all the plants.
4. Plants emphasizing flexibility: This requires much coordination between plants to
meet the changing needs and at the same time ensure efficient use of the facilities and
resources. Frequent changes in the long-term strategy in order to improve be efficiently
temporarily, are not healthy for the organization. In any facility location problem the
central question is: ‘Is this a location at which the company can remain competitive for
a long time?’
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III. IN CASE OF GLOBAL LOCATION
Because of globalisation, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.

VIRTUAL PROXIMITY
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the
information/communication pathway. Many firms use the communications highway for
conducting a large portion of their business transactions. Logistics is certainly an important
factor in deciding on a location—whether in the home country or abroad. Markets have to be
reached. Customers have to be contacted. Hence, a market presence in the country of the
customers is quite necessary.
VIRTUAL FACTORY

Many firms based in USA and UK in the service sector and in the manufacturing sector often
out sources part of their business processes to foreign locations such as India. Thus, instead of
one’s own operations, a firm could use its business associates’ operations facilities. The Indian
BPO firm is a foreign-based company’s ‘virtual service factory’. So a location could be one’s
own or one’s business associates. The location decision need not always necessarily pertain to
own operations.

REASONS FOR A GLOBAL/FOREIGN LOCATION

A. Tangible Reasons
The tangible reasons for setting up an operations facility abroad could be as follows:

Reaching the customer: One obvious reason for locating a facility abroad is that of capturing
a share of the market expanding worldwide. The phenomenal growth of the GDP of India is a
big reason for the multinationals to have their operations facilities in our country. An important
reason is that of providing service to the customer promptly and economically which is
logistics-dependent. Therefore, cost and case of logistics is a reason for setting up
manufacturing facilities abroad. By logistics set of activities closes the gap between production
of goods/services and reaching of these intended goods/services to the customer to his
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satisfaction. Reaching the customer is thus the main objective. The tangible and intangible
gains and costs depend upon the company defining for itself as to what that ‘reaching’ means.
The tangible costs could be the logistics related costs; the intangible costs may be the risk of
operating is a foreign country. The tangible gains are the immediate gains; the intangible gains
are an outcome of what the company defines the concepts of reaching and customer for itself.

The other tangible reasons could be as follows:

(a) The host country may offer substantial tax advantages compared to the home country.
(b) The costs of manufacturing and running operations may be substantially less in that foreign
country. This may be due to lower labour costs, lower raw material cost, better availability of
the inputs like materials, energy, water, ores, metals, key personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing plant in a
foreign country rather than exporting the items to that country.
B. Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be as
follows:
1. Customer-related Reasons
(a) With an operations facility in the foreign country, the firm’s customers may feel secure
that the firm is more accessible. Accessibility is an important ‘service quality’ determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.
2. Organisational Learning-related Reasons
(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an technologically more advanced country.
The firm can learn from advanced research laboratories/universities in that country. Such
learning may help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) It can also learn from its competitors operating in that country. For this reason, it may have
to be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant
there, it will have intensive interaction with the suppliers in that country from whom there may
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be much to learn in terms of modern and appropriate technology, modern management
methods, and new trends in business worldwide.

3. Other Strategic Reasons

(a) The firm by being physically present in the host country may gain some ‘local boy’ kind of
psychological advantage. The firm is no more a ‘foreign’ company just sending its products
across international borders. This may help the firm in lobbying with the government of that
country and with the business associations in that country.

(b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.
(d) The firm could hunt for human capital in different countries by having operations in those
countries. Thus, the firm can gather the best of people from across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market risks for the
firm. If one market goes slow the other may be doing well, thus lowering the overall risk.

FACTORS INFLUENCING PLANT LOCATION/FACILITY LOCATION

Facility location is the process of determining a geographic site for a firm’s operations. Managers of
both service and manufacturing organizations must weigh many factors when assessing the desirability
of a particular site, including proximity to customers and suppliers, labour costs, and transportation
costs.
Location conditions are complex and each comprises a different Characteristic of a tangible (i.e. Freight
rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality) nature. Location
conditions are hard to measure. Tangible cost based factors such as wages and products costs can be
quantified precisely into what makes locations better to compare. On the other hand non-tangible
features, which refer to such characteristics as reliability, availability and security, can only be measured
along an ordinal or even nominal scale. Other non-tangible features like the percentage of employees
that are unionized can be measured as well. To sum this up non-tangible features are very important for
business location decisions. It is appropriate to divide the factors, which influence the plant location or
facility location on the basis of the nature of the organisation as

1. General locational factors, which include controllable and uncontrollable factors for all
type of organisations.
2. Specific locational factors specifically required for manufacturing and service organisations.

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Location factors can be further divided into two categories: Dominant factors are those derived from
competitive priorities (cost, quality, time, and flexibility) and have a particularly strong impact on sales
or costs. Secondary factors also are important, but management may downplay or even ignore some of
them if other factors are more important.

2.3.1 General Locational Factors

Following are the general factors required for location of plant in case of all types of organisations.
CONTROLLABLE FACTORS
1. Proximity to markets
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labour and wages

6. External economies
7. Capital
UNCONTROLLABLE FACTORS

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8. Government policy
9. Climate conditions
10. Supporting industries and services
11. Community and labour attitudes
12. Community Infrastructure
CONTROLLABLE FACTORS
1. Proximity to markets: Every company is expected to serve its customers by providing
goods and services at the time needed and at reasonable price organizations may choose to
locate facilities close to the market or away from the market depending upon the product. When
the buyers for the product are concentrated, it is advisable to locate the facilities close to the
market.
Locating nearer to the market is preferred if
• The products are delicate and susceptible to spoilage.
• After sales services are promptly required very often.
• Transportation cost is high and increase the cost significantly.
• Shelf life of the product is low.
Nearness to the market ensures a consistent supply of goods to customers and reduces the
cost of transportation.
2. Supply of raw material: It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted production. This factor becomes very
important if the materials are perishable and cost of transportation is very high.

General guidelines suggested by Yaseen regarding effects of raw materials on plant location
are:
• When a single raw material is used without loss of weight, locate the plant at the raw
material source, at the market or at any point in between.
• When weight loosing raw material is demanded, locate the plant at the raw material
source.
• When raw material is universally available, locate close to the market area.
• If the raw materials are processed from variety of locations, the plant may be situated
so as to minimize total transportation costs.
Nearness to raw material is important in case of industries such as sugar, cement, jute and
cotton textiles.
3. Transportation facilities: Speedy transport facilities ensure timely supply of raw materials
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to the company and finished goods to the customers. The transport facility is a prerequisite for

the location of the plant. There are five basic modes of physical transportation, air, road, rail,
water and pipeline. Goods that are mainly intended for exports demand a location near to the
port
or large airport. The choice of transport method and hence the location will depend on relative
costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria
for plant location.
4. Infrastructure availability: The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location. Certain types of industries
are power hungry e.g., aluminum and steel and they should be located close to the power station
or location where uninterrupted power supply is assured throughout the year. The non-
availability of power may become a survival problem for such industries. Process industries
like paper, chemical, cement, etc., require continuous. Supply of water in large amount and
good quality, and mineral content of water becomes an important factor. A waste disposal
facility for process industries is an important factor, which influences the plant location.

5. Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during plant
location. Importing labour is usually costly and involve administrative problem. The history of
labour relations in a prospective community is to be studied. Prospective community is to be
studied. Productivity of labour is also an important factor to be considered. Prevailing wage
pattern, cost of living and industrial relation and bargaining power of the unions’ forms in
important considerations.
6. External economies of scale: External economies of scale can be described as urbanization
and locational economies of scale. It refers to advantages of a company by setting up operations
in a large city while the second one refers to the “settling down” among other companies of
related Industries. In the case of urbanization economies, firms derive from locating in larger
cities rather than in smaller ones in a search of having access to a large pool of labour, transport
facilities, and as well to increase their markets for selling their products and have access to a
much wider range of business services. Location economies of scale in the manufacturing
sector have evolved over time and have mainly increased competition due to production
facilities and lower production costs as a result of lower transportation and logistical costs. This
led to manufacturing districts where many
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companies of related industries are located more or less in the same area. As large corporations
have realized that inventories and warehouses have become a major cost factor, they have tried
reducing inventory costs by launching “Just in Time” production system (the so called Kanban
System). This high efficient production system was one main factor in the Japanese car industry
for being so successful. Just in time ensures to get spare parts from suppliers within just a few
hours after ordering. To fulfill these criteria corporations have to be located in the same area
increasing their market and service for large corporations.

7. Capital: By looking at capital as a location condition, it is important to distinguish the

physiology of fixed capital in buildings and equipment from financial capital. Fixed capital
costs as building and construction costs vary from region to region. But on the other hand
buildings can also be rented and existing plants can be expanded. Financial capital is highly
mobile and does not very much influence decisions. For example, large Multinational
Corporations such as CocaCola operate in many different countries and can raise capital where
interest rates are lowest and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast
growing (or not) high tech firms are concerned which usually have not many fixed assets. These
firms particularly need access to financial capital and also skilled educated employees.

UNCONTROLLABLE FACTORS
8. Government policy: The policies of the state governments and local bodies concerning
labour laws, building codes, safety, etc., are the factors that demand attention.
In order to have a balanced regional growth of industries, both central and state governments
in our country offer the package of incentives to entrepreneurs in particular locations. The
incentive package may be in the form of exemption from a safes tax and excise duties for a
specific period, soft loan from financial institutions, subsidy in electricity charges and
investment
subsidy. Some of these incentives may tempt to locate the plant to avail these facilities offered.
9. Climatic conditions: The geology of the area needs to be considered together with
climatic conditions (humidity, temperature). Climates greatly influence human efficiency and
behaviour. Some industries require specific climatic conditions e.g., textile mill will require
humidity.
10. Supporting industries and services: Now a day the manufacturing organisation
will not make all the components and parts by itself and it subcontracts the work to vendors.
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So, the source of supply of component parts will be the one of the factors that influences the
location. The various services like communications, banking services professional consultancy
services and other civil amenities services will play a vital role in selection of a location.

11. Community and labour attitudes: Community attitude towards their work and towards
the prospective industries can make or mar the industry. Community attitudes towards
supporting trade union activities are important criteria. Facility location in specific location is
not desirable even though all factors are favouring because of labour attitude towards
management, which brings very often the strikes and lockouts.
12. Community infrastructure and amenity: All manufacturing activities require access
to a community infrastructure, most notably economic overhead capital, such as roads,
railways, port facilities, power lines and service facilities and social overhead capital like
schools, universities and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is
enormously expensive to build and for most manufacturing activities the existing stock of
infrastructure provides physical restrictions on location possibilities.

Specific Locational Factors for Manufacturing Organisation

DOMINANT FACTORS
Factors dominating location decisions for new manufacturing plants can be broadly classified
in six groups. They are listed in the order of their importance as follows.

1. Favourable labour climate

2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs

Specific Locational Factors for Service Organisation

DOMINANT FACTORS
The factors considered for manufacturers are also applied to service providers, with one
important addition — the impact of location on sales and customer satisfaction. Customers
usually look about how close a service facility is, particularly if the process requires
considerable customer contact.

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PROXIMITY TO CUSTOMERS
Location is a key factor in determining how conveniently customers can carry on business with
a firm. For example, few people would like to go to remotely located dry cleaner or supermarket
if another is more convenient. Thus the influence of location on revenues tends to be the dominant
factor.
TRANSPORTATION COSTS AND PROXIMITY TO MARKETS
For warehousing and distribution operations, transportation costs and proximity to markets are
extremely important. With a warehouse nearby, many firms can hold inventory closer to the customer,
thus reducing delivery time and promoting sales.
LOCATION OF COMPETITORS
One complication in estimating the sales potential at different location is the impact of competitors.
Management must not only consider the current location of competitors but also try to anticipate
their reaction to the firm’s new location. Avoiding areas where competitors are already well established
often pays. However, in some industries, such as new-car sales showrooms and fast-food chains,
locating near competitors is actually advantageous. The strategy is to create a critical mass, whereby
several competing firms clustered in one location attract more customers than the total number who
would shop at the same stores at scattered locations. Recognizing this effect, some firms use a follow –
the leader strategy when selecting new sites.
SECONDARY FACTORS
Retailers also must consider the level of retail activity, residential density, traffic flow, and site
visibility. Retail activity in the area is important, as shoppers often decide on impulse to go shopping
or to eat in a restaurant. Traffic flows and visibility are important because businesses’ customers arrive
in cars. Visibility involves distance from the street and size of nearby buildings and signs. High
residential density ensures night-time and weekend business when the population in the area fits the
firm’s competitive priorities and target market segment.

LOCATION MODELS
Various models are available which help to identify the ideal location. Some of the popular models
are:
1) Factor rating method
2) Weighted factor rating method
3) Centre of gravity method
4) Break even analysis

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Factor Rating Method
The process of selecting a new facility location involves a series of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e., higher the ratings is indicative
of prominent factor.
3. Assign each location according to the merits of the location for each factor.
4. Calculate the rating for each location by multiplying factor assigned to each location with
basic factors considered.
5. Find the sum of product calculated for each factor and select best location having highest
total score.
ILLUSTRATION 1: Let us assume that a new medical facility, Health-care, is to be
located in Delhi. The location factors, factor rating and scores for two potential sites are
shown in the following table. Which is the best location based on factor rating method?

Weighted Factor Rating Method

In this method to merge quantitative and qualitative factors, factors are assigned weights based
on relative importance and weightage score for each site using a preference matrix is calculated.
The site with the highest weighted score is selected as the best choice.
ILLUSTRATION 2: Let us assume that a new medical facility, Health-care, is to be
located in Delhi. The location factors, weights, and scores (1 = poor, 5 = excellent) for

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two potential sites are shown in the following table. What is the weighted score for these
sites? Which is the best location?

Centre of Gravity

Centre of gravity is based primarily on cost considerations. This method can be used to assist managers
in balancing cost and service objectives. The centre of gravity method takes into account the locations
of plants and markets, the volume of goods moved, and transportation costs in arriving at the best
location for a single intermediate warehouse.
The centre of gravity is defined to be the location that minimizes the weighted distance between the
warehouse and its supply and distribution points, where the distance is weighted by the number of tones
supplied or consumed. The first step in this procedure is to place the locations on a coordinate system.
The origin of the coordinate system and scale used are arbitrary, just as long as the relative distances
are correctly represented. This can be easily done by placing a grid over an ordinary map. The centre
of gravity is determined by the formula.

Breakeven Analysis (Refer to Statistics/Quantitative Techniques 1 or 2

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