(5)Plant Location

7/29/2019 (5)Plant Location

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Manufacturing Plant Locationor

Facility Location


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Manufacturing Plant Location

Plant Location:

-It is the function of determining where the plant should belocated for maximum operational economy & effectiveness.

-It is one of the most important problems faced by anentrepreneur while launching a new enterprise.

- A selection on pure economic considerations will ensure

an easy & regular supply of raw materials, labour forceefficient plant layout, proper utilisation of plant capacity &reduced cost of production.

- An ideal location may not guarantee success, but it certainlycontributes to smooth & efficient working of an organization

- A bad location is a sever handicap for any enterprise & itfinally bankrupts it.


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Manufacturing Plant Location: contd

Need for the selection of the location arise due to :

-When business is newly started.

-The existing business has outgrown its original facilities &

expansion is not possible.

-The volume of business or the extent of market necessitatesthe establishment of branches.

-A lease expiring & is not likely to be renewed.-When the company thinks that there is a possibility of

manufacturing cost reduction by shifting to a new location.

-Other social or economic reasons; such as inadequate laboursupply , shifting of the market.

The guiding principle in search should be for a place where thecost of raw material & cost of fabrication, plus the cost of

marketing of finished product, will be minimum.


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Manufacturing Plant Location: contd.

Location theories:Alfred Webster has classified location factors in to 2-broad categories a)

Primary & b) Secondary.

Primary factors are materials & labours which contribute to the dispersal of

industries over different regions.-Industrial units are material oriented if their cost of transportation to units are

higher.

-Industrial units are market oriented when the cost of transporting finishedgoods to market are higher.

-Another primary factor is labour. Webster assumes that the centers flush withcheap & skilled labour pull industries towards themselves.

Secondary factors of location are banking credit, insurance, communication &rents & rates

- Some of these factors attract industries to certain areas from different placesThese factors are known as Agglomerating factors&

- Some others contribute to their dispersal from original places. These factorsare known as Degglomerating factors


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Manufacturing Plant Location: contd.Over the last 7-8 decades site selection has become easier due to following

developments1 Improvements in transportation & communication facilities & spread of

services.

2 Reduction in wage differentials between regions.

3 Mobility of workers & managements.4 Improvement in construction methods& designs for plant buildings which

make them less expensive to build.

5 Vigorous policy pursued by the Govt. to remove regional imbalance in

industrial development making all regions almost equal in attraction.6 Improvements in processing & machine designs that reduce the relative

number of employees required for a given output

7 Availability of A/C equipment to counteract adverse climatic conditions for

employees & processes.8 Expansion of markets for almost all goods & services so that more

enterprises are needed to meet the demands.


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Steps in location selection:1 Within the country or outside.

2 Selection of he region

3 Selection of the locality or community4 Selection of the exact site


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i) Soil, size &

*topography

ii) Disposal ofwaste

*description ofa particular

place or tract ofland

i) Availability of labour

ii) Civic amenities for

workersiii) Existence of

complementary &

competing industries.

iv) Finance & researchfacilities

v) Availability of water &

fire fighting facilities.

vi) Local taxes &

restrictions

vii) Momentum of an

early startviii) Personal factors

i) Availability of raw

materials

ii) Nearness tomarket

iii) Availability of

power

iv) Transport facilityv) Suitability of

climate

vi) Government

policy

vii) Competition

among states

i) Political

Stability

Export &Import

ii) Currency

& exchange

ratesiii) Culture &

economic

peculiarities

iv) Natural

environment

Selection of siteSelection of communitySelection of regionNational

decision


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Relative importance of local factors

45

26

33

26

15

0410

08

11

21

20

16

15

1309

14

24

53

47

58

70

8381

78

Personal business contacts in a

particular region

Good communication & / or

transport facilities

Availability of sufficient

infrastructureMarket research indicating size

or other benefits of local market

Availability of skilled labour

Regions promotion effortsParticular local/regionalpolicies to

attract business

Lack of information on other

potential areas

Important%

Neutral%

Unimportant%

Factors


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Village, Suburban or city sites:

All these offer advantages as industrial sites

Rural sites:

-Land is available at cheap rates;

-The rates & taxes are negligible;-Spacious layout available & open spaces are possible;

-Advantages of single story buildings are available;

-Low wages for unskilled workers but high wages for skilled workers because

they have to be mobilised from elsewhere;-Fewer labour troubles;

-Avoidance of undesirable neighbors;

-Avoidance of danger from fire & other hazards resulting from the operations

of neighboring units;-Absence of restrictions on smokes 7 disposal of waste.

Problems faced by country sites are:

-Lack of supply of skilled labours, civil amnities for employees, & transport

facilities.


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Manufacturing Plant Location: contd.Suburban sites:

These offer a compromise between city & village. Have the advantages ofboth, less costly, rail & road transport facilities are available, labour can bedrawn from nearby city or village, facilities as parks, schools & clubs canbe provided as land is available at fairly cheap rates.

Urban sites: Facilities favoring a location for a plant are:-Transport facilities are no problems

-Labour is available in plenty-Municipal services for water, sewage disposal, public health & education are

available

-All types of technical & commercial institutions & universities for the training of thestaff & workers are available

-Banking, repair & related services are available.

-Facilities for contracting out a portion of the work are available-Large local market is available

-High advertising value is availableDrawbacks of urban sites are:

Exorbitant land cost, House, water, sanitation & other similar taxes & rates,Frequent labour unrest, high labour cost, awkwardly shaped buildings, ill-lighted & ill

ventilated due to limited space.


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Manufacturing Plant Location: contd.Location models:

1 Factor Rating method2 Point Rating method

3 Break-even analysis4 Qualitative Factor Analysis

1 Factor Rating method:

Factor ratings are used to evaluate alternative locations. Advantages are:a) Simplicity which communicates about why one location is better than other

b) Brings diverse locational considerations into evaluation processc) Foster consistency of judgment about location alternatives.Steps involved are:

1List the most relevent factors in the location decision2 Rate each factor ( say from 1for very low to 5 for very high) according to its relative

importance3 Rate each location (say from 1for very low to 10 for very high) according to its merit on

each factor.

4Compute the product of ratings by multiplying the factor rating by the location rating foreach factor.

5 Compute the sum of the product of ratings for each locationDecision: Select the location alternative which has the maximum sum of the

product rating as the choice


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Manufacturing Plant Location: contd.( Factor Ratings & Location Rating s for location alternatives)

249

15

20

315

8

24

18

8

326

18

10

320

4

30

14

12

63

5

4

33

2

8

9

4

82

6

2

34

1

10

7

6

43

3

5

15

4

3

2

2

1 Tqx advantage2 Suitability of labour Skill

3 Proximity to customer

4 Proximity to supplier

5 Adequacy of water6Receptivity ofcommunity

7Quality of educational

System

8Access to rail & air

transportation

9Suitability of climate

10 Availability of power

Location

B

Location

A

Location

B

Location

A

Product RatingLocation Rating

Factor

RatingFactor

Total score 149 144


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Manufacturing Plant Location: contd.(Point Rating Method)

8758301080Total

250

150

100

20020

30

125

200

150

100

22020

40

100

300

200

100

25030

50

150

Future availability of fuel

Transportation facility & growth

Adequacy of water supply

Labour availabilityPollution regulation

Site topography

Living conditions

Location BLocation A

Points assigned to locationsMaximumpossible points

Factors Rated

Points assigned to alternative locations

From above it may be seen that location B has slight advantage over location A


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(Location Break-even Analysis)In comparing several potential locations on economic basis

(i.e tangible factors), the only revenues & costs that need to

be considered are the ones that vary from one location toanother.

If revenue per unit is the same regardless of where the good isproduced, the total revenue can be eliminated from

consideration.

An economic comparison of locations can be made byidentifying the fixed costs & variable costs & plotting the

breakeven analysis on a graph for each location.The graphical approach can easily identify the range of annual

production volume over which a location is preferable.


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(Location Break-even Analysis)The steps involved in the graphical method are:

1 Determine all relevant costs that vary with each location.

2 Categories the costs for each location in to annual fixed costs(FC) & variable cost per unit (VC)& calculate the total cost(TC) for the desired volume of production per annum, for eachlocation.

3 Plot the total costs associated with each location on a singlechart or graph of annual cost versus annual productionvolume.

4 Select the location with the lowest total annual cost (TC) at theexpected production volume per annum (Q).

Note:- If revenue vary from one location to another, thencomparison of locations should be made on the basis ofprofits (i.e. ,Total revenue Total cost) at each location

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(5)Plant Location