d.

Location Selection
Location decisions concern all types of
industries :
Manufacturing & Assembly units –
•fertilizer plants
•steel plants
•cement factories
•textile mills
•sugar mills
•breweries
•refineries
•thermal and hydro-electric plants
•automobiles
•rubber factories
Service organizations
•Banks
•Hospitals Project
•Recreation centres
•Repair shops
•Warehouses
Issues in location
•Proximity to customers
•Proximity to sources of raw material / supplier
•Total costs
•Infrastructure
•Quality of labour
•Free trade zones
•Political risk
•Government barriers
•Trading blocks
•Environmental regulation
•Host community
•Competitive advantage
 WHEN DOES A LOCATIONAL DECISION
ARISE?
1. A new manufacturing (or servicing) unit
2. Existing plant operations are difficult to
expand
3. The growth of the business makes it imperative
to establish additional facilities in new
territories.
4. New social (chronic labour problems), political
(political instability) or economic conditions
forcing a change in the location of the existing
plant.
5. Developments in technology of making
the product.
6. The changes in the Industrial Policy of
the Government, decentralization and
dispersal of industries
Steps in selecting PLANT LOCATION

1. General territory selection based on ,

Regional factors

2. Community selection based on

Community factors
and
3. Site selection based on Site factor
Regional factors decide the overall area (or
region) within the country or country in a
continent for a MNC based on
• proximity to markets,
• proximity to sources of raw materials,
• availability of utilities,
• transport facilities,
• climatic condition,
• industrial and taxation laws, etc.
Community factors :
1. availability of labour,
2. labour attitudes,
3. social structure,
4. service facilities,
5. etc.
Site factors favour specific site
within the community:
1. availability of the land,
2. cost of the land,
3. suitability of the land, etc.
 Phase of the study
Sr.No. Location factor Communit
Territory Site
y
Selection Selection
Selection
1. Proximity to markets *
2. Proximity to raw materials *
3. Infrastructural facilities * *
4. Transportation facilities * *
5. Labour and wages * *
6. Legislation and taxation * *
7. Climatic condition * *
8. Industrial and labour attitudes * *
9. Safety requirements * *
10. Community facilities *
11. Community attitudes *
12. Supporting industries and services *
13. Waste disposal * *
14. Availability and cost of the land * *
15. Suitability of the land * *
 Proximity to market:
is preferred if:
The product is fragile.
The product is susceptible to spoilage.
The promptness of service is required.
The product is relatively inexpensive and
transportation costs add significantly to the
cost.
e.g.Bread, soap factories, etc.
 Proximity to sources of raw materials:
raw materials usually constitute 50 to 60 percent
of the total product cost,
Location away from suppliers can lead to :
1. Increased Transport costs, specially if raw
material loses weight in the process of
transformation e.g. iron ore, sugarcane
2. Increase in Follow up cost with the suppliers
3. Replacement of defective materials is costlier
4. Buyer is unable to keep track of what is being
dispatched by the supplier
Methods of evaluating location alternatives
A. Factor rating method
1. Develop a list of relevant factors called critical
success factors
2. Assign a weight to each factor to reflect its relative
importance in the company’s objectives
3. Develop a scale for each factor
4. Have management score each location for each
factor , using the scale from point 3 above
5. Multiply the score by weights for each factor &
total the score for each location
6. Make a recommendation based on maximum point
score , considering the results of qualitative
approaches as well
 B. centre of gravity method
A mathematical technique used for
finding the best location for a single
distribution point that services several
stores or areas
∑ dix Qi
X coordinate = --------------
∑ Qi
∑ diy Qi
Y coordinate =
--------------
∑ Qi
C. locational break even analysis

•determine fixed & variable cost for each

location
•plot costs for each location , cost on vertical
and volume on horizontal axis
•select the location that has the lowest total
cost for expected production volume
D. Rate of return

Step 1: Prepare a list of all

relevant factors.
Step 2: Estimate expenses on materials,
transport, wages, power, etc. for each
location on each of the above factors.
Step 3: Collect data on intangible
factors like community facilities,
community attitudes, etc.
Step 4: Analyze the tangible data
for each location and calculate rate
of return on investment.
Step 5: Select provisionally a
location based on financial data.
Step 6: Compare the intangible
data for the different locations and
select the optimal location
considering tangible and intangible
data.
A small scale industrial unit intends to select one
of the three locations. The data on both tangible
and intangible factors collected by the location
analyst is given as follows:
 Site
S.N
Item
o A B C

a) Total Investment (Rs. 250 315 250

‘000)
b) Total sales (Rs. ‘000) 340 390 350
c) Expenses on raw
materials (Rs. ‘000) 85 100 120
d) Expenses on
distribution (Rs. ‘000) 50 50 80
e) Expenses on utilities
(Rs. ‘000) 50 40 25
f) Salaries and wages
(Rs. ‘000) 25 30 25
g) Community facilities Poor Good Bad
Suggest a suitable site and justify your
selection.
Solution:
Rate of return on investment has been
calculated in the following table considering
the expenses at each location. The table is
itself explanatory.
Rate of return on investment of different
sites
 Site
Sr
.
Item
N A B C
o.

(1) Total investment 2,50,000 3,15,000 2,50,000

(2) Total sales 3,40,000 3,90,000 3,50,000
(3) Expenses on raw materials 85,000 1,00,000 1,20,000
(4) Expenses on distribution 50,000 50,000 80,000
(5) Expenses on utilities 50,000 40,000 25,000
(6) Salaries and wages 25,000 30,000 25,000
(7) Total expenses (3 to 6) 2,10,000 2,20,000 2,50,000
(8) Rate of Return * (%) 52% 54% 40%
 Line 2 - Line 7
* = ___________________
Line 1
Site B is advantageous as it gives the highest rate
of return. Besides the community facilities and
community attitudes are also good.
 Line 2 - Line 7
* = ___________________
Line 1
Site B is advantageous as it gives the highest rate
of return. Besides the community facilities and
community attitudes are also good.