KIOT

Plant Layout and Facility Design

Course code: Greg 4181
Target group: 4th year GED
Chapter two
Plant location
By: Endashaw Yohannes
Kombolcha/Ethiopia
Nov, 2019

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 CHAPTER TWO OUTTLINE
o Concept of plant location

o Factors governing plant location

o Theories of industrial location

o Economic survey of the site selection

 1. Concept of Plant Location
o Plant location meaning: is the establishment
of an industry at a particular place.
oThe fundamental objective of location
analysis is to maximize the profits by
minimizing the total cost of production
associated with the production process.
1. Concept of Plant Location cont...
oThe principle of plant location
 is that the sum of manufacturing and distributing cost

should be at minimum for best location.

oThe necessary factors in selection of plant location

vary among industries and with changing technical and

economical conditions.
2. Circumstances for plant location decision
Four situations require an answer to the question of
plant locations:

1. New facility establishment

2. Expansion of existing facility

3. Additional facility in new territory due to growth

4. Change of existing facility location outweighed due

to new developments, economic, social, legal or

political factors
3. Mistakes in location decision Cause
o Higher investment
o Higher cost of production,
o Difficult marketing and transportation
o Dissatisfied and frustrated employees
and consumer
o Frequent interruption production
o Abnormal wastages
o Delays and substandard quality etc
 4. Location Planning
o Before a location for a plant is sought, long-range forecasts
should be made anticipating the future needs of the company.
o These should be based on the
 Company’s expansion policy,
 The anticipated diversification of products,
 The changing market,
 The changing source of raw materials, and any other
foreseeable influences.
o Careful attention should be given to all the economic factors
that influence the need for the new plant and the size and
location of the plant.
 4. Location Planning cont...
o Seven basic steps in locating and building every new plant:
1. Establish the need for a new plant.
2. Determine the best geographical area for the plant on the
basis of the company’s business needs.
3. Establish the requirements
o Product to be made,
o Equipment and Buildings needed,
o Utilities necessary
oTransportation necessary,
o Number of employees, and etc.
 4. Location Planning cont...
o Seven basic steps in locating and building every new plant

cont..

4. Screen many communities within the general area

decided on
5. Pinpoint a few communities for detained studies.
6. Select the best location.
7. Build the plant.
 5. Factors governing plant location
Location decision has two stages
1. General location of the plant
 Factors must be considered for selecting a
region where a factory is to be located
2. The selection of a particular site
 Factors must be considered for selecting a
suitable site in that region.
5.1. Factors governing General location of the plant

1) Availability of raw materials

o The site should be near to the source of raw material

o Transportation cost should be minimum

2) Proximity to markets
o The cost of transporting finished goods, advertising

and distribution cost reduced if it is near to markets

o Quick service to customer and their needs

3) Transport facilities
o Availability of road ,rail, air and ship transport
4) Availability of productive labor
o Low wages often over-emphasized
o Labor productivity important
o Labor cost per unit should be criterion: (Labor cost/day/
Units made/day)

Eg. Hourly Compensation ($)Mfg. Workers (1994)

Germany 27.37
Japan 21.38
U.S. 17.10
Hong Kong 4.79
Mexico 2.57
5) Availability and rate of power
o Electricity, coal mines, solar, wind, etc
6) Climatic and atmospheric condition
o It is a governing factor for several industries to
reduce the cost of air conditioning
E.g.. Cotton textile industries require moist climate
7) Availability of water
o All factories need soft and pure water
8) Availability of capital
o Amount of capital available determines size of a plant
and its future
9) Social and recreational facilities
o During off hours employees need amenities like parks,
retail stores, cinemas ,education centers for worker
health and work interest.
10) Business and Commercial Facilities
o Availability of financial and banking facilities for
factories constant feeding of working capital
11) Existence of related industries
• Especially for small scale industries to have common
facilities like maintenance and repairing service.
12) Other factors
o Taxes
o Government incentives
o Fire protection facilities
o Postal service
o Internet and telecommunication services
 5.1. Factors governing selection of a particular
site
1) Community attitude
o The attitude of the people and the state
government
o Most communities usually welcome setting up of
industries as it provide direct and indirect job
opportunities to the local community
o However in case of polluting and adverse working
condition the local community provide resistance
2) Community facilities
o Facilities which affect quality of life like schools,
hospitals, housing, banking ,communication and other
facilities.
3) Geographical topography
o This includes subsoil conditions for building
foundation, the cost of leveling and developing the
area, laying water supply, electricity, and sewage
system.
4) Transportation facility
o Transport infrastructure for quick access and
movement.
5) Waste disposal
o Including solid, liquid and gaseous wastes disposal
Eg. The plant should be positioned so that winds
carry out fumes away from populated areas .
6) Ecology and pollution
o Check if there is any restrictions on local
administration regarding ecology and pollution
7) Size of land
o Size of land should meet current facility
needs and future expansion plans.
8) Supporting industries
o Availability of supporting industries and other
services.
 6. THEORY OF INDUSTRIAL LOCATION
o The location of an industry is based on a unique set of
circumstances – these factors will enable to business to
operate at a lower cost giving them an advantage over
competitors.

o The factor that offers the most significant cost saving

will be the most important one to determine final
location
o In most plant location models, the objective is to
minimize the sum of all costs affected by location.

o Some items of cost may be higher at location A but

others may be higher at location B.
o The main aim is to seek the location that minimizes
the total cost.

o In attempting to minimize costs we should not only

consider today costs but also long run costs.
6.1. Techniques used for best plant location
1) Subjective techniques
a) Industrial precedence
o New facility is located in an area previously
selected by similar industry.
 assumption “if the location was best for similar industry
in the past it must be best for us now”.

b) Preferential Factor:
o Usually involves personal preferences
o It is not professional approach and is not good business
decision making.
C) Dominant Factor

o This occurs when one factor dominates any other

factors and could influence location decision .

Eg. Mining and petroleum drilling operations must be

located in the areas where the mineral resources are

available.
2) Qualitative techniques

o Also known as “factor ranking system”

o No comparative relationships for values with in the

factor other than position in the list is established

o Ranking is therefore unsatisfactory

3) Semi- Quantitative techniques

o Also known as “factor weighting system”

o Rating scales are used to compare locations to

locations using factors

o Variable weights are assigned to each of the factors

1. Intangible (qualitative) factors

Example: Education quality, labor skills

2. Tangible (quantitative) factors

Example: Short-run & long-run costs

4) Quantitative techniques

Important quantitative techniques

1) Break-Even Analysis

• Helps to relate costs and revenues to facility location

• It shows relation ship among volume of output, costs

and revenues.

• Costs can be generally divided as fixed and variable

cost
a. Fixed costs are the same regardless of volume of out
put.

Eg. Heating ,lighting administrative cost

b. Variable costs fluctuate directly with volume of out

put.

Eg. Direct labor and material

o Break even point indicates the level of volume for

which the total costs equals total revenues.

o BEP analysis identifies the level of out put that must

be reached in order to recover all costs of operation
through revenues.
The break even chart

To understand the role & purpose of break

even analysis
2) Economic/Cost Analysis

o It shows relation ship among volume of

output, costs and revenues among different
location .

3) Transportation Model

o This and other quantitative techniques can

be dealt more on Operation research
subjects
Examples
 Example Factor Weight Rating System
Possible Factory Location
Criterion Weighting
A B C D E
PROXIMITY TO:

Skilled labour 7 2 14 3 21 0 0 1 7 4 28

A pool of unskilled labour 8 5 40 2 16 0 0 4 32 2 16

A motorway 7 3 21 2 14 1 7 3 21 4 28

An airport 4 1 4 3 12 4 16 2 8 2 8

The sea / a river 0 2 0 5 0 5 0 2 0 1 0

Housing 5 4 20 3 15 0 0 3 15 4 20

Amenities 5 3 15 2 10 0 0 2 10 3 15

Potential for expansion 7 2 14 1 7 5 35 3 21 2 14

Availability of grants/incentives 8 1 8 2 16 5 40 1 8 3 24

Safety 2 3 6 2 4 5 10 2 4 2 4

Planning constraints 5 2 10 3 15 5 25 4 20 2 10

Environmental impact 4 3 12 2 8 4 16 1 4 2 8

TOTAL 164 138 149 150 175

 Example 1: Cost-Volume Analysis
Fixed and variable costs for four potential
locations

L o c a tio n F ix e d V a r ia b le
C ost C ost
A $ 2 5 0 ,0 0 0 $11
B 1 0 0 ,0 0 0 30
C 1 5 0 ,0 0 0 20
D 2 0 0 ,0 0 0 35

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 Example 1: Solution

Fixed Variable Total

Costs Costs Costs

A $250,000 $11(10,000) $360,000

B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000

8-33
 Example 1: Solution

$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

8-34
 Plant lay out and material handling
(R.B Choudary)
1) Determination of total cost/unit Page #11
2) Example 1.2 Page #12
3) Fig 1.2 page #16
4) Table 1.2 & table 1.3 page#20,21
5) Example 1.3 # page 21
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