LOCATION PLANNING

Location decisions represent a key part of the strategic planning process of almost
every organization. It may appear that only new organizations have to face location
related problem, but in fact, existing organizations also have to make such decisions
frequently.

REASONS OF LOCATION DECISIONS

Changes in Demand:
Organizations may need to change their location due to changes in demand for its
products or services. To meet higher demand, an operation could expand its
existing site, or choose a larger site in another location, or keep its existing location
and find a second location for an additional operation. The last two options will
involve a location decision.

Another way is, when a large textile company moves to new location, the suppliers
of thread and zip etc. will also follow and will move to that new location.

Changes in Supply:
Another reason for re-location is the availability of inputs. Organizations may locate
their stores or warehouses in those locations where there is a good supply of raw
materials and labor, or if the materials and labor are less costly at a particular
location.

Marketing Reasons:
Firms such as banks, fast-food chains etc. view locations as part of marketing
strategy, and they look for locations that will help them to expand their markets.
Basically, the location decision in these cases reflect the addition of new locations to
an existing system.

Depletion of Basic Inputs:

Some firms have to change their location due to depletion of basic inputs. For
example, fishing, timber operations are often relocated due to the temporary lack of
fish or depletion of forests at a given location.

For Expanding Market Share:

Organizations that want to increase their market share might want to re-locate their
operations to high-traffic areas.

OBJECTIVES OF LOCATION
The aim of the location decision is to achieve an appropriate balance between three
related objectives:
1. The spatially variable costs of the operation
2. The service the operation is able to provide to its customers;
3. The revenue potential of the operation.
 In for-profit organizations the last two variables are more relevant. Because if the
service is better, organization will be able to generate more profit. However, in non-
profit-organizations, last variable is not relevant.

Location criteria can depend on where a business is in the supply chain. For instance,
for businesses at the retail end of a chain, the focus is more on accessibility for
customers. On the other hand, businesses at the beginning of a supply chain are often
located near the source of the raw materials.

Web-based retail businesses are much less dependent on location decisions; they can
exist just about anywhere.

FACTORS THAT AFFECT LOCATION DECISIONS

1. Nearness to the Raw Material:

Firms locate near or at the source of raw material for three primary reasons:
o Necessity
o Perishability
o Transportation costs

Necessity means they can operate only at the source of raw material because raw
materials location can not be moved or shifted. For example, Mining operations,
farming and fishing etc.

Perishability means, items may lose their normal qualities if they are not treated
immediately. For example, fresh fruit may lose its freshness if it is kept in hot sun
for few days. Firms involved in freezing of fresh fruits and vegetables, processing of
dairy products are its examples.

Transportation costs are important in industries where processing of raw materials

eliminates much of the bulk material connected with a raw material. Transporting it
before processing will incur more costs. Therefore, firms tend to locate near the
source of raw material to avoid this extra transportation costs.

2. Nearness to Markets:
Some processing plants make a fragile or perishable product. Such industries profit
by being near the consumer.
 Moreover, industries which produce goods in accordance with the specifications of
consumers may profit by locating near the market.

On the other hand, in those companies where production is centralized at one point
in a country, such as books and magazines, nearness to the market does not matter
as much because these products can easily be transported to the market.

3. Labor Costs:
The costs of employing people with particular skills can vary between different
areas in any country, or between different countries.

A factory which uses low-paid labor should be located near the workers. That is the
reason, most of the giant companies in Europe and USA build the plants in China
because labor is cheap there.

Labor costs are affected by;

a. Efficiency of labor
b. The number of unemployed workers in an area
c. The extent of unionization
d. The level of wages
e. The cost of living
f. The housing conditions

4. Land Costs:
The cost of acquiring the site itself is sometimes a relevant factor in choosing a
location. Land and rental costs vary between countries and cities.

Lack of adequate space may force a company to build a multistory facility even if
single story building was more desirable. Similarly, certain production may require
adequate light and air, and protection against undesirable neighbourhood.

5. Energy Costs:
Operations which use large amounts of energy, such as steel factory, can be
influenced in their location decisions by the availability of relatively inexpensive
energy such as electricity or fuel. It will be difficult to cope in developing countries
because of higher cost and lesser availability of electricity.

6. Future Plans for expansion:

Space for possible expansion should also be available. A location should not be
chosen merely because land or building is for sale. Moreover, while deciding about
the appropriate location of land, firms should keep in mind the expansion in terms
of market and volume as well because it is not easy to change the location when
expansion is required.

7. Water Supply:
 Many modern industries generate large amount of heat and use water for cooling as
well as other purposes. Air-conditioning systems for public buildings also use large
amounts of water. Therefore, they should be located where water is available.

8. Civic Values:
Numerous features of community and civic life make a place desirable to live for
employees. If the city provides many services for its residents, the workers and his
family may receive benefits and community services as schools, libraries, hospitals,
parking parks etc

9. Taxes:
Tax rates differ from the one locality to another. Some tax advantage may be gained
by a small town location as compared with an urban site.

10. Climate:
Climate is usually not a deciding factor, although workers are presumed to do
better work in some climates that in others. Extremely cold, hot, rainy or dry
climates are not desirable

LOCATION TECHNIQUES
Although the judgment and experience of operations managers matter significantly
in deciding about the location for a facility, but there are also some quantitative
factors that help managers to decide about a particular location. The two mainly
used methods are Weighted-score method and Centre-of-gravity method.

Weighted-Score Method
This methods is very similar to a standard decision making process. It involves
following steps.

i. Identifying the criteria.

ii. Allocating weights to criteria.
iii. Rating each alternative location upon criterion variables.
iv. Analyzing the alternatives.
v. Selecting a location.

You can see an example in the following box.

An Irish company which prints and makes specialist packaging materials for the
pharmaceutical industry has decided to build a new factory. In order to choose a
site it has decided to evaluate all options against a number of criteria (Step 1)
− the cost of the site;
− the rate of local property taxation;
− the availability of suitable skills in the local labour force;
− the site’s access to the motorway network;
− the site’s access to the airport;
− the potential of the site for future expansion.
Please consult lecture notes to completely understand the example. Following table
shall be helpful.

Importance Scores
Criteria Weighting A B C
Cost of the site
Local taxes
Skills availability
Access to motorways
Access to airport
Potential for expansion
Total weighted scores