RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

SESSION NO. 9 / WEEK NO. 9

MODULE NO.9: Location Planning

10.1 The Need for Location Decisions

10.2 General Factors for Making Location Decisions
10.3 Importance of location planning

Overview

Being in the right location is a key ingredient in a business's success. If a company

selects the wrong location, it may have adequate access to customers, workers,
transportation, materials, and so on. Consequently, location often plays a significant
role in a company's profit and overall success. A location strategy is a plan for
obtaining the optimal location for a company by identifying company needs and
objectives, and searching for locations with offerings that are compatible with these
needs and objectives. Generally, this means the firm will attempt to maximize
opportunity while minimizing costs and risks.

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Topic Presentation

LOCATION PLANNING

Location is termed as a specific site where organizations set up their business or

manufacturing plant and location planning includes selecting an optimum or ideal
location after considering different possible alternatives.

Every firm must use location planning techniques. There are many options for
location planning. Corporations choose from expanding an existing location, shutting
down one location and moving to another, adding new locations while retaining
existing facilities, or doing nothing. There are a variety of methods used to decide the
best location or alternatives for the corporation. Methods such as identifying the
country, general region, small number of community alternatives, and site
alternatives. Several factors that influence location positioning include the location of
raw materials, proximity to the market, climate, and culture.

The Need for Location Decisions

 Marketing Strategy
 Cost of Doing Business
 Growth
 Depletion of Resources

PLANNING THE PLANT LOCATION

Location decisions include making decisions on different levels i.e.

country, region, and community. Organizations first make decisions
regarding the selection of the country, then region and community
respectively. Different choices are available for location planning.
Different alternates are there for corporations in addition to new locations
such as an expansion of existing locations, closing one location, and
shifting to another one.

GENERAL FACTORS FOR MAKING LOCATION DECISIONS

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Different factors contribute to and influence decisions of selecting the

best appropriate plant location. These factors can be broadly categorized
into two types i.e. general factors and special factors.

1. Controllable Factors
1.1) Land Availability
This is a crucial factor in making the decision of plant location. Most of the time it
happens that a specific area seems to be the appropriate place to build a plant
according to the forecasts, plans, and calculations of an organization. However, an
issue of land availability may arise. So, in that scenario, organizations should look for
the next suitable alternative in terms of location.

1.2) Raw Material Supply

To receive raw material of the right quality and at right time by an organization is a
prerequisite for the uninterrupted production facility. This factor is highly important
in the case of perishable raw materials such as fruit, vegetables, eatable items, etc. and
also, the transportation cost of such raw materials is quite high.

Below are the guidelines for location planning according to the influence of raw
materials:

1. If there is a requirement of one type of raw material without losing weight,

then the plant should be located at the source of raw material or somewhere
near to its market, or any area in between.
2. If the demand is for raw material with loss of weight, then the plant should be
located at the source of raw material.
3. In the case of the universal availability of the raw material, it is advisable to
locate the plant near to the market.
4. If there are different locations where raw materials are sourced, then it is
appropriate to locate the plant in between in order to keep transportation costs
as low as possible.

1.3) Availability of Labor

An organization should consider the factor of availability of labor in appropriate
numbers and with the required skill set at the time of deciding the location of the plant
at the community and regional level. It is required to study the history of the
prospective community and labor relations in the community. Labor productivity,

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living cost, union’s bargaining power, industrial relations, etc. should also be taken
into account as important factors.

1.4) Nearness to Market Areas

The plant can be located close to the market of customers or far as per the nature of
the product to be produced. A plant should be located near to the market in the
following circumstances:
 The life projection of the product is less
 Higher transportation cost
 Delicate products
 To promote after-sales services

1.5) Availability of Better Communication Facilities

Location planning is also influenced by the communication facilities that are available
in the region. The preference should be given to those sites that are linked with
telecommunication.

1.6) Availability of Infrastructure Facilities

Location planning is also influenced by the availability of basic infrastructure
facilities such as water, electricity, waste disposal, etc. For example, industries that
operate on a 24/7 basis like Steel, Aluminum need an uninterrupted power supply. So,
the location of plants of such industries should be near to the power station or at
places where there is no interruption in the power supply. If power is unavailable,
then it may create survival issues for these industries
Similarly, continuous water supply is another important factor while considering
infrastructure facilities; especially, in process industries such as chemical, paper,
cement. In such industries, it is important to have a good quality water supply on a
large-scale.
One more factor under infrastructure facilities is waste disposal that is extremely
important in the case of process-oriented industries such as sugarcane, chemicals,
medicine manufacturing, and paper.

1.7) Availability of Transport

This is an essential factor for deciding plant location because appropriate and fast
transport facilities lead to the availability of raw materials in a timely manner. It also
ensures the timely delivery of finished products/ services to end-users or customers.
Different transportation modes include air, rail, road, water, and pipeline. These

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modes should be considered while making decisions related to the location. For
instance, the location of goods meant for exports should be near to an airport or the
port. So, we can say that the selection of the transportation mode and the location is
based on suitability, convenience, and transportation costs.

1.8) External Economies of Scale

This includes location-based and urbanization economies of scale. Economics of
scale with reference to urbanization is related to an advantage that an organization
gets through setting up its unit in a big city. In this, organizations prefer big cities as
compared to small ones for gaining the benefit of transport facilities, access to a large
number of labor and extended business services, increase their market share and sales,
etc.
A location-based economy of scale is related to setting up a manufacturing unit where
other organizations of related industries have their units.

2. Uncontrollable Factors
2.1) Government Policies and Support
This is considered an important factor in location planning. Government policies
include different policies such as labor laws, safety, building codes, etc. made by the
state government and local bodies. To maintain a balance in the growth of industries
at the regional level, different incentive packages are offered by center and state
government to entrepreneurs that are based at different locations. These incentive
packages may include subsidy in electricity bill and investment, loan facility from
financial institutions, excise duty, and sales tax exemption, etc.

2.2) Conditions related to Climate

The geographic aspect of the location along with conditions of climate such as
temperature, humidity is considered an important factor in location planning. Human
behavior and work efficiency are somewhat indirectly influenced by climate. For
example, industries such as the Textile mill demand a more humid climate.

2.3) Community Infrastructure and Facility

Plant location is influenced by certain community infrastructure factors. It creates a
great impact if a manufacturing concern is located near to certain facilities such as
schools, hospitals, universities. These factors create an impact on location decisions
by motivating employees.

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2.4) Supporting Services

Different manufacturing concerns outsource few activities such as manufacturing of a
few parts and components of its product to outside vendors. So, location planning is
influenced by the factor of supply source. Other than this, manufacturing concern is
indirectly linked with different service industries such as banking, consulting, and
communications. So, these also play a crucial role in location selection decisions.

IMPORTANCE OF LOCATION PLANNING

Location planning decisions are very important for all types of business units. This is
because it affects the cost, selling price, and demand of the product. It is a non-
recurring heavy expenditure. Large companies take the help of different professionals
like lawyers, accountants, environmentalist, etc. for selecting the proper location of
plant.

Following image lists 8 points that bring out importance of location planning.

1. Expansion : If the company wants to expand and diversify its activities, it will
have to search for a new-location for setting up its new business unit. In this
case, it will need a location planning.
2. Cost advantages : If an existing plant is not near a market place, it will
increase the transport cost. This will also increase the cost of the product. So,
to avoid this, the company will search for a new plant location which is near
the market. Such location of plant must be convenient to the employees and
must have a regular supply of water and electricity. Overall, this will result in
reduction of the cost of production.
3. Discovery of raw-material : Generally, a plant must be located at a place
where raw-material is available. For example, if oil and gas are found at some
place, then a new petrochemical plant has to be set up there for processing
purpose.
4. Additional facilities : Plant location-related decisions will have to be taken if
the organization wants additional facilities. New facilities may be necessary to
improve the quality of work, to meet rising demands, etc.
5. Mergers : Mergers, joint-ventures, and Amalgamations may lead to start a
new unit at a new-location. It may even require closure of an existing plant
unit. In mergers, production is mostly started at a new place as per the new-
agreement.
6. Political and social changes : Each political party has its own philosophy.
Political changes can lead to changes in economic policies of the government.
This may make the existing location unattractive for doing business. Social

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changes may require production of eco-friendly goods. This may require a

change in location.
7. Increasing product demand : Demand for the company's product may
increase at other places, especially in abroad countries. So, the company will
have to start a branch in another state or in foreign countries. This would lead
to a search for new location of plant.
8. Avail tax benefits : Government may announce some tax benefits for starting
a business in rural areas. This may motivate entrepreneurs to start their
business units in remote areas.

References

This should include the list of books, websites or guides used in preparing the
module or other materials that the student may consult for further understanding or
appreciation of the lesson presented.

Your references should be:

 In APA format; and
 Arranged alphabetically
https://www.referenceforbusiness.com/management/Int-Loc/Location-
Strategy.html#ixzz6qsMJuE4D
https://kalyan-city.blogspot.com/2013/03/importance-of-location-planning.html
https://studiousguy.com/location-strategies-with-examples/

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