FACILITY LOCATION

Definition Of Plant Location

A facility is a place where men, materials, money,
machinery and equipment, etc., are brought together for
manufacturing a product
According to Bethel Smith & Alwater location
“Plant location stands for that spot where in consideration
of business as a whole, the total cost of production and
delivering goods to all the consumers is the lowest”
 Problems due to improper facility location planning
Sell off the facility to other companies
(disinvestment)
1. Finding buyer companies for a
facility at wrong location is difficult
2. The prices received are less than
actual investment
3. Disinvestment is time consuming
process

Relocate facility to new

Close down the operations completely
1. Only machines & equipments & liquidate the assets
can be relocated Facility set up 1. Liquidation of assests is most
2. Capital expenditure like land, without proper painful for any organisation
building, etc have to be sold & 2. finding the buyers & negotiation is
is time consuming location planning tedious & time consuming
3. More investment required for 3. The prices received are less than
purchasing land, construction, actual investment
train new workers form scratch
Continue operations at the
existing location
1. Inherent problems lead to low
profits
2. Competitors have plants at better
locations
3. In long run company have plan
again better location for competing
competitors
OPERATIONAL STRATEGIES FOR
MULTIPLE FACILITIES
1. Separate facilities for different products/Services
2. Separate facilities to serve different geographical
areas
3. Separate facilities for different processes
Factors Affecting Location Decision
 Proximity to raw material
 Proximity to markets
 Good transportation facilities
 Proximity to sub contractors
 Availability of power supply
 Basic amenities
 Govt. policies
 Environment & community
 Low construction cost
 Availability of cheap labour
 Residential complexes, school, hospitals Etc
Locating foreign Operations facilities
 Trade Barrier
 International customers
 International competition
 Exploitation of firm specific advantage
 Power & prestige
 Offensive in competitor’s home
 Selection of Site
 Urban
 Rural
 Suburban
Urban or City Area
Advantages:
 Good transportation
 Prompt communication services
 Banking & credit facilities
 Availability of skilled & unskilled labour
 Development of training institute
 Education, medical & recreational institutes
Disadvantages:
 Cost of land is costly
 Cost of labour is high
 Trade union movement is strong in city
 Sufficient land is not available
 Rural Area
Advantages :
 Land is available at cheaper rates
 Rate of labor is lower
 Taxes are lower
 Large area can be purchased
Disadvantages
 Transport facilities not available
 Banking & credit facilities not available
 Municipal facilities like water supply not available
Suburban Area

Advantages:
 Land available at cheaper rates as compared to urban area
 Future expansion for future is possible
 Skilled & unskilled labour is available
 Infrastructure facilities like water, road, etc are developed
Disadvantages as of urban area
Objectives of location Decision
1) To expand the existing facility
2) To add new location while retaining existing one
3) Shut down at one location and move to another
4) Do nothing & maintain status quo
 Facility Location Decision Process
Following process is followed for taking decision:
 The objectives and basic requirements are defined
Some decision criteria are established
Alternatives are short listed
The remaining alternatives are compared on
quantitative basis
Final selection of best location is done depending
upon all of the above mentioned factors
Location Analysis Techniques

1. Factor rating technique

2. Total cost technique
3. Break even analysis technique
4. Dimensional analysis technique
1. Factor Rating Technique
 The factor affecting the facility location decision are
all important for any type of industry.
 At the same time, importance of each of these factors
may vary for different plants.
 For the requirement of new plant, all the factors are
taken into account & these factors are rated from 1 to 5
to indicate importance attached to them(where 5 is
most important & 1 is least important). These are
called factor rating
 Factor Ratings Technique
(Location Analysis Techniques)

Factor Weight Loc.-A Loc.-A Loc.-B Loc.-B

(1-5) Rating Score Rating Score
(1-10) (W x R) (1-10) (W x R)
Tax advantages 4 5 10
Suitability of labor skills 3 5 5
Proximity to customers 3 5 2
Proximity to suppliers 5 2 2
Adequacy of water 1 10 3
Receptivity of community 5 4 4
Educational facilities 4 1 1
Rail/air transportation 3 10 10
Suitability of climate 2 7 7
Availability of power 2 6 6
Total Score
 1. Factor Ratings Technique
(Location Analysis Techniques)

Factor Weight Loc.-A Loc.-A Loc.-B Loc.-B

(1-5) Rating Score Rating Score
(1-10) (W x R) (1-10) (W x R)
Tax advantages 4 5 20 10 40
Suitability of labor skills 3 5 15 5 15
Proximity to customers 3 5 15 2 6
Proximity to suppliers 5 2 10 2 10
Adequacy of water 1 10 10 3 3
Receptivity of community 5 4 20 4 20
Educational facilities 4 1 4 1 4
Rail/air transportation 3 10 30 10 30
Suitability of climate 2 7 14 7 14
Availability of power 2 6 12 6 12
Total Score 150 154
 2. Total Cost Analysis
(Location Analysis Techniques)

Total Cost = Fixed Cost + Operational Cost

Fixed cost include expenditure on land, building, machines and
other equipments etc.
Operational costs are the expenditure incurred on inputs,
transformation process and the distribution of output.
 2. Total Cost Analysis
(Location Analysis Techniques)

1-Land
5 2-Plant
5 3-Material
4
4-Construction
4 5
5 5-Distribution
Total 3 3
costs 4
4 2
3 2
2 3
1 2 1
1 1

A B C D
Locations
 3. Breakeven Analysis
(Location Analysis Techniques)

Labor Transportation

Material

Costs

Total Fixed Costs

Volume of Units
 3. Breakeven Analysis
(Location Analysis Techniques)

E B
C
A
B D
Total A
Costs
D
E
C

Volume of Output
 3. Breakeven Analysis
(Location Analysis Techniques)

E B
C
A
B D
Costs/ A
Sales
D BEP

E Sales curve
C

Volume of Output
 4. Dimensional Analysis
(Location Analysis Techniques)

 Costs can be tangible or intangible & can be either

in absolute terms or in relative terms
 It is easy to select a plant when all costs are
tangible in nature but there are intangible cost,
which cann’t be expressed in absolute form like
education facilities etc.
 Dimensional analysis considers costs in absolute
terms & relative terms
 Weights of various factors are in power.
 4. Dimensional Analysis
(Location Analysis Techniques)

Relative merit of site A wrt site B:

MA [CA1] W
1 [CA2] W
[CA n] W
= X
2
X……. n

MB [CB1] [CB2] [CB n]

If MA is more than one then location B will be better than A.

MB
 4. Dimensional Analysis
(Location Analysis Techniques)

Costs Labour Power Education Recreation

facilities facilities
Site (1-10) (1-10)
M Rs. 2,00,000 Rs. 40,00,000 4 2

N Rs. 1,00,000 Rs. 20,00,000 8 4

Weightage 1 1 2 2

 Exercise: Which site is better?