FACTORS &

MODELS OF
LOCATION
DIYA RAMTRI
ANJALI KAUR
PRABHJOT KAUR
PARTH BILLAWRIA
SURMESH SINGH
 FACTORS AFFECTING FACILITY
LOCATION
Proximity to sources of supply:
Firms that process bulk raw materials usually locate close to the source of supply to
reduce transportation costs. Paper mills locate close to forests, canneries are built
close to farming areas, and fish processing plants are located close to the harbours
where the fishing vessels dock.
Proximity to customers:
There are several reasons why an organization would locate close to end customers.
Service firms need to be close to customers to be convenient, as is the case for grocery
stores, gas stations, fast food restaurants, and hospitals. Transportation costs can also
require proximity to customers, as in the case of concrete manufacturing. Perishable
products often require that they be produced close to the final market, as is the case
for bakeries and confectionaries
Labour factors:
Research shows that the majority of location decisions are largely based on labor factors, since labor is a
critical variable for many firms. Labour factors include the prevailing wage rate in a community for
similar jobs, the supply of qualified workers, and the average education level of the local population
(percentage of high school graduates, etc.). Other labor factors can include the degree of union organizing
and the general work ethic of a community, as well as other measures of absenteeism, and worker
longevity in a job can play a strong role when a firm makes a location decision.

Business climate :
A favourable business climate can include the presence of similar-sized businesses. the presence of
companies in the same industry, and, in the case of international locations, the presence of other foreign
companies. Probusiness government legislation and local government intervention to facilitate businesses
locating in an area via subsidies, tax abatements, and other support are also factors. Tata decided to
relocate its Nano car's factory from West Bengal to Gujarat mainly due to adverse business climate in
West Bengal.

Total costs :
The objective is to select a site with the lowest total cost. This includes regional costs. inbound
distribution costs, and outbound distribution costs. Land, construction, labour, taxes, and energy costs
make up the regional costs. In addition, there are hidden costs that are difficult to measure. These involve
(1) excessive moving of preproduction material between locations before final delivery to the customers
Infrastructure :
Adequate road, rail, air, and sea transportation is vital. Energy and telecommunications requirements also must be met. In
addition, the local government's willingness to invest in upgrading infrastructure to the levels required may be an
incentive to select a specific location. A quick analysis of industrial climate in India reveals that states in which the
infrastructure is not fully developed, the industries have maintained a distance in starting or scaling up their business.

Political Risk :
The fast-changing geopolitical scenes in numerous nations present exciting, challenging opportunities. But the extended
phase of transformation that many countries are undergoing makes the decision to locate in those areas extremely
difficult. Political risk in both the country of location and the host of the country influence location decisions.
 Error’s In selection:

• Errors in selection can be divided into two broad categories: behavioral and
non-behavioral.
• Behavioral errors are decision made by executives of the company where
personal factors are considered before success of location, for example,
movement of personal establishment from hometown to new location facility.
• Non-behavioral errors include lack of proper investigative practice and
analysis, ignoring critical factors and characteristics of the industry.
Errors in Selection Of Location:

• Facility location is critical for business continuity and success of the organization.
So it is important to avoid mistakes while making selection fora location.
• Choosing a site with inadequate labour and talent: Manufacturing investments
today are increasingly capital intensive and require access to employees with
sophisticated skillsets. Verifying an adequate short- and long-term labour force is
one of the most significant factors for today’s site-location projects; in the future,
the importance of qualified labour will only increase. Selecting a site in an area
without an adequate labour force is a major error, often resulting in higher human
resources costs that will have a long-term negative impact on quality and
production efficiency.
• Choosing a site that is too small:

Committing to a site that is too small can reduce the success of the initial start-up and limit
future expansion. Selecting a site that has the size to accommodate a best-case growth scenario
while maintaining an adequate buffer to provide privacy from future commercial or residential
encroachment is important.

• Choosing a site with either high logistics costs or unsuitable ingress and egress:

Logistics costs are an important consideration for many types of locations and expansions,
especially automotive and distribution projects. Selecting the wrong site from a logistics
perspective can add a permanent higher per-unit cost to production. For an automotive
manufacturer, this additional cost per unit can add millions of dollars in freight costs per year
and over the lifetime of the facility. Ingress and egress are also important considerations .
• Failing to keep the project confidential:

For most manufacturing site-selection projects, preserving confidentiality is vital. Inadvertent

release of information to business competitors or employees can be costly on many levels. In
the early stages of a project, not revealing the identity of a company conducting a site search
or the product they wish to manufacture is typically very important. Qualified site-selection
consultants are generally capable of devising and implementing strategies, including using
multiple project codenames and strict non-disclosure agreements, to reduce significantly the
risk of any release of private site-search information prematurely.
 Steps In Location Selection:

1.Develop a detailed list of selection criteria. ...

2.Analyze qualitative & quantitative factors. ...
3.Research competing communities and evaluate data. ...
4.Consider incentives and bonuses. ...
5.Finalize the decision, memorialize the deal.
 MODELS OF
LOCATION
various models are available which help identify a
near ideal location. The most popular models are:-
1.Factor rating method
2. Qualitative factor analysis
4.Break even analysis
 FACTOR RATING METHOD

The process of selecting a new facility location involves a series of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e., higher the ratings is
indicative
of prominent factor.
3. Assign each location according to the merits of the location for each factor.
4. Calculate the rating for each location by multiplying factor assigned to each location
with
basic factors considered.
5. Find the sum of product calculated for each factor and select best location having
highest total score.
ILLUSTRATION 1: Let us assume that a new medical facility, Health-care,
is to be located in Delhi. The location factors, factor rating and scores for
two potential sites are shown in the following table. Which is the best
location based on factor rating method
WEIGHTED FACTOR RATING METHOD

• In business and management, qualitative analysis uses subjective

judgment to analyze a company's value or prospects based on non-
quantifiable information, such as management expertise, industry
cycles, strength of research and development, and labor relations.
• Qualitative analysis contrasts with quantitative analysis, which
focuses on numbers found in reports such as balance sheets. The
two techniques, however, will often be used together to examine a
company's operations and evaluate its potential as an investment
opportunity.
• In this method to merge quantitative and qualitative factors, factors
are assigned weights based on relative importance and weightage
score for each site using a preference matrix is calculated. The site
with the highest weighted score is selected as the best choice.

ILLUSTRATION 2: Let us assume that a new medical facility, Health-

care, is to be located in Delhi. The location factors, weights, and scores
(1 = poor, 5 = excellent) for two potential sites are shown in the
following table. What is the weighted score for these sites? Which is
the best location?
 BREAK EVEN ANALYSIS :

Break-even analysis entails calculating and examining the

margin of safety for an entity based on the revenues collected and
associated costs. In other words, the analysis shows how many
sales it takes to pay for the cost of doing business. Analyzing
different price levels relating to various levels of demand, the
break-even analysis determines what level of sales are necessary
to cover the company's total fixed costs. A demand-side analysis
would give a seller significant insight into selling capabilities.
• Break-even analysis is useful in determining the level of production or a targeted desired
sales mix. The study is for a company's management’s use only, as the metric and
calculations are not used by external parties, such as investors, regulators, or financial
institutions. This type of analysis involves a calculation of the break-even point (BEP).

• The break-even point is calculated by

Break-even point = Fixed cost/-Price per cost – Variable cost

• Break-even analysis looks at the level of fixed costs relative to the profit earned by each
additional unit produced and sold. In general, a company with lower fixed costs will
have a lower break-even point of sale. For example, a company with $0 of fixed costs will
automatically have break even upon the sale of the first product assuming variable costs
do not exceed sales revenue.
Example of break-even analysis

 Variable costs per unit: Rs. 400 Sale price per unit: Rs. 600 Desired
profits: Rs. 4,00,000 Total fixed costs: Rs. 10,00,000.
 First we need to calculate the break-even point per unit, so we will
divide the Rs.10,00,000 of fixed costs by the Rs. 200 which is the
contribution per unit (Rs. 600 – Rs. 200). Break-Even Point = Rs.
10,00,000/ Rs. 200 = 5000 units
 Next, this number of units can be shown in rupees by multiplying
the 5,000 units with the selling price of Rs. 600 per unit. We get
Break-Even Sales at 5000 units x Rs. 600 = Rs. 30,00,000. (Break-
even point in rupees
Thank You