Manufacturing Plant Location or Facility Location

Manufacturing Plant Location

Plant Location: -It is the function of determining where the plant should be located for maximum operational economy & effectiveness. -It is one of the most important problems faced by an entrepreneur while launching a new enterprise. - A selection on pure economic considerations will ensure an easy & regular supply of raw materials, labour force efficient plant layout, proper utilisation of plant capacity & reduced cost of production. - An ideal location may not guarantee success, but it certainly contributes to smooth & efficient working of an organization - A bad location is a sever handicap for any enterprise & it finally bankrupts it.

Manufacturing Plant Location: contd

Need for the selection of the location arise due to : -When business is newly started. -The existing business has outgrown its original facilities & expansion is not possible. -The volume of business or the extent of market necessitates the establishment of branches. -A lease expiring & is not likely to be renewed. -When the company thinks that there is a possibility of manufacturing cost reduction by shifting to a new location. -Other social or economic reasons; such as inadequate labour supply , shifting of the market. The guiding principle in search should be for a place where the cost of raw material & cost of fabrication, plus the cost of marketing of finished product, will be minimum.

Manufacturing Plant Location: contd.

Location theories: Alfred Webster has classified location factors in to 2-broad categories a) Primary & b) Secondary. Primary factors are materials & labours which contribute to the dispersal of industries over different regions. -Industrial units are material oriented if their cost of transportation to units are higher. -Industrial units are market oriented when the cost of transporting finished goods to market are higher. -Another primary factor is labour. Webster assumes that the centers flush with cheap & skilled labour pull industries towards themselves. Secondary factors of location are banking credit, insurance, communication & rents & rates - Some of these factors attract industries to certain areas from different places These factors are known as Agglomerating factors & - Some others contribute to their dispersal from original places. These factors are known as Degglomerating factors

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Over the last 7-8 decades site selection has become easier due to following developments 1 Improvements in transportation & communication facilities & spread of services. 2 Reduction in wage differentials between regions. 3 Mobility of workers & managements. 4 Improvement in construction methods& designs for plant buildings which make them less expensive to build. 5 Vigorous policy pursued by the Govt. to remove regional imbalance in industrial development making all regions almost equal in attraction. 6 Improvements in processing & machine designs that reduce the relative number of employees required for a given output 7 Availability of A/C equipment to counteract adverse climatic conditions for employees & processes. 8 Expansion of markets for almost all goods & services so that more enterprises are needed to meet the demands.

Manufacturing Plant Location: contd.

Steps in location selection: 1 Within the country or outside. 2 Selection of he region 3 Selection of the locality or community 4 Selection of the exact site

Manufacturing Plant Location: contd.

National decision i) Political Stability Export & Import ii) Currency & exchange rates iii) Culture & economic peculiarities iv) Natural environment Selection of region i) Availability of raw materials ii) Nearness to market iii) Availability of power iv) Transport facility v) Suitability of climate vi) Government policy vii) Competition among states Selection of community i) Availability of labour ii) Civic amenities for workers iii) Existence of complementary & competing industries. iv) Finance & research facilities v) Availability of water & fire fighting facilities. vi) Local taxes & restrictions vii) Momentum of an early start viii) Personal factors Selection of site i) Soil, size & *topography ii) Disposal of waste *description of a particular place or tract of land

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Relative importance of local factors

Factors Personal business contacts in a particular region Good communication & / or transport facilities Availability of sufficient infrastructure Market research indicating size or other benefits of local market Availability of skilled labour Regions promotion efforts Particular local/regionalpolicies to attract business Lack of information on other potential areas

Unimportant % 24 53 47 58 70 83 81 78

Neutral % 11 21 20 16 15 13 09 14

Important % 45 26 33 26 15 04 10 08

Manufacturing Plant Location: contd.

Village, Suburban or city sites: All these offer advantages as industrial sites Rural sites: -Land is available at cheap rates; -The rates & taxes are negligible; -Spacious layout available & open spaces are possible; -Advantages of single story buildings are available; -Low wages for unskilled workers but high wages for skilled workers because they have to be mobilised from elsewhere; -Fewer labour troubles; -Avoidance of undesirable neighbors; -Avoidance of danger from fire & other hazards resulting from the operations of neighboring units; -Absence of restrictions on smokes 7 disposal of waste. Problems faced by country sites are: -Lack of supply of skilled labours, civil amnities for employees, & transport facilities.

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Suburban sites: These offer a compromise between city & village. Have the advantages of both, less costly, rail & road transport facilities are available, labour can be drawn from nearby city or village, facilities as parks, schools & clubs can be provided as land is available at fairly cheap rates.
Urban sites: Facilities favoring a location for a plant are: -Transport facilities are no problems -Labour is available in plenty -Municipal services for water, sewage disposal, public health & education are available -All types of technical & commercial institutions & universities for the training of the staff & workers are available -Banking, repair & related services are available. -Facilities for contracting out a portion of the work are available -Large local market is available -High advertising value is available Drawbacks of urban sites are: Exorbitant land cost, House, water, sanitation & other similar taxes & rates, Frequent labour unrest, high labour cost, awkwardly shaped buildings, ill-lighted & ill ventilated due to limited space.

Manufacturing Plant Location: contd.

Location models: 1 Factor Rating method 2 Point Rating method 3 Break-even analysis 4 Qualitative Factor Analysis 1 Factor Rating method: Factor ratings are used to evaluate alternative locations. Advantages are: a) Simplicity which communicates about why one location is better than other b) Brings diverse locational considerations into evaluation process c) Foster consistency of judgment about location alternatives. Steps involved are: 1List the most relevent factors in the location decision 2 Rate each factor ( say from 1for very low to 5 for very high) according to its relative importance 3 Rate each location (say from 1for very low to 10 for very high) according to its merit on each factor. 4Compute the product of ratings by multiplying the factor rating by the location rating for each factor.

5 Compute the sum of the product of ratings for each location Decision: Select the location alternative which has the maximum sum of the product rating as the choice

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( Factor Ratings & Location Rating s for location alternatives)

Location Rating Factor

1 Tqx advantage 2 Suitability of labour Skill 3 Proximity to customer 4 Proximity to supplier 5 Adequacy of water 6Receptivity of community 7Quality of educational System 8Access to rail & air transportation 9Suitability of climate 10 Availability of power

Product Rating
Location A 32 6 18 10 3 20 4 30 14 12 149 Location B 24 9 15 20 3 15 8 24 18 8 144

Factor Rating
4 3 3 5 1 5 4 3 2 2

Location A 8 2 6 2 3 4 1 10 7 6

Location B 6 3 5 4 3 3 2 8 9 4

Total score

Manufacturing Plant Location: contd.

(Point Rating Method) Points assigned to alternative locations Factors Rated Future availability of fuel Transportation facility & growth Adequacy of water supply Labour availability Pollution regulation Site topography Living conditions Total Maximum Points assigned to locations possible points Location A Location B 300 200 100 250 30 50 150 1080 200 150 100 220 20 40 100 830 250 150 100 200 20 30 125 875

From above it may be seen that location B has slight advantage over location A

Manufacturing Plant Location: contd. (Location Break-even Analysis)

In comparing several potential locations on economic basis (i.e tangible factors), the only revenues & costs that need to be considered are the ones that vary from one location to another. If revenue per unit is the same regardless of where the good is produced, the total revenue can be eliminated from consideration. An economic comparison of locations can be made by identifying the fixed costs & variable costs & plotting the breakeven analysis on a graph for each location. The graphical approach can easily identify the range of annual production volume over which a location is preferable.

Manufacturing Plant Location: contd. (Location Break-even Analysis)

The steps involved in the graphical method are: 1 Determine all relevant costs that vary with each location. 2 Categories the costs for each location in to annual fixed costs (FC) & variable cost per unit (VC)& calculate the total cost (TC) for the desired volume of production per annum, for each location. 3 Plot the total costs associated with each location on a single chart or graph of annual cost versus annual production volume. 4 Select the location with the lowest total annual cost (TC) at the expected production volume per annum (Q). Note:- If revenue vary from one location to another, then comparison of locations should be made on the basis of profits (i.e. ,Total revenue Total cost) at each location