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) Finding buyer companies for a facility at wrong location is difficult The prices received are less than actual investment Disinvestment is time consuming process Relocate facility to new Only machines & equipments can be relocated Capital expenditure like land, building, etc have to be sold & is time consuming More investment required for purchasing land, construction, train new workers form scratch Close down the operations completely & liquidate the assets Liquidation of assests is most painful for any organisation finding the buyers & negotiation is tedious & time consuming The prices received are less than actual investment Facility set up without proper location planning Continue operations at the existing location Inherent problems lead to low profits Competitors have plants at better locations In long run company have plan again better location for competing competitors

OPERATIONAL STRATEGIES FOR MULTIPLE FACILITIES Separate facilities for different products/Services Separate facilities to serve different geographical areas 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 Factor rating technique Total cost technique Break even analysis technique 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 (1-5) Loc.-A Rating (1-10) Score (W x R) Loc.-B Tax advantages Suitability of labor skills Proximity to customers Proximity to suppliers Adequacy of water Receptivity of community Educational facilities Rail/air transportation Suitability of climate Availability of power 4 3 5 1 2 10 7 6 Total Score

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

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 2-Plant 3-Material 4-Construction 5-Distribution 5 5 4 4 5 5 Total costs 3 3 4 4 2 2 3 3 2 1 2 1 1 1 A B C D Locations

(Location Analysis Techniques) 3. Breakeven Analysis (Location Analysis Techniques) Transportation Labor Material Costs Total Fixed Costs Volume of Units

(Location Analysis Techniques) 3. Breakeven Analysis (Location Analysis Techniques) E B C A D B Total Costs A D E C Volume of Output

(Location Analysis Techniques) 3. Breakeven Analysis (Location Analysis Techniques) E B C A D B Costs/ Sales A D BEP E Sales curve C Volume of Output

(Location Analysis Techniques) 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.

(Location Analysis Techniques) 4. Dimensional Analysis (Location Analysis Techniques) Relative merit of site A wrt site B: MA [CA1] W1 [CB1] [CA2] W2 [CB2] [CA n] Wn [CB n] = X……. X MB MA If is more than one then location B will be better than A. MB

(Location Analysis Techniques) 4. Dimensional Analysis (Location Analysis Techniques) Costs Site Labour Power Education facilities (1-10) Recreation facilities M Rs. 2,00,000 Rs. 40,00,000 4 2 N Rs. 1,00,000 Rs. 20,00,000 8 Weightage 1 Exercise: Which site is better?