Facility Location

Objective – To discuss different issues in facility locations

Concept of Facility location

Once you build a new manufacturing facility, you have made a substantial
investment of time, resources, and capital that can’t be changed for a long
time. Facility location may be defined as a place where the facility will be
set up for producing goods or services .Selecting the wrong location can be
disastrous. Some of the key factors that influence facility location are the
following:

 Proximity to customers, suppliers, and skilled labor

 Environmental regulations
 Financial incentives offered by state and local development
authorities
 Quality-of-life considerations
 Potential for future expansion

Need for Facility Layout

After the site location decision has been made, the next focus in production
planning is the facility’s layout. The goal is to determine the most efficient
and effective design for the particular production process. A manufacturer
might opt for a U-shaped production line, ,e.g.rather than a long, straight
one, to allow products and workers to move more quickly from one area to
another.
 Need for Facility Location

The facility Location of warehouses and other facilities are also having
direct bearing on the operational performance of organizations.
The existing firms will seek new locations in order to expand the capacity or
to place the existing facilities. When the demand for product increases, it
will give rise to following decisions:
 Whether to expand the existing capacity and facilities.
 Whether to look for new locations for additional facilities.
 Whether to close down existing facilities to take advantage of some
new locations.

Factors Influencing Facility Location

If the organization can configure the right location for the manufacturing
facility, it will have sufficient access to the customers, workers,
transportation, etc. For commercial success, and competitive advantage
following are the critical factors:
Customer Proximity: Facility locations are selected closer to the customer
as to reduce transportation cost and decrease time in reaching the
customer.
Business Area: Presence of other similar manufacturing units around
makes business area conducive for facility establishment.
Availability of Skill Labor: Education, experience and skill of available
labor are another important, which determines facility location.
Free Trade Zone/Agreement: Free-trade zones promote the
establishment of manufacturing facility by providing incentives in custom
duties and levies. On another hand free trade agreement is among
countries providing an incentive to establish business, in particular, country.
Suppliers: Continuous and quality supply of the raw materials is another
critical factor in determining the location of manufacturing facility.
Environmental Policy: In current globalized world pollution, control is very
important, therefore understanding of environmental policy for the facility
location is another critical factor.

(1) Proximity to Customers

Customer Proximity can be described as the mean distance from the firm to
the customer (i.e., the market place). As a firm matures and graduates into
incumbency the Customer Proximity tends to diminish. A customer
proximate company will create opportunities for customers to engage not
just with the firm, at the point of sale, but also with each other.  

Example: Japan’s NatSteel Electronics has built its two largest plants in
Mexico and Hungary to be closer to major markets in the United States and
Europe-whose buyers want their goods delivered yesterday. Such proximity
also helps ensure that customer needs are incorporated into products
being developed and built.

(2) Business climate

A favorable business climate can include the presence of similar-

sized businesses, the presence of companies in the same industry,
and, is a type of economic environment surrounding a specific
company or industry that consists of factors related to the nature of
operations performed by said company or industry and in the case of
international locations, the presence of other foreign companies. Pro
business government legislation and local government intervention to
facilitate businesses locating in an area via subsidies, tax
abatements, and other support are also factors.
(3) 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, labor, taxes, and energy costs make up the regional
costs. In addition, there are hidden costs that are difficult to measure. In
other words Total cost is an economic measure that sums all expenses
paid to produce a product, purchase an investment, or acquire a piece of
equipment including not only the initial cash outlay but also the opportunity
cost of their choices.
These involve excessive moving of preproduction material between
locations before final delivery to the customers and loss of customer
responsiveness arising from locating away from the main customer base.

(4) Infrastructure

The basic infrastructure facilities like power, water and waste disposal,
etc., become the prominent factors in deciding the location .Adequate
road, rail, air, and sea transportation are 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.
 (5) Quality of labor

The educational and skill levels of the labor pool must match the
company’s needs. Even more important are the willingness and
ability to learn

(6) Suppliers 
A high-quality and competitive supplier base makes a given location
suitable. The proximity of important suppliers’ plants also supports lean
production methods. Continuous and quality supply of the raw materials is
another critical factor in determining the location of manufacturing facility.

(7) Other facilities 

The location of other plants or distribution centers of the same company

may influence a new facility’s location in the network. Issues of product
mix and capacity are strongly interconnected to the location decision in
this context.

(8) Political Risk

Political stability is essential for industrial growth . 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 risks in both the country of location and the
host country influence location decisions.
 (9) Government Barriers
Barriers to enter and locate in many countries are being removed today
through legislation. Yet many non legislative and cultural barriers should
be considered in location planning. In order to promote the balanced
regional development, the Government also offers several incentives,
concessions, tax holidays for number of years, cheaper power supply,
factory shed, etc

(10) Environmental Regulations

The environmental regulations that impact a certain industry in a given
location should be included in the location decision. Besides measurable
cost implications, these regulations influence the relationship with the
local community.

(11) Host Community

The host community’s interest in having the plant in its midst is a necessary
part of the evaluation process. Local educational facilities and the broader
issue of quality of life are also important.

(12) Trading blocks

These are usually groups of countries in specific reason that manage and
promote trade activities. Trading blocs lead to trade liberalization which is
the feeling of trade from protectionist measures and trade creation between
members, since they are treated favorably in comparison to non members.

(13) Competitive advantage

An important decision for multinational companies is the nation in which to

locate the home base for each distinct business. Porter suggests that a
company can have different home bases for distinct businesses or
segments. Competitive advantage is created at a home base where
strategy is set, the core product and process technology are created, and a
critical mass of production takes place. So a company should move its
home base to a country that stimulates innovation and provides the best
environment for global competitiveness.1 This concept can also be applied
to domestic companies seeking to gain sustainable competitive advantage.
It partly explains the southeastern states’ recent emergence as the
preferred corporate destination within the United States (that is, their
business climate fosters innovation and low-cost production).