Plant Location Factors

Location Factors
• Albert Weber in 1909, classified the factors in
location as two namely, Primary factors and
secondary factors.
• Primary factors are those that involves
materials and labor.
• Secondary factors include Banking, Credit,
Insurance, Communication and other
infrastructure.
 Need for Plant Location Decisions

• Marketing Strategies
• Growth of Business
• Depletion of Resources
• Cost of Doing Business
 Nature of Plant Location Decisions

• Importance
– Long term commitment / costs
• Objectives
– Profit potential
• Options
– Expand existing facilities
– Add new facilities
– Shut down at one location and move to another
General Procedure for Location Decision Making

• Decide the criteria for evaluating location

alternatives (increase revenues, increase
community service).
• Identify important factors (nearness to
market location, raw materials)
• Develop location alternatives.
• Evaluate the alternatives and make a
selection.
Factors Influencing Plant /Facility Location

• Location conditions are complex and each

comprises a different characteristic of a tangible
(i.e. freight rates, production costs) and non-
tangible (i.e. reliability, security, quality) nature.
• Location conditions are hard to measure.
Tangible cost based factors such as wages and
products costs can be quantified precisely into
what makes locations better to compare.
Factors Influencing Plant / Facility Location
Two types of location factors
1. General locational factors, which include
controllable and uncontrollable factors for all type
of organizations.

2. Specific locational factors specifically

required for manufacturing and service
organizations.
 General Locational Factors
CONTROLLABLE FACTORS
• 1. Proximity to markets
• 2. Supply of materials
• 3. Transportation facilities
• 4. Infrastructure availability
• 5. Labor and wages
• 6. External economies
• 7. Capital
UNCONTROLLABLE FACTORS
• 8. Government policy
• 9. Climate conditions
• 10. Supporting industries and services
• 11. Community and labor attitudes
• 12. Community Infrastructure
 Specific Location Decision Factors

1. Regional Factors

2. Community Considerations

3. Multiple Plant Strategies

4. Site-related Factors
 Location Decision Factors…

Regional Factors Community Considerations

Multiple Plant Strategies Site-related Factors

 1. Regional Factors

1) Location near raw materials

Three reasons firms locate near the source of
raw materials
• necessity: mining, farming, forest
• perishability: canning or freezing fruits, dairy
products
• transportation cost: cheese making, paper
production
 1. Regional Factors……

2) Location of markets
• Retail sales and services are usually found
near the center of the markets they serve:
(fast food service)
• Distribution cost associated with their
products is the main factor
 1. Regional Factors…….

3) Labor factors
• Labor costs
• Employees skills
• Workers attitudes toward turnover,
absenteeism, may differ among potential
locations
 1. Regional Factors…..

4) Other factors
• Climate, taxes
• Many developing countries offer an
abundant supply of cheap labor
• International locations
 2. Community Considerations

• Community resistance to airport

expansion, changes in zoning, construction
of nuclear facility, waste disposal systems,
recycling centers etc.

• From a company standpoint, facilities for

education, shopping, recreation,
transportation etc.
 3. Multiple Plant Manufacturing Strategies
1) Product plant strategy
• entire products or product lines are produced in
separate plants (based on required quantity)
2) Market area plant strategy
• plants are designed to serve a particular
geographic segment of a market
3) Process plant strategy
• different plants concentrate on different aspects
of process: (Automobile: different plants for
engines, transmissions, body, etc.)
 4. Site-related Factors

• Primary consideration: land features,

transportation, zoning etc.

• Land costs, room for future expansion, etc.

 Trends in Locations
• Foreign producers locating in India.
– “Made in India”
– Currency fluctuations
• Just-in-time manufacturing techniques
• Micro factories
• Information highway
 EVALUATING PLANT LOCATIONS

• Cost-volume Analysis
– Determine fixed and variable costs
– Plot total costs
– Determine lowest total costs
 Example 1: Cost-Volume Analysis

Fixed and variable costs for

four potential locations
L o c a tio n F ix e d V a r ia b le
C o s t C o s t
A $ 2 5 0 ,0 0 0 $ 1 1
B 1 0 0 ,0 0 0 3 0
C 1 5 0 ,0 0 0 2 0
D 2 0 0 ,0 0 0 3 5
 Example 1: Solution

F ix e d V a r ia b le T o ta l
C o s ts C o s ts C o s ts

A $ 2 5 0 ,0 0 0 $ 1 1 (1 0 ,0 0 0 ) $ 3 6 0 ,0 0 0
B 1 0 0 ,0 0 0 3 0 (1 0 ,0 0 0 ) 4 0 0 ,0 0 0
C 1 5 0 ,0 0 0 2 0 (1 0 ,0 0 0 ) 3 5 0 ,0 0 0
D 2 0 0 ,0 0 0 3 5 (1 0 ,0 0 0 ) 5 5 0 ,0 0 0
 Example 1: Graphical Solution

$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16
Annual Output (000)
 EVALUATING PLANT LOCATIONS

• Transportation Model
– Decision based on movement costs of raw
materials or finished goods
• Factor Rating
– Decision based on quantitative and qualitative
inputs
• Center of Gravity Method
– Decision based on minimum distribution costs
Other Factors Influencing Plant Locations
Foreign a. Policies on foreign ownership of production facilities
Government Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
b. Stability issues
Cultural Living circumstances for foreign workers / dependents
Differences Religious holidays/traditions

Customer Possible buy locally sentiment

Preferences

Labor Level of training and education of workers

Work practices
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy,
transportation
end