FACILITY LOCATION

• Business systems utilize facilities

like, plant and machineries,
warehouses etc., while performing the
task of producing products/services.
• A proper planning of these facilities
would definitely reduce their cost of
operation and maintenance.
 Plant Location
• Plant location decisions are very important because they have direct
bearing on factors like, financial, employment and distribution patterns.

• In long-run, relocation of plant may even benefit the organization.

• But, the relocation of the plant involves stoppage of production, and also
cost for shifting the facilities to a new location.

• In addition to these things, it will introduce some inconvenience in the

normal functioning of the business.

• Hence, at the time of starting any industry, one should generate several
alternate sites for locating the plant.

• After a critical analysis, the best site is to be selected for commissioning

the plant.

• Location of warehouses and other facilities are also having direct bearing on
the operational performance of organizations.
Reasons for Plant Location Study
The following events are quite common in
any business venture.
- Establishment of a new venture.
- Expansion of existing business.
- Significant change in existing demand,
supply and marketing locations.
- Significant change in the cost structure.
- Government policies.
 FACTORS INFLUENCING PLANT LOCATION
General factors:

- Availability of land for present and future needs and

cost of land and land development and building etc.

- Availability of inputs such as labour, raw materials etc.

- Closeness to the market places

- Stability of demand

- Availability of communication facilities.

- Availability of necessary modes of transportation like

road, rail, airport and water ways.
- Availability of infrastructure facilities such as power, water,
financial institutions, banks, etc.

- Disposal of waste and effluent and their impact on the

environment.

- Government support, grant, subsidy, tax structure.

- Availability of housing facilities and recreational

facilities.

- Demographic factors like population, trained man power,

academic institutions, standard of living, income level, etc.

- Security, culture of society.

- Fuel cost.
 Specific Factors
A multinational company, desiring to set-up plant should consider the
following aspects in addition to the normal factors.

- The economic stability of the country and the concern of the

country towards outside investments are to be considered.

- The success of operation of the factory depends on the cultural

factors, language and cultural differences which can present
operating, control and even policy problems.

- Units of measurement is also very important in international

business.

- Analysis must be directed based on the factors like wage rate,

policy, duties, etc.

- The company can set-up joint ventures with any leading local
giants which will solve many operational problems.
 BREAK EVEN ANALYSIS
• An economic analysis can be done by
using Break-even analysis.

• This uses fixed costs and variable costs.

• The concept is demonstrated using an

example.
 Potential locations A,B and C have the cost
structures shown below for producing a product
expected to sell for Rs.2700 per unit.
Find the most economical location for an expected
volume of 2000 units per year.

Site Fixed Cost/Year Variable Cost/Unit

(Rs.) (Rs.)
A 60,00,000 1,500
B 70,00,000 500
C 50,00,000 4,000
 Solution
For each Plant find the total cost using the following formula.
TC = Fixed cost + (Variable Cost/Unit) (Volume)
= FC +(VC) (V)
Location Total Cost (TC)
=========================================
A 60,00,000 + 1,500 X 2,000 = 90,00,000
B 70,00,000 + 500 X 2,000 = 80,00,000
C 50,00,000 + 4,000 X 2,000 = 1,30,00,000
==========================================

Location B is better.
 Example
There are three proposed sites for locating a plant. The details are
shown below. Find the desirable site for locating the plant.
Description of item Site 1 Site 2 Site 3

Total cost due to Rs.95,85,450 Rs.1,08,50,480 Rs.98,40,950

quantitative factors

Qualitative Factors:

1. Community Good Excellent

facilities

2. Housing facilities Poor Poor Very good

3. Cost of living High

4. Community OK Not encouraging Encouraging

attitude
 Solution
Description of item Site 1 Site 2 Site 3

Total cost due to Rs.95,85,450 Rs.1,08,50,480 Rs.98,40,950

quantitative factors
Qualitative Factors:

1. Community facilities Good Excellent

2. Housing facilities Poor Poor Very good

3. Cost of living High

4. Community attitude OK Not encouraging Encouraging

As per quantitative factors, Site 1 is better, since it has lesser cost. 

Based on Qualitative Factors: 
The choice is in between the Site 1 and Site 3. 
Since, for all qualitative factors, the Site 3 is the best, the Site 3 is to be
selected. Here, the site 3 is selected with a trade-off of excess quantitative cost of
Rs.2,55,500.