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)
1. Finding buyer companies for a
facility at wrong location is difficult
2. The prices received are less than
actual investment
3. Disinvestment is time consuming
process

Relocate facility to new

Close down the operations completely
1. Only machines & equipments & liquidate the assets
can be relocated Facility set up 1. Liquidation of asset is most painful
2. Capital expenditure like land, without proper for any organization
building, etc have to be sold & 2. Finding the buyers & negotiation
is time consuming location planning is tedious & time consuming
3. More investment required for 3. The prices received are less than
purchasing land, construction, actual investment
train new workers from scratch
Continue operations at the
existing location
1. Inherent problems lead to low
profits
2. Competitors have plants at better
locations
3. In long run, company have plan
again with better location for
competing competitors
OPERATIONAL STRATEGIES FOR
MULTIPLE FACILITIES
1. Separate facilities for different products/Services
2. Separate facilities to serve different geographical
areas
3. 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
 Suitability of Climate
 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’s 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 compares on
quantitative basis
Final selection of best location is done depending
upon all the above-mentioned factors
Location Analysis Techniques

1. Factor rating technique

2. Total cost technique
3. Break even analysis technique
4. Dimensional analysis technique
5. Load distance
6. Centre of Gravity
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 Factor Loc.-A Loc.-A Loc.-B Loc.-B

Rating Rating Score Rating Score
(1-5) (1-100) (W x R) (1-100) (W x R)
Tax advantages 4 50 100
Suitability of labor skills 3 50 50
Proximity to customers 3 50 20
Proximity to suppliers 5 20 20
Adequacy of water 1 100 30
Receptivity of community 5 40 40
Educational facilities 4 10 10
Rail/air transportation 3 100 100
Suitability of climate 2 70 70
Availability of power 2 60 60
Total Score
 1. Factor Ratings Technique
(Location Analysis Techniques)

Factor Rating Loc.-A Loc.-A Loc.-B Loc.-B

Factor Rating Score Rating Score
(1-5) (1- (F x R) (1-10) (F x R)
100)
Tax advantages 4 50 200 100 400
Suitability of labor skills 3 50 150 50 150
Proximity to customers 3 50 150 20 60
Proximity to suppliers 5 20 100 20 100
Adequacy of water 1 100 100 30 30
Receptivity of community 5 40 200 40 200
Educational facilities 4 10 40 10 40
Rail/air transportation 3 100 300 100 300
Suitability of climate 2 70 140 70 140
Availability of power 2 60 60
Total Score 1500 1540
 Weighted Factor Rating Method
A new medical facility, Health-care, is to be located in Delhi. The location factors,
weights, and scores (1 = poor, 5 = excellent) for two potential sites are shown
in the following table. What is the weighted score for these sites? Which is the
best location?

Sr. Location Factor Weight Location A Location B

No. Score Score

1 Facility utilization 25 3 5

2 Total patient per month 25 4 3

3 Avg. time per emergency trip 25 3 3

4 Land and construction cost 15 1 2

5 Employee preference 10 5 3
 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
5 2-Plant
5 3-Material
4
4-Construction
4 5
5 5-Distribution
Total 3 3
costs 4
4 2
3 2
2 3
1 2 1
1 1

A B C D
Locations
 3. Breakeven Analysis
(Location Analysis Techniques)

Labor Transportation

Material

Costs

Total Fixed Costs

Volume of Units
 3. Breakeven Analysis
(Location Analysis Techniques)

E B
C
A
B D
Total A
Costs
D
E
C

Volume of Output
 3. Breakeven Analysis
(Location Analysis Techniques)

E B
C
A
B D
Costs/ A
Sales BEP
D
E Sales curve
C

Volume of Output
 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 can'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.
 4. Dimensional Analysis
(Location Analysis Techniques)

Relative merit of site A wrt site B:

MA [CA1] W
1 [CA2] W
[CA n] W
= X
2
X……. n

MB [CB1] [CB2] [CB n]

If MA is more than one then location B will be better than A.

MB
 4. Dimensional Analysis
(Location Analysis Techniques)

Costs Labour Power Education Recreation

facilities facilities
Site (1-10) (1-10)
M Rs. 2,00,000 Rs. 40,00,000 4 2

N Rs. 1,00,000 Rs. 20,00,000 8 4

Weightage 1 1 2 2

 Exercise: Which site is better?

Load-Distance Method
The load-distance method is a mathematical model
used to evaluate locations based on proximity factors.
The objective is to select a location that minimizes the
total weighted loads moving into and out of the
facility.
The distance between two points is expressed by
assigning the points to grid coordinates on a map.
Q. The new Health-care facility is targeted to serve seven census tracts in Delhi. The table given below
shows the coordinates for the centre of each census tract, along with the projected populations, measured
in thousands. Customers will travel from the seven census tract centers to the new facility when they need
health-care. Two locations being considered for the new facility are at (5.5, 4.5) and (7, 2), which are the
centers of census tracts C and F. Details of seven census tract centers, co-ordinate distances along with the
population for each centre are given below. If we use the population as the loads and use rectilinear
distance, which location is better in terms of its total load- distance score?
 Using the coordinates from the above table calculate the load-
distance score for each tract.
Using the formula DAB = |XA– XB| + |YA– YB|

Summing the scores for all tracts gives a total load-distance score of 239 when the
facility is located at versus a load-distance score of 168 at location (7, 2). Therefore,
the location in census tract F is a better location
 Centre of Gravity
 Centre of gravity is based primarily on cost considerations.
 This method can be used to assist managers in balancing cost and service
objectives.
 The centre of gravity method takes into account the locations of plants and
markets, the volume of goods moved, and transportation costs in arriving at the
best location for a single intermediate warehouse.
 The centre of gravity is determined by the formula.
CX = ∑Dix.Wi/∑Wi  and CY = ∑Diy.Wi/∑Wi
where Cx = x-coordinate of the centre of gravity
Cy = y-coordinate of the centre of gravity
Dix = x-coordinate of location i
Diy = y-coordinate of location i
The new Health-care facility is targeted to serve seven census tracts in Delhi. The table given below shows the coordinates for the centre of each census tract, along with the
projected populations, measured in thousands. Customers will travel from the seven census tract centre s to the new facility when they need health- care. Details of seven
census tract centers, coordinate distances along with the population for each centre are given below. Find the target area’s centre of gravity for the Health-care medical
facility?
Cx= 453.5/68 = 6.67
Cy= 205.5/68 = 3.02
The centre of gravity is (6.67, 3.02). Using the centre of gravity as
starting point, managers can now search in its vicinity for the optimal
location.