FACILITY LOCATION

Meaning of Plant Location:

Plant location refers

to the specific place
where plant is
located
Location may be
defined as a
particular
area/site/place
selected for setting a
manufacturing unit
or plant or
Location is service
one of
unit which
the factors
determine efficiency,
stability and
profitability of a
business unit
 Problems that can arise if the facility
location is inappropriate:
High production cost, marketing
difficulties, dissatisfaction among
employees

Costly to shift to another location

Therefore, before setting up a plant, proper

location analysis should be carried out
When does a Location Decision Arise?
•When the business is newly started
•The existing business unit has outgrown its original
facilities and expansion is not possible; hence a
new location has to be found
•The volume of business or the extent of market
necessitates the establishment of branches
•A lease expires and the landlord does not renew
the lease
•There is emergence of new social or economic
conditions which suggest a change of location of
the existing plant
 The guiding principle in
Whatever the reason, the the search should be for a
The selection of the location place where the cost of
When does a in
changes has to be made the raw material and
Location Decisionthe considering all economic fabrication, plus the cost
Arise?Industrial factors which have a of marketing of the
Policy of bearing on it finished product, will be
the minimum
Governme
nt,
The
favoring
product decentraliz
developm ation and
ents have
dispersal
outweighe of
d the
industries
advantage
to achieve
s of the overall
existing
plant developm
ent of the
country,
do not
permit
expansion
of the
existing
plant
 Factors Governing Plant Location:

• Locating a plant nearer to the market

is preferred if:
• The product is fragile
• The product is susceptible to
Proximity to spoilage
market: • The promptness of service is
required
• The product is relatively
inexpensive and transportation
costs add significantly to the cost
 Factors Governing Plant Location:

Proximity to market:
• If the product is to be exported, location near ports is
desirable
• Nearness to market not only lowers transportation costs but
also gives many other benefits namely:
• A good many administrative problems which cause
perpetual headaches and add to costs are avoided
• Liaison with dealers or wholesalers can be maintained
economically and easily
 Other costs
Factors Governing
such as Plant Location:
Customers’
commissions
accounts do
to middlemen Their
recovery is
which not
at remain
as easy and time
outstanding
times run
saving which
high as 20 toforitself
settlement. reduces
50 percent
can be selling costs
reducedProximit
significantlyy to
market:
 Factors Governing Plant Location:

Proximity to Sources of Besides transport costs,

Raw Materials:
• This factor assumes still greater
importance if raw materials are
of perishable nature or if they
are expensive to transport, or if
their weight is substantially
reduced by processing
distance can pose other
problems:
• Follow up with suppliers
becomes costlier
• The buyer is unable to keep
track of what is being
dispatched by the supplier
 Factors Governing Plant Location:

• Infrastructural facilities consider

availability of utilities like power,
water, disposal of waste, etc.
• Certain industries are power
intensive (e.g. aluminum, steel,
etc.) and must be located close to
the sites of power generation
Infrastructural • Similarly, chemical process
facilities: industries like paper and pulp,
cement etc. require perennial
source of water
• Drainage facilities are important
for process industries otherwise
disposal of waste can create lot of
difficulties
 Factors Governing Plant Location:

The structure of
the
transportation
Transportation cost depends on
Transport cost to value • (i) characteristics
added is a key of the commodity
facilities:. determinant of • (ii) average
distance of
the plant location shipment
• (iii) medium of
shipment: rail,
road, air, sea etc
 Factors Governing Plant Location:
Other things being
The need for equal, since
transport arises transport cost has
because raw a major effect on
materials and fuel product cost, the
Transport are to be moved to regions well
facilities: factory site and served by
finished goods are transport facilities
to be transported are most suitable
from factory to for industrial
markets
locations
 Factors Governing Plant Location:

Labor and wages:

• The required labor should be easily available in the
neighborhood
• Training facility should also be available in the neighborhood
• Skilled employees are easily available if ITIs, or Engineering
colleges are there in the neighborhood
Factors Governing Plant Location:
Labor and wages:
Productivity of labor is a factor of equal
importance

Inhabitants of certain areas are more

productive than others

Prevailing wage pattern, living costs and

industrial relations also need to be taken
into account
 Factors Governing Plant Location:

• The policies of the State Government

and Local Bodies relating to issue of
licenses, building codes, labor laws,
etc. are the factors in selecting /
Legislation and rejecting a particular site
• Since taxes and duties levied by the
Taxation: State Government and Local bodies
substantially influence product cost,
the incidence of such taxes/levies
must be taken into account while
selecting a site
 Factors Governing Plant Location:

Climatic conditions:

•Climatic factors may not have major influence these days because of modern air-conditioning
facilities available today
•However, it may be important factor for certain industries like textile mills which require high
humidity
•For example, textile mills require high humidity. So they are located in places where there is
humidity
 Factors Governing Plant Location:

Industrial and labor attitudes:

Locating facilities in a
certain
region/community may Political situation in the state
not be desirable as and attitude of the
frequent labor Government towards labor
problems and activities also influence
selection of site for the plant
interruptions are
harmful to the plant in
the long run
Factors Governing Plant Location:
Safety
requiremen
ts:

Safety factor
may be
important for
Location of certain
such industries
industries in such as:
remote areas • Nuclear
is preferable power
plants
• Explosive
factories
Factors Governing Plant Location:

Community facilities (or

social infrastructure):
• Community facilities imply
accommodation, educational,
entertainment and transport
facilities
• Accommodation is needed
unless the employees are local
residents
• Accommodation should be
easily available, comparatively
cheap and near some public
transport stop
 Factors Governing Plant Location:

Community facilities (or social infrastructure):

• The area should be accessible by road and have an efficient
public transport system for employees, officials, customers,
and suppliers to make easy trips for their work
• Communication is another important infrastructure
• Availability of post office, telegraph office, efficient telephone
service is very important
• Other infrastructure includes proximity to railhead or highway,
availability of medical, educational, entertainment facilities etc
Factors Governing Plant Location:

Community Attitudes:

Community attitudes towards work are very

important in locational decisions which must
take such factors into account particularly
while setting up labor intensive units
 Factors Governing Plant Location:

Availability and Cost

of the Land:
• Site size (plot size)
Suitability of Land: must be large enough
• Site selection should to accommodate
also take into account present production
topography and soil facilities, and also
structure of the land leave room for future
• The soil structure expansion
must be capable of • As a general rule, a
bearing loads site five times the
actual plant size is
considered minimum
for all these things
 Plant Location Methods

Many techniques are available for identifying potential sites for plants or other types
of facilities.
• Factor-rating method and point rating method,
• Transportation method, and
• Centroid method.
The process required to narrow the decision down to a particular area can vary
depending on the type of business and the competitive pressures.

Many different criteria need to be considered when selecting from the set of feasible
sites.

We will discuss the following three different types of techniques for selecting the
best site:
 • First, list all favorable factors for
evaluating the location
• Then each factor is rated from high
value to low, usually from 1 to 10
• This rating is according to relative
importance of the factor
Factor Rating • Then, rating of location according to
Method: characteristics and merits of each
location
• Finally, factor rating is multiplied by
location rating to obtain final result
• The total of the product of factor
rating and location rating specifies
the most appropriate location
 Example of Factor Rating Method

Factor Factor Location Product of

Rating Rating Ratings
Inter-company integration 4 8 32
Availability and cost of labor 3 2 6
Availability and cost of services 3 6 18
Availability and cost of materials 5 2 10
Availability of transport 1 3 3
Availability of car parking space 5 4 20
Expansion potential 4 1 4
Zoning and legal regulations 3 10 30
Cost of land 2 7 14
New development areas 2 6 12
Living conditions 2 5 10
Total 159
 Point Rating Method:
This method involves importance of each factor

Each factor is assigned relative weight out of

maximum of 100 points

Potential location is evaluated according to

every factor considered by the management

A number of points are assigned to each factor

The location having the highest score is selected

as the most suitable location
 Location Factor Unfavorable Average Favorable Total Points
(0 – 33) (34 – 66) (67 – 100)
A B A B A B A B
Inter-company integration 20 80 20 80
Availability and cost of labor 30 50 30 50
Availability and cost of services 50 70 50 70
Availability and cost of materials 60 40 60 40

Availability of transport 20 40 40 20
Availability of car parking space 30 80 30 80

Expansion potential 40 90 40 90
Zoning and legal regulations 60 80 60 80
Cost of land 40 90 40 90
New development areas 50 80 50 80
Living conditions 20 90 90 20
Total 510 700

An Example of Point Rating Method

 Factor Rating Method
A major problem with point-rating schemes is that they do not account for
the wide range of costs that may occur within each factor.
For example, there may be only a few hundred rupees difference between
best and worst locations for one factor but several thousands of rupees
difference between the best and worst on another.
The first factor may have most points available to it but provide little help in
making location decision.

The second factor may have few points available but potentially show real
difference in the value of locations.
To deal with this problem, it is suggested that points possible for each factor
be derived using a weighting scale based on standard deviations of costs
rather than simply total cost amounts.

In this way, relative costs can be considered.

 Transportation Method
This is a special case of linear programming method.

The name is derived from its applications to problems involving

transporting products from several sources to several destinations.

The two common objectives of such problems are either:

Minimize the cost of shipping n units to m
destinations or

Maximize the profit of shipping n units to m

destinations.
 Transportation Problem Formulation
• State the problem mathematically as follows:
• Let ai = quantity of product available at origin i.
• bj = quantity of product required at destination j.
• cij = the cost transporting one unit of product
• source/origin i to destination j
• xij = the quantity transported from source/origin
• i to destination j.
• Assume that  a   b which means that the total
m n

i j
i 1 j 1

quantity available at the origins is precisely equal to

the total quantity required at the destinations.
• With these, the problem can be stated as a linear
programming problem as:
m n

• Minimize Total Cost Z   c x i 1 j 1

ij ij

• Subject to x  a
j 1
for i = 1, 2, …, m
ij i

• forx  jb = 1, 2, …, n
m

 i 1
ij j

• And forx all

 0 i = 1, 2, …, m, and
ij

• j = 1, 2. …, n.
• The transportation problem can also be
portrayed in a tabular form by means of a
transportation tableau, as shown below:
• The tableau can be thought of as a matrix within a
matrix, of dimension m x n. One matrix is the per
unit cost matrix which represents unit transportation
costs for each possible transportation routes. Cij,
indicating cost of shipping a unit from ith origin to jth
destination.
• Superimposed on this matrix is the matrix in which
each cell contains a transportation variable –the
number of units shipped from the row-designated
origin to the column-designated destination. Each
such variable is represented by xij, the amount
shipped from ith source to jth destination.
• Right and bottom sides of the transportation
tableau show, respectively, the amount of supplies
ai available at source i and the amount demanded bj
at each destination j. The ai’s and bj’s represent the
supply and demand constraints.
• The aggregate transportation cost is determined by
multiplying the various xij’s with corresponding cij’s
and then adding them all. The solution to the
transportation problem calls for determining the
values of xij’s as would yield the minimum aggregate
transportation cost.
 Centroid Method
Centroid method is a technique for locating single facilities that considers
existing facilities, the distances between them and the volume of goods to be
shipped.

This technique is used to locate intermediate or distribution warehouses.

It assumes that inbound and outbound transportation costs are equal.

It does not include special shipping costs for less than full loads.

Another major application is the location of communication towers in urban

areas, such as Radio, TV, and cell phone towers.

In this application, the goal is to find sites that are near clusters of customers.
 Centroid Method
• The centroid method begins by placing the existing locations on a
coordinate grid system.
• The choice of the coordinate system is entirely arbitrary.
• The purpose is to establish relative distances between locations.
• The centroid (center of gravity of a geographical location) can be identified
by calculating the X and Y coordinate values of the location that would
minimize transportation costs.
• The coordinates of the center of gravity can be identified by
•
XV
Xc  i i

V i

• Where Xc andY 
Yc are the coordinates of the center of gravity, Vi is the
 YVi i

volume of itemstransported to and from location i, and Xi and Yi are the

c
V i

coordinates of location i.
 Centroid Method
• Example:
• The table below shows the X and Y coordinates of seven retail locations of
a retail chain. Information regarding the quantity to be shipped to each of
the seven locations is given in the table. Using the center of gravity
method, identify the coordinates of the optimal location for the
warehouse.

Retail Volum
X Y
Outlet e
A 4 10 80
B 3.5 15 100
C 4 6 120
D 10 2 130
E 16 6 100
F 8 5 150
G 14 13 90
 Centroid Method
• Solution

Retail Outlet X Y Volume Vi*Xi Vi*Yi

A 4 10 80 320 800
B 3.5 15 100 350 1500
C 4 6 120 480 720
D 10 2 130 1300 260
E 16 6 100 1600 600
F 8 5 150 1200 750
G 14 13 90 1260 1170
Total ∑ 770 6510 5800
 Centroid Method
• From the table, we get the values as under:
V  770
i

V X  6510
i i

V Y  5800
i i
• Substituting these values in the equation, we get
• Volume-weighted X coordinate = Xc =
V X  6510  8.45
i i

• Volume-weighted Y coordinate = Yc = V 770 i

VY  5800  7.53

i i

• The X and Y coordinates of the point of center

V of770
gravity are 8.45 and 7.53
i
• The graph below shows that the location of the warehouse is closest to
retail outlet F.
 Locating Service Facilities
Because of the variety in service firms, and relatively low cost of establishing a service
facility compared to manufacturing, new service facilities are more common.

Services typically have multiple sites to maintain close contact with customers.

The location decision is closely tied to market selection decision.

For example, if the target market is college groups, location decisions in retirement
communities – despite low cost, resource availability, etc. – are not viable.

Market needs also affect number of sites to be built and the size and characteristics
of the sites.

Many service location decision techniques maximize the profit potential of various
sites.