FACILITY

LOCATION
 TERMINOLOGY
 Plant: Any set-up, for the purpose of business,
which is engaged in any kind of production
operation and yields semi-finished or finished
goods as end results.

 Location: Any place or region of any set-up or

concern in which the set-up or concern is
situated.
 PLANT LOCATION DECISIONS

 Decisions made by managers, which are aimed

to the selection of a location for the settlement
of any intended plant of the concern business

 Decision are made based on factors as:

 labor supply condition
 raw materials supply condition
 distance with the market place, etc
 OBJECTIVES OF LOCATION DECISIONS
 Attempt to identify the best location available
 Find the number of location that would have to be examined to
find the best location
 In case of numerous acceptable locations of wide variety, find a
number of acceptable locations from which to choose
 To avoid choosing a location that will create future problems
 Profit-Oriented firms
 set-up their location based on profit potential
 Nonprofit firms
• strive to achieve balance between cost & services
 NEED FOR LOCATION DECISION
 For Existing Organizations:
 Marketing Strategy: Look for locations that will help the
firms expand their markets and reflect the addition of new
locations to an existing system, e.g., banks, fast food chains,
supermarkets
 Growth in Demand: Meet the demand that cannot be
satisfied by expansion at an existing location; the addition of
a new location can complement the existing one
 Depletion of Basic Inputs: When businesses are forced to
relocate due to the temporary exhaustion at a given location,
e.g., fishing, logging, mining
 Shift in Markets: When businesses are required to consider
relocation due to market shift, or,
 Costs of doing business at a particular location reach a point
where other locations begin to look more attractive
 OTHER REASONS

 Need for greater capacity

 Changes in resources
 Shift in geography of demand
 Redundant facilities resulting from merge of
companies
 Change in availability of resources and markets
 Political and economic conditions
 IMPORTANCE OF PLANT LOCATION
Primary Importance
1. Location decisions entail a long-term commitment, which
makes mistakes difficult to overcome.
2. They often have an impact on investment requirements,
operating costs and revenues, and operations itself.

A poor choice of location might detrimental to operations due to

 excessive transportation costs

 a shortage of qualified labor

 loss of competitive advantage

 inadequate supplies of raw materials, etc.

For services, a poor location could result in loss of customers

and/or high operating costs.
 PHASES OF PLAN LOCATION THEORY

The problem of plant location can be defined as the

determination of that location which, when
confederating all factors, will provide minimum
delivered-to-customer cost of the product(s) to be
manufactured

Plant location theory can be considered to have passed

though four phases:
 PHASES OF PLAN LOCATION THEORY (CONT.)
1. The Least Production Cost Site Phase: Interests are
concentrated on location factors directly affecting cost of
production
2. The Nearness of Market Phase: More realistic concepts are
introduced, such as the effect of uneven population, uneven
resource distribution, imperfect competition and the
independence of firms within a multi-market economy
3. The Profit Maximization Phase: Optimum location determined
by the difference between total revenue and total cost
4. The Least Costs to Customer Phase: Decision data are related to
delivered costs to customers. Greater emphasis is given on
analytical models, such as linear programming models and
delivery time to customers
 LOCATION PRINCIPLES
Before looking at approaches to location study, certain principles
to good plant location need to be established. E.g.,
 Objectively determine the needs of the plant or other facilities
and select the location whose services and conditions best
satisfy them. The degree of satisfaction can be determined only
if needs are well defined.
 Objectively determine the characteristics of the site that may
affect the effectiveness of the operations following location.
 Separate location studies from site studies

 Bring to bear the specific and different talents necessary to

most effectively conduct or supplement the different phases of
the problem
 NATURE OF LOCATION DECISION OPTIONS
1. To expand an existing facility
 Ifthere is adequate room for expansion
 Especially if the location has desirable features that are not readily
available elsewhere
2. To add new locations while retaining existing ones
 Essentialto take into account what the impact will be on the total system.
 Can be a defensive strategy designed to maintain a market share or to
prevent competitors from entering a market.
3. Shut down at one location and move to another
 Weigh the costs of a move and the resulting benefits against the costs and
benefits of remaining at the existing location.
 Causes are - a shift in markets, exhaustion of raw materials, and the cost
of operations.
4. Doing nothing
 Maintain the status quo, at least for the time being, if a detailed analysis
of potential locations fails to uncover benefits that make one of the
previous three alternatives attractive
 EFFECTS OF LOCATION ON REVENUE & COST
 Effects on Revenues
 In some industries, revenues depend on having the facility near potential
customers, e.g., beauty parlor
 Again, for manufacturing firms that supply to other manufacturers and
assemblers, delivery time can be a crucial component, resulting in
revenues.
 Location is not so important for stored services, as those are not directly
consumed, e.g., central banks, quasi manufacturers (appliances &
automotive repair shops), don’t necessarily have to be located near
consumers.
 Firms that offer directly consumed services, location can be critical and
must be located for public convenience, e.g., moving theaters,
restaurants, banks, apartments, dry cleaning stores, public recreation
areas.
 Otherwise, consumers will go elsewhere, and revenues will decline.
 EFFECTS OF LOCATION ON REVENUE & COST
 Effects on Fixed Costs
 New or additional facilities entail fixed initial costs (for new construction,
purchase and renovation of other existing plants, or rental), which must
be recovered out of revenues if the investment is to be profitable.
 Once they are acquired, more money must be spent on equipment and
fixtures. The magnitude of these costs may well depend on the site that is
selected.
 A chosen merchandising in corner location in downtown area like
Motijheel, Dhaka requires a totally different capital outlay from one in
suburban area.
 Construction costs also vary greatly from one place to another.
 EFFECTS OF LOCATION ON REVENUE & COST
 Effects on Variable Costs
 Once built, the new facility must be staffed and operated, and these
costs, too, depend on location.
 For labor-intensive conversion processes, the availability of labor and
local expectations for wages are major concerns.
 Management must also consider proximity to sources of raw materials
(inputs) and to markets for finished goods (outputs), which can vary
transportation and shipping costs.
 In Bangladesh textile facilities sprung up in places like Narayanganj,
Savar because of availability of inputs like labor, threads and large areas
of land.
 REASONS FOR LOCATION CHANGE
 Long-range forecasts and capacity plan may reveal the
need for additional capacity in some areas
 If a company has excess capacity in one location or excess
shipping cost to some areas, relocation of some facility or
facilities may be desirable
 At least four aspects of the facility question must be
addressed
 Types of facilities needed
 Location of those facilities
 Necessary capacity
 Design and layout of the facilities
 REASONS FOR LOCATION CHANGE
 Other reasons for changing or adding locations
 Changes in resource factors : The cost or availability of labor,
raw materials, and supporting resources (such as
subcontractors) may change.
 Geography of demand shift: As product markets change, it may
be desirable to change facility location to provide better service
to customers, i.e., the facility should be with customers.
 Companies merger: To prevent overlapping of efforts some
facilities may become useless, redundant and need to be
streamlined.
 New products and processes: Technological changes in the
methods of production can cause a location to become less
attractive, thus changing the availability of resources and
markets.
 Political and economic conditions: This intangible reason plays
a major role in some countries.
 REGIONAL AND COMMUNITY
FACTORS AFFECTING LOCATION
DECISIONS
REGIONAL AND COMMUNITY FACTORS AFFECTING LOCATION
DECISIONS
Location decisions can follow the following sequence
 Identification of important dominating factors. E.g.,
 in manufacturing: Availability of an abundant energy and water supply
and proximity to raw materials
 in service: Market-related factors that include traffic patterns,
convenience, competitors’ locations, proximity to the market
 Search for suitable alternatives (few) to one geographic region
 Detailed analysis of these communities & sites
 Joint consideration of community & site location factors as they are
often intertwined
 The primary regional factors involve (a) raw materials, (b) markets,
(c) competitors and (d) labor considerations.
 PRIMARY REGIONAL FACTORS
 With or without competitors
 Near to Raw Materials
 Necessity (e.g., mining, farming,  Convenience to attract
fishing) customers
 Perishability (e.g., dairy)  Distribution costs

 Transportation Costs (e.g.,  Customer contact

paper)
 Labor Factors
 Cost (wage rate) & availability
 Near to Markets
 Profit-oriented firms of labor
 Distribution costs  Labor productivity & attitudes

 Short shelf life  Labor unions and political

 Availability of retails sales and

problems
 Skills & training of the potential
services
 Convenience/competition factor
labor force
 Specialization
 Competitive Pressures
 MAJOR FACTORS IN REGIONAL ANALYSIS

 Market availability both from concentration and time to

delivery stand points
 Raw materials availability both present and future
 Transportation systems: Variety, concentrations, and costs
 Power: present and future (availability and costs)
 Climatic influences: primarily affecting construction, heating
& cooling costs, as well as personnel influence
 Labor & wages
 Taxation policies & other statutory influences
 STEPS IN MAKING SITE SELECTION
 Forecast future requirements by planned stages of
development, if applicable.
 Develop and define location criteria.
 Quite difficult to choose
 10 criteria by “Industrial Development”
 Conduct site survey which will measure the site by
measure of the criteria
 Look at past, present and future trends.
 Tabulate the results in a manner that will permit
comparison of one location to another in as objective a
manner as feasible or reasonable.
 SELECTION OF CRITERIA: 10 MAJOR FACTORS
 Markets (9-63)
 Labor (18-128)
 Materials & Services (4-31)
 Transportation (12-82)
 Government & Legislation (8-54)
 Financing (5-40)
 Water & Waste Disposal (10-72)
 Power & Fuel (5-38)
 Community Characteristics 26-181)
 Individual Sites (12-64)
• The numbers in the parenthesis represents the number of sub-
factors and sub-sub-factors under each of the classification.
• By “Industrial Development”
 Levels, factors and considerations for plant locations
Level Factors Considerations

Location of raw
Proximity, modes and costs of transportation, quantity available.
material

Location of markets Proximity, distribution costs, target market, trade practices/restrictions.

Regional

Availability, age distribution of labor, work attitudes, union or

Labor
nonunion, productivity, wage scales, unemployment compensation laws.

Schools, churches/mosques/temples, shopping, housing, transportation,

Facilities
entertainment.
Service Medical, fire, and police
Taxes State / local, direct and indirect

Community Environmental
State / local
regulation
Utilities Cost and availability

Development support Bond issues, tax abatement, low-cost loans,

Cost, degree of development required, soil characteristics and drainage,

Land
room for expansion, parking.
Site
Transportation Type (access road, rail spurs, air freight)
Environmental/ legal Zoning restrictions
 TRENDS IN LOCATIONS & POSSIBLE FUTURE STRATEGIES

Recent trends combine competitive & technological factors,

especially for manufacturing firms. e.g.,
 Foreign producers in foreign land
 United States represents a great market for cars, trucks, etc.
 By locating in the US these firms can shorten delivery time, reduce delivery
costs, avoid future tariff or quotas on imports (GATT)
 Just in time manufacturing techniques
 Encouraging suppliers and customers to locate near each other to reduce
supplier lead times
 Low labor cost becoming less important than market nearness (e.g., light
manufacturing)
 users of electronics components wants suppliers close to their manufacturing
facilities
 future may see smaller factories located close to markets to reduce response
time
 TRENDS IN LOCATIONS & POSSIBLE FUTURE STRATEGIES

 Information highway
 Advances in IT will enhance the manufacturing firms ability to gather, track, &
distribute information that links purchasing, marketing, & distribution with design,
engineering & manufacturing
 Thiswill reduce the need for the functions to be located close together, thereby
permitting a strategy of locating production facilities near major markets
 Locating manufacturing in countries that contain their markets
 E.g., Japanese auto companies establishing factories in US
 Currency fluctuation and devaluation
 can have a significant impact on demand and, hence, on profits.
 Changes in currency value alter the price of foreign goods, but not the price of
goods produced within a country.
 E.g., if the value of a country’s currency falls, prices within the country don’t change but
foreign produced goods become more expensive.
 If demand is elastic, then demand for those foreign goods will fall.
 Bylocating & selling within a country & buying from local suppliers,
manufacturers can avoid the impact of currency change.
STEPS & PROCEDURES FOR
FACILITY LOCATION
DECISIONS
STEPS & PROCEDURES FOR FACILITY LOCATION DECISIONS

 Major steps necessary in the overall location strategy:

1. Development of the major objectives of the firm necessitating
location selection by the management.
2. Isolation of pertinent variables affecting the choice of
location.
3. Development of accurate and timely information on each of
the variables selected in step 2
4. Design for the location system with detailed timetable for
implementation.
5. Completing the location move in an effective and efficient
manner by review, testing and feedback control
 STEPS & PROCEDURES FOR FACILITY LOCATION DECISIONS (CONT.)

1. Development of location objectives

Some managerial objectives for the proposed location movement may
include the following:
 Additional growth-space and layout;

 Better transportation network;

 Reduction in plant operations and service costs;
 Cordial labor situation;
 Better environment in terms of water, air, and land;
 Better community and public relations;
 Greater inter-plant coordination and centralized control;
 Improved logistics; and
 Increased future plant profitability.
 STEPS & PROCEDURES FOR FACILITY LOCATION DECISIONS (CONT.)
2. Isolation of pertinent variables
The choice of location will involve substantial research & documentation on the
variables. Some suggested variables are:

Site Variables Resource Variables

• Proximity to market • Available manpower
• Proximity to railroad • Available water supply
• Proximity to road transportation • Available energy sources
• Proximity to other plants • Housing facility
• Proximity to warehouse • Public transportation
• Land and terrain • Communications
• Climate
• Zoning

Financial Variables Image Variables

• Cost of equipment and machinery moves • Public relations in existing plant
• Cost of land and site acquisition • Public relations and image building in new site
• Interest, rent, and depreciation on existing • Employee welfare in location
facilities • Alternative absorption plans for non-located
• Moving costs of employees employees
• Cost of temporary operations in dual locations • Favorable (or adverse) reaction in the government
• Advertising costs • Overall community feelings toward moves
• Structure of local taxes • Publicity and campaign
• Cost of site construction and engineering.
2. Isolation of pertinent variables (Cont.)
Government Interface Variables Industry Variables

• Relations with the director of • Proximity to other competitors

industries in existing site • Heavy geographical concentration
• Relations with the director of in few areas
industries in new sites • Industry representative
• Government restrictions on moves associations strategy for and
(political pressures) against such moves
• Structure of long-term capital • Future development programs for
debts owed to government and the area.
what the move will do to these
loans
• Informal governmental leader’s
pressure both for and against such
moves
• Taxes– direct and indirect,
deferment and allowances.
 STEPS & PROCEDURES FOR FACILITY LOCATION DECISIONS (CONT.)

3. Development of accurate and timely information

 In this phase a detailed analysis of the relevant factors obtained in step two are made.
Care should be taken in respect of accuracy and timeliness of the data

4. Design of location system

 The suggested blueprint includes the following major items:
 Gross design for the plant
 Detailed departmental layout design
 Materials flow design
 Utilities flow design

 Communication flow design

 Finished goods inventory and storage design
 Auxiliary services design
 Recreational facilities design
 Machinery, equipment and tooling design
 Freight, railroad heads, and docking design
 Logistic design
 Other miscellaneous services (and products) design
STEPS & PROCEDURES FOR FACILITY LOCATION DECISIONS (CONT.)

5. Review and feedback control

 Review or feedback enables to determine the efficiency of

production man-hours lost, output curtailed and total cost
GENERAL PROCEDURES FOR FACILITY LOCATION PLANNING

 Decide on the criteria that will be used to evaluate location

alternatives, such as increased revenues or community service
 Identify important factors, such as location of market or raw
materials
 Develop location alternatives:
• Identify the general region for a location
• Identify a small number of community alternatives
• Identify site alternatives among the community alternatives
• Evaluate the alternatives
 Make a decision
 GENERAL PROCEDURES FOR FACILITY LOCATION PLANNING

 Resources and local conditions for facility location planning

Resources Local Conditions

Labor skills & productivity Community receptivity to
business
Land availability & cost Construction costs

Raw materials Organized industrial complexes

Subcontractors Quality of life: Climate, housing,

recreation
Transportation facilities School

Utility availability & rates Taxes

 EVALUATING LOCATION ALTERNATIVES

Factors utilized for evaluating alternative locations

1. Location Cost-Volume Analyses

 Determine the fixed & variable costs associated with each location
decisions.
 Plot the total cost lines for all location alternatives on the same graph.
 Determine which location has the lowest total cost for the expected level
of output.

Assumptions
 Fixed costs are constant for the range of probable output
 Variable costs are linear for the range of probable output
 The required level of output can be closely estimated
 Only one product is involved
 EVALUATING LOCATION ALTERNATIVES (CONT.)

2. The transportation model

 Transportation costs can be included in a location cost-
volume analysis
 Overall transportation cost is the criterion used for
performance evaluation

3. Factor rating
 Enables decision-makers to incorporate personal opinions &
quantitative information into the decision process.
 EVALUATING LOCATION ALTERNATIVES (CONT.)
 Procedure to Develop Factor Rating
 Determine which factors are relevant (e.g., location market, water supply,
parking facilities, revenue potential).
 Assign a weight to each factor that indicates its relative importance
compared with all other factors. Typically, weights sum to 1.00.
 Decide on common scale for all factors (e.g., 0 to 100).
 Score each location alternative.
 Multiply the factor weight by the score for each factor, and sum results
for each location alternatives.
 Choose the alternative that has the highest composite score.
THANK YOU