Factors Governing Plant Location

Facility location, also known as location analysis or k center problem, is a branch of operations research and computational geometry concerning itself with mathematical modeling and solution of problems concerning optimal placement of facilities in order to minimize transportation costs, avoid placing hazardous materials near housing, outperform competitors’ facilities, etc.

Importance of facility location

Plant location may be understood as the function of determining where the plant should be located for maximum operating economy and effectiveness. The selection of location for a plant is one of the problems, perhaps the most important, which is faced by an entrepreneur while launching a new enterprise. A selection on pure economic considerations will ensure an easy and regular supply of raw materials, labour force, efficient plant layout, proper utilization of production capacity and reduced cost of production. An ideal location may not, by itself, guarantee success; but it certainly contributes to the smooth and efficient working of an organization. A bad location, on the other hand, is a severe handicap for any enterprise and it finally bankrupts it.

It is therefore, very essential that utmost should be exercised in the initial stages to select a proper location. Once a mistake is made in locating a plant it becomes extremely difficult and costly to correct it, especially where large plants are concerned.

Plant location decisions need detailed analysis because:-

1. Wrong plant location generally affects cost parameters i.e. poor location can act as a continuous stimulus of higher cost. Marketing, transportation, quality, customer satisfaction are some of the other factors which are greatly influenced by the plant location decisions – hence these decisions require in-depth analysis.

2. Once a plant is set up at a location which is not much suitable, it is a very disturbing as well as very expensive process to shift works of a company to some other place, as it would largely affect the cycle of production.

3. The investments involved in the in setting up of the plant premises .buying of the land etc are very large and especially in the case of big multinational companies, the investments can go into millions of rupees, so economic factors of the location should be very minutely and carefully checked and discussed in order to achieve good returns on the money which has been invested.

The Need for location decisions:-

These decisions are needed when a new plant is to be set up or when the operations involved in the company at the present location need to be expanded but expansion becomes difficult because of the poor selection of the site for such operations. These decisions are sometimes taken because of the social or the political conditions engulfing the working of a company.

The way the works of a company have to be performed, largely depends upon the industrial policies issued by the government. Any change that creeps in the industrial policy of the government which favors decentralization and hence does not permit any change or any expansion of the existing plant – requires strictly evaluated location decisions.

Factors governing plant location:-

1. Regional factors: These factors include proximity of the plant to the market and also to the sources of the raw materials. They also include infrastructural facilities, transportation facilities, and availability of skilled workers, legislation, the taxation and also the work attitude of the workers.

Robinson was the one who has very clearly justified industrial location concerns using pure materials nearer to the markets or the consumption centers. According to Robinson, the place of production is likely to be at the place of consumption where the final product is more expensive to carry because it is more bulky, more fragile or more perishable than is raw materials.

2. Community factors: These involve accommodation, education, entertainment and transport facilities. It also includes attitude of the community, supporting industries and services, suitability of the land etc.

Location Selection Factors

For a company which operates in a global environment; cost, available infrastructure, labor skill, government policies and environment are very important factors. A right location provides adequate access to customers, skilled labors, transportation, etc. A right location ensures success of the organization in current global competitive environment.

Industrialization

A geographic area becomes a focal point for various facility locations based on many factors, parameters and issues. These factors are can be divided into primary factors and secondary factors. A primary factor which leads to industrialization of a particular area for particular manufacturing of products is material, labor and presence of similar manufacturing facilities. Secondary factors are available of credit finance, communication infrastructure and insurance.

Errors in Location Selection

Facility location is critical for business continuity and success of the organization. So it is important to avoid mistakes while making selection for a location. Errors in selection can be divided into two broad categories behavioral and non-behavioral. Behavioral errors are decision made by executives of the company where personal factors are considered before success of location, for example, movement of personal establishment from hometown to new location facility. Non-behavioral errors include lack of proper investigative practice and analysis, ignoring critical factors and characteristics of the industry.

Location Strategy

The goal of an organization is customer delight for that it needs access to the customers at minimum possible cost. This is achieved by developing location strategy. Location strategy helps the company in determining product offering, market, demand forecast in different markets, best location to access customers and best manufacturing and service location.

Good location of a production facility will give cost advantage to production and may also reduce the raw material and distribution costs. The location aspect is particularly advantageous to small business enterprises. Location adds to competitive advantages and improved profits.

Existing facilities are relocated

To take advantage of better infrastructure NEED FOR LOCATION

New plant or service is planned

Adding to existing business

THE LOCATION SELECTION HAS THREE MAIN ISSUES:

(i) Selection of the region: It is imperative to produce near the raw material base or customer to meet set competition, trade agreement and transport costs.

(ii) Selection of locality: The choices are the rural place, the urban place or suburban area near the metro. The selection usually boils down to developed industrial area or having government sponsored advantages.

(iii) Selection of site: Advantages of low labour cost, low land cost, infrastructure or transport facilities chosen. After the selection of location of manufacturing or services, the next important activity is facilities layout.

The arrangement of various departments, machines in the building and plant services is to be done in order to get the maximum efficiency by the optimum usage of resources. The type of production equipment and product characteristics are to be considered while evolving a good factory layout.

A factory layout means location of different departments, like foundry, forging, machine shop, tool room, administration, maintenance shop whereas a plant layout means the location sequence or arrangement of machines and equipments in a department.

Selection of proper location is very important for the success of any business. Plant location is considered as the function of determining where the plant should be located for maximum operating economy and effectiveness.

FACTORS AFFECTING LOCATION DECISION

Primary Factors :

– Nearness to customers

– Near raw materials

– Supply of capital

– Logistic facilities and infrastructure

– Skilled labour availability

– Power supply

– Business climate

(a) Nearness to Customers: Nearness to customer helps a plant to incorporate customer needs into the products being made in the unit. Finished goods to customers can reach faster and in less cost. There is less chance of breakage or damage during transportation.

(b) Nearness to raw materials: Cost of raw material input is a large cost in case of manufactured goods. The time & cost of transporting raw material is less if the plant is located near the source of raw material. For example, thermal power plants are located near to the coal mines.

(c) Supply of capital: Short term and long term funds are required for any manufacturing or service industry. A company decides to locate its plant in such a location where fund movement is hassle free.

(d) Logistic facilities and Infrastructure: Adequate roads, rail, phone, postal and transportation facilities are to be considered while deciding on the location of plant and service facilities.

(e) Skilled labour Supply: Regular supply of skilled labour is one of the major factors to be considered while deciding on the plant or service location. Example: Software companies are located in Bangalore, Hyderabad and New Delhi.

(f) Power Supply: This is a very critical factor to be analyzed. Uninterrupted power supply with proper voltage is one of the prerequisites of plant location decision.

(g) Business Climate: Companies must find a positive business climate or environment in the area, state or a country to set-up manufacturing or service facility there.

FACTORS INFLUENCING FACILITY LOCATION

If the organization can configure the right location for the manufacturing facility, it will have sufficient access to the customers, workers, transportation, etc. For commercial success, and competitive advantage following are the critical factors:

Customer Proximity: Facility locations are selected closer to the customer as to reduce transportation cost and decrease time in reaching the customer.

Business Area: Presence of other similar manufacturing units around makes business area conducive for facility establishment.

Availability of Skill Labour: Education, experience and skill of available labor are another important, which determines facility location.

Free Trade Zone/Agreement: Free-trade zones promote the establishment of manufacturing facility by providing incentives in custom duties and levies. On another hand free trade agreement is among countries providing an incentive to establish business, in particular, country.

Suppliers: Continuous and quality supply of the raw materials is another critical factor in determining the location of manufacturing facility.

Environmental Policy: In current globalized world pollution, control is very important, therefore understanding of environmental policy for the facility location is another critical factor.

PLANT LOCATION METHODOLOGY

Factor Rating

In this method all the major factors of the site location are identified. The point range for each factor is defined. After that, points are assigned for each location alternatives. The location with the total highest point is chosen.

Centroid Method

The Centroid method is used for locating single facilities that considers the existing facilities, the distances between them, and the volumes of goods to be shipped between them.

This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above.

Plant Location Methodology:

Centroid Method Formulas-

Where: CX = X coordinate of Centroid

CY = Y coordinate of Centroid

dix = X coordinate of the ith location

diy = Y coordinate of the ith location

Vi = Volume of goods moved to or from ith location

Forecasting:

Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed. A commonplace example might be estimation of some variable of interest at some specified future date.

Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively to less formal judgmental methods.

Usage can differ between areas of application: for example, in hydrology, the terms “forecast” and “forecasting” are sometimes reserved for estimates of values at certain specific future times, while the term “prediction” is used for more general estimates, such as the number of times floods will occur over a long period.

The simplest form of forecasting is extrapolation, which consists of naively extending past trends into the future. In the case of simple trends, linear regression can determine the mathematical equation that best fits a line to the existing data points.

Extending this linear equation into the future provides an exact mathematical extrapolation of the trend. Regression analysis can also fit exponential and higher-order mathematical trends to existing data and extend these trends into the future. Exponential trends are often used to forecast high-growth industries. Prediction intervals provide mathematical “probability brackets” around future predictions created by regression analysis.

Importance of forecasting:

First, it enables management to change operations at the right time in order to reap the greatest benefit. It also helps the company prevent losses by making the proper decisions based on relevant information. Organizations that can create high quality and accurate forecasts are able to “see what interventions are required to meet their business performance targets”.

Forecasting is also important when it comes to developing new products or new product lines. It helps management decide whether the product or product line will be successful. Forecasting prevents the company from spending time and money developing, manufacturing, and marketing a product that will fail.

Stockholder expectations highlight another reason behind the importance of forecasting. Public companies experience scrutiny and pressure for short-term performance from investors. Operational results will be examined by investors and investment analysts, and actual results that differ from forecasts will be bad for the company and its stock price. This is because both meeting predictions and exceeding predictions will reduce investor confidence. This will cause investors to believe that the company does not understand its own business model.

Competitive Environment:

The competitive environment, also known as the market structure, is the dynamic system in which your business competes. The state of the system as a whole limits the flexibility of your business. World economic conditions, for example, might increase the prices of raw materials, forcing companies that supply your industry to charge more, raising your overhead costs. At the other end of the scale, local events, such as regional labor shortages or natural disasters, also affect the competitive environment.

Factors of competitive environment:

Internal factors: Internal factors are those factors which exist within the premises of an organization and directly affect the different operations carried out in a business. These internal factors are :

-VALUE SYSTEM: It implies the culture and norms of the business. In other words, it means the regulatory framework of a business and every member of the organization has to act within the limits of this framework.

-MISSIONS AND OBJECTIVES: Different priorities, policies and philosophies of a business is guided by the mission and objectives of a business.

-FINANCIAL FACTORS: Financial factors like financial policies, financial position and capital structure also affect a business performance and its strategies.

-INTERNAL RELATIONSHIP: Factors like the amount of support the top management enjoys from its shareholders, employees and the board of directors also affects the smooth functioning of a business.

External factors

They include all those factors which exists outside the firm and are often regarded as uncontrollable.. These external forces can further be categorized as MICRO ENVIRONMENT and MACRO ENVIRONMENT.

MICRO ENVIRONMENT includes the following factors:-

-SUPPLIERS: Suppliers are those people who are responsible for supplying necessary inputs to the organization and ensure the smooth flow of production.

-COMPETITORS: Competitors can be called the close rivals and in order to survive the competition one has to keep a close look in the market and formulate its policies and strategies as such to face the competition.

-MARKETING INTERMEDIARIES: Marketing intermediaries aid the company in promoting, selling and distribution of the goods and services to its final users. Therefore, marketing intermediaries are vital link between the business and the consumers.

MACRO ENVIRONMENT includes the following factors:-

-ECONOMIC FACTORS: Economic factors include economic conditions and economic policies that together constitute the economic environment. These include growth rate, inflation, and restrictive trade practices etc. which have a considerable impact on the business.

-SOCIAL FACTORS: Social factors includes the society as a whole alongside its preferences and priorities like the buying and consumption pattern, beliefs of people their purchasing power, educational background etc.

-POLITICAL FACTORS: The political factors are related to the management of public affairs And their impact on the business. It is important to have a political stability to maintain stability in the trade.

-TECHNOLOGICAL FACTORS: Latest technologies help in improving the marketability of the product plus make it more consumers friendly. Therefore, it is important for a business to keep a pace with the changing technologies in order to survive in the long run.

MICHAEL PORTER FIVE FORCES MODEL

Porter’s five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An “unattractive” industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching “pure competition”, in which available profits for all firms are driven to normal profit.

Threat of new competition

Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents, the abnormal profit rate will tend towards zero (perfect competition).

The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily.

Economies of product differences

Brand equity

Switching costs or sunk costs

Capital requirements

Access to distribution

Customer loyalty to established brands

Absolute cost

Industry profitability; the more profitable the industry the more attractive it will be to new competitors.

Threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. Note that this should not be confused with competitors’ similar products but entirely different ones instead. For example, tap water might be considered a substitute for Coke, whereas Pepsi is a competitor’s similar product. Increased marketing for drinking tap water might “shrink the pie” for both Coke and Pepsi, whereas increased Pepsi advertising would likely “grow the pie” (increase consumption of all soft drinks), albeit while giving Pepsi a larger slice at Coke’s expense.

Buyer propensity to substitute

Relative price performance of substitute

Buyer switching costs

Perceived level of product differentiation

Number of substitute products available in the market

Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product.

Substandard product

Quality depreciation