CHAPTER 5: FACILITY LOCATION

5.1 The Need for Location Decisions

Facilities location may be defined as selection of suitable location or site or place where the
factory or plant or facilities to be installed, where plant will start functioning.

The development of a location strategy depends upon the type of firm being considered.
Industrial location analysis decisions focus on minimizing costs; retail and professional service
organizations typically have a focus of maximizing revenue. Warehouse location, on the other
hand, may be determined by a combination of cost and speed of delivery. The objective of
location strategy is to maximize the benefit of location to the firm.

Facility planning has developed, in the past decade, into a major thriving business sector and
discipline. One of the major reasons for new facilities is the global economic boom that has been
accompanied by an enhancement of capacity worldwide.

In addition to the global economic boom, there are several other reasons for changing or adding
locations:

1. The cost or availability of labour, raw materials, and supporting resources often change.
These changes in resources may spur the decision.
2. As product markets change, the geographical region of demand may shift. For example,
many international companies find it desirable to change facility location to provide better
service to customers.
3. Companies may split, merge, or be acquired by new owners, making facilities redundant.
4. New products may be introduced, changing the requirement and availability of resources.
5. Political, economic and legal requirements may make it more attractive to change location.
Many companies are moving facilities to regions where environment or labour laws are more
favorable.

Well-planned facilities enable an organization to function at its most efficient and effective level,
offering real added value improvements to the organization's core business.

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5.2 The Nature of Location Decisions

Location decision involves four options that mangers can consider in location planning.
These are:
 Expanding an existing facility- These options can be attractive if there is adequate
room for expansion, especially if the location has desirable features that are not readily
available elsewhere. Expansion costs are often less than those of other alternatives.
 Addition new location- Another option is to add new location while retaining existing
ones, as it is done in many retail operations. The advantage of this option are: it draws
/attracts customers who are already looking for an existing business, and used as a
defensive strategy designed to maintain a market share or prevent competitors from
entering a market.
 Shutting down- The third option is to shut down at one location and move to another.
An organization must weigh the cost of a move and the resulting benefits against the
costs and benefits and remaining in an existing location. This option is considered when
market shifts, exhaustion of raw materials and the cost of operation often cause firms to
seriously consider this option.
 Doing nothing- If is a detailed analysis of potential locations fails to uncover benefits
that make one of the previous three alternatives attractive, a firm may decide to maintain
a status of at least for the time being
5.3 Factors That Affect Location Decisions

Manufactured products differ from many service products as production may take place at a
location, and then the goods are distributed to the customer. Often the source of raw materials is
an important factor in deciding locations. Very often, you want to locate your operation close to
that source of raw material.

Example: In aquaculture, the incubation of salmon eggs and the first stage lifecycle of the fish
are done in fresh water. Therefore, it is advantageous to locate hatcheries where there is an
abundance of fresh water.

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The typical factors that require consideration are:

1. Location of markets: Locating plants and facilities near the market for a particular product
or service may be of primary importance for many products in the sense that location may
impact the economics of the manufacturing process. This may be because of:
a. Increased bulk or weight of the product
b. Product may be breakable
c. It susceptible to spoilage
d. Add to transportation costs
e. Increase transit time
f. Decrease deliveries
g. Affect the promptness of service
h. Affect the selling price of the product – the transportation cost often makes the product
expensive

Assembly-type industries, in which raw materials are gathered together from various diverse
locations and are assembled into a single unit, often tend to be located near the intended market.
This becomes especially important in the case of a custom-made product, where close customer
contact is essential.

2. Location of materials: Access to suppliers of raw materials, parts, supplies, tools,

In general, the location of materials is likely to be important if:

a. Transportation of materials and parts represent the major portion of unit costs.
b. Material is available only in a particular region.
c. Material is bulky in the raw state.
d. Material bulk can be reduced in various products and by products during processing.
e. Material is perishable and processing increases the shelf life.

Keeping in mind those materials may come from a variety of locations; the plant would then be
located such as to minimize the total transportation costs. Transportation costs are not simply a

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function of distance – they can vary depending on the specific routes as well as the specific
product classifications.

3. Transportation facilities: Adequate transportation facilities are essential for the economic
operation of a production system. These can include – road, rail waterways airports. The bulk
of all freight shipments are made by rail since it offers low costs, flexibility and speed.

For companies that produce or buy heavy and bulky low-value-per-ton commodities as are
generally involved in import and export activities, shipping and location of ports may be a factor
of prime importance in the plant location decision. Truck transport for intercity transport is
increasing as is airfreight and executive travel.

Traveling expenses of management and sales personnel should also be considered in the
equation.

4. Labour supply: Manpower is the most costly input in most production systems. An ample
supply of labour is essential to any enterprise. The following rule of thumb is generally
applied:
a. The area should contain four times as many permanent job applicants than the
organization will require.
b. There should be a diversification between industry and commerce-roughly 50/50.

Organizations often take advantage of a location with an abundant supply of workers. Labour
costs and/or skills are often a very important consideration for locating a facility.

The type and level of skill possessed by the workforce must also be considered. If a particular
required skill is not available, then training costs may be prohibitive and the resulting level of
productivity inadequate.

In the call center business, the need of English speaking workers becomes a factor in deciding
the location of your business capacity. India has come on the map for software development
because it has a large number of skilled software personnel. Microsoft, Texas Instruments, Cisco
Systems, Oracle, etc., some of the best-known names in software applications, have located
facilities in India.

Many countries, like China and India, are turning out to be attractive locations for industries that
require large contingents of unskilled labour.

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Though, this is often very appealing, you need to bear in mind that conditions can change in
time. For example, while labour costs may be low in a certain geographic location now, this will
change if the demand for labour grows significantly.

In considering the labour supply, the following points should be considered.

a. Skills available – size of the labour force – productivity levels.

Some organizations have relocated from a high skill/high cost area to a low skill/low cost area
without any decrease in productivity. Sometimes it has been due to skill availability and labour-
management relations but often it has been the result of higher investment in mechanization.

5. Location of other plants and warehouses: Organizations need to look at their plant
locations for the complete system point of view.
a. Distribution and supply requirements require the support of sister-plants and warehouses
that complement the system.
b. The system should be designed to minimize total system costs.
c. The locations of competitor's plant and warehouses must also be considered (what do
they know, that you don't) the object being to obtain an advantage in both freight costs
and the level of customer service.
6. Climate: The recent typhoons in the Gulf of Mexico have indicated the need to look at
climatic conditions as a parameter for making location decisions. Example: Petrochemical
plants near Houston were seriously threatened by Hurricane
7. Governmental controls and regulations: Labour conditions include skills, availability,
unionization and history of labour relations. Tax regulations, environmental regulations or
various other kinds of government policies and regulations can be important factors in the
location decision. There may be a more favorable investment climate in a particular
geographical or political region that may attract industry to invest in that region.