VESIMSR

FACILITY
LOCATION
 Plant location may be understood as the function of
determining where the plant should be located for
maximum operating economy and effectiveness.

 Small entrepreneur to big industrial houses, hospital

to a fashion designer shop and school to a five star
hotel start the first planning activity with questions:

“Where to locate the site so that no change is

needed for years to come.”

 An ideal location may not by itself, guarantee

success; but it certainly contributes to the smooth and
efficient working of an organisation.

 It is a very vital decision which has long term

implications. We call this type of decision as a
STRATEGIC DECISION.
 Plant location decisions being strategic, long term and non-
repetitive require detailed analysis of long term consequences
because of various reasons.

 Some of the reasons are:

(i) uncertainty in future

(ii) complexity and conflicting factors associated with the
site selection problem
(iii) constraints and limitation of resources to produce a site,
etc. 

Let us consider two sites for location of a new factory.

 Site A is nearer to market but far from the raw material source;
site B is otherwise.
 Site A is a rural location with cheap availability of labor; site B
is an urban location with better availability of power.
 Similarly, we can list many factors: Some are better at site A,
while the rest are better at site B.
 Which site to select? When site selection decision is needed,
many options are available with their relative strength and
weaknesses. A careful consideration is needed on an integrated
framework before final site is selected.
WHEN DOES A LOCATIONAL DECISION ARISE ?

 A new manufacturing unit is to be set up;

 Existing plant operations are difficult to expand,

hence a new location is to be found;

 The growth of business makes it advisable to

establish additional facilities in new territories;

 Changes in industrial policy of the government,

decentralization and dispersal of industries to
achieve overall development of the country, do
not permit expansion of the existing plant.
 COMPARATIVE STUDY OF RURAL AND URBAN SITES
  Factors Urban or City Sub-urban Rural or
Site Country Site

1. Availability of land Less Moderate Plenty

2. Cost of land High Moderate Low

 
3. Connected by rail/road etc. Well Moderate Poor

4. Availability of labour Less Moderate More

5. Wages of labour More Moderate Less

6. Communication network, like internet, fax, Very good Moderate Poor

telephone, fax postal, etc.

7. Power and water availability Good Moderate Poor

8. Supporting industries and ancillaries' units Nearby Nearby Far

9. Quality of life, such as recreation, school, hospital, Very good Moderate Poor
etc.

10. Market and consumer Nearby Moderate Far

 LOCATION MODELS
Various models are available which help identify a
near ideal location. The most popular models are:-

Factor Rating Method.

Point Rating Method.

Break-even Analysis.

Quantitative Factor Analysis.

 FACTOR RATING METHOD

1. List the most relevant factors in the location decision.

2. List the most relevant factors in the location decision.
3. Rate each factor (say from 1 very low and to 5 for every
high) according to its relative importance, i.e., a factor
rating is given to each factor, based on its importance, the
higher the ratings the more important is the factor.
4. Rate each locations (say 1 for very low and 10 for very
high) according to its merits on each factor .
5. Compute the product ratings by multiplying the factor
rating by the location rating of the each factor.
6. Compute the sum of the product ratings for each location
Factor ratings and location ratings for location alternatives
Factor Factor Location Rating Product of rating
Rating
Location Location Location A Location B
A B
1. Tax advantage 4 8 6 32 24
2. Suitability of labour skill 3 2 3 6 9
3. Proximity to customers 3 6 5 18 15
4. Proximity to suppliers 5 2 4 10 20
5. Adequacy of water 1 3 3 3 3
6. Receptivity of community 5 4 3 20 15
7. Quality of educational system 4 1 2 4 8
8. Access to rail and air 3 10 8 30 24
transportation
9. Suitability of climate 2 7 9 14 18
10. Availability of power 2 6 4 12 8
Total score 149 144
 Point Rating Method

•This method involves an inspection of the

importance of each factor in the location selection
process. Each location factor is assigned a relative
weight out of a maximum number of possible
points, which is usually 100.

•Then a 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.
 Points assigned to alternative locations
Factors rated Maximum Points assigned to
possible points locations
Location A Location B
Future availability of fuel 300 200 250
Transportation flexibility 200 150 150
and growth
Adequacy of water supply 100 100 100
Labour availability 250 220 200
Pollution regulations 30 20 20
Site topography 50 40 30
Living conditions 150 100 125
Total 830 875
 Break Even Analysis
Break even point
At this point the cost of operations equals its
revenues.

Break even analysis specifies the level of output

that must be reached in order to recover all the
cost of operations through revenues.

And the break-even point depends on the

selling price of the product and the operating
cost structure.

Cost is divided into two categories

Fixed cost: Doesn't vary with volume of
production. For eg., salaries of staff, insurance.
Variable cost: shipping handling cost etc.
 Qualitative Factor analysis Method

a) Develop a list of relevant factors

b)Assign a weight to each factor to indicate its

relative importance(Weights may total up to 1.0)

c)Assign a common scale to each factor say 0 to

100 and designate any minimum point to be
scored by any location

d)Score each potential location according to the

designated scale and multiply the scores by the
weights to arrive at the weighted scores

e)Total the points for each location, and choose the

location with the maximum points
 XYZ company is evaluating four locations for a
new plant and has weighted the relevant scores as
given below. Scores have been assigned with
values indicative of preferred conditions. Using
these scores, develop a qualitative factor
comparison for the four locations
Relevant Factor Assigned Scores for locations
weight A B C D

Production cost 0.35 50 40 60 30

Raw material supply 0.25 70 80 80 60
Labour availability 0.20 60 70 60 50
Cost of Living 0.05 80 70 40 80
Environment 0.05 50 60 70 90
Markets 0.10 70 90 80 50
Factor Weighted Score for locations
A B C D
Production cost 17.5 14.0 21.0 10.5
Raw material supply 17.5 20.0 20.0 15.0
Labour availability 12.0 14.0 12.0 10.0
Cost of Living 4.0 3.5 2.0 4.0
Environment 2.5 3.0 3.5 4.5
Markets 7.0 9.0 8.0 5.0
Total score 60.5 63.5 66.5 49.0
 Errors in selection of Location
1. Lack of thorough investigation and consideration of factors
involved.

2. Personal likes and prejudices of key executives or owners

overriding impartially established facts.

3. Reluctance of key executives to move from traditional

established home ground to new and better locations.

4. Moving to congested areas already or about to be over

industrialised.

5. Preference for acquiring an existing structure (usually at

an imagined bargain) that is improperly located or not
designed for the most efficient production.

6. Choice of community with low cultural and educational

standards, so that key administrative and technical
personnel eventually accept employment elsewhere.
 Factors
Availability
of power
supply
Easy
availability Basic
of cheap amenities
land

Proximity to
Government
subcontractor policies

Environment
&
community
 Factors
Availability
of
skillful
labour
Low
construction Proximity
cost to markets

Proximity to Good
raw transportation
facilities
materials
Residential
complexes,
schools,
hospitals etc.