PLANT LOCATION &

LAYOUT
 Plant location or the facilities location problem is an
important strategic level decision making for an
organization.
 One of the key features of a conversion process
(manufacturing system) is the efficiency with which the
products (services) are transferred to the customers.
 This fact will include the determination of where to place
the plant or facility.
 The selection of location is a key-decision as large
investment is made in building plant and machinery.
 It is not advisable or not possible to change the location
very often. So an improper location of plant may lead to
waste of all the investments made in building and
machinery, equipment.
 Before a location for a plant is selected, long range
forecasts should be made anticipating future needs of the
company.
 The plant location should be based on the company’s
expansion plan and policy, diversification plan for the
products, changing market conditions, the changing
sources of raw materials and many other factors that
influence the choice of the location decision.
 The purpose of the location study is to find an optimum
location one that will result in the greatest advantage to
the organization.
NEED FOR SELECTING SUITABLE
PLANT LOCATION
 The need for selecting a suitable location arises because of three
situations.
 When starting a new organization, i.e., location choice for the first
time.
 In case of existing organization.
 In case of Global Location.
 In Case of Location Choice for the First Time or New
Organizations
Cost economies are always important while selecting a location for
the first time, but should keep in mind the cost of long-term
business/ organizational objectives. The following are the factors to
be considered while selecting the location for the new
organizations:
 Identification of region:
The organizational objectives along with the various
long-term considerations about marketing, technology,
internal organizational strengths and weaknesses,
region-specific resources and business environment,
legal-governmental environment, social environment
and geographical environment suggest a suitable region
for locating the operations facility.
 Choice of a site within a region:
Once the suitable region is identified, the next step is
choosing the best site from an available set.
 Choice of a site is less dependent on the organization’s
long-term strategies.
 Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem.
 The problem of location of a site within the region can
be approached with the following cost-oriented non-
interactive model, i.e., dimensional analysis.
 Dimensional analysis:
If all the costs were tangible and quantifiable,
the comparison and selection of a site is easy.
 The location with the least cost is selected. In
most of the cases intangible costs which are
expressed in relative terms than in absolute
terms.
 Their relative merits and demerits of sites can
also be compared easily.
 Since both tangible and intangible costs need
to be considered for a selection of a site,
dimensional analysis is used.
 C1M, C2M, …, CzM are the different costs associated with a
site M on the ‘z’ different cost items.
 C1N, C2N, …, CzN are the different costs associated with a
site N and W1, W2, W3, …, Wz are the weightage given to
these cost items, then relative merit of the M and site N
is given by:
 (C1M/ C1N)W1X (C2M/ C1N)W2 ,..., (CZM/ CZN)WZ
 If this is > 1, site N is superior and vice-versa.
 When starting a new factory, plant location decisions are
very important because they have direct bearing on
factors like, financial, employment and distribution
patterns. In the long run, relocation of plant may even
benefit the organization.
II. In Case of Location Choice for Existing
Organization
 In this case a manufacturing plant has to fit into a
multi-plant operations strategy.
 That is, additional plant location in the same
premises and elsewhere under following
circumstances:
 Plant manufacturing distinct products.
 Manufacturing plant supplying to specific market
area.
 Plant divided on the basis of the process or stages in
manufacturing.
 Plants emphasizing flexibility.
 Plants manufacturing distinct products:
Each plant services the entire market area for the
organization.
 This strategy is necessary where the needs of
technological and resource inputs are specialized or
distinctively different for the different product-lines.
 Manufacturing plants supplying to a specific market
area:
Here, each plant manufactures almost all of the company’s
products.
 This type of strategy is useful where market proximity
consideration dominates the resources and technology
considerations.
 This strategy requires great deal of coordination from the
corporate office. An extreme example of this strategy is
that of soft drinks bottling plants.
 Plants divided on the basis of the process or stages in
manufacturing:
Each production process or stage of manufacturing may require
distinctively different equipment capabilities, labor skills,
technologies, and managerial policies and emphasis.
 Since the products of one plant feed into the other plant, this
strategy requires much centralized coordination of the
manufacturing activities from the corporate office that are
expected to understand the various technological aspects of all
the plants.
 Plants emphasizing flexibility:
This requires much coordination between plants to meet the
changing needs and at the same time ensure efficient use of the
facilities and resources.
 Frequent changes in the long-term strategy in order to improve
be efficiently temporarily, are not healthy for the organization.
 In any facility location problem the central question is: ‘Is this a
location at which the company can remain competitive for a
long time?’
III. In Case of Global Location
Because of globalization, multinational corporations are setting up
their organizations in India and Indian companies are extending
their operations in other countries.
 In case of global locations there is scope for virtual proximity and
virtual factory.
 VIRTUAL PROXIMITY
With the advance in telecommunications technology, a firm can
be in virtual proximity to its customers.
 For a software services firm much of its logistics is through the
information/ communication pathway.
 Many firms use the communications highway for conducting a
large portion of their business transactions.
 Logistics is certainly an important factor in deciding on a
location whether in the home country or abroad.
 Markets have to be reached. Customers have to be contacted.
Hence, a market presence in the country of the customers is
quite necessary.
 VIRTUAL FACTORY
Many firms based in USA and UK in the service sector and
in the manufacturing sector often out sources part of their
business processes to foreign locations such as India.
 Thus, instead of one’s own operations, a firm could use its
business associates’ operations facilities.
 The Indian BPO firm is a foreign-based company’s ‘virtual
service factory’. So a location could be one’s own or one’s
business associates.
 The location decision need not always necessarily pertain
to own operations.
 Factors Influencing Plant Location or
Layout- Aswathappa-BOOK
Principles of layout
 principle of minimum travel: men & material should travel
the shortest distance between operations so as to avoid
waste of labor & time & minimize the cost of materials.
 principle of sequence: machinery & operations should be
arranged in a sequential order. This principle is best
achieved in product layout & efforts should be made to
have it adopted to process layout.
 principle of usage: every foot of available space should be
effectively utilized. This principle should receive top
consideration in towns and cities where land is costly.
 principle of compactness: there should be a harmonious
fusion of all the relevant factors so that the final layout
looks well integrated & compact.
 principle of safety & satisfaction: layout should contain built
in provision for safety of workmen. It should also be
planned on the basis of comfort and convenience of the
workmen so they feel satisfied.
 principle of flexibility: layout should permit revisions with
the least difficulty and at minimum cost.
 principle of minimum investment: the layout should result in
savings in fixed capital investment, not by avoiding
installation of necessary facilities but by an intensive use
of available facilities.
LOCATION THEORIES
 Weber classified locational factors into two broad
categories-Primary & Secondary.
 Materials & Labor constitute primary factors that
contribute to dispersal of industries over different
regions.
 industrial units are materials oriented if their cost of
transportation to unit is higher.
 industrial plants are material oriented when cost of
transporting finished goods to markets is higher.
 another primary factor is labor- cheap and skilled labor
pull industries towards themselves.
 Banking credit, insurance, communication and rent rates
constitute the secondary factors of locations.
 Some of these attract industries to certain areas from
different laces and some others contribute to their
dispersal from original places.
 The later are called degglomerating factors and the
former are called agglomerating factors.
 THEORY II: Andreas Predohl told that plant will be
relocated because the new location offers added
advantages. But there is no clarity on why new industries
are located at particular places.
LOCATION MODELS
There are 4 location models:
 Factor rating method
 weighted factor method
 break-even analysis
 Qualitative factor analysis
FACTOR RATING METHOD: This method involves giving
rating to each factor based on its importance. Factor ratings
are used to evaluate alternative locations
STEPS: 1. List the most relevant factors in location decision
2. rate each factor (1-very low & 5-very high)
according to its relative importance, i.e. higher the ratings
the more important is the factor.
 3. rate each location (1-very low & 10-very high)
according to its merits on each factor.
 4. compute the product of ratings by multiplying the
factor rating by the location rating for each factor.
 5. compute the sum of the product of ratings for each
location.
 6. select the location alternative which has the maximum
sum of product ratings as the choice.
 ILLUSTRATION 1: Let us assume that a new medical facility, Health-care,
is to be located in Delhi. The location factors, factor rating and scores for
two potential sites are shown in the following table. Which is the best
location based on factor rating method?

Weighted Factor Rating Method
 In this method to merge quantitative and qualitative
factors, factors are assigned weights based on relative
importance and weightage score for each site using a
preference matrix is calculated.
The site with the highest weighted score is selected as the
best choice.
 LLUSTRATION 2:
Let us assume that a new medical facility, Health-care, is to be located in
Delhi.The location factors, weights, and scores (1 = poor, 5 = excellent) for
two potential sites are shown in the following table. What is the weighted
score for these sites? Which is the best location?

SOLUTION:
The weighted score for this particular site is calculated by multiplying
each factor’s weight by its score and adding the results:
 Weighed score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 ×
5 = 75 + 100 + 75 + 15 + 50 = 315
 Weighed score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15× 2 + 10 ×
3 = 125 + 75 + 75 + 30 + 30 = 335
 Location 2 is the best site based on total weighted scores.
Location break-even analysis:
 Break even analysis implies that at some point in the
operations, total revenue equals total cost.
 Break even analysis is concerned with finding the point at
which revenues and costs agree exactly. It is called ‘Break-
even Point’.
 The Fig. portrays the Break Even Chart: Break even point
is the volume of output at which neither a profit is made
nor a loss is incurred.
STEPS:
 Determine all relevant cost that vary with each location.
 categorize the cost for each location into annual Fixed
Cost (FC) and variable cost per unit (VC) and calculate
Total Cost (TC) for the desired volume of production per
annum for each location.
 plot the total cost associated with each location on a
single chart or graph of annual cost vs annual production
volume.
 select the location with lowest total annual cost (TC) at
the expected production volume per annum (Q).
 ILLUSTRATION: Potential locations A,B,C have the cost structures
shown for producing a product expected to sell at Rs. 100/Unit.
Find the most economical location for an expected volume of
2,000 units/year. Also determine the range of annual volume of
production for which each location A,B & C would be most
economical.

Location FC/Year (Rs) VC/Unit /(Rs)

A 25,000 50
B 50,000 25
C 80,000 15

 Solution- Refer book. P.NO.131

Qualitative Factor Analysis Method:
 If economic criteria are not sufficiently influential to
decide the location alternative, a system of weighing the
criteria might be useful in making a plant location
decisions.
 STEP 1: Develop a list of relevant factors
 2. assign a weight to each factor to indicate its relative
importance (Wt. may total up to 1.0).
 assign a common scale to each factor (0-100) and
designate any minimum point to be scored by any
location.
 score each potential location according to the designated
scale and multiply the scores by the weights to arrive at
the weighted score
 total the points for each location and choose maximum
point location.
ILLUSTRATION: P.NO.132
