Location is termed as a specific site where organizations set up their business or manufacturing plant and location planning includes selecting an optimum or ideal location after considering different possible alternatives.
Identifying manufacturing plant location (site selection) for producing goods or services is considered one of the important decisions that any organization takes from a strategy point of view. Both planning and managing the plant or site location comes under such a decision. Also, choosing the right location is a crucial element in the success of any organization as one of the major goals of the organization is to delight its customers, and for this, customers must be accessible within the organization’s reach. The selection of the right location can be achieved by formulating a location strategy. Through the location strategy, an organization can determine its market, product offering, demand forecast, appropriate manufacturing, and service setup place for easy customer access.
So, a plan, which is formulated to obtain the appropriate location for an organization as per the objectives and requirements of the organization is termed as location strategy. This includes ensuring the compatibility of location search with an organization’s objectives and needs. By doing so, the main aim of an organization is to maximize the potential market share and reducing risks and associated costs.
There are different reasons that push organizations to get involved in making decisions for location planning. For example, supermarkets, banks, retail and fast food chains, etc. consider location planning as an integral aspect of their marketing strategy and plan their locations to gain the advantage of market expansion in their relevant industry. Similarly, when the demand for an organization’s offering increases and it is not possible to meet such increased demand at the same location, then, the organization looks for location decisions.
Wrong or ill choice while making the decision of location, may result in less qualified labor, an increase in transportation costs, an insufficient supply of raw materials, loss of customers, etc.
At the time of making decision-related to plant location, an organization must consider the below-mentioned forecasting needs for the long-term:
- The plan and policy of an organization to meet expansion needs
- Plans for product diversification
- Fluctuating market conditions
- Dynamic sources of raw materials
- Different other factors that may affect the decision of choosing the location
The Process of Location Planning
Planning is considered the initial and most important management function in different business decisions and strategy-formulation. Planning decisions related to deals associated with building, equipment & machinery, lands, etc. require a huge investment and it is not easy to move them once occupied. So, a lot of thought processes, data collection, and prediction of the future are required in location planning.
Therefore, organizations use proper location planning processes and techniques. Following steps are involved in the process of location planning:
Planning the Plant Location
Location decisions include making decisions on different levels i.e. country, region, and community. Organizations first make decisions regarding the selection of the country, then region and community respectively. Different choices are available for location planning. Different alternates are there for corporations in addition to new locations such as an expansion of existing locations, closing one location, and shifting to another one.
Different factors contribute to and influence decisions of selecting the best appropriate plant location. These factors can be broadly categorized into two types i.e. general factors and special factors.
This consists of both controllable and uncontrollable factors that influence location planning of all industry types.
1. Controllable Factors
1.1) Land Availability
This is a crucial factor in making the decision of plant location. Most of the time it happens that a specific area seems to be the appropriate place to build a plant according to the forecasts, plans, and calculations of an organization. However, an issue of land availability may arise. So, in that scenario, organizations should look for the next suitable alternative in terms of location.
1.2) Raw Material Supply
To receive raw material of the right quality and at right time by an organization is a prerequisite for the uninterrupted production facility. This factor is highly important in the case of perishable raw materials such as fruit, vegetables, eatable items, etc. and also, the transportation cost of such raw materials is quite high.
Below are the guidelines for location planning according to the influence of raw materials:
- If there is a requirement of one type of raw material without losing weight, then the plant should be located at the source of raw material or somewhere near to its market, or any area in between.
- If the demand is for raw material with loss of weight, then the plant should be located at the source of raw material.
- In the case of the universal availability of the raw material, it is advisable to locate the plant near to the market.
- If there are different locations where raw materials are sourced, then it is appropriate to locate the plant in between in order to keep transportation costs as low as possible.
1.3) Availability of Labor
An organization should consider the factor of availability of labor in appropriate numbers and with the required skill set at the time of deciding the location of the plant at the community and regional level. It is required to study the history of the prospective community and labor relations in the community. Labor productivity, living cost, union’s bargaining power, industrial relations, etc. should also be taken into account as important factors.
1.4) Nearness to Market Areas
The plant can be located close to the market of customers or far as per the nature of the product to be produced. A plant should be located near to the market in the following circumstances:
- The life projection of the product is less
- Higher transportation cost
- Delicate products
- To promote after-sales services
1.5) Availability of Better Communication Facilities
Location planning is also influenced by the communication facilities that are available in the region. The preference should be given to those sites that are linked with telecommunication.
1.6) Availability of Infrastructure Facilities
Location planning is also influenced by the availability of basic infrastructure facilities such as water, electricity, waste disposal, etc. For example, industries that operate on a 24/7 basis like Steel, Aluminum need an uninterrupted power supply. So, the location of plants of such industries should be near to the power station or at places where there is no interruption in the power supply. If power is unavailable, then it may create survival issues for these industries.
Similarly, continuous water supply is another important factor while considering infrastructure facilities; especially, in process industries such as chemical, paper, cement. In such industries, it is important to have a good quality water supply on a large-scale.
One more factor under infrastructure facilities is waste disposal that is extremely important in the case of process-oriented industries such as sugarcane, chemicals, medicine manufacturing, and paper.
1.7) Availability of Transport
This is an essential factor for deciding plant location because appropriate and fast transport facilities lead to the availability of raw materials in a timely manner. It also ensures the timely delivery of finished products/ services to end-users or customers. Different transportation modes include air, rail, road, water, and pipeline. These modes should be considered while making decisions related to the location. For instance, the location of goods meant for exports should be near to an airport or the port. So, we can say that the selection of the transportation mode and the location is based on suitability, convenience, and transportation costs.
1.8) External Economies of Scale
This includes location-based and urbanization economies of scale. Economics of scale with reference to urbanization is related to an advantage that an organization gets through setting up its unit in a big city. In this, organizations prefer big cities as compared to small ones for gaining the benefit of transport facilities, access to a large number of labor and extended business services, increase their market share and sales, etc.
A location-based economy of scale is related to setting up a manufacturing unit where other organizations of related industries have their units.
2. Uncontrollable Factors
2.1) Government Policies and Support
This is considered an important factor in location planning. Government policies include different policies such as labor laws, safety, building codes, etc. made by the state government and local bodies. To maintain a balance in the growth of industries at the regional level, different incentive packages are offered by center and state government to entrepreneurs that are based at different locations. These incentive packages may include subsidy in electricity bill and investment, loan facility from financial institutions, excise duty, and sales tax exemption, etc.
2.2) Conditions related to Climate
The geographic aspect of the location along with conditions of climate such as temperature, humidity is considered an important factor in location planning. Human behavior and work efficiency are somewhat indirectly influenced by climate. For example, industries such as the Textile mill demand a more humid climate.
2.3) Community Infrastructure and Facility
Plant location is influenced by certain community infrastructure factors. It creates a great impact if a manufacturing concern is located near to certain facilities such as schools, hospitals, universities. These factors create an impact on location decisions by motivating employees.
2.4) Supporting Services
Different manufacturing concerns outsource few activities such as manufacturing of a few parts and components of its product to outside vendors. So, location planning is influenced by the factor of supply source. Other than this, manufacturing concern is indirectly linked with different service industries such as banking, consulting, and communications. So, these also play a crucial role in location selection decisions.
These include specific factors for the manufacturing and service industries.
Special Factors for the Manufacturing Industry
These are divided into dominant and secondary factors.
Dominant factors are those that dominate the decisions related to location for new manufacturing units. These are further categorized into the below 6 categories:
Favorable Labor Climate
This is considered a very important factor in making decisions related to the location; especially, for organizations that are labor-oriented and operate in industries such as electronics, furniture, textile, chemical. Labor climate consists of productivity of workers, wage rate, work attitude, training needs, and strength of labor union.
Nearness to Markets
Once an organization is able to find out the place that has a great demand for its products and services, then the facility location is selected for demand-supply. It is important to locate near the market area if products are in bulk or heavy products and higher transportation cost. For example, if a company is indulged in the production of heavy metals, then it is feasible to locate the plant near the market of the product.
Quality of Life
This includes better education facilities such as good universities and schools, cultural events, modern lifestyle, recreational facilities. This factor can influence decisions related to location.
Closeness to Different Resources and Suppliers
Different large manufacturing organizations outsource a few of their core functions and also, depend on different suppliers. This demands effective communication and coordination between the organization and different suppliers which is difficult in case of more distance of the location.
Costs Associated with Utility, Land, Taxes
Different utility costs such as water, electricity, phone usage, taxes imposed by local and state government, relocation costs, cost of land also affect location decisions.
Other factors that create an impact on location planning are cost associated with construction and shifting of manpower and material from one plant to another, expansion plans, community attitude, accessibility to different transportation mediums, etc.
Special Factors for Service Industry
Both, dominant and special factors that influence manufacturing firms, also affect service organizations while making location decisions. This includes location effects on the satisfaction of customers and sales.
Closeness to Customers
Location is considered a key component to determine the convenience of customers in association with the service organization.
Cost of Transportation and Nearness to Markets
It is important that the market should be nearby to the location for warehousing and distribution activities. In the case of the closeness of the warehouse, service organizations can keep their inventory near to the customer. This helps in sales promotion and cutting down the delivery time.
The impact of competitors may create hindrances in making estimation of sales capacity at different locations. So, a factor related to the location of competitors plays a crucial role in deciding location as an organization needs to keep in mind the competitor’s current location.
Different secondary factors must also be considered in the location planning of service firms like retail companies. Factors such as retail activity, visibility of the site, the flow of traffic are crucial factors for retailers. Customers that are businessmen visit retail stores by cars; this is an illustration of the flow of traffic. The size of buildings that are nearby and signs are considered into visibility factor.
Both general and special factors mentioned above have their own significance while deciding the location of the manufacturing plant. So, location can be determined by giving rating and appropriate weightage to these factors. These methods include:
- Method of Rating Plan
- Method of Factor Rating
- Method of Point Rating
- Break-even Analysis Method
- Centre of Gravity Method
1. Method of Rating Plan
In this method, the rating is given to different factors that influence the plant location decisions. This rating is based on the management’s perception. Once all factors have been given rating, then the location obtaining the highest rating is considered for locating a manufacturing unit.
For example, a car manufacturing company wants to start its manufacturing unit in India. For this, it selects four appropriate cities i.e. Noida, Gurgaon, Chandigarh, and Jaipur. To choose the best location for its manufacturing plant, the company adopts a rating plan method according to its business requirements. For this, the company made a list of important factors of its business requirement. The same is shown in the table given below:
The manufacturing company further allotted proportional values for each factor in the form of percentage as per the Rating plan method. The above table shows the approach of a rating plan that the car manufacturing company has used.
Once the rating is given to each factor and for each city (as shown in the above table), then, the rating of Noida comes to the maximum one i.e. 95 out of 100. So, accordingly, the company has selected the Noida location for establishing its manufacturing plant.
2. Method of Factor Rating
These methods are considered the most common methods for selecting the location of a plant as it is easy to analyze different factors through this method. The factor rating method includes rating each factor of location. It also considers ratings given to competitive locations. After determining these ratings, products of rating are calculated by multiplying factor rating with location rating. Finally, that location will be selected which receives the maximum product of rating.
This method includes the below steps in its selection process for a new location:
- Identification of the location factors according to the importance.
- Rating each factor as per its appropriate importance, like prominent factors will be given the higher ratings.
- Assigning each location as per each factor’s location-based merits.
- Calculation of each location’s rating
- Determining the product of rating and its total to select the best suitable location that gets the maximum total score.
The below example represents the method of factor rating. The table listed below indicates three locations, factor rating, location rating, and final product of rating.
The manager of a manufacturing company gives a rating to each suitable factor as shown in the column of factor rating in the above table. The location rating includes rating or ranking to each individual location which is again determined by the company. The last column is the product of the rating values of all three locations. The value of this column is obtained by multiplying factor rating with location rating. After summing up the product of rating of each location, the company is able to determine the location with the maximum product of rating. In the above example, the maximum product of rating is 201 of location 1 as compared to location 2 and location 3. So, the most suitable location is location 1.
Moreover, the total product of rating is almost the same in the case of location 2 and location 3 i.e. 195 and 196 respectively. These cases require a personal reconsideration of different factors.
3. Method of Weighted Factor Rating/ Point Rating
This method includes merging both qualitative and quantitative factors and for this; weights are assigned to factors according to the importance. These relative weights that a company allots to each location factor may be displayed by the number of points. These points are those that are given to the perfect location in each factor. Further, through the preference matrix, each site’s weightage score is determined.
In other words, the evaluation of each potential location is done based on each factor that an organization considers, and points are given to each factor.
The selection of the location is based on the site having a maximum weighted score.
For example, a manufacturing company of auto spare parts is looking to expand its business in new locations in the Punjab region i.e. Jalandhar, Mohali, and Bathinda. The below table represents different possible factors, weights/ points of each factor, and each location ratings through point or weighted rating method.
The weighted score is calculated by using the below formula:
The weighted score of each location and each factor= Weights * Rating
So, the total weighted rating of Mohali will be:
20 *4+15*2+25*3+20*5+20*3= 345.
Similarly, the total weighted ratings of the other two locations are determined. By comparing the final score of weighted ratings, the score of Jalandhar location is the highest one i.e. 395. So, Jalandhar is considered the best site for the manufacturing unit.
4. Break-even Analysis
This is considered a technique to evaluate the choices of location from the economic aspect. Break-even analysis explains that the break-even point is the one where total revenue and total cost are the same. So, this method is related to locating the point where both revenue and costs are equal. This point is termed as a break-even point. In other words, the break-even point is a no-profit and no-loss situation.
There are three main heads in cost in every manufacturing organization i.e.
- Cost in the form of investments that are made for equipment, machinery, land, plant, etc. This cost is termed as a fixed cost. These investments are associated with interest and depreciation.
- Recurring cost (part of the fixed cost)
- Costs that change according to the quantities of product i.e. variable cost.
Steps in break-even analysis
- To calculate each location’s fixed and variable costs.
- To determine the indifference point for each alternate location pair.
- Identifying the output ranges
- Selecting the location that has the lowest cost in terms of design capacity related to the new facility.
For example, an electronic company has two options for potential sites to launch its new manufacturing plant. Both fixed and variable costs on annual basis for each potential site are as given below:
Let’s say if the annual demand for the company’s products is estimated to be 50,000 units, then break-even analysis is used to determine the best location among the two locations mentioned in the above table.
Below are the steps to determine the best location:
Calculation of fixed and variable costs
The total cost for each potential location will be calculated through the below formula:
Total cost (TC) = Fixed cost (FC) + Variable cost (VC) * Q
Q is considered the volume of output or demand of the product
So, as per the above formula, the total cost of Delhi, Banglore is as under:
Total cost (Delhi) = 10,00,000 + 6Q
Total cost (Banglore) = 15,00,000 + 4Q
The next step is to determine the indifference points among location pairs i.e.
Let’s say, Q1 is the indifference demand, so:
Total cost (Banglore) = Total cost (Delhi) at Q1
15,00,000 + 4Q1= 10,00,000 + 6Q1
Q1= 5,00,000/2= 2,50,000 units
Further, the range of output is calculated to determine each location’s lowest total costs:
Let’s say Q=0, then
Total cost (Delhi) = 10,00,000
Total cost (Banglore)= 15,00,000
5. Center of Gravity Method
A mathematical method which is utilized to find a distribution center’s location aiming at minimizing distributions cost is termed as the “center of gravity method”. This method considers market location, the shipping cost of products, and the volume of products delivered to markets, etc. in order to find out the most appropriate location for a distribution setup.
In other words, the center of gravity is termed as an average location where the weighted distance between the warehouse and its distribution centers is minimized. The weighted distance is determined by the supply or consumption of the number of tones.
Cost considerations are the prime factor on which the center of gravity method is based. Managers can balance costs and objectives related to the service by using this method. This methodology can be utilized in the following circumstances:
- In case of high production rates
- The huge weights and volume of materials that are being shifted
- The main criteria for product distribution of material gathering from various suppliers are the transportation cost
- The time that is consumed in receiving material from vendors or delivering the goods to customers is crucial.
The below table shows the supply of tonnages from five different locations to a specific plant:
Now, we have to first locate the above five locations in a graph and for this, the value of X and Y coordinates needs to be determined. Further, the center of gravity point (G) will be located. While calculating the X and Y coordinates, the minimum cost should be obtained.
The formula for calculating X and Y is as under:
So, according to the above formula, calculations of the above terms will be as under: