location of a plant

© Copyright 2013 Anupam Kumar 1

Locating a Plant

Presented By:

Anupam Kumar

Reader

SMS Varanasi

E mail: [email protected]

1© Copyright 2013 Anupam Kumar

Need for Locating a Plant

• It arises when:

– The business in newly started

– The expansion to the existing plant is not possible

– A firm wants to establish new branches

– The landlord does not renew the existing lease

– Economic or social reasons like:

• Inadequate power supply

• Government regulations, etc.


Importance of the Right Location

• Location Decision is a long term decision

• Location Decision is difficult to revise or

reverse

• The location of plant fixes the production

technology.

– Options between labour intensive or capital /

machine intensive production technologies.


Importance of the Right Location

• The location of plant fixes the cost structure.

– It affects the fixed and variable costs.

– At times transportation costs are almost 25% of the price of product.

• Location of a facility affects the company’s ability to serve its customers quickly and conveniently.

• Location determines the nature and size of the business


Factors Affecting Location Decisions

• Market Proximity

• Integration with other parts of the organization

• Availability of Labour and Skills

• Site Cost

• Availability of Amenities

• Availability of Transport Facilities

• Availability of Inputs

• Availability of Services

• Suitability of Land and Climate

• Regional Regulations

• Room for Expansion

• Safety Requirements

• Political Cultural and Economic Situations

• Regional Taxes, Special Grants and Import / Export Barriers.


Factors Affecting Plant Location

• Controllable Factors

– Market

– Supply of Raw Material

– Transport

– Infrastructure

Availability

– Labour and Wages

• Uncontrollable Factors

– Government Policy

– Climatic Conditions

– Supporting Industries

– Community

– Social Network



Need for Locating a Plant

• The need for locating a plant can broadly be divided

into 2 types.

– Location Choice for Existing Organization

• Plants Manufacturing Distinct Products

• Plants Supplying to a Specific Market Area

• Plants Based on the Process or Stage of Manufacturing

• Plant Emphasizing Flexibility (Increase in Operations)

– Location Choice for New Organizations

• Identification of Region

• Choice of Site with a region

• Selecting a Site


Location Evaluation Methods

• There are various methods for evaluating the

ideal Location for a Plant.

• Some of them are:

– Factor Rating Method

– Point Rating Method

– Locational Break-Even Analysis

– Center of Gravity Method

– Transportation Model


Factor Rating Method

• Most widely used location technique

• Useful for service & industrial locations

• Rates locations using factors

– Intangible (qualitative) factors

• Example: Education quality, labor skills

– Tangible (quantitative) factors

• Example: Short-run & long-run costs


Factor Rating – Selection Criteria

• Labor costs; including – wages,

– unionization,

– productivity

• Labor availability; including – attitudes,

– age,

– distribution and

– skills

• Proximity to raw materials and suppliers

• Proximity to markets

• State and local government fiscal policies; including– incentives,

– taxes,

– unemployment compensation

• Utilities; including – fuel,

– electricity,

– Water costs

• Site costs; including – land,

– expansion,

– parking,

– drainage


Factor Rating – Selection Criteria

• Quality-of-life issues; including

– all levels of education,

– cost of living,

– health care,

– sports,

– cultural activities,

– transportation,

– housing,

– entertainment,

– religious facilities

• Foreign exchange; including

– rates and stability

• Transportation availability; including

– rail,

– air,

– water and

– interstate roads

• Quality of government; including

– stability,

– honesty,

– attitudes toward new business - whether overseas or local


Factor Rating Method

• List relevant factors

• Assign importance weight to each factor (0 - 5)

• Develop scale for each factor (1 - 10)

• Score each location using factor scale

• Multiply scores by weights for each factor &

total

• Select location with maximum total score



Factor Rating Method - Illustration

Factor Factor

Rating

Location

A

Location

B

Tax Advantage 4 8 6

Suitability of labour Skill 3 2 3

Proximity to customers 3 6 5

Adequacy of Water 1 3 3

Receptivity of community 5 4 3

Quality of Education System 4 1 6

Access to rail and Air transport 3 10 8

Suitability of climate 2 7 9

Availability of Power 2 6 4

139 14013© Copyright 2013 Anupam Kumar

Point Rating Method

• While selecting a location, companies have several objectives,– But not all are of equal importance

• To overcome this issue, in Factor Rating Method, – each objective is given a Factor Rating depending upon

– the mutual importance of the various objectives.

• The Point Rating Method takes into consideration a hypothetical ideal location and tries to fix the maximum points for each of the objectives.

• Now all the available locations are given points after considering the maximum possible points as per the ideal site.


1100 1130

Factor Rated Maximum

Possible Points

Location

X

Location

Y

Future Availability of Fuel 300 200 290

Transportation, Flexibility &

Growth

250 200 95

Adequacy of Water Supply 150 100 140

Labour Availability 250 210 200

Pollution Regulations 300 250 280

Site Topography 50 40 30

Living Conditions 150 100 135

Point Rating Method - Illustration


Point Rating Method

• The drawback of this method is that

– high score in any factor can overcome a low score

in other factor.

• To overcome such extreme deviations,

– any site which does not have at least a specified

number of points for those essential factors are

– excluded from further consideration.


Point Rating Method - Illustration

Factor Rated Maximum

Possible Points

Location

X

Location

Y

Future Availability of Fuel 300 200 290

Transportation, Flexibility &

Growth

250 200 95

Adequacy of Water Supply 150 100 140

Labour Availability 250 210 200

Pollution Regulations 300 250 280

Site Topography 50 40 30

Living Conditions 150 100 135

1100 113017© Copyright 2013 Anupam Kumar

Point Rating Method

• Point Rating Method helps in comparing the tangible factors with the intangible factors.

• Points are assigned only to the intangible factors.

• Evaluation is made to determine whether

– the difference between the intangible scores is worth

– the difference between the tangible costs (if any) of the competing locations.



Point Rating Method

• If two alternative locations are found to be

equally attractive by comparing costs based

on tangible factors then

• These two alternative potential locations may

further be evaluated, based on the intangible

factors using the Point Rating Method.


Locational Break-Even Analysis

• Method of cost-volume analysis used for

industrial locations

• Steps

– Determine fixed & variable costs for each location

– Plot total cost for each location

– Select location with lowest total cost for expected

production volume

• Must be above break-even


Locational Break-Even Analysis -

Illustration• You’re an analyst for ACC Cement.

• You’re considering a new manufacturing plant in Aurangabad,

Bhubaneswar, or Coimbatore. Fixed costs per year are Rs.

11Cr., Rs. 6Cr., & Rs.3Cr. respectively.

• Variable costs per case are Rs. 250, Rs.450, & Rs.750

respectively.

• The price per bag is Rs. 1200.

• What is the best location for an expected volume of 200,000

bags per year?

• Would your decision change if the expected volume is more

than 5 Lakh bags or less than 1 Lakh bags?



Sr.

No.

Place Fixed Cost

(in INR)

‘000s

Variable

Cost

(in INR)

Total Cost

(at 0 Unit

production)

‘000s

Variable Cost

( at 2 Lac unit

production)

‘000 s

1. Aurangabad 110000 250 110000 50000

2. Bhubaneswar 60000 450 60000 90000

3. Coimbatore 30000 750 30000 150000

Back to Question

Sr.

No.

Place Fixed Cost

(in INR)

‘000s

Variable

Cost

(in INR)

Variable Cost

(at 1 Lac Unit

production)

‘000s

Variable Cost

( at 5 Lac unit

production)

‘000 s

4. Aurangabad 110000 250 25000 125000

5. Bhubaneswar 60000 450 45000 225000

6. Coimbatore 30000 750 75000 375000


Locational Break-Even Analysis –

Illustration Chart

0

500

1000

1500

2000

0 5 10 15 20 25 30

Volume

(in ‘00)

Annual Cost

(in ‘00)

C lowest

cost

B lowest

cost

A

lowest

cost



• Godavari Electricals Ltd. Wanted to set up its new plant for manufacturing

of heaters. The management of Godavari identified three potential areas

whose fixed and variable costs are as below.

• The product is expected to be sold at Rs. 1050 per unit and the existing

demand in the market is likely to be 600 units per year.

• Calculate the most profitable location for Godavari under the current

conditions.

• What is the minimum quantity that Godavari should target to break even

its costs in Hyderabad?

Location Fixed Cost / Year Variable Cost / Unit

Kakinada Rs. 2,00,000.00 325

Vijayawada Rs. 2,50,000.00 285

Hyderabad Rs. 3,00,000.00 265



Center of Gravity Method

• Finds location of single distribution center

serving several destinations

• Used primarily for services

• Considers

– Location of existing destinations

• Example: Markets, retailers etc.

– Volume to be shipped

– Shipping distance (or cost)• Shipping cost/unit/mile is constant


Center of Gravity Method Steps

• Place existing locations on a coordinate grid– Grid has arbitrary origin & scale

– Maintains relative distances

• Calculate X & Y coordinates for ‘center of

gravity’– Gives location of distribution center

– Minimizes transportation cost


Center of Gravity Method


Transportation Model

• Finds amount to be shipped from several

sources to several destinations

• Used primarily for industrial locations

• Type of linear programming model

– Objective: Minimize total production

& shipping costs

– Constraints

• Production capacity at source (factory)

• Demand requirement at destination


For further details …

Contact

Anupam Kumar

Reader

School of Management Sciences, Varanasi.

Email: [email protected]


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