Facility Location & Evaluation Alternatives

Manufacturing plant facility location:

i. The location where firm setup their operations is called facility location.
ii. All manufacturing and service organisations carefully plan where they should locate
their plant and service facilities became location will have serious effect on the survival
and success of an organisations.
iii. The selection of facility location is strategic decision which is needed survival of the
organisation.
iv. It has to be done with considerable thought taking into account various aspects leading
to the end profitability of the firm.
v. The selection of site has permanent repercussion on the operation of the plant and if it
is not done properly then it would become handicap to the plant performance.
Therefore firm conduct facility location analysis where they evaluate different
locations and finally choose an optimum location to start their operations.
The ideal location of a plant would be where it will mean "OVERALL LOWEST COST
OF PRODUCTION AND MAXIMISATION OF PROFITS" . In other words the best
location is one where unit cost of production and distributions are at minimum and where
prices and volume of sales will bring maximum profits.
This decision is important because it can't be corrected without large losses in
investment and need of additional capital outlay for another side like NANO PROJECT
OF TATA MOTORS.
The need of selection of facility location may arise under the following
circumstances.
i. When the business is newly started.
ii. When the expansion of existing plant is not possible.
iii. When a firm wants to establish new branches.
iv. When the landlord does not renew the lease
v. For social or economic reason like inadequate water supply.
Nowadays much more importance is given to the subject of a selection due to the
government objective of establishing a socialistic pattern of society provided with various
benefits and incentives to the firm that are located in the underdeveloped areas.

Once the facility location is determined then the firm design a structure internal to
the firm that satisfies its production and service requirement. This is called a LAYOUT
DESIGN AND IMPLEMENTATION to enhance productivity.
Thus the various factors are to be considered and firms make logical, more scientific
approach towards selection of location.
i. It depends upon the size and nature of business.
ii. Production unit located in underdeveloped country will choose labour intensive
process to utilise lower labour cost. While in developed country will choose capital
intensive manufacturing process since cost of labour is high in that region.
iii. It depends upon the company ability to serve its customers quickly and conveniently.

FACTORS AFFECTING THE LOCATION DECISION

The factors can be classified as:i. Market related factors such as proximity to market.
ii. Tangible or cost factors such as transportation.
iii. Intangible or qualitative factors such as environment factors.
Primary factors:
i. Nearness to market.
ii. Availability of raw material.
iii. Availability of quality and quantity of labour.
iv. Availability of right quality and quantity of power.
v. Transport facility.
Secondary factors:
i. Legislation
ii. Climate financial aids.

iii. Banking facilities.

iv. Water supply.
Other factors:
i. Total site cost
ii. Availability of amenities such as housing, shops, education and hospital and transport
facilities.
iii. Availability of service like electricity, gas, water, drainage and disposal of waste.
iv. Suitability of climate - climate condition such as humidity temperature, atmosphere
geology conditions (seismic zone for adequate foundations)
v. Regional regulations - the laws and regulations relative to recruitment of employees
and disposal of affluents.
vi. Room for expansion
vii. Safety requirements - chemical exposure, nuclear plants and their explosions.
viii. Political, cultural and economical conditions - since these factors might affect the
smooth running of the plant.
ix. Regional taxes, special grants, import/export barriers.
x. Tax incentives.

I. GENERAL STEPS IN LOCATION, SELECTION AND LOCATION DECISION

PROCESS
i. Define the location objectives and associated constraints
ii. Identity the relevant decision criteria
iii. Relate the objectives to the criteria by using appropriate model
iv. Do field research to relevant data and use the model to evaluate alternative locations.
v. Select the location that best satisfies the criteria.

LOCATION EVALUATION METHOD:

I. Cost - profit - volume or Break even analysis.
II. Point rating method.
III. Transportation method of L.P.P.
Point Rating Several objectives of various importance level company assignees weight-age to these
objectives in the form of points. The potential sites are evaluated w.r.t every factors of
company is looking for and points are allocated accordingly to each factor. The
superior site is one that scores more points. However drawback of this is high score in
anyone can over come a low score in any other factor.
The significance of point method is relative importance of tangible cost factors when
compare to intangible factors. Only intangible factors are assigned points. However
evaluation is done to know whether the difference between intangible factors is worth
between tangible factors of these competitive locations.
Factors rated :
i. Availability of fuel.
ii. Availability of labour.
iii. Water supply.
iv. Transport facility.
v. Topography of site.
vi. Living condition.

II. Factor Rating Method

Here a weight is allocated to each influencing factor depending upon the importance of
factor. Most important factor is given higher weight and next one is lesser weight and so
on. These weight are added to site, which gets higher total weight is given preference.
One must be careful when selecting a scale for fixing up weights.

FACTORS USED

MAX. WEIGHTS
IN UNITS
250
200
400
200
50

LABOUR COST
NEARNESS TO MARKET
NEARNESS TO MATERIAL
WATER SUPPLY
TAXES AND LCOAL LAWS
TOTAL

LOCATION LOCATION
A
B
225
200
175
150
300
250
100
150
40
45

1100

840

795

Location A has higher weight than B hence A is recommended. Incase two sites are
having more or less same weight factor than other important factors are selected and
weights are allocated to select location.

III. POINT RATING METHOD

Here the factor is allocated a rank or rate according to importance. Importance is given a
rank of one and all factors are expressed in the whole numbers as multiple of the least
number shown in the table below each rank is multiply by an appropriate weighting
factor to get score for each location. The scores are totalled and site which is higher score
is selected.
RELATIVE RANKING OF DIFFERENT FACTORS
FACTORS

LABOUR COST
NEARNESS TO
MARKET
NEARNESS TO
RAW MATERIALS
WATER SUPPLY
TAXES AND LAWS
TOTAL

WEIGHT
(1)
20
30

LOCATION
A
RANK
(2)
3
2

LOCATION
A
SCORE
(1) * (2)
60
60

LOCATION
B
RANK
(4)
3
5

LOCATION
B
SCORE
(1) * (4)
60
150

40

200

40

10
5
105

4
3
-

40
15
375

4
2
-

40
10
300

As location A has higher score hence it is recommended.

Significance of point rating method is relative importance of tangible factors when
compare with intangible factors. Only intangible factors are assigned points. However
evaluation is done to know whether the difference between intangible factors is worth
between tangible factors of these competitive locations.
General steps in location selection and location decision process.

LOCATION ALTERNATIVE EVALUATION METHOD.

I. Total cost analysis:
i. Comparative cost analysis.
ii. Break even analysis.
iii. Point rating method.
II. Factor rating method.
III. Point rating method.
I. Total cost analysis:
Here cost involved in establishing and operating the point at site is listed and total cost
is worked out (involved). The lower total cost select that site for location of the plant.
COSTS
Cost of Land
Building
Water
Power utilities
Labour
Incoming Freight
Out going Freight
Fuel
Raw Materials and other
supplies
Taxes
Total Cost
1. Fixed Cost
2. Variable Cost

LOCATION A

400
584
984

LOCATION B

320
638
958

The above costs considered as fixed cost and variable cost / operating cost

Total cost B
BREAK EVEN ANALYSIS

Total cost A

Sales

400
300

Fixed csot A

200

Fixed csot B

Units Production Volume

For this sales revenue should be known to get Break Even Point

THE RATE OF RETURN METHOD

Highest the rate of return best is the location
DETAILS
Total Initial Investment
Total Expected Sales
Distribution Expenses
Raw Material Expenses
Power and water supply exp
Wages and Salaries
Other Expenses

A
200000
256000
40000
70000
40000
20000
25000

B
200000
300000
40000
80000
30000
25000
40000

C
200000
250000
75000
90000
20000
20000
30000

Total

195000

215000

235000

R.O.I = (Total Sales Total Cost / Total Investment) = profit / Investment

For Site A = (25000 195000 / 200000) * 100 = 27.5%

For Site B = 42.5%

For Site C = 7.5%
Site B is Prefered (selected)
Intangible Factors
Community attitudes
like Jaita w.r.t others
Employees housing /
education / transport
facilities

A
Indifferent

B
Wants Business

C
Indifferent

Poor

Excellent

Good