LOCATION DECISIONS

FOR
PRODUCTION PLANT
Location Strategies
Objective of Location Strategy

Maximize the benefit of

location to the firm
 Industrial Location Decisions

• Cost focus
–Revenue varies little between
locations
• Location is a major cost factor
–Affects shipping & production costs
(e.g., labor)
–Costs vary greatly between locations
 Industrial Location Decisions Contd..

• Tangible costs such as transportation of raw materials

and finished goods, labor, raw materials etc.
• Intangible costs such as education expenditures, quality
of life etc..
 Service Location Decisions
• Revenue focus
– Costs vary little between market areas
• Location is a major revenue factor
– Affects amount of customer contact
– Affects volume of business
• Purchasing power
• Parking, security, lighting etc..
• Rent
 In General - Location Decisions
• Long-term decisions
• Difficult to reverse
• Affect fixed & variable costs
– Transportation cost
• As much as 25% of product price
– Other costs: Taxes, wages, rent etc.
Objective: Maximize benefit of location to firm
 Factors That Affect Location Decisions
• Country level:
–Political risks, govt. rules, attitudes
–Cultural and economic issues
–Location of markets
–Labor talent, productivity
–Exchange rates and currency risks
 Factors That Affect Location Decisions
• Region level:
–Corporate desires (Reliance refineries in Guj. )
–Attractiveness of the region (culture, taxes, climate etc.)
–Labor availability
–Proximity to raw materials and customers
–Land and construction costs
 Factors That Affect Location Decisions Contd:

• Site Level
–Site, Size and Cost
–Air, rail, highway systems
–Proximity of services needed
–Environmental impact issues
–Proximity to competitors
 Location Evaluation Methods

⚫ Factor-rating method
⚫ Locational break-even analysis
⚫ Center of gravity method

© 1995 Corel Corp.

 Factor-Rating Method

• Most widely used location technique

• Useful for service & industrial
locations
• Rates locations using factors
 Steps in Factor Rating Method
• List relevant factors
• Assign importance weight to each factor (such as 0 – 1)
• Develop scale for each factor (such as 1 – 100)
• Score each location using factor scale
• Multiply scores by weights for each factor & total for each
location
• Select location with maximum total score
 Factor rating method contd..
Factors Weight Scores (100) Weighted Average
Scores
A B A B

Labor availability 0.25 70 60 17.5 15.0

Attitude 0.05 50 60 2.5 3.0

Per capita income 0.10 85 80 8.5 8.0

Tax 0.39 75 70 29.3 27.3

Education 0.21 60 70 12.6 14.7

Total 1.00 70.4 68.0

 BEP
➢ The break-even point in economics, business—and
specifically cost accounting—is the point at which total
cost and total revenue are equal, i.e. "even".
➢ There is no net loss or gain, and one has "broken even",
though opportunity costs have been paid and capital has
received the risk-adjusted, expected return.
 BEP
➢ How to Calculate for Break-even Point
➢ There are two ways to compute for the break-even point
– one is based on units and the other is based in dollars.

➢ To compute for the break-even point in units, the

following formula is followed:
➢ Break-even Point (Units) = Fixed Costs / (Revenue Per
Unit – Variable Cost Per Unit)
 BEP
➢ To compute for break-even point in dollars, the following
formula is followed:
➢ Break-even Point (Sales in dollars) = Fixed Costs / (Sales
Price per Unit x BEP in Units
➢ Where:
➢ Fixed Costs are the costs that are independent of the
volume of sales, such as rent
➢ Variable Costs are the costs that are dependent on the
volume of sales, such as the materials needed for
production or manufacturing
 Factors that Increase a Company’s Break-even Point
➢ It is important to calculate a company’s break-even point
in order to know their least target to cover their
production expenses.

➢ However, there are times when BEP increases or

decreases, depending on certain factors.

➢ Here are some of the factors:

 Factors that Increase a Company’s Break-even Point
➢ 1. Increase in customer sales
➢ When there is an increase in customer sales, it means
that there is higher demand. And when it does, a
company needs to produce more of its products to meet
this new demand which, in turn, raises the BEP in order
to cover the extra expenses.
➢
 Factors that Increase a Company’s Break-even Point
➢ 2. Increase in production costs
➢ The hard part of running a business is when customer
sales or product demand remains the same while the
price of variable costs increases, such as the price of raw
materials.
➢ When that happens, the BEP also goes up because of the
additional expense.
➢ Aside from production costs, other variable costs that
increase include rent of warehouse, increase in salaries
for employees, or higher utility rates.
 Factors that Increase a Company’s Break-even Point
➢ 3. Equipment repair
➢ In cases where the production line falters,
➢ or a part of the assembly line breaks down, the BEP
increases since the target number of units is not met
within the required time.
Locational Break-Even Crossover Chart
 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 (Cost on vertical axis, Annual
Volume on horizontal axis)
– Select location with lowest total cost for expected production
volume
• Must be above break-even
 Locational Break-Even Analysis - Example
You’re appointed a consultant!!
You’re considering a new manufacturing plant in Birgunj, Pokhara
or Biratnagar.
Fixed costs per year are 30k, 60k, & 110k respectively.
Variable costs per case are 75, 45, & 25 respectively.
The price per case is 120.
What is the best location for an expected volume of 2,000 cases
per year?
Locational Break-Even Crossover Chart
200000

150000

Annual Cost
100000

50000 Birgunj Lowest cost Pokhara lowest cost Biratnag

c

0
0 500 1000 1500 2000 2500

Volume
 Locational Break-Even
Birgunj: FC/Price per unit – Variable cost/Unit)
30000/(120-75)= 666.66
666.66x120= 80000 (minimum)

Pokhara: 60000/ (120-45) = 800

800x120= 96000

Biratganj: 110000/(120-25) =1157.89

1157.89x120 = 138947
 Center of Gravity Method
• Finds location of single distribution center
serving several destinations
• Considers
– Location of existing destinations
– Volume to be shipped
– Shipping distance (or cost)
Center of Gravity Method Steps

• Place existing locations on a coordinate grid

– Grid has origin & scale
– Maintains relative distances
• Calculate X & Y coordinates for ‘center of
gravity’
 Center of Gravity Method Equations

X Coordinate
dix = x coordinate of
 d ix Wi location i
Cx = i
 Wi Wi = Volume of
i
goods moved to or from
Y Coordinate location i
 d iy Wi diy = y coordinate of
Cy = i
 Wi location i
i
 CG Method
• Locations Number of containers
shipped per month
• A (30,120) 2000
• B (90,120) 1000
• C (130,130) 1000
• D (60,40) 2000
 CG Method Contd..
• X-Coordinate of the CG:
(30)(2000)+(90)(1000)+(130)(1000)+(60)(2000)
2000+1000+1000+2000
=66.7
• Y-Coordinate of the CG:
(120)(2000)+(110)(1000)+(130)(1000)+(40)(2000)
2000+1000+1000+2000
=93.3
 Service Location strategies
• Purchasing power of the customers in the area.
• Service and image compatibility with the demographics
• Competition in the area
• Quality of the competition
• Uniqueness of the firm’s and competitor’s locations
 Contd..
• Bank
• Hospital
• Hotels
• Telemarketing industry
• School