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Location Planning
One of the important Decisions Long-Term
Lesson 5
Location Planning
Refers to selection of location where plant should be installed. Have Two Parts:
Selection of Regions (like which state, city) Selection of Site Particular Piece of Land
Location Planning
Process of determining Where the plant should be located For Maximum operating economy and efficiency
According to Davis - Location Planning is the process of determining where the plant should be located for maximum operating economy and efficiency.
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Need / Significance
Profitability also depends on this Once decision irreversible is taken, it become
Can be required by a Old firm for relocation Also effects the efficiency of distribution of finished goods.
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Objective:
Combined Cost of four element should be minimized
Cost of Using
RESOURCES
Total Cost of
Cost incurred on
Cost of Distributing
INPUTS
PROCESS
OUTPUT
1. 2. 3. 4. 5. 6.
PRIMARY FACTORS Availability of Raw-Material Nearness to Market Availability of Transportation Availability of Power Special Grants / Regional Taxes, Import Barriers etc. Industry Concentration
1. 2. 3. 4.
SECONDARY FACTORS Political Factors Legal Factors Natural Factors Social/Religious Factors
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Factors (Primary)
Factors (Primary)
1. Availability of Raw-Material RawRM cost is a considerable part of total cost Two points should be considered while selecting location
Regular & Uninterrupted Supply of RM At a minimum total Cost (Cost of RM + Transportation)
1. Availability of Raw-Material RawGoverning Principle for selecting Location near to RM Source is:
When Weight of RM > Weight of Finished Product (Sugar) Or When RM is of Perishable Nature (Milk Powder) Production Facility Should be Near to RM Source As it will reduce the cost on those three factors. When Weight of FG > Weight of RM (Soft Drinks) or When RM has to be collected from various places Production Facility should be Near to Market As firm has to spent much more on transportation of FG in comparison to transport of RM
Above two points can be followed by selecting location near to source of raw-material
Price of RM will be Minimum - Competition Transportation Cost will be Minimum Transportation Storage Cost will be Minimum Less Storage
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Less
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Factors (Primary)
2. Nearness to Market
It is important from the point of view of control over market
For supplying FP to customers in minimum time Quick adjustments to supply as per demand
Suitability depends on the Nature of the product & business like for exports Water or Air
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Factors (Primary) 4. Availability of Labor Its importance increased, when firm is using labor intensive technique Availability of Suitably skilled & Cost effective labor Cost Effectiveness should be judged by
Prevailing Wage rate of required labor Productivity of Required Labor
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They Generally located near to source of Power i.e. near coal mines in Bihar to minimize overall cost Now a days, Availability of electricity, its cost etc. become important factors
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Industrialization
These factors should also be considered, for meeting the objective of Minimum Cost
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Factors (Secondary)
Political Factors
Policy of Govt. towards that particular business like Haryana Govt. Alchohal
Legal Factors
Law & Order Situation (Assam ULFA) Legal Restriction (Taz Tripazeum)
been
Natural Factors
Climate, Weather, Ecological Factors like J&K
Social/Religious Factors
Society or Religion of Place should permit that business (MacD)
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Gurgaon 3 6 7 2 7 25
Gurgaon 3 6 7 2 7 25
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Delhi 4 9 9 0 7
Gurgaon
S
8 2 4 9 7
3 6 7 2 7
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Delhi
W
Gurgaon
S W
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power TOTAL
Haridwar
S W S
Delhi
W
Gurgaon
S W
8 2 4 9 7
56 18 32 45 35
4 9 9 0 7
28 81 72 0 35
3 6 7 2 7
21 54 56 10 35
8 2 4 9 7
56 18 32 45 35 186
4 9 9 0 7
28 81 72 0 35 216
3 6 7 2 7
21 54 56 10 35 176
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Haridwar
S W S
Delhi
W
Gurgaon
S W
1. Investment in Land & Building 2. Annual Sales 3. Cost of Raw-Material 4. Transportation on purchase 5. Labor Charges 6. Water & Power 7. Transportation on Sales 8. Taxes
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8 2 4 9 7
56 18 32 45 35 186
4 9 9 0 7
28 81 72 0 35 216
3 6 7 2 7
21 54 56 10 35 176
Methods/Models 4. Location Break-Even Analysis Break Like in Previous method we have drawn income statement for each individual location We will do the Break-Even Analysis for each individual location using formula:
BEP = Fixed Costs / (Selling Price Variable Cost)
Haridwar 500000 100000 15000 3000 10000 15000 7000 3000 47000 53000 10.60%
Delhi 800000 100000 18000 7000 12000 13000 2000 8000 60000 40000 8.00%
Gurgaon 700000 100000 16000 6000 12000 10000 3000 6000 53000 47000 9.40%
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Location for which BEP (Break-Even Point or No-Profit No Loss Point) will be minimum should be selected.
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