Factors Influencing Plant Location in Operation Management - Production and Operations Management

Factors affecting Facility location decision in Operations Management

Facility location is the process of determining a geographic site for a firm’s operations. Managers of both service and manufacturing organizations must weigh many factors when assessing the desirability of a particular site, including proximity to customers and suppliers, labor costs, and transportation costs.

Location conditions are complex and each comprises a different Characteristic of a tangible (i.e. Freight rates, production costs) and non-tangible (i.e. reliability, frequency security, quality) nature.

Location conditions are hard to measure. Tangible cost based factors such as wages and products costs can be quantified precisely into what makes locations better to compare. On the other hand non-tangible features, which refer to such characteristics as reliability, availability and security, can only be measured along an ordinal or even nominal scale. Other non-tangible features like the percentage of employees that are unionized can be measured as well. To sum this up non-tangible features are very important for business location decisions.

It is appropriate to divide the factors, which influence the plant location or facility location on the basis of the nature of the organization as

  1. General locational factors, which include controllable and uncontrollable factors for all type of organizations.
  2. Specific locational factors specifically required for manufacturing and service organizations.

Location factors can be further divided into two categories: Dominant factors are those derived from competitive priorities (cost, quality, time, and flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are important, but management may downplay or even ignore some of them if other factors are more important.

General Locational Factors
Following are the general factors required for location of plant in case of all types of organisations.

CONTROLLABLE FACTORS

  1. Proximity to markets.
  2. Supply of materials
  3. Transportation facilities
  4. Infrastructure availability
  5. Labour and wages
  6. Factors influencing plant location

    Factors influencing plant location

  7. External economies
  8. Capital

UNCONTROLLABLE FACTORS

  1. Government policy
  2. Climate conditions
  3. Supporting industries and services
  4. Community and labor attitudes
  5. Community Infrastructure

CONTROLLABLE FACTORS

  1. Proximity to markets:
    Every company is expected to serve its customers by providing goods and services at the time needed and at reasonable price organizations may choose to locate facilities close to the market or away from the market depending upon the product. When the buyers for the product are concentrated, it is advisable to locate the facilities close to the market. Locating nearer to the market is preferred if
    • The products are delicate and susceptible to spoilage.
    • After sales services are promptly required very often.
    • Transportation cost is high and increase the cost significantly.
    • Shelf life of the product is low.
    Nearness to the market ensures a consistent supply of goods to customers and reduces the cost of transportation.
  2. Supply of raw material:
    It is essential for the organization to get raw material in right qualities and time in order to have an uninterrupted production. This factor becomes very important if the materials are perishable and cost of transportation is very high.
    General guidelines suggested by Yaseen regarding effects of raw materials on plant location are:
    • When a single raw material is used without loss of weight, locate the plant at the raw material source, at the market or at any point in between.
    • When weight loosing raw material is demanded, locate the plant at the raw material source.
    • When raw material is universally available, locate close to the market area.
    • If the raw materials are processed from variety of locations, the plant may be situated so as to minimize total transportation costs.
    Nearness to raw material is important in case of industries such as sugar, cement, jute and cotton textiles.
  3. Transportation facilities:
    Speedy transport facilities ensure timely supply of raw materials to the company and finished goods to the customers. The transport facility is a prerequisite for the location of the plant. There are five basic modes of physical transportation, air, road, rail, water and pipeline. Goods that are mainly intended for exports demand a location near to the port or large airport. The choice of transport method and hence the location will depend on relative costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria for plant location.
  4. Infrastructure availability:
    The basic infrastructure facilities like power, water and waste disposal, etc., become the prominent factors in deciding the location. Certain types of industries are power hungry e.g., aluminum and steel and they should be located close to the power station or location where uninterrupted power supply is assured throughout the year. The non-availability of power may become a survival problem for such industries. Process industries like paper, chemical, cement, etc., require continuous. Supply of water in large amount and good quality, and mineral content of water becomes an important factor. A waste disposal facility for process industries is an important factor, which influences the plant location.
  5. Labor and wages:
    The problem of securing adequate number of labor and with skills specific is a factor to be considered both at territorial as well as at community level during plant location. Importing labor is usually costly and involve administrative problem. The history of labor relations in a prospective community is to be studied. Prospective community is to be studied. Productivity of labor is also an important factor to be considered. Prevailing wage pattern, cost of living and industrial relation and bargaining power of the unions’ forms in important considerations.
  6. External economies of scale:
    External economies of scale can be described as urbanization and locational economies of scale. It refers to advantages of a company by setting up operations in a large city while the second one refers to the “settling down” among other companies of related Industries. In the case of urbanization economies, firms derive from locating in larger cities rather than in smaller ones in a search of having access to a large pool of labor, transport facilities, and as well to increase their markets for selling their products and have access to a much wider range of business services.

Location economies of scale in the manufacturing sector have evolved over time and have mainly increased competition due to production facilities and lower production costs as a result of lower transportation and logistical costs. This led to manufacturing districts where many companies of related industries are located more or less in the same area. As large corporations have realized that inventories and warehouses have become a major cost factor, they have tried reducing inventory costs by launching “Just in Time” production system (the so called Kanban System). This high efficient production system was one main factor in the Japanese car industry for being so successful. Just in time ensures to get spare parts from suppliers within just a few hours after ordering. To fulfill these criteria corporations have to be located in the same area increasing their market and service for large corporations.

  1. Capital:
    By looking at capital as a location condition, it is important to distinguish the physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs as building and construction costs vary from region to region. But on the other hand buildings can also be rented and existing plants can be expanded. Financial capital is highly mobile and does not very much influence decisions. For example, large Multinational Corporations such as Coca- Cola operate in many different countries and can raise capital where interest rates are lowest and conditions are most suitable.

Capital becomes a main factor when it comes to venture capital. In that case young, fast growing (or not) high tech firms are concerned which usually have not many fixed assets. These firms particularly need access to financial capital and also skilled educated employees.

UNCONTROLLABLE FACTORS

  1. Government policy:
    The policies of the state governments and local bodies concerning labor laws, building codes, safety, etc., are the factors that demand attention. In order to have a balanced regional growth of industries, both central and state governments in our country offer the package of incentives to entrepreneurs in particular locations. The incentive package may be in the form of exemption from a safes tax and excise duties for a specific period, soft loan from financial institutions, subsidy in electricity charges and investment subsidy. Some of these incentives may tempt to locate the plant to avail these facilities offered.
  2. Climatic conditions:
    The geology of the area needs to be considered together with climatic conditions (humidity, temperature). Climates greatly influence human efficiency and behavior. Some industries require specific climatic conditions e.g., textile mill will require humidity.
  3. Supporting industries and services:
    Now a day the manufacturing organization will not make all the components and parts by itself and it subcontracts the work to vendors. So, the source of supply of component parts will be the one of the factors that influences the location.

The various services like communications, banking services professional consultancy services and other civil amenities services will play a vital role in selection of a location.

  1. community and labor attitudes:
    Community attitude towards their work and towards the prospective industries can make or mar the industry. Community attitudes towards supporting trade union activities are important criteria. Facility location in specific location is not desirable even though all factors are favoring because of labor attitude towards management, which brings very often the strikes and lockouts.
  2. Community infrastructure and amenity:
    All manufacturing activities require access to a community infrastructure, most notably economic overhead capital, such as roads, railways, port facilities, power lines and service facilities and social overhead capital like schools, universities and hospitals.

These factors are also needed to be considered by location decisions as infrastructure is enormously expensive to build and for most manufacturing activities the existing stock of infrastructure provides physical restrictions on location possibilities.

Specific Locational Factors for Manufacturing Organization

DOMINANT FACTORS
Factors dominating location decisions for new manufacturing plants can be broadly classified in six groups. They are listed in the order of their importance as follows.

  1. Favorable labor climate
  2. Proximity to markets
  3. Quality of life
  4. Proximity to suppliers and resources
  5. Utilities, taxes, and real estate costs
  1. Favorable labor climate:
    A favorable labor climate may be the most important factor in location decisions for labour-intensive firms in industries such as textiles, furniture, and consumer electronics. Labor climate includes wage rates, training requirements, attitudes toward work, worker productivity, and union strength. Many executives consider weak unions or al low probability of union organizing efforts as a distinct advantage.
  2. Proximity to markets:
    After determining where the demand for goods and services is greatest, management must select a location for the facility that will supply that demand. Locating near markets is particularly important when the final goods are bulky or heavy and outbound transportation rates are high. For example, manufacturers of products such as plastic pipe and heavy metals all emphasize proximity to their markets.
  3. Quality of life:
    Good schools, recreational facilities, cultural events, and an attractive lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but it can make the difference in location decisions.
  4. Proximity to suppliers and resources:
    In many companies, plants supply parts to other facilities or rely on other facilities for management and staff support. These require frequent coordination and communication, which can become more difficult as distance increases.
  5. Utilities, taxes, and real estate costs:
    Other important factors that may emerge include utility costs (telephone, energy, and water), local and state taxes, financing incentives offered by local or state governments, relocation costs, and land costs.

SECONDARY FACTORS
There are some other factors needed to be considered, including room for expansion, construction costs, accessibility to multiple modes of transportation, the cost of shuffling people and materials between plants, competition from other firms for the workforce, community attitudes, and many others. For global operations, firms are emphasizing local employee skills and education and the local infrastructure.

Specific Locational Factors for Service Organization

DOMINANT FACTORS
The factors considered for manufacturers are also applied to service providers, with one important addition the impact of location on sales and customer satisfaction. Customers usually look about how close a service facility is, particularly if the process requires considerable customer contact.

PROXIMITY TO CUSTOMERS
Location is a key factor in determining how conveniently customers can carry on business with a firm. For example, few people would like to go to remotely located dry cleaner or supermarket if another is more convenient. Thus the influence of location on revenues tends to be the dominant factor.

TRANSPORTATION COSTS AND PROXIMITY TO MARKETS
For warehousing and distribution operations, transportation costs and proximity to markets are extremely important. With a warehouse nearby, many firms can hold inventory closer to the customer, thus reducing delivery time and promoting sales.

LOCATION OF COMPETITORS
One complication in estimating the sales potential at different location is the impact of competitors. Management must not only consider the current location of competitors but also try to anticipate their reaction to the firm’s new location. Avoiding areas where competitors are already well established often pays. However, in some industries, such as new-car sales showrooms and fast- food chains, locating near competitors is actually advantageous. The strategy is to create a critical mass, whereby several competing firms clustered in one location attract more customers than the total number who would shop at the same stores at scattered locations. Recognizing this effect, some firms use a follow –the leader strategy when selecting new sites.

SECONDARY FACTORS
Retailers also must consider the level of retail activity, residential density, traffic flow, and site visibility. Retail activity in the area is important, as shoppers often decide on impulse to go shopping or to eat in a restaurant. Traffic flows and visibility are important because businesses’ customers arrive in cars. Visibility involves distance from the street and size of nearby buildings and signs. High residential density ensures nighttime and weekend business when the population in the area fits the firm’s competitive priorities and target market segment.


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