Download - Session-SDC 4 Facility Location
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Facility Location
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Definition
Facility location is the process of identifying the
best geographic location for a service or production
facility. In other words Facility location or Plant
location is a function of determining the location
for a plant for maximum operating economy and
effectiveness.
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Facility Location/Plant Location
A plant location on pure economic considerations will ensure
an easy and regular supply of raw materials, labour force,
efficient plant layout, proper utilization of production
capacity, and reduced manufacturing.
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Reason for plant location
Establishment of a new venture
Expansion of existing business
Expansion of demand or volume of business
Re-location of existing plant Merging of companies
Changes in political, economical and social condition
Significant changes in the cost structure
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Factors Influence Plant Location/ Facility Location
Facility location is the process of determining a geographic
site for a firms 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, labourcosts, andtransportation costs. It is appropriate to divide the factors,
which influence the plant location or facility location on the
basis of the nature of the organisation as
General locational factors Specific locational factors
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General Locational Factors
1. CONTROLLABLE FACTORS
Proximity to markets
Supply of materials
Transportation facilities Infrastructure availability
Labour and wage
External economies
Capital
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General Locational Factors
2. UNCONTROLLABLE FACTORS
Government policy
Climate conditions
Supporting industries and services Community and labour attitudes
Community Infrastructure
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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 isadvisable to locate the facilities close to the market.
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Supply of raw material
It is essential for the organization to get raw material in right
qualities and right time in right order to have an
uninterrupted production. This factor becomes very important
if the materials are perishable and cost of transportation is
very high.
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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.
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Infrastructure availability
The basic infrastructure facilities like power, water and
transport, etc., become the prominent factors in deciding the
location.
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Labour and wages
The problem of securing adequate number of labour and with
skills specific is a factor to be considered both at territorial
(region) as well as at community level during plant location.
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UNCONTROLLABLE FACTORS
1. Government policy-
The policies of the state governments and local bodies
concerning labour laws, building codes, safety, etc., are the
factors that demand attention.
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2. Climatic conditions:
The geology of the area needs to be considered together withclimatic conditions (humidity, temperature). Climates greatlyinfluence human efficiency and behaviour. Some industries
require specific climatic conditions e.g., textile mill will requirehumidity.
UNCONTROLLABLE FACTORS
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UNCONTROLLABLE FACTORS
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3. Supporting industries and services:
Now a day the manufacturing organisation will not make all thecomponents and parts by itself and it subcontracts the work tovendors. So, the source of supply of component parts will be the
one of the factors that influences the location.
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UNCONTROLLABLE FACTORS
5. Community and labour attitude-
Community attitude towards their work and towards the
prospective industries can make the industry. Community
attitudes towards supporting trade union activities are important
criteria.
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UNCONTROLLABLE FACTORS
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6. Community infrastructure and amenity:
All manufacturing activities require access to acommunity infrastructure, most notably economic
overhead capital, such as roads, railways, portfacilities, power lines and service facilities and socialoverhead capital like schools, universities andhospitals.
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Decisions Making Process in Facility Location/
Facility Location Models
1. Qualitative Factor analysis models
Factor Rating Method
Weighted factor rating method
Point rating Method2. Quantitative Factor analysis models
Return on Investment
Break even analysis
Dimensional Analysis
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Factor Rating Method
The process of selecting a new facility location involvesa series of following steps:
Identify the important location factors.
Rate each factor according to its relative importance,
i.e., higher the ratings is indicativeof prominent factor. Assign each location according to the merits of the
location for each factor.
Calculate the rating for each location by multiplying
factor assigned to each location with basic factorsconsidered.
Find the sum of product calculated for each factor
and select best location having highesttotal score.
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Weighted factor rating method
Factors are assigned weights based on relativeimportance and weightage score for each site using
a preference matrix is calculated.The site with thehighest weighted score is selected as the best
choice.
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Point Rating Method All objectives of plant location dont have
equal weightage. When relative
importance of each objective isrepresented by the number of points, is
called point rating method
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Break even analysis
Break even analysis implies that at some point in theoperations, total revenue equals total cost. Break
even analysis is concerned with finding the point atwhich revenues and costs agree exactly. It is called
Break-even Point.
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Alternative location x,y,z have a cost structures shown to
produce a product expected for selling at Rs. 120 per unit.
Find the most economical location for an expected volume of
2,500 units 1 year and determine the range of annual volume
of production for which , each of the locations x,y, and z
would be most economical or potential
Location FC/year (Rs.) VC/ unit (Rs.)
X 40,000 60Y 60,000 40
Z 90,000 25
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Dimensional analysis
C1M, C
2M , C
3MC
ZM are the different costs
associated with a site M on the Zdifferent cost items
C1
N , C2
N , C3
N, CZ
N are the different costs
associated with a site N, andW
1,W
2,W
3 .W
Zare the weightages given to these
cost items, then the relative merit ofsite M and
site N is given by:
(C1M / C1
N) W1x (C2M / C2
N) W2x (C3M / C3
N) W3x (CzM /
Cz
N) WZ
If this is > 1, it means site N is superior; and vice versa.
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ILLUSTRATION
Potential locations X, Y and Z have the coststructures shown below.
The ABC company has a demand of 1,30,000 unitsof a new product. Three potential locations X, Y
and Z having following cost structures shown areavailable. Select which location is to be selectedand also identify the volume ranges where each
location is suited?
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