OPERATIONS

MANAGEMENT

Dr.Nitin K.

Operations
Management
PLANT LOCATION

Introduction
Need for plant location:
Starting new factory
Expansion of existing plant
Re-location of existing plant

Plant location:
Plant location refers to the choice of region
and the selection of a particular site for
setting up a business or factory.

Ideal location
Demographic Analysis
Trade Area Analysis
Competitive Analysis
Site economics

 WHICH ARE THE FACTORS

AFFECTING PLANT
LOCATION ?

(A) Primary Factors :

Supply of raw materials .

Nearness to market.
Transport facilities .
Labour supply .
Availability of power .
Supply of capital .

B) Secondary Factors :
Facilities.
Natural factors .
Government subsidies and facilities .
Personal factors.

C) Miscellaneous factors :
Suitability of the Land.
Disposal of Water.
Availability of Water and fire- fighting facilities.
Community attitudes.

 Supply of Raw Materials.

Raw materials usually constitute 50 to 60 percent of the
product cost.
It important that the firm should get its requirements of
raw materials at the right time and at the reasonable price
for which the plant must be located in the neighbourhood.
Raw materials can be classified in to two categories :
Gross materials:.
Pure Materials :

 Nearness to the Market :

Since

goods are produced for sale , it is very essential that

the factory should be located near their market .
Industries using pure or non-weight- losing raw
materials ,bulky products and servicing units tends to be
located near their market .
e.g. concerns manufacturing wooden accessories for
electrical wiring , must be located near their market.

 Transport Facilities :
Speedy transport facilities are needed for the regular and
timely supply of raw materials at low cost and for
transporting finished products on time to the market.
Transport facilities with good speed and capacity are
needed for transporting laborers and establishing contacts in
the market, and controlling supply according to change in
demand.

 Supply of Labour :
Plant

location should be such that required labor is easily

available in the neighourhood.
Availability

of required labor locally is better since problem

of arranging accommodation and other related problems do
not arise.

Availability of power :
power is necessary for process of production and for
transporting finishing goods and raw materials
All type of power like electricity , diesel and atomic energy
are localized and mobile .power shortage lead to tremendous
losses due to the stoppage of machinery.

 Supply of Capital :
Industries require capital for initial promotion and
expansion. Therefore, a capital market must be developed in
industries centres.

Capital is more mobile than labour and , therefore nearer to

capital is not required for the purpose of industrialization.

 Facilities :
An

enterprising spirit innovation , technical know how and an

industrious nature of population all these factors taken tighter
and a favourable Government policy create a favourable
atmosphere for the purpose of the establishment of industries

Natural Factors :
Climatic

factor may not have a major influence these days

because of modern air conditioning facilities available today.
However it is important for some industry like textiles mills
which depend on particular climatic conditions.

 Government Subsidies and Facilities :

The

Government may encourage the dispersal of industries in

underdeveloped areas by making capital , land , power and water
available at subsidized rates
The Government may give such such facilities as developed
rebate , tax exemption , price subsidies , banking , insurance and
postal facilities at low rates , priority in transport and supply of
raw materials etc.
By giving these facilities , the Government may bring about
the development of industries in backward area and this will
result in the regional balancing of industries .

 Personal Factors :

There are entrepreneurs, specially small industrialists , who

locate their plants purely on personal grounds , disregarding
economic considerations.

Such location sometime totally disapprove the many current

theories of plant location.

Miscellaneous Factors :
a) Suitability of the land :
Site selection should also take into account topography and soil
structure of the land.
Though modern building techniques can overcome the
limitations of the soil.

b) Disposal of waters :
The problems of the disposal of effluents is common to many
industries , particularly chemical , sugar , steel and leather
industries .
The site selected for the location of the plant should have
provision for the disposal of waste .
c) Availability of Water and Fire-fighting Facilities :
Some industries require plentiful supply of water for water for
their working. e.g. fertilizer units , bleaching. These factories
must be located in places where. water is available in
abundance.

Contd
Industrial units are exposed to fire hazards.
In such case , adequate fire-fighting facilities must be available.
Otherwise , the loss from a pire will be considerable .

d) Community attitudes :
Community attitudes towards work as well as their attitudes
towards the incoming entrepreneurs can make or mar an
industry. Locational decisions , therefore , must take such
factors also into account particularly while setting up labour
intensive units.

Selection of Site
There are broadly three possible
alternatives open for selection of the
locality of the industrial unit
Urban or City area.

Rural area.
Suburban area.

Urban or City Area

Advantages
Transport facilities
Means of communication
Banking and Insurance facilities
Availability of Labour and Wages
Vicinity to the market
Other facilities
Storage facilities

Rural Area
Advantages
Cost of land
Cost of labour
Labour turnover
Taxes
Industrial relationship
Municipal restrictions
Others

Suburban Area
Advantages
Cost of land and area
Infrastructure facilities
Type of labour
Training facilities
Near to the market
Other facilities

Urban v/s Rural area

Availability of local market

Labour:
Transport Facilities
Cost of Land
Allied Industries
Availability of Facilities
Cost of Labour
Rates of Taxes
Trade Union Movement
Training Facilities

Location Models
Various models are available which
help identify a near ideal location.
The most popular models are:
1. Factor Rating Method
2. Point rating Method
3. Break-even Analysis
4. Qualitative Factor Analysis

Factor Rating Method

The steps involved are:
List the most relevant factors in the location decision.
Rate each factor ( say from 1for every low and to
5for very high ) according to its relative importance,
i.e. a factor rating is given to each factor, based on its
importance, the higher the ratings the more
important is the factor.
Rate each location (say 1 for very low and to 10 for
very high) according to its merits on each factor,
Compute the product of ratings multiplying the
factor rating by the location rating for each factor.
Compute the sum of the product of ratings for each
location.

ILLUSTRATION
TABLE : FACTOR RATINGS AND
LOCATION RATINGS FOR LOCATION
ALTERNATIVES.
LOCATION
RATING

PRODUCT OF
RATING

FACTOR
RATI
NG
FACTORS

LOCATION A

LOCATIO
NB

LOCATIO
NB

LOCATION A

1. TAX ADVANTAGE

32

24

2. SUITABILITY OF LABOUR SKILL

3. PROXIITY

18

15

4. PROXIMITY TO SUPPLIERS

10

20

5. ADEQUACY OF WATER

6. RECEPTIVITY OF COMMUNITY

20

15

7. QUALITY OF EADUCATIONAL SYSTEM

8. ACCESS TO RAIL AND AIR

TRANSPORTATION

10

30

24

9. SUITABILITY OF CLIMATE

14

18

10. AVAILABILITY OF POWER.

12

TO CUSTOMERS

Point Rating Method

What is significant in the point rating
system is the relative importance of
tangible cost factors compared to
intangible factors. Points are usually
assigned only to intangible factors and
an evaluation is made to determine
whether the difference between the
intangible score is worth the
difference if any, between the tangible
costs of the competing locations.

ILLUSTRATION:
Points assigned to locations
Factors Rated

Maximum
Possible Points

Location A

Location B

Future availability of
fuel

300

200

250

transportation
flexibility and growth

200

150

150

Adequacy of water
supply

100

100

100

Labour availability

250

220

200

Pollution regulations

30

20

20

Site topography

50

40

30

Living conditions

150

100

125

830

875

Total

Location Break-even Analysis:

The steps involved in this method are :
Determine all relevant costs that vary with each
location.
Categorize the costs for each location into
annual fixed cost (FC) and variable cost per unit
(VC) and calculate the total cost (TC) for the
desired volume of production per annum, for
each location.
Plot the total costs associated with each location
on a single chart or graph of annual cost versus
annual production volume.
Select the location with the lowest total annual
cost (TC) at the expected production volume per
annum (Q).

ILLUSTRATION

Location

Fixed
cost/year

Variable cost per

unit

Rs.25000

Rs.50

Rs.50000

Rs.25

Rs.80000

Rs.15

Solution
To determine the most economical location for an expected
annual volume of production of 2000 units, calculate the
total cost of production at each of the locations for the
annual production volume Q= 2000nos.
Total cost = ( Fixed cost per annum) + (Variable cost per
unit) x (Quantity produced)
Total cost at location A, TC = (FC) + (VC) x Q
TC=25000 + 50 x 2000
=125000
Similarly
Total cost at location B, TC = 50000 + 25 x 2000
= 100000
Total cost at location C, TC = 80000 + 15 x 2000
= 110000

Qualitative factor analysis

method
If economic criteria are not sufficiently influential to decide the
location alternatives, a system of weighing the criteria might be
useful in making a plant location decision. This approach is
referred to as qualitative factor analysis. The steps involved are:
Develop a list of relevant factors.
Assign a weight to each factor to indicate its relative importance
(weights may total upto 1.0)
Assign a common scale to each factor (say 0 to 100) and
designate any minimum points to be scored by any location.
Score each potential location according to the designated scale
and multiply the scores by the weights to arrive at the weighted
scores.
Total the points for each location, and chose the location with
the maximum points.

RECENT TRENDS IN THE LOCATION

OF INDUSTRIES
PRIORITY FOR THE SUBURBAN AREAS
INDUSTRIAL DEVELOPMENT IN THE
NOTIFIED BACKWARD AREAS
ESTABLISHMENT OF INDUSTRIAL ESTATE
DECENTRALISATION OF INDUSTRIES
INCREASED ROLE OF THE GOVERNMENT
IN THE DECISION OF LOCATION OF
INDUSTRIES
COMPETITION BETWEEN GOVERNMENT
AND INSTITUTUION

GOVERNMENT CONTROL ON
LOCATION OF INDUSTRIES
Licensing policy
Incentives for the spread of the
industries in the industrially
backward areas
Establish the giant public sector units
in the relatively less developed areas

OBJECTIVES OF STATE
INTERVENTION AND CONTROL
To attain balanced regional development.
To narrow down the gap of inequality of
income and wealth through creating and
providing employement opportunities to
less developed areas
To reduce the concentration of population
and congestion of industries in city areas
As strategic defence policy, spread of
industries reduces the chances of heavy
losses in war time.

Comparing Chinese &

Indian Manufacturing
Labour Issues
Environments
Overtime basis
Overtime basis
Work culture
Labour Laws
Minimum wages
Trade Unions
Cost of Production
Working Capital Requirements
Problems of Supply Chain
Government subsidy
Duty structure
Infrastructure

THANK YOU