Literature Review

What are the key decisional factors involved in determining a manufacturing plant’s
location?

Abstract
The study of manufacturing location decision is a substantial area of interest for any company
setting up a new plant, but it has received a limited exposure due to lack of acknowledgement
of its immense importance. During the study of this area, it has thrown light on many unknown
external, internal factors and challenging problems due to changes in the recent trends in
manufacturing and criteria on location decision. Whether it be world economy, technology or
environment issues, it has affected the prevailing models used in production location decision.
The main aim of this literature review is to examine the current factors affecting the location
decision concerned with manufacturing and the impact on location of current trends in the
global trading environment, production systems, and technologies. Based on the critical
examination of articles it is found that location decision is considered on the basis of only
quantitative factors relative to cost and very minute attention has been paid to the qualitative
factors. In order to bridge this gap of manufacturing plant location decision factors such as raw
material input prices, logistic factors, human factors and financial factors should be considered
with grave qualitative importance. By the help of this research, an efficient judgement and
decision can be taken regarding the location of a manufacturing plant.

1. Introduction

Manufacturing Production location can be an important essence for the manufacturing firms for
several reasons such as production capacity, expansion to new market, obsolete or emerging
business. (Thanh, Bostel & Peton 2008). A manufacturing plant is often affected by the global
competition and world market thus, decision makers focus on the production resources and it costs
relative to it. Location is an important decision parameter which is often neglected due to the
quantitative approach followed by most of the plant decision makers keeping in focus the cost
advantages which they forget are often transitionary. Therefore, it is necessary that to keep in mind
the location decision variables first and then try to support it to the business plans (MacCormack
et al. 1994). Production location decision is a key perspective of strategic and logical decision

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making for the operation to be located. Production location decisions generally involve a long term
plan and the choice of location may have a significant impact on the company’s strategic
competitive position. The selected choice of location may a give competitive advantage thus
production location decision is the process that uses a model or part of a model as a tool for making
decision to determine the best alternative. In the model, it is needed to set or determine the variable
to limit the consideration. Each variable comes from factor of different places such as production
system factors, supply chain factors, or even factors from product life cycle (Rhim, Ho &
Karmarkar 2002). The problems of manufacturing start with the procurement of raw material and
the costs associated with it if the distance between the source and the receiving plant location is far
which in turn increases the transportation cost. Thus increase in production cost and less profit due
to rise in the expected selling cost. To overcome this challenge, a game theory model is used which
give information about the raw material input prices and the important raw material procurement
areas and saves from the unexpected product price changes ( Burton & Love 2002). Not only
locally, but international manufacturing location decisions are also a major concern due to the
business profits from the exports and imports, and to be in competition in the global market. To
analyze such global factor, Delphi study has been made in which a team of international experts
investigated factors regarding the location for manufacturing across national borders and have
identified the major factors for international location decision as costs, infrastructure, labor
characteristics, government, political and economic factors ( MacCarthy & Atthirawongto 2003).
When a company or a firm locates a new facility and starts to deliver a service/product to the market
it becomes important to have an equilibrium between the economic and environmental factors. To
resolve this issue, an mixed integer model is formulated which gives the information regarding the
location decision and how it impacts on the carbon footprints (Ghaddar & Sawaya 2012). Another
major location decision challenge is paying wages to the laborer’s depending upon the type of work
and the existing pay rate relative to the area. Thus it becomes necessary to establish a manufacturing
plant at a location where the labor cost is less and skilled labor availability is abundant (Bognanno,
Keane & Yang 2005). The mix of a facility location decision in manufacturing and marketing
strategies provides with an opportunity to compete in global markets. To achieve such a mix is
difficult, thus an attempt is made by using mathematical model to integrate manufacturing utility
and marketing utility for a global location so that there is better understanding between consumer
and supplier for better product manufacturing future with customer satisfaction (Canel & Das
2002). In order to achieve the aim of this research, it is necessary to review, relate and categorize
the existing location factors with current demanded factors with the help of evaluation
mathematical models and identifying the key decision factors which will be discussed further in
the literature review.

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2. Literature Review
Cheng et al. 2011 describes about the production location decision being decided on the basis
of the cost evaluation only, while certain factors relative to the operational performance are not
considered though it being of immense importance. Bellgran et al. (2013) suggested that
decision makers should use product localization decisions by keeping in mind the operational
factors and has provided with a five phase decision process. This process phases include
initiation, scoping, pre-study of location, alternative location and then finally selecting a best
location for manufacturing. With this above key activities, the expected outcome of plant can
be visualized and makes it easier for decision maker to choose an optimum plant location. It is
has become necessary to study the current global trends in manufacturing so that, it gives us
an in depth about the impacts of it on the location selection. For this issue, MacCormack et al.
(1994) has developed a framework for new location policy with four phases which describe
about the current business-level, implications changes in production systems, organizational
philosophies, production methodologies and global product volumes. These examination
suggests that future companies will have a network of small and flexible manufacturing plant
whose location will be based on regional infrastructure and local skill availability. It is easy to
manage the supply and demand for a single manufacturing firm having single plant location
but for a multiple manufacturing firm there exists several purchasing cost and transportation
cost of raw material or ready products. In order to resolve this problem various cost minimizing
models are prepared which describes about the firms cost regarding the purchase of inputs and
their transportation cost at the production site. This cost minimizing models will give us a
method of selecting an optimal location which has the least cost of input and transportation
along-with fixed level of outputs which is suggested by Venta (1980).
Moreover, a case study has been provided which gives information about the key factors
considered by Tata Nano for selection of their manufacturing plant of 1100 acres area at
Sanand. The key factors were considered by a panel of experts in different field which are raw
material, nearness to markets, transportation availability, labor availability, cost and unions,
fuel and power availability, community attitude, environmental regulations, local community
consideration and benefits by government. A similar approach was made by MacCarthy & W
Atthirawongto (2003) determine the factors that strongly affect the location decision in
international operations by Delphi study made by international panel of experts which further
broke down the factors to five major factors which were cost, labor characteristics,

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infrastructure, political, government and economic factors respectively. Moreover, Haug
(1992) explains about the international production location decision and production technology
transfer by considering the cost flow of a single product over a period of time. It explains about
various cost varied functions and procedure which can help to evaluate and minimize the cost
of transferring a plant location from domestic to international location. To add on, Kravis &
Lipsey (1981) elaborates about some international location decision key factors to be
considered while manufacturing overseas by considering exports from high wage countries
where labor cost is less and low capital, low wages industries will choose high wage location
for their manufacturing plant location. Canel & Das (2002) further provides with an integrated
mathematical model of marketing combined with manufacturing decision. It briefs that
manufacturing outcomes and market needs are directly relative to one another as marketing
provides necessary information customer demands for product which helps decision maker to
produce the right quantity of product in right time and price. Thus this integration model will
help in deciding which countries to choose for a facility location, what amount of products to
be manufactured at the certain facility and from which facility market customers will be served.
Rhim, Ho & Karmarkar (2002) discusses about the plant location for production depending
upon the competitive market locations. It provides with a method of determining potential
locations , markets for manufacturing, capacity of plant and then determines the pre-determined
cost of opening a facility and variable cost with respect to the location of the industry with the
help of cournot mechanism. However, Wendy et al. (2014) claims that manufacturing location
should be where there is huge customer demand so that there is an increase in demand of
product being market readily available. Now the main issue lies with the raw material input
prices which are given less importance in context with the determination of plant location. To
resolve this Burton & Love (2002) have provided with an estimation method which analyzes
the raw material input prices, transportation costs relative to the location of plant and predicts
the expected demands and profit by opting for a certain location. An another important aspect
of location decision is the availability of skilled labor in the nearby environment so that high
wages are not to be beared by the owner of the facility due to its location being far from the
city. Therefore, Bognanno, Keane & Yang (2005) suggests about finalizing a production
location after the survey of wages currently existing in the areas and choosing a location with
the least one. N Brahimi & S Khan (2014) have formulated the facility problem with help of
mixed integer linear programming and it has resulted in giving us solutions to minimize the
overall cost regarding a combined location decision and its associated factors. Lastly, Ghaddar
& Sawaya (2012) illustrates the amount of carbon emissions due to the long transportation

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 distances from facility location to the consumer market and provides a model supporting it.
Thus, it suggests that a facility location decision should be such that there is an economic as
well as an environment equilibrium. To recapitulate, all the factors concerned with the location
decision needs a thorough study in aspects of market competition, raw material input prices,
transportation cost, labor wages, re-shoring locally or internationally and environment factors
which will help in focusing the key factors to be considered while meeting the global demands
in manufacturing.

3. Evaluation
Plant location decision has been an important factor in today’s world for decision makers
setting up a new manufacturing plant. It has become inevitable to ignore the factors relative to
the plant location decision as it is a major criterion which is related to many aspects of
manufacturing. The current study of factors of manufacturing location decision suggests that it
has been following the same traditional steps while considering a manufacturing location being
stressed only on the financial factors and not on the operational factors being it an unquantified
factor. There exists a gap between the factors considered for plant location and current
requirements that needs to be fulfilled by a certain methodology and fixed factors that can help
make location decision globally. To meet the current requirements, the method to identify the
optimal location should involve steps such as determining the primary factors, prior studies of
location and its advantages, secondary factors and alternative factors which will give a
particular methodology to follow while considering a location ( Bellgran et al. 2013). To meet
the new business standards, it is necessary to formulate a location based policy which will
contain information regarding business factors like changes in business operations, production
policies, global product volumes, taxes, government policies and the organizational
philosophies (MacCormack et al. 1994). For an effective manufacturing business, there will be
implantation of smaller manufacturing plants which will be established on the basis of the
region preference and skill availability so that there is a reduction in plant location costs. A
cost estimation model can help in minimizing the input and transportation cost by indicating
the optimal location based on different production site location studies with respect to their
cost associated (Venta 1980). While determining a plant location decision it can be useful to
take advices from experts of the concerned production area so that they can list which key
critical factors, sub factors and factors to be neglected (MacCarthy & Atthirawongto 2003).
When transferring a plant location internationally Irving Kravis & Robert Lipsey (1981)

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 suggested the factors to be considered should be relative to the cost factors of exports, imports
and wages relative to the location. The market being directly influenced by the product it is
necessary to study and aim at a competitive market so that it is easier to establish a
manufacturing plant location near to its demand as suggested by Canel & Das (2002). A major
and most critical aspect lies with consideration of the raw material relative prices with reference
to location which is generally deferred by decision makers which can help reduce the
procurement and transportation cost with help of mathematical modelling and providing
accurate data results relative to the cost as claimed by Burton & Love (2002). Moreover, wages
and skilled labor availability are also an essential factor which can be related to the plant
location determination so that the overall cost of product is reduced due regional advantages.
Finally, and most importantly, the environment factor should be considered along with
economic factors which indirectly helps in location selection. In order to reduce the carbon
footprint, it is required that the transportation cost is minimal which can be achieved by
reducing distance between the plant location and seller location as noted by Ghaddar & Sawaya
(2012). Thus, considering the above mentioned factors during location decision tends to
improve the traditional existing methods followed for factors consideration and adoption of
current global factors.

4. Conclusions
The current research on determining the key factors affecting a manufacturing plant location
had many challenges relative to a particular method to implied to determine precise factors for
location decision of a manufacturing plant. An attempt has been made to bridge this gap by
considering the qualitative, operational, environmental and global market requirements. By
reviewing the research articles, it has provided with the most important factors, its impact and
various methods that can be applied for accurate results to problems. Among the challenges
faced during this examination were the factors to be considered for multiple firms and what
exact finance factors to be considered while choosing an optimal location. The factors
mentioned for the international location decision and overseas production still needs to be
given more consideration. Thus, by consideration of factors like wages, raw material input
prices, integration of market with location, economic with environmental equilibrium,
international location considerations and production localization it has proved to depict a clear
picture of what factors to be considered for manufacturing plant location. This literature review

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 has helped identify the research gaps, understand the persisting problems and develop a
solution from critical analysis of articles and broadening the scope of the area.

5. References
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4. Bellgran, M., Bruch, J., Rosio, C. & Wiktorsson, M. 2013, ‘Decision support for
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