PLANT LOCATION

To find location that yields an advantage in cost, revenue, customer services, and market
penetration.
Location of facility refers to its placement with respect to customers’ suppliers, and other
facilities with which it interfaces. Also, location includes its placement and orientation on
specific plot of land.

Facility - A facility is something built or established to serve a purpose.

Purpose of plant location – To find an optimal location that will provide the greatest
advantage to the organization concern.

Cases of location
• A new plant just being started.
• A new branch of an existing plant, or a new location for an existing plant.

Three expansion choices

1. On site
• Keeps management together
• Lower construction time and costs
• Avoids splitting up operations

2. New plant
• Do not put everything together
• Escape unproductive labor
• Modernize technology
• Reduce transportation cost

3. Relocation
• Proper for small firms
• Within a short distance

Many new plants are created everywhere – warehouses, stores, office buildings, etc. There
are significant impacts on operation costs, prices, ability to compete, also nearness to
customer, scope of comparison.
Globalization trend of operations – expansion.

For location planning

• Anticipate long-range forecasts – apply expansion policy, diversification of products,
changing market, changing sources of raw materials, and any other foreseeable
influences.
• Consider all economic factors that influence the need for the new plant and the size
and location of the plant.

• Three steps in selection process:

 1. The region in which the plant should be situated.
2. The community in which it should be placed
3. The exact site in a city or countryside

• Committee for location selection

Representatives from manufacturing, industrial engineering, industrial relations, product
engineering, public relations and from other influential groups. Normally done by consulting
firm.

• 7 Basic steps followed by a large company

1. Establish the need/objective for a new plant
2. Determine the best geographical area
3. Establish the requirements – product to be made, equipment and buildings needed,
utilities and transportation necessary, size and types of employees, etc.
4. Screen several communities within the general area decided on
5. Identify a few communities for detailed studies
6. Select the best location
7. Build the plant.

Factors affecting location

A. For regional and community site
• Proximity to good highway network/access to a major airport
• Abundant labor supply
• Proximity to markets
• Nearness to raw materials
• Nearness to an existing plant
• Availability of land and its costs
• Transportation facilities
• Power, water and gas supply
• Pollution control
• Taxes
• Climate
• Community administration and attitude
• Schools, religious establishments, parks, residential areas.

B. For local/exact sites

• Transportation facilities
• Availability of water, electricity, gas supply and swears.
• Zoning restrictions
• Soil characteristics
• Drainage
• Parking
• Areas
• Space of expansion
• Accessibility to workers
• Cost of land
 • Existing buildings

Dominant factors in manufacturing

• Favorable labor climate and employee transportation facilities
• Proximity to markets
• Quality of life – good schools, religious facilities, medical facilities, recreational
facilities, cultural events, attractive life style
• Proximity to parent company facilities
• Utilizes’ taxes and real estate costs
• Fire and police protection
• Capital availability
• Local ordinances/zonal restrictions
• Future growth of community

Comparing several sites

1. Identify important location factors (dominant and secondary)
2. Consider alternatives, narrow choices
3. Collect data
4. Analyze data quantitatively
5. Evaluate qualitative factors

Strategic Importance of Location Analysis

• Affect fixed and variable costs
• Reduce transportation costs
• Globalization issues: market economics; communications; rapid, reliable travels and
shipping; ease of capital flow; labor cots/

General Procedure for making Location Decisions

Depends on size, nature or scope of operations of an organization. For small and
new firms, normally informal approaches are applied. Large organization,
operating in more than one location, make it formal considering a wide range of
geographical locations. The general procedure is as such:
1. Decide on the criteria for evaluating location alternatives. For example:
increased revenue, transportation ease, community services.
2. Identify important factors that will affect the operations
3. Explore location alternatives:
a. Identify the general region for a location
b. Identify a small number of community alternatives
c. Identify site alternatives among those communities
4. Evaluate the alternatives and make a decision
Methods of Evaluation of Location Alternatives
A number of techniques are used in evaluating location alternatives
1. Factor Rating Method
2. Cost-profit-volume (Break-even analysis)
3. Transportation model
4. Center of gravity method

1. Factor Rating Method

Instill objectivity into the process of identifying hard-to-evaluate costs. Value or number
used is however subjectively, i.e., not “exact”.
Steps:
a. List the relevant factors and see if these are fulfilled/available in a region and the site.
b. Assign weight to each factor, based on their relative importance
c. Determine scale for each factor
d. Allocate the value to each factor for every location.
e. Sum up the weight for each location and select the “best” location

Ex.
Location factor Region Community or site
Market
Raw material
Transportation
Power
Climate
Labor and wages
Law and taxation
Community services and attitude
Water and waste disposal

Factor Max. possible Location

points A B C
Nearness to raw mats. 400 300 250 150
Nearness to market 300 150 200 250
Labor supply 275 150 225 175
Water supply 200 100 150 175
Power supply 200 150 150 100
Transportation 125 125 100 125
Water disposal 100 50 75 75
Land & const cost 70 60 50 50
Climate 40 35 25 40
Taxes and laws 40 35 25 40
 Local sites 40 40 30 35
Total 1800 1185 1295 1210

Preference Matrix in location decision Analysis

Factor Weight A B C
Material supply 0.1 5 0.5 9 8
Quality of life 0.2 9 1.8 8 4
Mild climate 0.3 10 3.0 6 8
Labor skills 0.4 3 1.2 4 7
Total

Break-even analysis
See the past note.

Transportation method of linear programming

Not covered under this course. For cost, add production and distribution cost.

Mathematical programming
Here you can consider, number of customers, number of potential plant sites, fixed cost of
opening plant j, percent or fraction of customer I’s demand that is satisfied by factory j, cost
of supplying the total demand of customer I by plant j, etc.

Center of gravity method

It determines the center of movement in a geographical area based on transport weight and
distance. Cost if function of distance, weight and time.

Identify a set of coordinates in a XY plane designating a center location (weight center) on a

map relative to all other locations.
Consider 3 locations A, B and C. Say annual weight to be carried from location I is wi.

Our objective: determine the central location for a new facility.

Say, (x, y) coordinates of the new facility at center of gravity and (xi, yi) coordinates of
existing facility i.

n n

x w i i y w i i
x= i =1
n
y= i =1
n

w
i =1
i w
i =1
i
Ex. There are four existing departments. Data is in table. Determine a possible location point
for the distribution center to these locations.
A B C D
(220, 200) (100, 500) (250, 600) (500, 300)
wA = 75 tons wA = 105 tons wA = 135 tons wA = 60 tons

Load-distance Technique
It is a method used in evaluating different locations based on load being transported and the
distance covered.
Here, instead of identifying a single set of location coordinates, various locations are
evaluated using a load-distance value that is a measure of weight and distance.
For a single potential location, load-distance value is ld = li di
Where li = load expressed as a weight, number of trips, or units being carried from the
proposed site to location, and di = distance between the proposed site and location i, which is
obtained from an area map/graph.
Location with the lowest load-distance value would result in the minimum transportation
cost and thus would be preferable.
Distance can be calculated using two formulas:

• Euclidean distances between the locations by applying the following equation:

Distance between location A and B:

d AB = ( x A − x B ) 2 + ( y A − y B ) 2
• Rectilinear distances between the locations by applying the following equation:
d AB = x A − x B  + y A − y B  .
And then calculate the load-distance scores by ld = li d i and the respective total cost.
The lowest cost value will be the deciding factor.
Ex. There are three proposed sites, namely P (360, 180), Q (420, 450) and R (250, 400). And
there are four existing departments. Which site is the best one relative to the existing
departments?
A B C D
(220, 200) (100, 500) (250, 600) (500, 300)
wA = 75 tons wA = 105 tons wA = 135 tons wA = 60 tons

Compare the results using Euclidean and rectangular distance calculations.

MCE4729: Tutorial Class

Plant Location
#1. A manufacturing company is considering four locations for its new plant: A, B, C, and D. Annual fixed
costs and variable costs per pair of its product (a pair makes a unit) are shown in the table below:

Location Annual fixed costs Variable costs per pair

A RM32, 000,000 RM 1000
B RM 9, 600,000 RM 520
C RM13, 600,000 RM 360
D RM17, 000,000 RM 260

i. Identify the range in volume over which each location would be best.
ii. What break-even quantity defines each range?

Although location A’s fixed and those of the other locations dominate variable costs, the company believes
that both the demand and price would be higher for its product in that area than in other locations. The
following table shows those projections.

Location Price per pair Forecast demand per year

A RM2000 60,000
B RM1400 45,000
C RM1400 43,000
D RM1400 40,000

i. Determine which location yields the highest total profit contribution per year.
ii. At what minimum sales volume, does A become the location of choice?
#2. XYZ manufacturing company is considering where to locate its new plant relative to its two suppliers (in
cities A and B) and two market areas (locations P and Q). Management wants to limit its search to these four
locations. The following information has been collected.

Location xy-coordinates (km) 1000kg/year Freight rate (RM/2000kg-km)

A (200, 300) 10,000 16
B (500, 200) 8,000 8
P (100, 100) 10,000 8
Q (400, 400) 6,000 12

i. Which of these locations gives the lowest total cost based on Euclidean distances?
ii. Which location is best, based on rectilinear distances?
iii. What are the coordinates of the center of gravity of the four locations?

#3. The Pelican Company has four distribution centers (A, B, C, and D) that require 50,000, 40,000, 60,000
and 40,000 liters of diesel fuel, respectively, per month for their long-haul trucks. Three fuel wholesalers (1,
2 and 3) have indicated their willingness to supply as many as 60,000, 80,000, and 50,000 liters of fuel,
respectively. The total cost (shipping and price) of delivering 1000 liters of fuel from each wholesaler to
each distribution center is shown in the following table.

Distribution center
Wholesaler A B C D
1 1700 1600 1600 1600
2 1500 1800 1600 1700
3 1800 1500 1800 1600

i. Determine the optimal solution. Check if all capacities have been exhausted and that all demands
can be met with this solution.
ii. What is the total cost of the solution?

#4. A couple is trying to decide among several available rentals. Alternatives were scored on the scale of 1
to 5 (5 = best) against weighted performance criteria (table below). The criteria included rent, proximity to
work and recreational opportunities, security, and other neighborhood characteristics associated with the
couple’s values and life style. Alternative A is an apartment, B is a bungalow, C is a condo, and D is a
downstairs apartment.
Which location does the preference matrix indicate?
Factor score for each location
Location factor Factor weight A B C D
1. Rent 25 3 1 2 5
2. Quality of life 20 2 5 5 4
3. Schools 5 3 5 3 1
4. Proximity to work 10 5 3 4 3
5. Proximity to recreation 15 4 4 5 2
6. Neighborhood security 15 2 4 4 4
7. Utilities 10 4 2 3 5
Total 100