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Production and Operations Management

Location Planning
One of the important Decisions Long-Term

Lesson 5

Location Planning

Refers to selection of location where plant should be installed. Have Two Parts:
Selection of Regions (like which state, city) Selection of Site Particular Piece of Land

Amit Agrawal GLA University, Mathura

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Location Planning
Process of determining Where the plant should be located For Maximum operating economy and efficiency
According to Davis - Location Planning is the process of determining where the plant should be located for maximum operating economy and efficiency.
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Need / Significance
Profitability also depends on this Once decision irreversible is taken, it become

Can be required by a Old firm for relocation Also effects the efficiency of distribution of finished goods.
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Objective:
Combined Cost of four element should be minimized
Cost of Using

Factors Influencing Plant Location

Factors Influencing Plant Location

RESOURCES

Total Cost of

Cost incurred on

Cost of Distributing

INPUTS

PROCESS

OUTPUT

1. 2. 3. 4. 5. 6.

Should minimize sum of all four:

INPUTS: Cost of Inputs + its transportation cost RESOURCES: Cost of using resources PROCESS: Cost of Processing OUTPUT: Transportation cost of distributing FGs.
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PRIMARY FACTORS Availability of Raw-Material Nearness to Market Availability of Transportation Availability of Power Special Grants / Regional Taxes, Import Barriers etc. Industry Concentration

1. 2. 3. 4.

SECONDARY FACTORS Political Factors Legal Factors Natural Factors Social/Religious Factors

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Factors (Primary)

Factors (Primary)

1. Availability of Raw-Material RawRM cost is a considerable part of total cost Two points should be considered while selecting location
Regular & Uninterrupted Supply of RM At a minimum total Cost (Cost of RM + Transportation)

1. Availability of Raw-Material RawGoverning Principle for selecting Location near to RM Source is:
When Weight of RM > Weight of Finished Product (Sugar) Or When RM is of Perishable Nature (Milk Powder) Production Facility Should be Near to RM Source As it will reduce the cost on those three factors. When Weight of FG > Weight of RM (Soft Drinks) or When RM has to be collected from various places Production Facility should be Near to Market As firm has to spent much more on transportation of FG in comparison to transport of RM

Above two points can be followed by selecting location near to source of raw-material
Price of RM will be Minimum - Competition Transportation Cost will be Minimum Transportation Storage Cost will be Minimum Less Storage
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Less

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Factors (Primary)

2. Nearness to Market
It is important from the point of view of control over market
For supplying FP to customers in minimum time Quick adjustments to supply as per demand

Factors (Primary) 3. Availability of Suitable Transport Facility

Suitable & Speedy Transportation Facility should be available Mainly Five Basic Modes of Transportation
Road Water Rail Air Pipeline

Firm has to generally locate its plant near to market

If Weight of FP > Weight of Raw Material (Soft-Drink) If Size of FP become so large like Ship Building FP is of Perishable Nature (like sweets) Service Industries like Banks
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Suitability depends on the Nature of the product & business like for exports Water or Air
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Factors (Primary) 4. Availability of Labor Its importance increased, when firm is using labor intensive technique Availability of Suitably skilled & Cost effective labor Cost Effectiveness should be judged by
Prevailing Wage rate of required labor Productivity of Required Labor
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Factors (Primary) 5. Availability of Power

A Steel Manufacturing Plant requires
400 Tons of Coal (Source of Power) 200 Tons of Iron-Ore (Raw-Material) To Produce 100 tons of Steel (FP)

They Generally located near to source of Power i.e. near coal mines in Bihar to minimize overall cost Now a days, Availability of electricity, its cost etc. become important factors
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Factors (Primary) 6. Tax Exemptions / Grants / Barriers

Some Govt. to promote provides benefits in
Excise Duties Sales Taxes Customs & Import Duty

Factors (Primary) 7. Industry Concentration

Sometimes, Same type of business get concentrated in an area Resulting to concentration of Factors of Production in same area At these locations firm can minimize the cost because of competition among factors of production like labor, RM supplier etc.
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Industrialization

There can be some barriers also in form of

Import Restriction High Rates of Taxes etc.

These factors should also be considered, for meeting the objective of Minimum Cost
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Factors (Secondary)
Political Factors
Policy of Govt. towards that particular business like Haryana Govt. Alchohal

Methods / Models of Location Planning

Large No. of factors are involved It become complicated to judge the best one on overall basis Various Quantitative Methods has developed: Factor Rating Method Weighted Factor Rating Method Composite Measure Method Location Break Even Analysis
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Legal Factors
Law & Order Situation (Assam ULFA) Legal Restriction (Taz Tripazeum)

been

Natural Factors
Climate, Weather, Ecological Factors like J&K

Social/Religious Factors
Society or Religion of Place should permit that business (MacD)
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Methods/Models 1. Factor Rating Method

Step I: A list of different factors & Locations under consideration is prepared;
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power Alternative Sites Haridwar Delhi Gurgaon

Methods/Models 1. Factor Rating Method

Step II: Each Site is give a score out of 10, based on suitability for each individual factor
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power Alternative Sites Haridwar 8 2 4 9 7 Delhi 4 9 9 0 7 Gurgaon 3 6 7 2 7

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Methods/Models 1. Factor Rating Method

Step III: Score of each site should be summed up.
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power TOTAL
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Methods/Models 1. Factor Rating Method

Step IV: Site having highest score should be selected
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power TOTAL
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Alternative Sites Haridwar 8 2 4 9 7 30 Delhi 4 9 9 0 7 29

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Alternative Sites Haridwar 8 2 4 9 7 30 Delhi 4 9 9 0 7 29

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Gurgaon 3 6 7 2 7 25

Gurgaon 3 6 7 2 7 25
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Methods/Models 2. Weighted Factor Rating Method

Drawback of Factor Rating Method was that it gives equal importance to all factors Whereas, it is possible that for some businesses factors like nearness to market or nearness to rawmaterial are more important than others Therefore, Weighted Factor Rating Method is an improvement over Factor Rating Method

Methods/Models 2. Weighted Factor Rating Method

Step I: A list of different factors & Locations under consideration is prepared;
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power Alternative Sites Haridwar Delhi Gurgaon

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Methods/Models 2. Weighted Factor Rating Method

Step II: Weight (importance) of each factor is decided out of 10;
Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power Weights (out of 10) 7 9 8 5 5 Alternative Sites Haridwar Delhi Gurgaon

Methods/Models 2. Weighted Factor Rating Method

Step III: Scores are given to each side based on suitability of factors out of 10;
Alternative Sites Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power Weights (out of 10) 7 9 8 5 5 Haridwar
S S

Delhi 4 9 9 0 7

Gurgaon
S

8 2 4 9 7

3 6 7 2 7

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Methods/Models 2. Weighted Factor Rating Method

Step IV: Weighted Scores of each site is calculated by multiplying weights of factors to scores;
Alternative Sites Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power Weights (out of 10) 7 9 8 5 5 Haridwar
S W S

Methods/Models 2. Weighted Factor Rating Method

Step V: Weighted Scores for each site is summed up
Alternative Sites Weights (out of 10) 7 9 8 5 5

Delhi
W

Gurgaon
S W

Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power TOTAL

Haridwar
S W S

Delhi
W

Gurgaon
S W

8 2 4 9 7

56 18 32 45 35

4 9 9 0 7

28 81 72 0 35

3 6 7 2 7

21 54 56 10 35

8 2 4 9 7

56 18 32 45 35 186

4 9 9 0 7

28 81 72 0 35 216

3 6 7 2 7

21 54 56 10 35 176
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Methods/Models 2. Weighted Factor Rating Method

Step VI: Site having highest Weighted Scores will be selected
Alternative Sites Factors Nearness to Raw-Material Nearness to Market Availability of Transport Tax Benefits Availability of Labor & Power TOTAL
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Methods/Models 3. Composite Measure Method

Under this method an expected income statement for each location is prepared and location providing the highest Rate of Return is selected.
Particulars Haridwar 500000 100000 15000 3000 10000 15000 7000 3000
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Delhi 800000 100000 18000 7000 12000 13000 2000 8000

Gurgaon 700000 100000 16000 6000 12000 10000 3000 6000

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Weights (out of 10) 7 9 8 5 5

Haridwar
S W S

Delhi
W

Gurgaon
S W

1. Investment in Land & Building 2. Annual Sales 3. Cost of Raw-Material 4. Transportation on purchase 5. Labor Charges 6. Water & Power 7. Transportation on Sales 8. Taxes
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8 2 4 9 7

56 18 32 45 35 186

4 9 9 0 7

28 81 72 0 35 216

3 6 7 2 7

21 54 56 10 35 176

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Methods/Models 3. Composite Measure Method

Particulars 1. Investment in Land & Building 2. Annual Sales 3. Cost of Raw-Material 4. Transportation on purchase 5. Labor Charges 6. Water & Power 7. Transportation on Sales 8. Taxes 9. Total Operating Cost (Sum 3-8) 10. Net Profit (2-9) 11. Return on Investment(%of 10 on 1)
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Methods/Models 4. Location Break-Even Analysis Break Like in Previous method we have drawn income statement for each individual location We will do the Break-Even Analysis for each individual location using formula:
BEP = Fixed Costs / (Selling Price Variable Cost)

Haridwar 500000 100000 15000 3000 10000 15000 7000 3000 47000 53000 10.60%

Delhi 800000 100000 18000 7000 12000 13000 2000 8000 60000 40000 8.00%

Gurgaon 700000 100000 16000 6000 12000 10000 3000 6000 53000 47000 9.40%
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Location for which BEP (Break-Even Point or No-Profit No Loss Point) will be minimum should be selected.
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