Chapter 5

Facility Location
Facility Planning
One of the major strategy decisions that must be made by any organization is where to locate
its producing and storage facilities. For manufacturers, the problem is broadly categorized
into factory location and ware house location; within this categorization, we may be
interested in locating the firm’s first factory or warehouse or locating a new factory or
warehouse relative to the locations of existing facilities. The general objective in choosing a
location is to select that site or combination of sites that minimizes two classes or costs –
regional and distribution or sites that minimizes two classes or costs – regional and
distribution costs. Regional costs are those associated with a given locate and include land,
construction, manpower, and state and local expenses and regulations. Distribution costs are
those directly related to the shipping of supplies and products to customers and other
branches of the distribution network. Since the location of the firm, economic analysis of
facility location has focused on the problem of adding warehouses or factories to the existing
production-distribution system.
The selection of location is a key-decision as large investment is made in building plant and
machinery. It is not advisable or not possible to change the location very often. So an
improper location of plant may lead to waste of all the investments made in building and
machinery, equipment.
Before a location for a plant is selected, long range forecasts should be made anticipating
future needs of the company. The plant location should be based on the company’s expansion
plan and policy, diversification plan for the products, changing market conditions, the
changing sources of raw materials and many other factors that influence the choice of the
location decision. The purpose of the location study is to find an optimum location one that
will result in the greatest advantage to the organization.
Profit oriented organizations base their decisions on profit potential, while non-profit
organization strive to achieve a balance between cost and the level of customer service they
provide. The organizations will try to identify the best location available. The location
options for any organization are as follows:
• Expanding the existing facility
• Add new locations while retaining existing ones, as is done in many retail
stores
 • Shut down one location and move to another.
• Option of doing nothing and maintaining the status quo.
In service organization, the facility location decision is also a major one, but as a rule, the
choice of a location is based upon nearness to the customer rather than on resource
considerations. With the shift in the U.S. economy away from manufacturing and toward
service, there is little questions that opening of new service facilities has become for more
common that opening new factories and warehouses. Indeed, there are few communities in
rapid growth in public private branch offices, franchises, and entertainment facilities.

Locational Flexibility
Availability of Raw Material: Nearness to the place of the raw material will give advantage
on the transportation cost, so that overall profitability can be improved. When the raw
material is heavy or is consumed in bulk, then plant location has to be nearer to the raw
material site.
Nearness to Markets: It reduced the cost of transportation as well as the chances of the
finished products getting damaged and spoiled on the way, especially the perishable products.
Moreover, a plant being near to the market can capture a big market share and render quick
service to the customers.
Transport Facilities: A lot of money is spend both in transporting the raw materials and the
finished goods. Depending upon the size of raw material and finished goods, a suitable
method of transportation like roads, rail, water or air is selected and accordingly the plant
location is decided. One point which must be kept in mind is that cost of transportation
should remain fairly small in proportion to the total cost.
Availability of Labour: Stable labour force, of right kind, of adequate size and at reasonable
rates with its proper attitude towards work are a few factors which govern plant location to a
major extent.
Availability of Fuel and Power: The main sources of energy are electrical power, coal, oil,
etc. In the case of power intensive industries like steel manufacturing units or continuous
process industries like petrochemical and cement, the availability of fuel and power will be
one of the major deciding factories in plant location.
Climate: Depending on the type of industry and the products that are being manufactured,
this is a different factor. For instance, in the case of textile mills climatic conditions with
adequate humidity is a basic essential criterion. That is the reason many textile mills have
been put up in Bombay, Coimbatore region.
Water Availability: In industries like textile dying, paper or chemicals, the requirements of
good quality water is one of the basic requirement for plant location. The water is required for
processing or for effluent rejection into the rivers or specifically for waste disposal.
Government Policies: The central and state governments may declare many talks as
backward and give numerous concessions like tax holiday, uninterrupted power supply,
capital subsidy, easy availability of loans, etc. for balanced development of regions in the
country.
Land: Topography, area, the shape of the site, cost, drain age and other facilities, the
probability of floods and earthquakes will influence the selection of the location.
Community Attitude: Industries like matches, crackers, hosiery and leather have flourished
because of the positive attitude of the community towards these.
(a) The presence of related industries will give many advantages like availability of skilled
labourers, standard components.
(b) Housing facilities
(c) Security
(d) Local by-laws, taxes, building restrictions
(e) Existence of other service facilities like hospital marketing centres, schools, banks, post
offices, clubs.
These factors, depending on the product to be manufactured or the industry, may separately
or collectively have to be given the required weightage. In the process, many alternatives may
emerge. The management decisions will be taken after weighing all the alternatives and
selecting the best among them.

Need for Selecting a Suitable Location

The need for selecting a suitable location arises because of three situations.
When starting a new organisation, i.e.,
1. Location choice for the first time.
2. In case of existing organisation.
3. In case of Global Location.
I. In Case of Location Choice for the First Time or New Organisations
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organisational objectives. The following are the
factors to be considered while selecting the location for the new organisations:
Identification of region: The organisational objectives along with the various long-term
considerations about marketing, technology, internal organisational strengths and
weaknesses, region-specific resources and business environment, legal-governmental
environment, social environment and geographical environment suggest a suitable region for
locating the operations facility.
Choice of a site within a region: Once the suitable region is identified, the next step is
choosing the best site from an available set. Choice of a site is less dependent on the
organisation’s long-term strategies. Evaluation of alternative sites for their tangible and
intangible costs will resolve facilities-location problem.
The problem of location of a site within the region can be approached with the following
cost-oriented non-interactive model, i.e., dimensional analysis.
Dimensional analysis: If all the costs were tangible and quantifiable, the comparison and
selection of a site is easy. The location with the least cost is selected. In most of the cases
intangible costs which are expressed in relative terms than in absolute terms. Their relative
merits and demerits of sites can also be compared easily. Since both tangible and intangible
costs need to be considered for a selection of a site, dimensional analysis is used.
Dimensional analysis consists in computing the relative merits (cost ratio) for each of the cost
items for two alternative sites. For each of the ratios an appropriate weightage by means of
power is given and multiplying these weighted ratios to come up with a comprehensive figure
on the relative merit of two alternative sites.
II. In Case of Location Choice for Existing Organisation
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premises and elsewhere under following circumstances:
1. Plant manufacturing distinct products.
2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:
Plants manufacturing distinct products: Each plant services the entire market area for the
organization. This strategy is necessary where the needs of technological and resource inputs
are specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with other
product-line requiring little emphasis on precision. It may not be proper to have too many
contradictions such as sophisticated and old equipment, highly skilled and semi-skilled
personnel, delicates processes and those that could permit rough handlings, all under one roof
and one set of managers. Such a setting leads to much confusion regarding the required
emphasis and the management policies.
Product specialization may be necessary in a highly competitive market. It may be necessary
to exploit the special resources of a particular geographical area. The more decentralized
these pairs are in terms of the management and in terms of their physical location, the better
would be the planning and control and the utilization of the resources.
Manufacturing plants supplying to a specific market area: Here, each plant manufactures
almost all of the company’s products. This type of strategy is useful where market proximity
consideration dominates the resources and technology considerations. This strategy requires
great deal of coordination from the corporate office. An extreme example of this strategy is
that of soft drinks bottling plants.
Plants divided on the basis of the process or stages in manufacturing: Each production
process or stage of manufacturing may require distinctively different equipment capabilities,
labour skills, technologies, and managerial policies and emphasis. Since the products of one
plant feed into the other plant, this strategy requires much centralized coordination of the
manufacturing activities from the corporate office that are expected to understand the various
technological aspects of all the plants.
Plants emphasizing flexibility: This requires much coordination between plants to meet the
changing needs and at the same time ensure efficient use of the facilities and resources.
Frequent changes in the long-term strategy in order to improve be efficiently temporarily, are
not healthy for the organization. In any facility location problem the central question is: ‘Is
this a location at which the company can remain competitive for a long time?’
For an established organization in order to add on to the capacity, following are the ways: (a)
Expansion of the facilities at the existing site: This is acceptable when it does not violate the
basic business and managerial outlines, i.e., philosophies, purposes, strategies and
capabilities. For example, expansion should not compromise quality, delivery, or customer
service. (b) Relocation of the facilities (closing down the existing ones): This is a drastic step
which can be called as ‘Uprooting and Transplanting’. Unless there are very compelling
reasons, relocation is not done. The reasons will be either bringing radical changes in
technology, resource availability or other destabilization.
All these factors are applicable to service organizations, whose objectives, priorities and
strategies may differ from those of hardcore manufacturing organizations.
III. In Case of Global Location
Because of globalisation, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global
locations there is scope for virtual proximity and virtual factory.
• Virtual Proximity
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the information/
communication pathway. Many firms use the communications highway for conducting a
large portion of their business transactions. Logistics is certainly an important factor in
deciding on a location—whether in the home country or abroad. Markets have to be reached.
Customers have to be contacted. Hence, a market presence in the country of the customers is
quite necessary.
• Virtual Factory
Many firms based in USA and UK in the service sector and in the manufacturing sector often
out sources part of their business processes to foreign locations such as India. Thus, instead
of one’s own operations, a firm could use its business associates’ operations facilities. The
Indian BPO firm is a foreign-based company’s ‘virtual service factory’. So a location could
be one’s own or one’s business associates. The location decision need not always necessarily
pertain to own operations.

Reasons for a Global/Foreign Location

A. Tangible Reasons
The tangible reasons for setting up an operations facility abroad could be as follows:
• Reaching the customer: One obvious reason for locating a facility abroad is that of
capturing a share of the market expanding worldwide. The phenomenal growth of the GDP of
India is a big reason for the multinationals to have their operations facilities in our country.
An important reason is that of providing service to the customer promptly and economically
which is logistics-dependent. Therefore, cost and case of logistics is a reason for setting up
manufacturing facilities abroad. By logistics set of activities closes the gap between
production of goods/services and reaching of these intended goods/services to the customer to
his satisfaction. Reaching the customer is thus the main objective. The tangible and intangible
gains and costs depend upon the company defining for itself as to what that ‘reaching’ means.
The tangible costs could be the logistics related costs; the intangible costs may be the risk of
operating is a foreign country. The tangible gains are the immediate gains; the intangible
gains are an outcome of what the company defines the concepts of reaching and customer for
itself. The other tangible reasons could be as follows:
• The host country may offer substantial tax advantages compared to the home country.
• The costs of manufacturing and running operations may be substantially less in that
foreign country. This may be due to lower labour costs, lower raw material cost, better
availability of the inputs like materials, energy, water, ores, metals, key personnel etc.
• The company may overcome the tariff barriers by setting up a manufacturing plant in a
foreign country rather than exporting the items to that country.
B. Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be
as follows:
Customer-related Reasons
• With an operations facility in the foreign country, the firm’s customers may feel secure
that the firm is more accessible. Accessibility is an important ‘service quality’
determinant.
• The firm may be able to give a personal tough.
• The firm may interact more intimately with its customers and may thus understand their
requirements better.
• It may also discover other potential customers in the foreign location.
Organisational Learning-related Reasons
• The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learning by having operations in a technologically more advanced
country. The firm can learn from advanced research laboratories/universities in that
country. Such learning may help the entire product-line of the company.
• The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
• It can also learn from its competitors operating in that country. For this reason, it may
have to be physically present where the action is.
• The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant
there, it will have intensive interaction with the suppliers in that country from whom there
may be much to learn in terms of modern and appropriate technology, modern
management methods, and new trends in business worldwide.
Other Strategic Reasons
• The firm by being physically present in the host country may gain some ‘local boy’ kind
of psychological advantage. The firm is no more a ‘foreign’ company just sending its
products across international borders. This may help the firm in lobbying with the
government of that country and with the business associations in that country.
• The firm may avoid ‘political risk’ by having operations in multiple countries.
• By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.
• The firm could hunt for human capital in different countries by having operations in those
countries. Thus, the firm can gather the best of people from across the globe.
• Foreign locations in addition to the domestic locations would lower the market risks for
the firm. If one market goes slow the other may be doing well, thus lowering the overall
risk.
Factors Influencing Plant Location/Facility Location
Facility location is the process of determining a geographic site for a firm’s 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,
labour costs, and transportation 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, which include controllable and uncontrollable factors for all
type of organisations.
• Specific locational factors specifically required for manufacturing and service
organisations. Location factors can be further divided into two categories:
Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are
important, but management may downplay or even ignore some of them if other factors are
more important.
General Locational Factors
Following are the general factors required for location of plant in case of all types of
organisations.
Controllable Factors
1. Proximity to markets
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labour and wages

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 is advisable to locate the facilities close
to the market.
Locating nearer to the market is preferred if
• The products are delicate and susceptible to spoilage.
• After sales services are promptly required very often.
• Transportation cost is high and increase the cost significantly.
• Shelf life of the product is low.
Nearness to the market ensures a consistent supply of goods to customers and reduces the
cost of transportation.
Supply of raw material: It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted production. This factor becomes very
important if the materials are perishable and cost of transportation is very high.
General guidelines suggested by Yaseen regarding effects of raw materials on plant location
are:
• When a single raw material is used without loss of weight, locate the plant at the
raw material source, at the market or at any point in between.
 • When weight loosing raw material is demanded, locate the plant at the raw material
source.
• When raw material is universally available, locate close to the market area.
If the raw materials are processed from variety of locations, the plant may be situated so as to
minimize total transportation costs. Nearness to raw material is important in case of industries
such as sugar, cement, jute and cotton textiles.
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. There are five basic modes of physical transportation, air, road,
rail, water and pipeline. Goods that are mainly intended for exports demand a location near to
the port or large airport. The choice of transport method and hence the location will depend
on relative costs, convenience, and suitability. Thus transportation cost to value added is one
of the criteria for plant location.
Infrastructure availability: The basic infrastructure facilities like power, water and waste
disposal, etc., become the prominent factors in deciding the location. Certain types of
industries are power hungry e.g., aluminum and steel and they should be located close to the
power station or location where uninterrupted power supply is assured throughout the year.
The non-availability of power may become a survival problem for such industries. Process
industries like paper, chemical, cement, etc., require continuous. Supply of water in large
amount and good quality, and mineral content of water becomes an important factor. A waste
disposal facility for process industries is an important factor, which influences the plant
location.
Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during
plant location. Importing labour is usually costly and involve administrative problem. The
history of labour relations in a prospective community is to be studied. Prospective
community is to be studied. Productivity of labour is also an important factor to be
considered. Prevailing wage pattern, cost of living and industrial relation and bargaining
power of the unions’ forms in important considerations.
External economies of scale: External economies of scale can be described as urbanization
and locational economies of scale. It refers to advantages of a company by setting up
operations in a large city while the second one refers to the “settling down” among other
companies of related Industries. In the case of urbanization economies, firms derive from
locating in larger cities rather than in smaller ones in a search of having access to a large pool
of labour, transport facilities, and as well to increase their markets for selling their products
and have access to a much wider range of business services.
Location economies of scale in the manufacturing sector have evolved over time and have
mainly increased competition due to production facilities and lower production costs as a
result of lower transportation and logistical costs. This led to manufacturing districts where
many companies of related industries are located more or less in the same area. As large
corporations have realized that inventories and warehouses have become a major cost factor,
they have tried reducing inventory costs by launching “Just in Time” production system (the
so called Kanban System). This high efficient production system was one main factor in the
Japanese car industry for being so successful. Just in time ensures to get spare parts from
suppliers within just a few hours after ordering. To fulfill these criteria corporations have to
be located in the same area increasing their market and service for large corporations.
Capital: By looking at capital as a location condition, it is important to distinguish the
physiology of fixed capital in buildings and equipment from financial capital. Fixed capital
costs as building and construction costs vary from region to region. But on the other hand
buildings can also be rented and existing plants can be expanded. Financial capital is highly
mobile and does not very much influence decisions. For example, large Multinational
Corporations such as Coca- Cola operate in many different countries and can raise capital
where interest rates are lowest and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast
growing (or not) high tech firms are concerned which usually have not many fixed assets.
These firms particularly need access to financial capital and also skilled educated employees.

Uncontrollable Factors
Government policy: The policies of the state governments and local bodies concerning
labour laws, building codes, safety, etc., are the factors that demand attention. In order to
have a balanced regional growth of industries, both central and state governments in our
country offer the package of incentives to entrepreneurs in particular locations. The incentive
package may be in the form of exemption from a sales tax and excise duties for a specific
period, soft loan from financial institutions, subsidy in electricity charges and investment
subsidy. Some of these incentives may tempt to locate the plant to avail these facilities
offered.
Climatic conditions: The geology of the area needs to be considered together with climatic
conditions (humidity, temperature). Climates greatly influence human efficiency and
behaviour. Some industries require specific climatic conditions e.g., textile mill will require
humidity.
Supporting industries and services: Now a day the manufacturing organisation will not
make all the components and parts by itself and it subcontracts the work to vendors. So, the
source of supply of component parts will be the one of the factors that influences the location.
The various services like communications, banking services professional consultancy
services and other civil amenities services will play a vital role in selection of a location.
Community and labour attitudes: Community attitude towards their work and towards the
prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria. Facility location in specific location is not
desirable even though all factors are favouring because of labour attitude towards
management, which brings very often the strikes and lockouts.
Community infrastructure and amenity: All manufacturing activities require access to a
community infrastructure, most notably economic overhead capital, such as roads, railways,
port facilities, power lines and service facilities and social overhead capital like schools,
universities and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is
enormously expensive to build and for most manufacturing activities the existing stock of
infrastructure provides physical restrictions on location possibilities.
Specific Locational Factors for Manufacturing Organisation
Dominant Factors
Factors dominating location decisions for new manufacturing plants can be broadly classified
in six groups. They are listed in the order of their importance as follows.
• Favourable labour climate
• Proximity to markets
• Quality of life
• Proximity to suppliers and resources
• Utilities, taxes, and real estate costs
Favourable labour climate: A favorable labour climate may be the most important factor in
location decisions for labour-intensive firms in industries such as textiles furniture and
consumer electronics. Labour climate includes wage rates, training requirements attitudes
toward work, worker productivity and union strength. Many executives consider weak unions
overall low probability of union organizing efforts as a distinct advantage.
Proximity to markets: After determining where the demand for goods and services is
greatest, management must select a location for the facility that will supply that demand.
Locating near markets is particularly important when the final goods are bulky or heavy and
outbound transportation rates are high. For example, manufacturers of products such as
plastic pipe and heavy metals all emphasize proximity to their markets.
Quality of life: Good schools, recreational facilities, cultural events, and an attractive
lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but it
can make the difference in location decisions.
Proximity to suppliers and resources: In many companies, plants supply parts to other
facilities or rely on other facilities for management and staff support. These require frequent
coordination and communication, which can become more difficult as distance increases.
Utilities, taxes, and real estate costs: Other important factors that may emerge include
utility costs (telephone, energy, and water), local and state taxes, financing incentives offered
by local or state governments, relocation costs, and land costs.

Secondary Factors
There are some other factors needed to be considered, including room for expansion,
construction costs, accessibility to multiple modes of transportation, the cost of shuffling
people and materials between plants, competition from other firms for the workforce,
community attitudes, and many others. For global operations, firms are emphasizing local
employee skills and education and the local infrastructure.
Specific Locational Factors for Service Organisation
Dominant Factors
The factors considered for manufacturers are also applied to service providers, with one
important addition — the impact of location on sales and customer satisfaction. Customers
usually look about how close a service facility is, particularly if the process requires
considerable customer contact.
• Proximity to Customers
Location is a key factor in determining how conveniently customers can carry on business
with a firm. For example, few people would like to go to remotely located dry cleaner or
supermarket if another is more convenient. Thus the influence of location on revenues tends
to be the dominant factor.
• Transportation Costs and Proximity to Markets
For warehousing and distribution operations, transportation costs and proximity to markets
are extremely important. With a warehouse nearby, many firms can hold inventory closer to
the customer, thus reducing delivery time and promoting sales.
• Location of Competitors
One complication in estimating the sales potential at different location is the impact of
competitors. Management must not only consider the current location of competitors but also
try to anticipate their reaction to the firm’s new location. Avoiding areas where competitors
are already well established often pays. However, in some industries, such as new-car sales
showrooms and fast-food chains, locating near competitors is actually advantageous. The
strategy is to create a critical mass, whereby several competing firms clustered in one
location attract more customers than the total number who would shop at the same stores at
scattered locations. Recognizing this effect, some firms use a follow –the leader strategy
when selecting new sites.

Secondary Factors
Retailers also must consider the level of retail activity, residential density, traffic flow, and
site visibility. Retail activity in the area is important, as shoppers often decide on impulse to
go shopping or to eat in a restaurant. Traffic flows and visibility are important because
businesses customers arrive in cars. Visibility involves distance from the street and size of
nearby buildings and signs. High residential density ensures night time and weekend business
when the population in the area fits the firm’s competitive priorities and target market
segment.