Facility Location

• Plant location may be understood as the function determining where

the plant should be located for maximum operating economy and
effectiveness.

• The selection of a place for locating a plant is one of the problems,

perhaps the most important, which is faced by an entrepreneur while
launching new enterprise.

• A selection on pure economic considerations will ensure an easy and

regular supply of raw materials, labour force, efficient plant layout,
proper utilisation of production capacity and reduced cost of production.

The need for the selection of the location may arise under any of
the following conditions:

• When the business is newly started

• The existing business unit has outgrown its original facilities and
expansion is not possible, hence a new location has to be found

• The volume of business or the extent of market necessities the

establishment of branches

• A lease expires and the landlord does not renew the lease

• When a company thinks that there is a possibility of reducing

manufacturing cost by shifting from one location to another location and

• Other social or economic reasons for instance, inadequate labour

supply, shifting of the maker, etc.
2.1 Steps in Location Selection

To be systematic, in choosing a plant location, the entrepreneur would

do well to proceed step by step, the steps being:

• Within the country or outside

• Selection of the region

• Selection of the locality or community

• Selection of the exact site

2.1.1 Domestic or International Location

• The 1st step in plant location is to decide whether the facility should be
located domestically or internationally.

• A few years ago, this factor would have received little consideration.
But with increasing internalization of business, the issue of home or
foreign country is gaining greater relevance.

• If the management decides on foreign location the next logical step

would be to decide upon a particular country for location.

• This is necessary because countries across the world varying with

each other to attract foreign investments. The choice of particular
country depends on such factors as political stability, export and import
quotas, currency and exchange rates, cultural and economic
peculiarities, and natural or physical conditions.

2.2.2 Selection of region

The selection of a particular region out of the many natural regions of a

country is the second step of plant location.

The following factors influence such selection:

Availability of raw materials

As the manufacturing plant is engaged in the conversion of raw material

into final product, it is essential that it should be located in a place where
the supply of raw material with minimum transport cost.
Nearness to raw materials offers such advantages as:

• Reduced cost of transportation

• Regular and proper supply of materials uninterrupted by transportation

breakdowns and

• Savings in the cost of storage of materials

Nearness to the market

• Since the goods are produced for sale, it is very essential that the
factory should be located near their market.

• A reduction in the cost of transporting finished goods to the market.

• The ability to adjust the production program to suit the likes and
dislikes of consumers.

• The ability to render prompt service to the consumers, provide after

sales services, and execute replacement orders without delay these are
some of the advantages that accrue to the entrepreneur if he/she
establish his /her factory near his market.

• Industries using pure or non-weight losing raw materials, industries

producing perishable or bulky products and servicing units tend to be
located near their market.

Availability of power

• Power is essential to move the wheels of an industry. Coal, electricity,

oil and natural gas are the sources of power.

• Where coal is the source of power as in the case of the iron and steel
industry, the factory has to be located near the coal fields.

Transport Facilities

• While going with the process of selection of location an entrepreneur

considers the question of the availability

of transport facilities.
• Transport facilities are essential for bringing raw materials and men to
the factory and for carrying the finished products from the factory to the
market.

• A place which is well connected rail, road and water transport is ideal
for a plant location.

Suitability of climate

• The climate has its own importance in the location of a plant because
of two reasons.

• First there are certain industries which, because of the nature of their
production, require particular climatic conditions. For example, humid
climate for cotton textiles and jute.

• Secondly, climate affects labour efficiency. Extreme climatic conditions

adversely affect labour efficiency and such places do not attract
industries.

• It is for this reason that little industrial activity is found in tropical and
polar regions, whereas there is a heavy concentration of industrial
activities in cool and temperate regions.

Government policy

• The influence of government policies and programs on plant location is

apparent in every country, particularly in planned economies like ours.

• In the name of balanced regional development, many backward

regions in India have been selected for the location of new industries,
which would generate the region's economy and on larger canvas, the
national economy.

• The government of India has been influencing plant location in a

number of ways. Some of these are:

Licensing policy

Freight rate policy

Establishing a unit in the public sector in remote area and developing it

to attract other industries
Institutional finance and government subsidies

Competition between States

• States compete with other to attract new industries. Various states offer
investment subsidies and sales tax exemptions to new units.

• The incentives may not be of big help to big sized plants.

• But for small and medium sized plants the incentives do matter. The
owners of these plants certainly consider incentive in selection of region.

3.9.3 Selection of Community

Selecting a particular locality or community in a region is the third step in

selection of plant location

The selection of a locality in a particular region is influenced by the

following factors:

Availability of labour

Labour is an important factor in the production of goods. An adequacy of

labour supply at reasonable wages is very essential for the smooth and
successful working of an organisation.

Civic amenities for workers

Besides good working conditions inside the factory, the employees

require certain facilities outside it. Recreation facilities such as clubs,
theatres, parks, must be provided for the employees. They require
schools for their children.

A place which abounds in all these facilities will naturally be preferred to

another place which lacks them.

Existence of complimentary and competing industries

The existence of complementary industries is favorable to the location of

industries, because an industrial unit, in association with other units, can
get the following benefits:

• An industrial unit, in collaboration with other similar units, can secure

materials on better terms than it can do it by itself.
• The concentration of similar industries at one place improves the
labour market both for the employer and employee.

• The specialised centers, bank, become familiar with the requirements

of the industry, this makes the granting of loans easy

• The group of plants will attract a variety of repair plants, such as

foundries, machine, shops, tool makers and the like.

• The reputation build up by the existing units will be shared by the new
units established in the same locality.

Finance and research facilities

Adequate capital is essential for the successful working of any

organisation. A place where facilities for raising capital are available
attracts new industries. This is particularly true in developing countries,
where capital is not available uniformity throughout the country. In
advanced countries thee case is different because, in such
countries,capital is distributed uniformly.

Availability of water and fire fighting facilities

Some industries require a plentiful supply of water for their working.

Some of these are fertiliser units, rayon manufacturing units, absorbent
cotton manufacturing units, leather tanneries, bleaching, dyeing and
screen printing units.

These factories must be located in places where water is available in

abundance.

Water may be obtained from the local authority, from the canal, from a
river or a lake, or by sinking a borewell. In any case, the supply of water
should be considered with respect to its regularity, cost and purity.

Local taxes and restrictions

Local authorities collect charges for the supply of water, electricity and
other facilities. They also collect various

taxes from industrial units. They impose restrictions on the location of

new units in the public interest. It is natural, therefore for industrialists to
prefer an area where such taxes and restrictions are the least tedious
Personal factors

There are entrepreneurs, especially small industrialists, who locate their

plants purely on personal grounds disregarding economic
considerations. Such locations sometimes may totally disapprove the
current theories of plant location.

3.9.4 Selection of Site

The selection of an exact site in a chosen locality is the fourth step 1

plant location. The selection of the site is influenced by the following
considerations:

Soil, size and topography

• For factories producing engineering goods, the fertility or otherwise of

the soil may not be a factor influencing plant location. But for agro-based
industries, a fertile soil is necessary for ensuring a strategic plant
location.

• The area of the land should be such as to accommodate not only the
existing manufacturing facilities, but offer scope for future expansion
programs as well.

• Besides the area, the cost of land deserves consideration. If the land is
to be purchased, and if the place enjoys all the facilities for plant
location, its price should not affect the decision to locate the plant in that
particular place, because the cost of land forms a small percentage of
the total fixed investment.

• But if the land is to be leased, the question of rent, rates and taxes has
to be seriously considered because they constitute a part of the
permanent working expenses.

• The topography of the place deserves consideration to some extent. A

hilly, rocky and rough terrain is unsuitable for plant location because a
great deal of expenditure has to be incurred to level it.

Disposal of waste
The site selection for the location of the plant should have the provision
for the disposal of the waste. There must be enough land for dumping of
the solid waste. The site selected should, as far as possible, be in the
midst of good scenery. The question of beauty should not be ignored.

3.10 Errors in Selection

Though location selection is relatively easy, businessmen commit errors

and wrong locations are selected.

Interestingly, errors in site selection seem to fall into a pattern.

Some of the most common errors are:

• Lack of investigation

• Personal likes and dislikes

• Reluctance of key executives to move from traditional established

home ground to new and better locations

• Moving to congested areas already or about to be over industrialised

• Preference for acquiring an existing structure that is improperly located

or not designed for the most efficient production

• Choice of community with low cultural and educational standards

3.11 Importance of Location Factors

The site selected may be a urban, a suburban or a rural one. All these
offer advantages as industrial sites.

Rural site

The facilities available at a village site are not as many as are found in a
city; but they are more attractive.

• Land is available at cheaper rates.

• The rates and taxes are negligible.

• Spacious layout available and open spaces are possible.

• Advantages of single storey buildings are available.

• Low wages for unskilled workers but high wages for skilled workers
because they have to be mobilised from elsewhere.

• Fewer labour troubles

Avoidance of danger from fire and other hazards resulting from the
operations of neighboring units

• Avoidance of undesirable neighbors

• Lack of supply of skilled workers

• Lack of civic amenities for employees

• Lack of transport facilities

Suburban site

• They are less costly.

• All transport facilities are available.

• Quarters for workers provided by local authorities or by private

entrepreneurs.

• Easy availability of labors.

• Land is available at cheap rates.

Urban site

A big city has all the facilities which favor a location for a plant.

• Transportation facilities are no problem.

• Labour is available in plenty.

• Municipal services for water, sewage disposal, public health and

education are available.

• banking, repair and related services are available

• facilities for contracting out a portion of the work are available

• a large local market is available

• high advertising value is available