FACILITY LOCATION PROBLEMS

2.1 INTRODUCTION AND MEANING

Plant location or the facilities location problem is an important strategic level decision- making
for an organisation. One of the key features of a conversion process (manufacturing system) is the
efficiency with which the products (services) are transferred to the customers.This fact will
include the determination of where to place the plant or facility.
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.

2.2 NEED FOR SELECTING A SUITABLE LOCATION

The need for selecting a suitable location arises because of three situations.
I. When starting a new organisation, i.e., location choice for the first time.
II. In case of existing organisation.
III. 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:

1. 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.

2. 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.

3. 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 needto 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, i.e.,
C1 M, C2 M, …, CZ M are the different costs associated with a site M on the ‘z’ different cost
items.
C1 N, C2 N, …, CZ N are the different costs associated with a site N and W , W , W , …, W
are the weightage given to these cost items, then relative merit of the M and site N is given by:

C / C1N   C2M / CN2  ,..., CMz / CNz 

W1 W2 Wz
M
1

If this is > 1, site N is superior and vice-versa.

When starting a new factory, plant location decisions are very important because they have
direct bearing on factors like, financial, employment and distribution patterns. In the long run,
relocation of plant may even benefit the organization. But, the relocation of the plant involves
stoppage of production, and also cost for shifting the facilities to a new location. In addition to these
things, it will introduce some inconvenience in the normal functioning of the business. Hence, at
the time of starting any industry, one should generate several alternate sites for locating the plant.
After a critical analysis, the best site is to be selected for commissioning the plant. Location of
warehouses and other facilities are also having direct bearing on the operational performance of
organizations.

The existing firms will seek new locations in order to expand the capacity or to place the
existing facilities. When the demand for product increases, it will give rise to following decisions:
● Whether to expand the existing capacity and facilities.

● Whether to look for new locations for additional facilities.

● Whether to close down existing facilities to take advantage of some new locations.

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 premesis 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:
1. 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 wouldbe the
planning and control and the utilization of the resources.

2. 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.

3. 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.

4. 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 stepwhich
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 Kenya
and Kenya 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. Thus, instead of one’s own operations,
a firm could use its business associates’ operations facilities. 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 East africa is
a big reason for the multinationals to have their operations facilities in our region. An important
reason is that of providing service to the customer promptly and economically whichis logistics-
dependent. Therefore, cost and case of logistics is a reason for setting up manufacturingfacilities
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:
(a) The host country may offer substantial tax advantages compared to the home country.
(b) 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.
(c) 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:
1. Customer-related Reasons
(a) 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.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.

2. Organisational Learning-related Reasons

(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an 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.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) 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.
(d) 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.

3. Other Strategic Reasons

(a) 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.
 (b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.
(d) 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.
(e) 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.

2.3 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.
Location conditions are complex and each comprises a different Characteristic of a tangible
(i.e. Freight rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality)
nature.
Location conditions are hard to measure. Tangible cost based factors such as wages and
products costs can be quantified precisely into what makes locations better to compare. On the
other hand non-tangible features, which refer to such characteristics as reliability, availability and
security, can only be measured along an ordinal or even nominal scale. Other non-tangible features
like the percentage of employees that are unionized can be measured as well. To sumthis up
non-tangible features are very important for business location decisions.
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
1. General locational factors, which include controllable and uncontrollable factors for all
type of organisations.
2. 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.

2.3.1 General Locational Factors

Following are the general factors required for location of plant in case of all types of organisations.
CONTROLLABLE FACTORS
UNCONTROLLABLE FACTORS
1. Proximity to markets
1. Government policy
2. Supply of materials
2. Climate conditions
3. Transportation facilities
3. Supporting industries and services
4. Infrastructure availability
5. Labour and wages 4. Community and labour attitudes
6. External economies 5. Community Infrastructure
7. Capital
 PRODUCTION
AND
OPERATIONS
Fig. 2.1 Factors influencing plant location.

MANAGEMENT
CONTROLLABLE FACTORS
1. 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.

2. 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 situatedso as
to minimize total transportation costs.
Nearness to raw material is important in case of industries such as sugar, cement, jute and
cotton textiles.

3. 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.

4. 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.
 5. 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.

6. 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.

7. 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
1. 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 safes 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.
2. 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.
3. 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.
4. The various services like communications, banking services professional consultancy
servicesand other civil amenities services will play a vital role in selection of a
location.
5. 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.
6. 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, universitiesand 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.

2.3.1 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.

1. Favourable labour climate

2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs
1. Favorable 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 or al low probability
of union organizing efforts as a distinct advantage.
2. 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.
3. 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.
 4. 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.
5. 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.

2.3.3 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 thedominant
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 nighttime and weekend business when the population
in the area fits the firm’s competitive priorities and target market segment.
 2.4 LOCATION THEORIES

ALFRED WEBER’S THEORY OF THE LOCATION OF INDUSTRIES

Alfred Weber (1868–1958), with the publication of Theory of the Location of Industries in 1909, put
forth the first developed general theory of industrial location. His model took into account several
spatial factors for finding the optimal location and minimal cost for manufacturing plants.
The point for locating an industry that minimizes costs of transportation and labour requires
analysis of three factors:
1. The point of optimal transportation based on the costs of distance to the ‘material
index’—the ratio of weight to intermediate products (raw materials) to finished product.
2. The labour distortion, in which more favourable sources of lower cost of labour may
justify greater transport distances.
3. Agglomeration and degglomerating.

Agglomeration or concentration of firms in a locale occurs when there is sufficient demand

for support services for the company and labour force, including new investments in schools and
hospitals. Also supporting companies, such as facilities that build and service machinesand financial
services, prefer closer contact with their customers.
Degglommeration occurs when companies and services leave because of over concentration
of industries or of the wrong types of industries, or shortages of labour, capital, affordable land,
etc. Weber also examined factors leading to the diversification of an industry in the horizontal
relations between processes within the plant.
The issue of industry location is increasingly relevant to today’s global markets and trans-
national corporations. Focusing only on the mechanics of the Weberian model could justify greater
transport distances for cheap labour and unexploited raw materials. When resources are exhausted
or workers revolt, industries move to different countries.

2.5 LOCATION MODELS

Various models are available which help to identify the ideal location. Some of the popular models
are:
1. Factor rating method
2. Weighted factor rating method
3. Load-distance method
4. Centre of gravity method
5. Break even analysis

2.5.1 Factor Rating Method

The process of selecting a new facility location involves a series of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e., higher the ratings is indicative
of prominent factor.
3. Assign each location according to the merits of the location for each factor.
4. Calculate the rating for each location by multiplying factor assigned to each location with
basic factors considered.
5. Find the sum of product calculated for each factor and select best location having highest
total score.
 ILLUSTRATION 1: Let us assume that a new medical facility, Health-care, is to be located
in Nairobi. The location factors, factor rating and scores for two potential sites areshown in
the following table. Which is the best location based on factor rating method?

Sl. No. Location factor Factor Rating

rating Location 1 Location 2
1. Facility utilization 8 3 5
2. Total patient per month 5 4 3
3. Average time per emergency trip 6 4 5
4. Land and construction costs 3 1 2
5. Employee preferences 5 5 3

SOLUTION:
Sl. No. Location Factor Location 1 Location 2
factor rating (Rating) Total= (Rating) Total
(1) (2) (1) . (2) (3) = (1) . (3)
1. Facility utilization 8 3 24 5 40
2. Total patient per 5 4 20 3 15
month
3. Average time per 6 4 24 5 30
emergency trip
4. Land and 3 1 3 2 6
construction costs
5. Employee 5 5 25 3 15
preferences
Total 96 Total 106

The total score for location 2 is higher than that of location 1. Hence location 2, is the best
choice.

2.5.2Weighted Factor Rating Method

In this method to merge quantitative and qualitative factors, factors are assigned weights based
on relative importance and weightage score for each site using a preference matrix is calculated.
The site with the highest weighted score is selected as the best choice.
ILLUSTRATION 2: Let us assume that a new medical facility, Health-care, is to be located
in Nairobi. The location factors, weights, and scores (1 = poor, 5 = excellent) for two
potential sites are shown in the following table. What is the weighted score for thesesites?
Which is the best location?
Sl. No. Location factor Weight Scores
Location 1 Location 2
1. Facility utilization 25 3 5
2. Total patient km per month 25 4 3
3. Average time per emergency trip 25 3 3
4. Land and construction costs 15 1 2
5. Employee preferences 10 5 3
 SOLUTION: The weighted score for this particular site is calculated by multiplying each
factor’s weight by its score and adding the results:
Weighed score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 × 5
= 75 + 100 + 75 + 15 + 50 = 315
Weighed score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15 × 2 + 10 × 3
= 125 + 75 + 75 + 30 + 30 = 335
Location 2 is the best site based on total weighted scores.

2.5.3Load-distance Method
The load-distance method is a mathematical model used to evaluate locations based on proximity
factors. The objective is to select a location that minimizes the total weighted loads moving into
and out of the facility. The distance between two points is expressed by assigning the points to grid
coordinates on a map. An alternative approach is to use time rather than distance.
DISTANCE MEASURES
Suppose that a new warehouse is to be located to serve Nairobi. It will receive inbound shipments
from several suppliers, including one in Ghaziabad. If the new warehouse were located atGurgaon,
what would be the distance between the two facilities? If shipments travel by truck,the distance
depends on the highway system and the specific route taken. Computer softwareis available for
calculating the actual mileage between any two locations in the same county. However, for load-
distance method, a rough calculation that is either Euclidean or rectilinear distance measure may
be used. Euclidean distance is the straight-line distance, or shortest possible path, between two
points.

Fig. 2.2 Distance between point A and point B

The point A on the grid represents the supplier’s location in Ghaziabad, and the point B
represents the possible warehouse location at Gurgaon. The distance between points A and B
is the length of the hypotenuse of a right triangle, or
dAB = Sqrt ((XA – XB)2 + (YA – YB)2)
where dAB = distance between points A and B XA
= x-coordinate of point A
YA = y-coordinate of point A XB
= x-coordinate of point B YB =
y-coordinate of point B
 Rectilinear distance measures distance between two points with a series of 90° turns as city
blocks. Essentially, this distance is the sum of the two dashed lines representing the base and side
of the triangle in figure. The distance travelled in the x-direction is the absolute value of the
difference in x-coordinates. Adding this result to the absolute value of the difference in the y-
coordinates gives
DAB = |XA – XB| + |YA – YB|
CALCULATING A LOAD-DISTANCE SCORE
Suppose that a firm planning a new location wants to select a site that minimizes the distances
that loads, particularly the larger ones, must travel to and from the site. Depending on the
industry, a load may be shipments from suppliers, between plants, or to customers, or it may be
customers or employees travelling to or from the facility. The firm seeks to minimize its load-
distance, generally by choosing a location so that large loads go short distances.
To calculate a load-distance for any potential location, we use either of the distance measures
and simply multiply the loads flowing to and from the facility by the distances travelled. These
loads may be expressed as tones or number of trips per week.
This calls for a practical example to appreciate the relevance of the concept. Let us visit
a new Health-care facility, once again.
ILLUSTRATION 3: The new Health-care facility is targeted to serve seven census tracts
in Nairobi. The table given below shows the coordinates for the centre of each censustract,
along with the projected populations, measured in thousands. Customers will travel from the
seven census tract centres to the new facility when they need health-care. Two locations being
considered for the new facility are at (5.5, 4.5) and (7, 2), which are thecentres of census tracts
C and F. Details of seven census tract centres, co-ordinate distances along with the population
for each centre are given below. If we use the population as theloads and use rectilinear
distance, which location is better in terms of its total load- distance score?
Sl. No. Census tract (x, y) Population (l)
1 A (2.5, 4.5) 2
2 B (2.5, 2.5) 5
3 C (5.5, 4.5) 10
4 D (5, 2) 7
5 E (8, 5) 10
6 F (7, 2) 20
7 G (9, 2.5) 14

SOLUTION: Calculate the load-distance score for each location. Using the coordinates
from the above table. Calculate the load-distance score for each tract.
Using the formula DAB = |XA – XB| + |YA – YB|
 Census (x, y) Population Locate at (5.5, 4.5) Locate at (7, 2)
tract (l) Distance (d) Load- Distance (d) Load-
distance distance
A (2.5, 4.5) 2 3+0= 3 6 4.5 + 2.5 = 7 14
B (2.5, 2.5) 5 3+2= 5 25 4.5 + 0.5 = 5 25
C (5.5, 4.5) 10 0+0= 0 0 1.5 + 2.5 = 4 40
D (5, 2) 7 0.5 + 2.5 = 3 21 2+0=2 14
E (8, 5) 10 2.5 + 0.5 = 3 30 1+3=4 40
F (7, 2) 20 1.5 + 2.5 = 4 80 0+0=0 0
G (9, 2.5) 14 3.5 + 2 = 5.5 77 2 + 0.5 = 2.5 35
Total 239 Total 168
Summing the scores for all tracts gives a total load-distance score of 239 when the facility
is located at (5.5, 4.5) versus a load-distance score of 168 at location (7, 2). Therefore, the
location in census tract F is a better location.

2.5.4 Centre of Gravity

Centre of gravity is based primarily on cost considerations. This method can be used to assist
managers in balancing cost and service objectives. The centre of gravity method takes into account
the locations of plants and markets, the volume of goods moved, and transportation costs in arriving
at the best location for a single intermediate warehouse.
The centre of gravity is defined to be the location that minimizes the weighted distance
between the warehouse and its supply and distribution points, where the distance is weighted
by the number of tones supplied or consumed. The first step in this procedure is to placethe
locations on a coordinate system. The origin of the coordinate system and scale used are arbitrary,
just as long as the relative distances are correctly represented. This can be easily doneby placing
a grid over an ordinary map. The centre of gravity is determined by the formula.
 Dix .Wi  Diy .Wi
CX =
 W i
C Y =

W i

where Cx = x-coordinate of the centre of gravityCy

= y-coordinate of the centre of gravityDix =
x-coordinate of location i
Diy = y-coordinate of location i

ILLUSTRATION 4: The new Health-care facility is targeted to serve seven census tracts
in Nairobi. The table given below shows the coordinates for the centre of each census tract,
along with the projected populations, measured in thousands. Customers will travel from
the seven census tract centres to the new facility when they need health- care. Two locations
being considered for the new facility are at (5.5, 4.5) and (7, 2), which are the centres of
census tracts C and F. Details of seven census tract centres, coordinate distances along with
the population for each centre are given below. Find the target area’s centre of gravity for the
Health-care medical facility.
 Sl. No. Census tract (x, y) Population (l)
1 A (2.5, 4.5) 2
2 B (2.5, 2.5) 5
3 C (5.5, 4.5) 10
4 D (5, 2) 7
5 E (8, 5) 10
6 F (7, 2) 20
7 G (9, 2.5) 14

SOLUTION: To calculate the centre of gravity, start with the following information, where
population is given in thousands.
Sl. No. Census tract (x, y) Population (l) Lx Ly

1 A (2.5, 4.5) 2 5 9
2 B (2.5, 2.5) 5 12.5 12.5
3 C (5.5, 4.5) 10 55 45
4 D (5, 2) 7 35 14
5 E (8, 5) 10 80 50
6 F (7, 2) 20 140 40
7 G (9, 2.5) 14 126 35
Total 68 453.50 205.50
Next we find Cx and Cy.
Cx = 453.5/68 = 6.67
Cy = 205.5/68 = 3.02
The centre of gravity is (6.67, 3.02). Using the centre of gravity as starting point, managers
can now search in its vicinity for the optimal location.

2.5.5 Break Even Analysis

Break even analysis implies that at some point in the operations, total revenue equals total cost.
Break even analysis is concerned with finding the point at which revenues and costs agree
exactly. It is called ‘Break-even Point’. The Fig. 2.3 portrays the Break Even Chart:
Break even point is the volume of output at which neither a profit is made nor a loss is incurred.
The Break Even Point (BEP) in units can be calculated by using the relation:
Fixed Cost F
BEP = =
Fixed Cost = units

Contribution per unit Selling Price – Variable Cost per unit S – V

The Break Even Point (BEP) in Rs. can be calulated by using the relation:
 Fig. 2.3 Units of output or percentage of capacity
Plotting the break even chart for each location can make economic comparisons of locations.
This will be helpful in identifying the range of production volume over which location can be
selected.
ILLUSTRATION 5: Potential locations X, Y and Z have the cost structures shown below.
The ABC company has a demand of 1,30,000 units of a new product. Three potential locations X,
Y and Z having following cost structures shown are available. Select which location is to be
selected and also identify the volume ranges where each location is suited?
Location X Location Y Location Z
Fixed Costs Ksh. 150,000 Ksh. 350,000 Ksh. 950,000
Variable Costs Ksh. 10 Ksh. 8 Ksh. 6

SOLUTION: Solve for the crossover between X and Y:

10X + 150,000 = 8X + 350,000
2X = 200,000
X = 100,000 units
Solve for the crossover between Y and Z:
8X + 350,000 = 6X + 950,000
2X = 600,000
X = 300,000 units
Therefore, at a volume of 1,30,000 units, Y is the appropriate strategy.
From the graph (Fig. 2.4) we can interpret that location X is suitable up to 100,000 units,
location Y is suitable up to between 100,000 to 300,000 units and location Z is suitable if the
demand is more than 300,000 units.
 Fig. 2.4 BEP chart

2.6 LOCATIONAL ECONOMICS

An ideal location is one which results in lowest production cost and least distribution cost per unit.
These costs are influenced by a number of factors as discussed earlier. The various costs which
decide locational economy are those of land, building, equipment, labour, material, etc. Other factors
like community attitude, community facilities and housing facilities will also influence the selection
of best location. Economic analysis is carried out to decide as to which locate best location.
The following illustration will clarify the method of evaluation of best layout selection.
ILLUSTRATION 6: From the following data select the most advantageous location for
setting a plant for making transistor radios.
Site X Site Y Site Z
Kshs Ksh. Ksh.
(i) Total initial investment 2,00,000 2,00,000 2,00,000
(ii) Total expected sales 2,50,000 3,00,000 2,50,000
(iii) Distribution expenses 40,000 40,000 75,000
(iv) Raw material expenses 70,000 80,000 90,000
(v) Power and water supply expenses 40,000 30,000 20,000
(vi) Wages and salaries 20,000 25,000 20,000
(vii) Other expenses 25,000 40,000 30,000
(viii) Community attitude Indifferent Want Indifferent
business
(ix) Employee housing facilities Poor Excellent Good
SOLUTION:
Site X Site Y Site Z
Total expenses Rs. Rs. Rs.
[Add (iii) (iv) (v) (vi) and (vii)] 1,95,000 2,15,000 2,35,000
 Total sales  Total expenses
Rate of return (RoR), % = ×100
Total investment
2,50,000  1,95,000
RoR for Site X = ×100
2,00,000
= 27.5%
3,00,000  2,15,000
RoR for Site Y = ×100
2,00,000
= 42.5%
2,50,000  2,35,000
RoR for Site Z = ×100
2,00,000
= 7.5%
Location Y can be selected because of higher rate of return.

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EXERCISES
Section A
1. What do you mean by plant location?
2. What is virtual proximity?
3. What is virtual factory?
4. What is agglomeration?
5. What is degglomeration?
Section B
1. Explain different operations strategies in case of location choice for existing organisation.
2. Explain the factors to be considered while selecting the location for the new organisation.
3. Explain the reasons for global or foreign location.
4. Explain the Alfred Weber’s theory of the location of industries.
Section C
1. Explain the need for selecting a suitable location.
2. Explain the factors influencing plant location.

Section D Skill Development

1: Let us assume that a new medical facility, Health-care, is to be located in Eldoret. The
location factors, factor rating and scores for two potential sites are shown in the following
table. Which is the best location based on factor rating method?

Sl. No. Location factor Factor Rating

rating Location 1 Location 2
Kesses Elgon View
1. Facility utilization 5 8 7
2. Total patient per month 3 7 5
3. Average time per emergency trip 6 2 5
4. Land and construction costs 7 3 5
5. Employee preferences 6 6 4
 2 Let us assume that a new medical facility, Health-care, is to be located in Eldoret. The
location factors, weights, and scores (1 = poor, 5 = excellent) for two potential
sites are shown in the following table. What is the weighted score for thesesites?
Which is the best location?
Sl. No. Location factor Weight Scores
Location Location 2
Kesses Elgon View
1. Facility utilization 20 4 5
2. Total patient km per month 30 5 4
3. Average time per emergency trip 20 4 5
4. Land and construction costs 15 2 4
5. Employee preferences 15 6 2

3 The new Health-care facility is targeted to serve seven census tracts in Eldoret. The
table given below shows the coordinates for the centre of each census tract, along with the
projected populations, measured in thousands. Customers will travel from the seven census
tract centres to the new facility when they need health-care. Two locations being considered for
the new facility are at (6.5, 3.5) and (6, 3 ), which are the centres of census tracts C and F.
Details of seven census tract centres, co-ordinate distances along with the population for each
centre are given below. If we use the population as theloads and use rectilinear distance,
which location is better in terms of its total load- distance score?
Sl. No. Census tract (x, y) Population (l)
1 A (3.5, 4.5) 3
2 B (2.5, 3.5) 6
3 C (5.5, 5.5) 12
4 D (5, 3) 8
5 E (7, 5) 12
6 F (7, 4) 22
7 G (7, 2.5) 10

4 The new Health-care facility is targeted to serve seven census tracts in Eldoret.
The table given below shows the coordinates for the centre of each census tract, along
with the projected populations, measured in thousands. Customerswill travel from the seven
census tract centres to the new facility when they need health- care. Two locations being
considered for the new facility are at (4.5, 4.5) and (3, 5 ), which are the centres of census
tracts C and F. Details of seven census tract centres, coordinate distances along with the
population for each centre are given below. Find the target area’s centre of gravity for the
Health-care medical facility.
 Sl. No. Census tract (x, y) Population (l)
1 A (3.5, 4.5) 14
2 B (2.5, 3.5) 20
3 C (4.5, 4.5) 7
4 D (5, 4) 10
5 E (6, 5) 12
6 F (7, 6) 5
7 G (8, 1) 2

5 Potential locations X, Y and Z have the cost structures shown below. The ABC
company has a demand of 150,000 units of a new product. Three potential locations X, Y and Z
having following cost structures shown are available. Select which location is to be selected
and also identify the volume ranges where each location is suited?
Location X Location Y Location Z
Fixed Costs Kshs. 180,000 Ksh. 420,000 Ksh. 850,000
Variable Costs Kshs. 15 Ksh. 10 Ksh. 12

6 From the following data select the most advantageous location for setting a plant for
making transistor radios.
Site X Site Y Site Z
Ksh. Ksh. Ksh.
(i) Total initial investment 250,000 270,000 300,000
(ii) Total expected sales 350,000 370,000 375,000
(iii) Distribution expenses 45,000 50,000 75,000
(iv) Raw material expenses 65,000 80,000 80,000
(v) Power and water supply expenses 30,000 30,000 25,000
(vi) Wages and salaries 30,000 35,000 45,000
(vii) Other expenses 20,000 40,000 30,000
(viii) Community attitude Indifferent Want Indifferent
business
(ix) Employee housing facilities Poor Excellent Good