Unit 2

Plant Location

Definition: Location Decision in operation management is finding an ideal

geographical region to install a Facility or Plant. It is a vital component in
facility planning as it greatly impacts the organization’s Profitability, Cost and
Success.Plant location refers to the choice of region and the selection of a
particular site for setting up a business or factory. But the choice is made only
after considering cost and benefits of different alternative sites. It is a strategic
decision that cannot be changed once taken. Depending on the business and
market conditions, the organizations can have all facilities under single or
multiple units. It includes both the location of the plant and the facilities within
the plant.

Generally, the location decision is taken to set up a new

plant, relocate or expand the existing plant.

The decision depends on several factors that impact the business in the short
and long run. These factors may be the industry’s size, nature and product.

Objectives of Facility Location

A good site location helps in reducing costs and amplifies the profit earned. The
industries invest their valuable time in search of an ideal site for the following
purposes: –

 Revenue Potential from that Site

 Availability of Resources
 Tax advantages
 Reducing Cost and Production Time
 Convenient Transportation Facilities
 Suitable Environment for Employees
 Meet the Maximum Demands of Customers
 Maximum Space Utilization

Factors Influencing Plant Location

There are many factors affecting plant location

A) Primary Factors

B) B) Secondary Factors
Primary Factors Influencing Plant Location
There are several Primary factors that influence plant location. Moreover,
moving forward by resolving all other problems and considering these factors
leads to success in business. The major factors affecting the plant location are
listed as follows:

 Availability of Raw Materials

 Proximity to Market
 Transportation
 Availability of Labour
 Availability of Power, Fuel or Gas
 Supply of Water
 Climatic Conditions
Availability of Raw Materials
The source of raw materials is one of the most important factors influencing the
selection of a plant location. Attention should be given to the purchased price of
raw materials, distance from the source of supply, freight and transportation
expenses, availability and reliability of supply, purity of raw materials and
storage requirements.

Proximity to Market
The location of markets or intermediate distribution centers affect the cost of
product distribution and time required for shipping. Proximity to major markets
is important consideration in the selection of the plant location because the
buyer usually finds advantageous to purchase from near-by sources.

Transportation
The transportation of materials and products to and from plant will be an
overriding consideration in the selection of plant location. If practicable, a site
that it is close to at least two major forms of transport: road, rail, waterway or a
seaport, should be selected. Road transport is being increasingly used, and is
suitable for local distribution from a central warehouse.

Rail transport will be cheaper for long-distance transport. If possible, the plant
location should have access to all three types of transportation. There is usually
a need for convenient rail and air transportation facilities between the plant and
the main company headquarters, and the effective transportation facilities for
the plant personnel are necessary.

Availability of Labour
Labour will be needed for the construction of plant and its operation. Skilled
construction workers will usually be brought in from outside the site, but there
should be an adequate pool of unskilled labours available locally; and labour
suitable for training to operate the plant. Skilled tradesmen will be needed for
plant maintenance. Local trade union customs and restrictive practices will have
to be considered when assessing the availability and suitability of labour for
recruitment and training.

Availability of Power, Fuel or Gas

It is important for an organisation to ensure the continuous supply of power,
fuel and gas before selecting a plant location. For example, the location of
thermal power plants and steel plants near coal fields is crucial for reducing cost
of the fuel transportation.

Supply of Water
Water is important for survival. It is required for processing in industries like
chemical, sugar and paper industries. Also, water is used for drinking and
sanitary purposes. It is important for an organisation to investigate a quality and
probable source of supply. In addition, the chemical properties like hardness,
alkalinity and acidity level of water should be checked. Apart from that, a
thorough study should be conducted related to the disposal of water like
effluents, solids, chemicals and other waste products.

Climatic Conditions
The climate of a region where the plant is to be located has great impact on both
capital and operational costs. Various aspects related to climatic conditions to
be considered by an organisation include the level of snow fall or rain fall in the
region, humidity, velocity of wind, frequency of natural calamities and so on.

In most plant locations, the target is to reduce cost. Some items of cost, like
freight, could also be higher for one city and lower for the other city, but power
costs, for instance, may have the reverse pattern. A little labour supply may
cause labour rates to be bid up beyond rates measured during a location survey.

The sort of labour available may indicate future training expenditures. Thus,
although a comparative analysis of varied locations may point toward one
community, an appraisal of intangible factors could also be the idea of the
choice to pick another.

Secondary Factors

Numerous other factors might affect the location decision. The suitable location
is determined by analyzing various factors, parameters and issues. Some of the
factors are listed below:
  Regulatory and Policy Issues: The political policies differ in different
geographical boundaries. So, the organizations prefer locations inside open
economies having favourable policies.
 Free Trade Zones: Free Trade Zones are areas in which one can conduct
business free from customs duty. Thus, it is an essential factor when
selecting a site location.
 Infrastructure: Before the installation, industries must assess the
availability of infrastructure in that region. It may include connectivity via
Rail, Roads, Air and Sea.
 Taxes: The tax rates vary within and across the regions. This factor
directly impacts the organizations.
 Miscellaneous-Regional Politics,Native place of owner etc.

What is Location Analysis?

Location Analysis is choosing the most suitable plant location within/outside

the country. The decision-making in this regard is known as Location
Decisions.

Location Decisions are crucial as they significantly affect the company’s

finances and operating costs.

It is more relevant in the service industries because the service product’s

production and delivery happen instantaneously.

What is an Ideal Location for Business?

The ideal location for a plant is the best location where the production and
distribution cost is the lowest.

We can refer to a particular region as an ideal location when it has the

following:

 Maximum Social Gain

 Least Risk
 Large Market Share
Plant Location Techniques
Depending on the requirements, the businesses can use the following:

1. Quantitative Methods
2. Qualitative Methods

Following are the various quantitative and qualitative location analysis

techniques. Organizations can use either one method or a combination thereof.

1. The Factor-Rating Method

2. Location Break-Even Analysis
3. Centre-of-Gravity Method
4. Delphi Technique

1.The Factor-Rating Method

In this location analysis technique, the analysis is based on the influential

factors and the prospecting locations. It is a simple and widely used method
for locating the facility.

It is the comparative analysis of alternative locations and the factors affecting

business. And the site having the maximum product of factor rating and location
ranks is the one to be selected.

The factors include tangible and intangible factors essential to the organization.
The steps involved in the factor rating method are discussed below.

Steps in Factor Rating Method

1. Identify the relevant factors affecting that business location.

2. Rate various factors as per their relative importance.
3. Performance rating of the alternatives as per advantage on each factor.
4. Calculate the product of ratings by multiplying the factor ratings with
location ratings for each factor.
5. Compare the factor ratings between the available alternative.
6. Select the site containing the maximum sum of the products.

Note: The higher the rank is, the more influential the factor will be.

The merits of using this method are:

  The clarity in comparison during the selection of the alternatives.
 An analysis is on the basis of multiple factors.
 Fast judgement while selecting the location.
 Can incorporate any factor that can impact the plant during analysis.

Besides all the above merits, its demerits are as follows:

 Only limited to board-level analysis

 Helpful for just initial screening

2.Location Break-even Analysis

Location Break-even Analysis helps in finding the most economical location

alternative. This technique examines the economic aspect of the prospecting
sites.

The location providing a minimum cost of production yielding maximum output

is to be selected

Therefore, we estimate the costs from various factors that significantly affect
business. After that, we separate all the costs under operating and fixed costs.
And then, plot the break-even analysis for each location on the graph.

Formula:

where,

Q = Break-even quantity

p = Price/unit
c = Variable cost/unit
F = Fixed cost

Note: One can only use this technique when the costs of each location are
known.
3.Centre-of-Gravity Method

Centre-of-Gravity Method is the most suitable when selecting multiple sites in

an area. Generally, organizations use this technique for locating warehouses.

All the potential locations have some value. This value is the sum of
transportation costs to and from that location.

The centre of gravity is where the x and y coordinates show the lowest
weighted supply and demand points. For this, we plot the weights of supply
and demand points on the grid.

We need to find a site where the transportation cost is minimum. In other words,
the distance travelled to and from the proposed location on the grid is minimum.

Formula:

Delphi Method

The Delphi method is a process used to arrive at a group opinion or decision by

surveying a panel of experts.

1. Experts respond to several rounds of questionnaires, and the responses are

aggregated and shared with the group after each round.

2. The experts can adjust their answers each round, based on how they interpret
the “group response” provided to them.

3. The ultimate result is meant to be a true consensus of what the group thinks.

Understanding the Delphi Method

Several rounds of questionnaires are sent out to the group of experts, and the
anonymous responses are aggregated and shared with the group after each
round. The experts are allowed to adjust their answers in subsequent rounds,
based on how they interpret the “group response” that has been provided to
them. Since multiple rounds of questions are asked and the panel is told what
the group thinks as a whole, the Delphi method seeks to reach the correct
response through consensus.

The Delphi method was originally conceived in the 1950s by Olaf Helmer and
Norman Dalkey of Rand Corp. The name refers to the Oracle of Delphi, a
priestess at a temple of Apollo in ancient Greece known for her prophecies. The
Delphi method allows experts to work toward a mutual agreement by
conducting a circulating series of questionnaires and releasing related feedback
to further the discussion with each subsequent round. The experts’ responses
shift as rounds are completed based on the information brought forth by other
experts participating in the analysis.

The Delphi method is a process of arriving at group consensus by providing

experts with rounds of questionnaires, as well as the group response before each
subsequent round.

Delphi Method Process

First, the group facilitator selects a group of experts based on the topic being
examined. Once all participants are confirmed, each member of the group is
sent a questionnaire with instructions to comment on each topic based on their
personal opinion, experience, or previous research.

The questionnaires are returned to the facilitator, who groups the comments and
prepares copies of the information. A copy of the compiled comments is sent to
each participant, along with the opportunity to comment further. At the end of
each comment session, all questionnaires are returned to the facilitator, who
decides if another round is necessary or if the results are ready for publishing.

The questionnaire rounds can be repeated as many times as necessary to achieve

a general sense of consensus.

Advantages of the Delphi Method

The Delphi method seeks to aggregate opinions from a diverse set of experts,
and it can be done without having to bring everyone together for a physical
meeting. Since the responses of the participants are anonymous, individual
panelists don’t have to worry about repercussions for their opinions. The
anonymity of the participants also helps prevent the “halo effect,” which sees
higher priority given to the views of more powerful or higher-ranking members
of the group.
By conducting Delphi studies, consensus can be reached over time as opinions
are swayed, making the method very effective. In contrast with many other
types of interviews and focus groups, Delphi studies allow participants to
rethink and refine their opinions based on the input of others, contributing to a
more reflective and thoughtful process.

Disadvantages of the Delphi Method

Although it provides the benefits of anonymity and the possibility for

reevaluation and reflection, the Delphi method does not result in the same sort
of interactions as a live discussion. A live discussion can sometimes produce a
better example of consensus, as ideas and perceptions are introduced, broken
down, and reassessed. Response times with the Delphi method can be long,
which slows the rate of discussion. It is also possible that the information
received back from the experts will provide no innate value.

The deliberate and drawn-out nature of the Delphi method also presents some
challenges. Since the method often requires multiple rounds of questionnaires,
there is a chance that some participants may drop out from the study before it
has been completed. In addition, while there are benefits

to giving participants the opportunity to reassess their views, there is a chance

that they will adjust their responses so that they are more closely aligned with
the views of the majority, reducing the diversity of opinions represented and
diminishing the validity of the results.

Plant Layout: Concept, Objectives, Principles and Types

Concept of Plant Layout:
The concept of plant layout may be described as follows:
Plant layout is a plan for effective utilisation of facilities for the manufacture of
products; involving a most efficient and economical arrangement of machines,
materials, personnel, storage space and all supporting services, within available
floor space.

More defines plant layout as follows:

“Plant layout is a plan of optimum arrangement of facilities including personnel,
equipment’s, storage space, material handling equipment and all other
supporting services along with the decision of best structure to contain all these
facilities.”

Objectives/Advantages of Plant Layout:

Following are the objectives/advantages of plant layout:
(i) Streamline flow of materials through the plant

(ii) Minimise material handling

(iii) Facilitate manufacturing progress by maintaining balance in the processes

(iv) Maintain flexibility of arrangements and of operation

(v) Maintaining high turnover of in-process inventory

(vi) Effective utilisation of men, equipment and space

(vii) Increase employee morale

(viii) Minimise interference (i.e. interruption) from machines

(ix) Reduce hazards affecting employees

(x) Hold down investment (i.e. keep investment at a lower level) in equipment.

Principles of Plant Layout:

While designing the plant layout, the following principles must be kept in
view:
(i) Principle of Minimum Movement:
Materials and labour should be moved over minimum distances; saving cost and
time of transportation and material handling.

(ii) Principle of Space Utilization:

All available cubic space should be effectively utilized – both horizontally and
vertically.

(iii) Principle of Flexibility:

Layout should be flexible enough to be adaptable to changes required by
expansion or technological development.

(iv) Principle of Interdependence:

Interdependent operations and processes should be located in close proximity to
each other; to minimize product travel.

(v) Principle of Overall Integration:

All the plant facilities and services should be fully integrated into a single
operating unit; to minimize cost of production.

(vi) Principle of Safety:

There should be in-built provision in the design of layout, to provide for
comfort and safety of workers.

(vii) Principle of Smooth Flow:

The layout should be so designed as to reduce work bottlenecks and facilitate
uninterrupted flow of work throughout the plant.

(viii) Principle of Economy:

The layout should aim at effecting economy in terms of investment in fixed
assets.

(ix) Principle of Supervision:

A good layout should facilitate effective supervision over workers.

(x) Principle of Satisfaction:

A good layout should boost up employee morale, by providing them with
maximum work satisfaction.

Types of Plant Layout:

Two basic plans of the arrangement of manufacturing facilities are – product
layout and process layout. The only other alternative is a combination of
product and process layouts, in the same plant.

Following are the various types of plant layout:

(a) Product Layout (or Line Layout):
In this type of layout, all the machines are arranged in the sequence, as required
to produce a specific product. It is called line layout because machines are
arrange in a straight line. The raw materials are fed at one end and taken out as
finished product from the other end.

Special purpose machines are used which perform the required jobs (i.e.
functions) quickly and reliably.
Product layout is depicted below:

Advantages:
1. Reduced material handling cost due to mechanized handling systems and
straight flow

2. Perfect line balancing which eliminates bottlenecks and idle capacity.

3. Short manufacturing cycle due to uninterrupted flow of materials

4. Simplified production planning and control; and simple and effective

inspection of work.

5. Small amount of work-in-progress inventory

6. Lesser wage cost, as unskilled workers can learn and manage production.

Disadvantages:
1. Lack of flexibility of operations, as layout cannot be adapted to the
manufacture of any other type of product.

2. Large capital investment, because of special purpose machines.

3. Dependence of whole activity on each part; any breakdown of one machine in

the sequence may result in stoppage of production.

4. Same machines duplicated for manufacture of different products; leading to

high overall operational costs.

5. Delicate special purpose machines require costly maintenance / repairs.

Suitability of product layout:

Product layout is suitable in the following cases:
1. Where one or few standardized products are manufactured.
2. Where a large volume of production of each item has to travel the production
process, over a considerable period of time.

3. Where time and motion studies can be done to determine the rate of work.

4. Where a possibility of a good balance of labour and equipment exists.

5. Where minimum of inspection is required, during sequence of operations.

6. Where materials and products permit bulk or continuous handling by

mechanical parts.

7. Where minimum of set-ups are required.

(b) Process Layout (or Functional Layout):

In this type of layout, all machines performing similar type of operations are
grouped at one location i.e. all lathes, milling machines etc. are grouped in the
shop and they will be clustered in like groups.
A typical process layout is depicted below:

Advantages:
1. Greater flexibility with regard to work distribution to machinery and
personnel. Adapted to frequent changes in sequence of operations.

2. Lower investment due to general purpose machines; which usually are less
costly than special purpose machines.

3. Higher utilisation of production facilities; which can be adapted to a variety

of products.
4. Variety of jobs makes the work challenging and interesting.

5. Breakdown of one machine does not result in complete stoppage of work.

Disadvantages:
1. Backtracking and long movements occur in handling of materials. As such,
material handling costs are higher.

2. Mechanisation of material handling is not possible.

3. Production planning and control is difficult

4. More space requirement; as work-in-progress inventory is high-requiring

greater storage space.

5. As the work has to pass through different departments; it is quite difficult to

trace the responsibility for the finished product.

Suitability of process layout:

Process layout is suitable in the following cases, where:
1. Non-standardised products are manufactured; as the emphasis is on special
orders.

2. It is difficult to achieve good labour and equipment balance.

3. Production is not carried on a large scale.

4. It is difficult to undertake adequate time and motion studies.

5. It is frequently necessary to use the same machine or work station for two or
more difficult operations.

6. During the sequence of operations, many inspections are required.

7. Process may have to be brought to work, instead of “vice-versa”; because
materials or products are too large or heavy to permit bulk or continuous
handling by mechanical means.

(c) Combination Layout:

In practice, plants are rarely laid out either in product or process layout form.
Generally a combination of the two basic layouts is employed; to derive the
advantages of both systems of layout. For example, refrigerator manufacturing
uses a combination layout.

Process layout is used to produce various operations like stamping, welding,

heat treatment being carried out in different work centres as per requirement.
The final assembly of the product is done in a product type layout.

(d) Fixed Position Layout:

It is also called stationary layout. In this type of layout men, materials and
machines are brought to a product that remains in one place owing to its size.
Ship-building, air-craft manufacturing, wagon building, heavy construction of
dams, bridges, buildings etc. are typical examples of such layout.