UNIT-3

What is Plant Location?

Plant location refers to the process of selecting a suitable site or place for
establishing a manufacturing facility or industrial plant. It is a critical decision
for businesses, as the location of a plant can significantly impact the company’s
overall success and competitiveness. Plant location considerations are
important across various industries, including manufacturing, agriculture,
energy generation, and more.
Entrepreneurs face a major problem with plant location in deciding the best
location for their factory or plant. The utmost care must be exercised in
selecting the plant location and many different factors must be taken into
account. Primarily, the plant must be located where the minimum cost of
production and distribution can be obtained but, other factors such as room
for expansion and safe living conditions for plant operation as well as the
surrounding community are also important. The location of the plant can also
have a crucial effect on the profitability of a project.
For example, Consumer industries like televisions, washing machines and other
luxury goods are set up near the marketing centres, while producer industries
like steel mills are located near the vicinity of raw materials. Plant location is
the choice of region and the site selection to set up a business or a factory.
The choice is primarily made after considering all the benefits and costs of
various alternative areas. Moreover, it is a strategic plan which cannot be
changed after deciding. The location chosen should be selected according to
the specific circumstances and requirements. Each entrepreneur has an
individual plant and makes an optimum attempt.
Factors Influencing Plant Location
There are several 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
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. The example of a managerial decision with multiple
criteria, where trade-offs must be made between the varied values and
criteria.

Location Analysis
Every organisation attempts to find an ideal or optimum location. An optimum
location is a place where the product cost is less with a huge market share and
less risk. To find such location, an organisation needs to perform vast analysis.
Business location analysis is a reliable process where an organisation weighs
down the pros and cons of each alternative site.
Location analysis is based on the following aspects:
 Demographic analysis
 Competitive analysis
 Site economics
 Trade area analysis
 Traffic analysis
The following are the objectives of location analysis:
  To make sure the smooth running of the business
 To hold minimum investment and operational cost
 To co-ordinate with government policies
 To promote employee welfare

IMPORTANCE OF PLANT LOCATION

1.) Nature and size of business
2.) Production technology and cost structure
3.) Customer Service
4.) Competition
5.) Physical factors

1.) Nature and size of business

Plant location depends on the size or nature of the plant. A small-scale firm
normally selects the location near to the market because if they don't like the
location later on then they can relocate. But for a big company, the amount of
investment is large. So, they have to be very careful will locating the location.

2.) Production technology and cost structure

The location of the plant will decide the type of production technology
management adopt and the structure of cost. For example - If management
installs its plant in an underdeveloped country, they will choose a labor-
intensive process to take benefit of the availability of low-cost labor.

3.) Customer Service

The location of the plant affects the company's ability to serve its customer
quickly and speedily. For example - In case of dairy milk products that are
delivered on daily basis to their customers. In this case, the location of the
plant must be near to delivered the milk products on time.

4.) Competition
The importance of plant location decisions also helps the company to take a
competitive advantage. An optimum location that reduces the transportation
cost, available to the near market, having low labor cost, etc. always gives the
company an advantage as compared to its competitor.

5.) Physical factors

One another importance of plant location decisions is that it helps the
company to look over the other aspects also.
For example - heating, ventilation requirements, disposal of company waste
properly, etc.

Strategic significance of plant location is connected with capacity decisions.

Plant location involves commitment towards resources to a long-range plan.
The criterion for the selection of location should be profit maximisation and
cost minimisation. If the costs of products are uniform altogether, then the
criterion becomes one among minimising relevant costs. Plant location is
generally a stable decision that cannot be changed frequently and requires a
lot of cost and efforts.

Any wrong decision can bring huge losses for the organisation. Therefore, it is
important for an organisation to consider all the factors that impact the plant
location before making the selection. If all processes and costs are
independent of location, choices are going to be guided by proximity to
potential customers or clients or similar and competing organisations and
centres of economic activity generally.
Plant Location Selection Criteria
Most new investments in land, machines, buildings and expertise are made for
the long run. This is furthermore important in terms of manufacturing plants.
Being the global business environment, the company requires a location that
every single day it holds a major role in the new production plant.
Organisations can have several reasons to start the location selection process
for their new manufacturing plant, cost reduction, the capacity expansion for
business growth, new market entries, the pools of labour coping with
geopolitical developments.
The factors that play a crucial role in plant location selection are as follows:
 Materials
 Machinery
 Labour
 Safety and Security
 Future Operations
Materials
 The layout of the productive equipment will depend on the
characteristics of the product to be managed at the facility, as well as
different parts and materials to work on.
 Main factors to be considered: size, shape, volume, weight and the
physical-chemical characteristics, since they influence the manufacturing
methods and storage and material handling processes.
 The sequence and order of operations will affect plant layout as well,
taking into account the variety and quantity to produce.

Machinery
  Having information about the processes, machinery, tools and necessary
equipment, as well as their use and requirements is essential to design a
correct layout.
 The methods and time studies to improve the processes are closely
linked to the plant layout.
 Regarding machinery, we have to consider the type, total availability for
each type, as well as quantity of tools and equipment.
Labour
 Labour has to be organised in the production process (direct labour,
supervision etc.)
 Environment considerations: employees’ safety, light conditions,
ventilation, temperature, noise, etc.
 Process considerations: personnel qualifications, flexibility, number of
workers required at a given time as well as the type of work to be
performed by them.
Safety and Security
 Safety always be a consideration in the design or layout of the facility.
 A company can design the most efficient production layout but if it
places employees at risk or places the product at risk from the layout, it
cannot be implemented.
 Providing a quality product with the least amount of movement and
material handling is important, but the most important asset that any
company has is its employees. If the safety of those employees is
jeopardised, the layout should not imperil employee’s safety.
Future Operations
 Every plan should include a consideration for the future of operations.
Whether it is a manufacturing facility that needs to consider future
products or variations of the same product or a distribution centre that
needs to consider future storage requirements and product
configurations, as well as the ability to expand capacity in the future.
 It is important to forecast future changes to avoid having an inefficient
plant layout in a short term.
 Flexibility can be reached keeping the original layout as free as possible
regarding fixed characteristics, allowing the adjustment to emergencies
and variations of the normal process activities.
 Possible future extensions of the facility must be taken into account, as
well as the feasibility of production during re-layout.
 PLANT LAYOUT
Meaning and Definition of Plant Layout:
Plant layout is the most effective physical arrangement, either existing or in
plans of industrial facilities i.e arrangement of machines, processing equipment
and service departments to achieve greatest co-ordination and efficiency of
4M’s (Men, Materials, Machines and Methods) in a plant.
Layout problems are fundamental to every type of organisation/enterprise and
are experienced in all kinds of concerns/undertakings.
The adequacy of layout affects the efficiency of subsequent operations. It is an
important pre-requisite for efficient operations and also has a great deal in
common with many problems. Once the site of the plant has been decided, the
next important problem before the management of the enterprise is to plan
suitable layout for the plant.
Definitions:

According to James Lundy, “Layout identically involves the allocation of space

and the arrangement of equipment in such a manner that overall operating
costs are minimized.”
In the words of Mallick and Gandreau, “Plant layout is a floor plan for
determining and arranging the designed machinery and equipment of a plant,
whether established or contemplated, in the best place, to permit the quickest
flow of material, at the lowest cost and with the minimum handling in
processing the product, from the receipt of raw material to the shipment of
finished product.”
According to Apple, “Plant layout is planning the path each component/part of
the product is to follow through the plant, coordinating the paths of the
various parts so that the manufacturing processes may be carried out in the
most economical manner, then preparing drawing or other representation of
the arrangement and finally seeing that the plan is properly put into effect.”
(Plant Layout and Material Handling by Apple).
In the words of Sansonneti and Mallick (Factory Management, Vol. 103) “It is
placing the right equipment, coupled with right place, to permit the
processing of a product unit in the most effective manner, through the
shortest possible distance and in the shortest possible time.” The last
definition seems to be most appropriate.

Need of Plant Layout:

Many situations give rise to the problem of plant layout. Two plants having
similar operations may not have identical layouts. This may be due to size of
the plant, nature of the process and management’s calibre.
The necessity of plant layout may be felt and the problem may arise when:
(i) There are design changes in the product.
(ii) There is an expansion of the enterprise.
(iii) There is proposed variation in the size of the departments.
(iv) Some new product is to be added to the existing line.
(v) Some new department is to be added to the enterprise and there is
reallocation of the existing department.
(vi) A new plant is to be set up.

Importance of Plant Layout:

The layout of a plant is quite important in view of the above definition but the
importance of a layout may greatly vary from industry to industry.
The possibility of attaining the best possible layout is directly proportional to
following factors:
(i) The Weight, Volume or Mobility of the Product:
If the final product is quite heavy or difficult to handle involving costly material
handling equipment or a large amount of labour, important consideration will
be to move the product minimum possible e.g. boiler, turbines, locomotive
industries and ship building companies etc.
(ii) Complexity of the Final Product:
If the product is made up of a very large number of components and parts i.e.
large number of people may be employed for handling the movement of these
parts from shop to shop or from machine to machine or one assembly point to
another e.g. automobile industry.
(iii) The Length of the Process in Relation to Handling Time:
If the material handling time represents a appreciable proportion of the total
time of manufacturing, any reduction in handling time of the product may
result in great productivity improvement of the industrial unit e.g. Steam
Turbine Industry.
(iv) The Extent to which the Process Tends towards Mass Production:
With the use of automatic machines in industries for adopting mass production
system of manufacturing the volume of production will increase. In view of
high production output, larger percentage of manual labour will be engaged in
transporting the output unless the layout is good.
Objectives of Good Plant Layout:

A good rather an optimum layout is one which provides maximum satisfaction

to all concerned i.e. shareholders, management employees and consumers.
The objectives of a good layout are as follows:
(i) Should provide overall satisfaction to all concerned.
(ii) Material handling and internal transportation from one operation to the
next is minimized and efficiently controlled.
(iii) The production bottle necks and points of congestions are to be eliminated
so that input raw materials and semi-finished parts move fast from one work
station to another.
(iv) Should provide high work in process turnover.
(v) Should utilize the space most effectively; may be cubical utilization.
(vi) Should provide worker’s convenience, promote job satisfaction and safety
for them.
(vii) Should avoid unnecessary investment of capital.
(viii) Should help in effective utilization of labour.
(ix) Should lead to increased productivity and better quality of the product with
reduced capital cost.
(x) Should provide easy supervision.
(xi) Should provide space for future expansion of the plant.
(xii) Should provide proper lighting and ventilation of the areas of work
stations
Factors Affecting Plant Layout:
Whatever be the type of layout being contemplated the following factors are
to be considered because these factors have got significant influence on the
design of the layout.
(i) Man Factor:
The man is very flexible element who can be made suitable for all sort of
layouts.
Main considerations are as follows:
(i) Safety and working conditions.
(ii) Man power requirements-skill level of workers, their number required and
their training programme.
(iii) Man power utilization in the plant.
(iv) Human relations.
(ii) Material Factor:
It includes the various input materials like raw materials, semi-finished parts,
and materials in process scrap, finished products, packing materials, tools and
other services.
The main considerations are:
(i) Design and specifications of the product to be manufactured.
(ii) Quantity and variety of products and materials.
(iii) Physical and chemical characteristics of various inputs materials.
(iv) Component parts or material and their sequence of operations i.e. how
they go together to generate the final product.

(iii) Machinery Factor:

The operating machinery is also one of the most important factors therefore all
the information regarding equipment and the tools are necessary for
inspection, processing and maintenance etc.
(i) The processes and methods should be standardized first.
(ii) Machinery and tools selections depend upon the type of process and
method, so proper machinery and other supporting equipment should be
selected on the basis of volume of production.
(iii) Equipment utilization depends on the variation in production,
requirements and operating balance.
(iv)Machines should be used to their optimum levels of speed, feed and depth
of cut.
(v) Machinery requirement is mostly based on the process/method.
(v) Maintenance of machines and replacement of parts is also important.
(iv) Movement Factor:
It mainly deals with the movement of men and materials. A good layout should
ensure short moves and should always tend towards completion of product. It
also includes interdepartmental movements and material handling equipment.
This includes the flow pattern reduction of unnecessary handling, space for
movement and analysis of handling methods.
(v) Waiting Factor:
Whenever material or men is stopped, waiting occurs which costs money.
Waiting cost includes handling cost in waiting area, money tied up with idle
material etc.
Waiting may occur at the receiving point, materials in process, between the
operations etc.
The important considerations in this case are:
(a) Location of storage or delay points.
(b) Method of storing.
(c) Space for waiting.
(d) Safeguard equipment for storing and avoiding delay.
(vi) Service Factor:
It includes the activities and facilities for personnel such as fire protection,
lighting, heating and ventilation etc. Services for material such as quality
control, production control, services for machinery such as repair and
maintenance and utilities like power, fuel/gas and water supply etc.
(vii) Building Factor:
It includes outside and inside building features, shape of building, type of
building (single or multi-storey) etc.
(viii) Flexibility Factor:
This includes consideration due to changes in material, machinery, process,
man, supporting activities and installation limitations etc. It means easy
changing to new arrangements or it includes flexibility and expendability of
layouts.
Principles of Plant Layout:
According to Muther there are six basic principles of “best layout”.
These are:
(i) Principle of Overall Integration:
According to this principle the best layout is one which provides integration of
production facilities like men, machinery, raw materials, supporting activities
and any other such factors which result in the best compromise.
(ii) Principle of Minimum Distance:
According to this principle the movements of men and materials should be
minimized.
(iii) Principle of Flow:
According to Muther, the best layout is one which arranges the work station
for each operation process in same order or sequence that forms treats or
assembles the materials.
(iv) Principle of Cubic Space Utilization:
According to this, the best layout utilizes cubic space i.e. space available both
in vertical and horizontal directions is most economically and effectively
utilized.
(v) Principle of Satisfaction and Safety:
According to this principle best layout is one which provides satisfaction and
safety to all workers concerned.
(vi) Principle of Flexibility:
In automotive and other allied industries where models of products change
after sometime the principle of flexibility provides adoption and
rearrangement at a minimum cost and least inconvenience

Types of Plant Layout:

Production results from men, materials and machinery together with
management. The characteristics are changed. To manufacture a product
layout begins with which element or elements mentioned above move.
Keeping in view the type of industry and volume of production, the type of
layout to be selected is to be decided from the following:
1. Product or Line Layout.
2. Process or Functional Layout.
3. Fixed Position Layout.
4. Combination type of Layout.
Example: making of chocolate
1. Product or Line Layout:
If all the processing equipment and machines are arranged according to the
sequence of operations of a product, the layout is called product type of
layout. In this type of layout, only one product or one type of products is
produced in an operating area. This product must be standardized and
produced in large quantities in order to justify the product layout.
The raw material is supplied at one end of the line and goes from one
operation to the next quite rapidly with a minimum work in process, storage
and material handling. Fig. 3.3 shows product layout for two types of products
A and B.
Advantages offered by Product Layout:
(i) Lowers total material handling cost.
(ii) There is less work in process.
(iii) Better utilization of men and machines.
(iv) Less floor area is occupied by material in transit and for temporary
storages.
(v) Greater simplicity of production control.
(v) Total production time is also minimized.
Limitations of Product Layout:
(i) No flexibility which is generally required is obtained in this layout.
(ii) The manufacturing cost increases with a fall in volume of production.
(iii) If one or two lines are running light, there is a considerable machine
idleness.
(iv) A single machine breakdown may shut down the whole production line,
(v) Specialized and strict supervision is essential.
Example: hospital etc

2. Process or Functional Layout:

The process layout is particularly useful where low volume of production is
needed. If the products are not standardized, the process layout is more
desirable, because it has greater process flexibility than other. In this type of
layout the machines are not arranged according to the sequence of operations
but are arranged according to the nature or type of the operations.
This layout is commonly suitable for non-repetitive jobs. Same type of
operation facilities are grouped together such as lathes will be placed at one
place all the drill machines are at another place and so on. See Fig. 3.4 for
process layout. Therefore, the process carried out in any area is according to
the machine available in that area.

Advantages of Process Layout:

(i) There will be less duplication of machines. Thus total investment in
equipment purchase will be reduced.
(ii) It offers better and more efficient supervision through specialization at
various levels.
(iii) There is a greater flexibility in equipment and man power thus load
distribution is easily controlled.
(iv) Better utilization of equipment available is possible.
(v) Breakdown of equipment can be easily handled by transferring work to
another machine/ work station.
(vi) There will be better control of complicated or precision processes,
especially where much inspection is required.
Limitations of Process Layout:
(i) There are long material flow lines and hence the expensive handling is
required.
(ii) Total production cycle time is more owing to long distances and waiting at
various points.
(iii) Since more work is in queue and waiting for further operation hence
bottlenecks occur.
(iv) Generally more floor area is required.
(v) Since work does not flow through definite lines, counting and scheduling is
more tedious.
(v)Specialization creates monotony and there will be difficulty for the laid
workers to find job in other industries.
3. Fixed Position Layout:

Example : making of ship or aeroplane etc

This type of layout is the least important for today’s manufacturing industries.
In this type of layout the major component remain in a fixed location, other
materials, parts, tools, machinery, manpower and other supporting equipment
are brought to this location.
The major component or body of the product remains in a fixed position
because it is too heavy or too big and as such it is economical and convenient
to bring the necessary tools and equipment’s to work place along-with the
man power. This type of layout is used in the manufacture of boilers, hydraulic
and steam turbines and ships etc.
Advantages Offered by Fixed Position Layout:
(i) Material movement is reduced
(ii) Capital investment is minimized
(iii) The task is usually done by gang of operators, hence continuity of
operations is ensured
(iv) Production centres are independent of each other. Hence effective
planning and loading can be made. Thus total production cost will be reduced
and
(v) It offers greater flexibility and allows change in product design, product mix
and production volume.
Limitations of Fixed Position Layout:
(i) Highly skilled man power is required.
(ii) Movement of machines equipment’s to production centre may be time
consuming.
(iii) Complicated fixtures may be required for positioning of jobs and tools. This
may increase the cost of production.
4. Combination Type of Layout:
Now days in pure state any one form of layouts discussed above is rarely
found. Therefore generally the layouts used in industries are the compromise
of the above mentioned layouts. Every layout has got certain advantages and
limitations therefore, industries would not like to use any type of layout as
such.
Flexibility is a very important factor, so layout should be such which can be
moulded according to the requirements of industry, without much investment.
If the good features of all types of layouts are connected, a compromise
solution can be obtained which will be more economical and flexible.

Advantages of a Good Plant Layout:

The advantages expressed by Mallick and Gandeau are as follows:
To the Worker:
(i) Reduces the effort of the worker.
(ii) Reduces the number of handlings.
(iii) Extends the process of specialization.
(iv) Permits working at optimum conditions by eliminating congestions.
(v) Produces better working conditions by eliminating congestions.
(vi) Reduces the number of accidents.
(vii) Provides better employee service facilities/conditions.
(viii) Provides basis for higher earning for employees.
In Labour Cost:
(i) Increases the output per man-hour.
(ii) Reduces set up time involved.
(iii) Reduces the number of operations or some operations may be combined.
(iv) Reduces the number of handlers. Thus reducing labour cost.
(v) Reduces the length of hauls.
(vi) Reduces lost motions between operations.
(vii) Converts operator into a producer instead of a handler by eliminating the
various unnecessary movements.
In Other Manufacturing Costs:
(i) Reduces the cost of expensive supplies.
(ii) Decreases maintenance costs.
(iii) Decreases tool replacement costs.
(iv) Effects a saving in power loads.
(v) Decreases spoilage and scrap. Thus waste is minimized
(v) Eliminates some of the waste in raw material consumption.
(vii) Improves the quality of the product by decreasing handling.
(viii) Provides better cost control.
In the Manufacturing Cycle:
(i) Shortens the moves between work-stations.
(ii) Reduces the manufacturing cycle in each department.
(iii) Reduces the length of the travel by the product for completion.
(iv) Reduces the overall time of manufacturing the product.
In Production Control:
(i) Facilitates receipts, shipments and delivery of inputs and finished goods.
(ii) Provides adequate and convenient storage facilities.
(iii) Permits the maximum possible output with same input.
(iv) Paces production & determines production flow.
(v) Makes production time predictable.
(vi) Makes scheduling and dispatching automatic.
(vii) Sets up production centre & permits straight line layout by products for
mass production.
(viii) Permits layout by process for job order manufacturing.
(ix) Moves work in process by most direct lines.
(x) Reduces the number of lost or mishandled parts leading to waste
minimization.
(xi) Reduces the paper work for production control & reduces the number of
stock chasers. Thus reduces production control expenses.
In Supervision:
(i) Tends to ease the burden of supervision.
(ii) Determines the supervisory control.
(iii) Reduces the cost of supervision process.
(iv) Reduces cost of piece counts.
(v) Decreases the amount of inspection involved.
In Capital Investment:
(i) Holds permanent investment at its minimum level.
(ii) Keeps the plant from becoming obsolete before it is worn out.
(iii) Reduces the investment in machinery and equipment by
(a) Increasing the production per machine.
(b) Utilizing idle machine time.
(c) Reducing the number of operations per machine.
(iv) Maintains a proper balance of departments.
(v) Eliminates wasted aisle space.
(vi) Reduces the capital investment by proper space utilization of material
handling equipment required.
(vii) Reduces the inventory level of work in process and of finished product.

Business Sizes
It refers to the scale or number of operations. Studying the size of a company
is important because it significantly affects its efficiency and profitability.
Company size refers to the size of the company’s operations. We measure it
using various metrics, including assets, revenue, production, market
capitalisation, number of employees, and invested capital. Size is one of the
most relevant aspects in which companies differ. Knowing the different
company sizes and categories of organisations can be a professional advantage
no matter what your job is. Knowing the most common company sizes and
their main characteristics is essential information.
The size of the company matters as it affects the company’s competitiveness.
For example, large companies have substantial resources to support
competitiveness. In addition, they benefit from more significant economies of
scale that do not exist in small businesses. Therefore, they have the advantage
of reducing costs while increasing yields.
How Do You Determine Company Size?
Several metrics that determine company size include:
The number of employees – how many people the company employs. Large
companies use more workers than small companies because of the size of their
operations.
Revenue – Revenue is income earned from the sale of goods or services.
Another way is to use a sales volume measure.
Production – Production is the yield produced by the company. This metric is
irrelevant for service companies, as we cannot quantify their production in the
same way as manufacturing companies.
Amount of capital invested – how much money the company holds. It
generally correlates positively with available resources. For example, capital
can refer to the sum of equity and debt. Alternatively, we can refer to physical
assets such as property, plants and equipment.
Market Capitalization – What is the total value of the shares issued by the
company. It only applies to public companies whose publicly traded shares and
listed on the stock exchange.
 Market capitalisation = company share price x number of outstanding
shares.

What Are The Classifications of Company Size?

The size of a company is a relative term that largely depends on the industry in
which it operates. However, there are three main company sizes, and
regardless of their field, they all share some characteristics. The three main
types of company size classification are:
Small Business Definition: Any service sector unit with an investment of up to
Rs 2 crore in equipment is classified as a small enterprise in the MSME
department. In manufacturing, any unit with an investment of less than Rs 5
crore in factories and machinery is classified as a small business.
Medium-sized Business Definition: In India, a medium-sized business refers to
an enterprise with an investment of no more than Rs 50 crore in plant and
machinery or equipment and a turnover of no more than Rs 250 crore.
Large-sized Business Definition: In India, Large-sized businesses are those with
fixed assets exceeding 10 crore or Rs. 100 million.
Some of the Business Factors That Determine Company Size Include
(i) Sales estimates: The size of the company depends on the size of the market,
as evidenced by reliable sales estimates; this way the company can avoid
investing in facilities that are too large and too costly to be profitable. The size
of the company is limited by the size of the market (i.e. the size of the
demand).
(ii) Expansion Prospects: The size of the company also depends on the
prospect of near-term demand growth. An enterprise can operate on a large
scale and can meet the needs of future business expansion.
(iii) Technical factors: Some of the technical factors that evaluate the company
size include:
1. The nature of the production machine: When the production machine is
very large, the size of the company will be large, eg. In the case of the
steel industry or shipbuilding or aviation. Likewise, companies are
usually smaller when the production machines are small and simple,
such as when making cutlery, baking bread, making ballpoint pens, etc.
2. Diversification of production: more standardized products; perhaps
larger business scale. Companies that produce standardized and
fashionable products tend to be smaller.
3. Availability of inputs: The size of a company depends on the availability
of inputs required for production, such as inputs required for raw
materials, labour, energy, etc. are not readily available; the size of the
company cannot be very large. The size of a company depends on the
availability of necessary inputs.
4. Applicability of the Income Approach: According to The Economist, the
size of a company also depends on the applicability of the Income
Approach. Whether the relevant industry obeys the law of increasing or
decreasing returns affects the size of the company.
5. Transportation costs: When the finished product transportation costs
are high; the business can be operated on a small scale to meet the
needs of local consumers.
Business Size by Employees
 An employee has a contractual obligation to work in a company and get
paid.
 People on sick leave, paid leave or furloughs are included, while owner-
operators, active business partners, unpaid domestic workers and
domestic workers are excluded.
  Permanent employees are those who have and have entered into an
express or implied contract of employment with the same employer or
have continued such employment contracts for a period exceeding the
prescribed national minimums (as determined by the circumstances of
the country).
 A permanent employee is an employee with a permanent contract.
 The company is responsible for paying taxes and social security
contributions, and national labour laws govern the contractual
relationship.
 Companies can be small or medium (fewer than 250 employees) or large
(250 or more employees). This indicator denotes the number of people
employed in the manufacturing industry.

Criteria for measuring the size of Business

Unit, Factors, Concepts, Optimum Size of
Business

The size of a business unit means the size of a business firm. It means the scale
or volume of operation turned out by a single firm. The study of the size of a
business is important because it significantly affects the efficiency and
profitability of the firm. One of the most important entrepreneurial decisions
in organizing a business is realizing its ‘size’ as it affects in company and
profitability of business enterprises. The term’ size of business’ refers to the
scale of organization and operations of a business enterprise. It is essential
here to have a clear understanding of the terms’ size’ of the ‘plant’ size of
‘firm’ and the size of the industry. A ‘plant’ means an establishment of the
manufacturing of goods. It represents a production unit where the due
provision of all the activities facilitating the production process as made. A
‘firm’ means as an organization that owns manages and controls a plant or
number of plants and also arranges for the marketing of products, provision of
finance, and other facilities to run the organization. The term industry’ implies
the aggregate of all firm which manufacture similar types of products.

Measures of Size
Business firms vary in size-small, medium, and large. To measure the size of a
business unit, the standards of measurement can be grouped into the
following two categories.
1. Measures About Input
This includes capital employed, net worth, total assets, labor employed, and
raw material and power consumed.
a. Capital employed
The capital includes owned capital and borrowed capital. The larger the
amount of capital employed, the larger the size of the firm.
b. Net worth
Net worth is the excess of assets over liabilities, as shown in the balance sheet
of a firm. However, for all practical purposes, it refers to the amount of paid-up
capital plays reserves and surpluses built up during business. This measure is
appropriate for comparing the size of different firms in an industry or to
measure the rate of growth for a particular firm.
c. Total assets
Another measure of size if the size of the total assets of a firm. The value of
total assets is calculated by taking into account the amount invested in fixed
(land, building, plant, and machinery), current (cash, short-term securities,
stock, debtors, etc.) and intangible assets (goodwill, planet, rights, etc.).
d. Labor employed
The number of laborers employed in a firm is another measure commonly
employed to measure the size of the business, which is producing similar types
of goods and which are in the same stage of development.
e. Amount of raw materials and power consumed.
The quantity or value of raw materials and power used is yet another measure
that can be used to adjudge a firm.
1. Measure About Output
This includes a volume of output, the value of output, and value-added.
a. The volume of output
The number of goods produced or services rendered may also serve as a good
basis for comparison between firms. The greater the number of goods and
services produced, the larger the size.
b. Value of Output
The monetary value of goods and services produced by a firm also serves as a
basis for measuring the size of a firm.
c. Value Added
A useful variation or combination of the two output criteria is the measure of
net value-added, calculated by deducting the costs of production from the
value of production. It must be mentioned here that no one measure is fully
comprehensive, and the accuracy, adequacy, and utility of each standard will
depend upon three factors – nature of industry and character of its output, the
uniformity and accuracy of data available, and the purpose for which it is
required. On the whole, the output seems to be the best indicator to measure
the size of the firm.

Factors Affecting the Size of the Firm

The main factors that affect the size of the firm are as follows:
1. Nature of Industry
The nature of the industry has a direct influence on the size of the firm.
Manufacturing industries are, by and large, bigger compared to trading and
service firms. Manufacturing industries heavy machinery, produce goods on a
large scale, make higher capital investments, and therefore large.
2. Nature of Products
When the product is less standardized, the size of the firm is often small when
the product is standardized, complex, and durable; the size of the firm is often
big.
3. Capital employed
When the capital involved is large, and the firm can raise it, the size of the firm
is large, when the capital involved in small, the size of such a unit will be small.
4. Size of the market
If the size of the market is large for the product, the firm will also be large and
vice-versa.
5. Quality of management
The competence and integrity of management largely determine the size of a
business unit. If the management is competent to manage the complex tasks
of modern business, the firm can afford to be large.

Factors Determining Size of the Firm

Every business is striving towards attaining the optimum size. Usually, any
business starts as a small entity, and then during its operating period, it
expands till it reaches the optimum size.
1. Capital Investment Factor
The capital employed by shareholders in the form of share capital, reserves,
and surplus (net worth) determines the size of the business. It is mainly used to
compare two firms or more that are producing similar or differentiated
products.
2. Number of Employees
The number of employees employed by any business determines its size. This
is done by comparing the wages paid to employees with other businesses. This
factor is used where firms produce similar goods. If you use it in comparing
firms that are producing differentiated products, then you end up with false
results.
3. Power Used
The amount of power used determines the size of the business. Business firms
don’t rely on this factor as it is inaccurate because of the amount of power
used by any business may be more or less.
4. Raw Materials Used
The annual consumption of raw materials of any firm determines its size. It
used only on those firms that are producing similar products.
5. The volume of the output
This factor is used for those firms that are producing homogeneous goods.
 6. The capacity of Plant
It is used by firms that produce similar products.
7. Total Assets
The total assets of any business determine its size. The value of all assets
(current and fixed) is taken as a means of measure. It is used in both similar
and differentiated firms.
8. Value of Output
This is another factor that determines the size of any firm; however, this
method is only effective in cases where firms produce a variety of products and
where price levels remain constant. In all these factors, the volume of output is
the most effective and reliable factor in measuring the size of any business
unit.
The Optimum Size of Business
From an economic point of view, every business organization should expand as
long as its average per-unit cost is just equal to that of its marginal cost. In
simple words, when the factors of production-land, labor, capital, and
organization can affect maximum returns at their minimum involvement, the
economics consider that as the best, and the most desired size of business. A
firm with this-sat and volume of operation may ensure minimum unit cost, but
a maximum return is known as the optimum firm. “By the optimum firm,” says
E.A.G. Robinson, “we must mean that firm which, in exiting conditions of
techniques and organizing ability has the lowest average cost of production per
unit, when all those costs which must be covered in the long run are included.
The implications of this definition are as follows;
1. The point to be considered is the average cost of production and not-
profits. The average cost means the total cost divided by the total
output. Total cost includes all costs, including depreciation, interest, and
a reasonable margin of profit.
2. Optimum size is a moving point and depends upon technological and
managerial developments. Thus the optimum size is a relative and
dynamic concept and static. That is why the optimum size of firms will
vary in different industries where different technical, marketing, and
financial conditions are encountered.
The concept of the optimum firm is represented in the following graph:

The size’ is measured along the “X” axis and the average cost per unit along the
axis. The cost per unit falls as output increases until, at the point, “p” it begins
to rise again. This point represents the optimum size ▸ iedunote.com/size-of-
business