Chapter: Plant Location
Course Teacher: Professor Dr. Ahmed Sayem
Specialization: Strategic Management, Supply Chain Management,
Industrial Management, Global Manufacturing Network.
Department of Industrial & Production Engineering,
Shahjalal University of Science & Technology, Sylhet.
Facility Location
• Strategy to estimate the demand in various markets.
• Strategy also consist of selecting the location from which
potential markets will be served.
• Location of a non-manufacturing operation helps to
determine how conveniently costumers can conduct business
with the company.
• Location of manufacturing or non-manufacturing operations
can have a great impact on
• Operating cost, as well as profit
• Decision about which goods or services can be offered.
The Importance of Location
Main reasons for care in the selection of facility locations are:
1. Competition: firm ability to compete.
• Direct cost (e.g. transpiration)
• Labor cost
• Demand of service and the effectiveness of the entire operators.
2. Cost: failure to make good location decisions are expensive and have
long-lasting consequence.
3. Hidden Effects: Opportunity cost.
• Usually no checks are written for the opportunity cost; they do
not show up in accounting reports. But…
The Systems View: in location decisions
• A broad system view is necessary, because the problem may
encompass many interrelated factors.
• The operations function is part of a larger system- the company.
• The company in turn is part of a larger system- a logistic chain.
• Manufacturing companies depend on suppliers for inputs,
• and need to supply their outputs to customers.
• Thus several companies or several divisions of a large company
may be linked in a logistics chain.
Major issues should be in the analysis.
The Systems View: in location decisions
Figure: The logistic chain
Location Factors
• Typically involve a broad array of factors that can influence revenue,
cost, or both,
• and consequently affect profits.
In general they may grouped into three categories:
1. Market-related factors: locations of demand and of competition.
2. Tangible cost factors: transportation, labor, utilities, site costs,
construction costs, taxes.
3. Intangible factors: international considerations, zoning and legal
regulations, environmental factors, climate, room for growth,
schools, hospitals, and so on.
Market related Factors
• Location of facilities considering market strategies.
• A decision on the location of the facility that supplies the demand
(forecasted demand of product according to market/s) .
• Location of competitors: Sometimes it is necessary to be
located near competitors. Alternatively, some companies wish to
avoid competitors.
• In case of high-volume purchases- suppliers located closer to
the purchaser’s plant.
• Based on production philosophy: e.g. JIT production.
Tangible cost Factors
(1/2)
1. Transportation: can be a major expensive in manufacturing,
they can be affective by site selection.
• Availability of multiple modes of transportation,
• The relative weights and freight costs for inbound and outbound
items may influence location decisions.
• International transportation; use of consolidation services might
result in significant saving when there is less than full container.
2. Labor availability and Costs: labor-intensive companies may
place more emphasis on the cost of processing materials than on
the cost of transportation them.
Tangible cost Factors
(2/2)
2. Energy Availability and Costs: When a manufacturing facility or
plan needs large amounts of energy sources to operate production
processes.
3. Water availability and costs: Processes that require large amounts of
water are restricted to locations where abundant water resources are
available.
• Cost of water treatment and pollution control must be considered by
operations that make extensive use of water.
4. Site and Construction costs: Cost per unit area of land varies widely
form site to site in a region, and from region to region.
5. Taxes: tax concessions as incentives to attract business and industry.
Intangible Factors
(1/2)
1. International consideration: factors like, trade quotas, culture,
government stability and cooperation, monetary system, etc.
2. Zoning and legal Regulations: Pollution control regulations may
limit the location available to some companies.
Zoning regulation control the types of business that may operate in certain
areas.
3. Environmental Factors: Availability of suitable waste disposal sites
and the cost of waste disposal are important.
Obtaining permits to build and operate some facilities can be a lengthy
and expensive process. Hence the process needed to begun early to
achieve timely completion.
Intangible Factors
(2/2)
4. Community attitudes: some areas may be unfavorable to a
particular type of business, even though there is no formal
legislation against it.
5. Quality of life: the cost of living, high crime rates are
important to all employees.
6. Expansion potential: flexibility and room for expansion.
Materials-oriented location
A company is said to have a materials-oriented locations:
• If a company is located near its source of materials,
• If it has a single source of raw material and ships its products in
many directions,
• If the raw material is heavy or cumbersome.
• For example: paper manufacturing, quarrying and mining
operations must be located
Market-oriented locations
Locating near the consumer.
A company is said to have a market-oriented locations:
• If their products are perishable, extremely heavy or bulky.
• When rapid delivery is a condition of sales.
• When most of a company’s product is consumed within a small
region,
• If raw materials come from several regions, and are
inexpensively shipped.
• For example: Retail and finished-goods warehousing operations. Service
operations: contact with consumer is important.
Location Evaluation Methods
There are four models or techniques in reaching a location
decision:
1. Cost-Profit-Volume or Break-Even Analysis
2. Point Rating
3. The Transportation Method of Linear
Programming
4. Simulation
Cost-Profit-Volume or Break-Even Analysis
• Some of the costs of having a facility in a location will
be fixed, and others will vary with the volume of
business.
• The cost structures will be different for each location
being considered.
• Also, the volume of sales will be different for each
location.
Cost-Profit-Volume or Break-Even Analysis
Cost-Profit-Volume Analysis procedure:
➢
Determine fixed and variable costs
➢
Plot total costs lines
➢
Determine lowest total costs
Assumptions
✓ Fixed costs are constant
✓ Variable costs are linear
✓ Output can be closely estimated
✓ Only one product involved
Cost-Profit-Volume or Break-Even Analysis
Example (Cost-Profit-Volume)
Fixed and variable costs for four potential locations
L o c a tio n
A
B
C
D
F ix e d
C ost
$ 2 5 0 ,0 0
1 0 0 ,0 0
1 5 0 ,0 0
2 0 0 ,0 0
0
0
0
0
V a r ia b le
C ost
$11
30
20
35
Solution (Cost-Profit-Volume)
Fixed
Costs
A
B
C
D
$250,000
100,000
150,000
200,000
Variable
Costs
$11(10,000)
30(10,000)
20(10,000)
35(10,000)
Total
Costs
$360,000
400,000
350,000
550,000
Solution (Cost-Profit-Volume)
$(000)
800
700
600
500
400
300
200
100
0
D
B
C
A
A Superior
C Superior
B Superior
0
2
4
6
8
10
Annual Output (000)
12
14
16
Another option: Considering Revenue Vs Total Cost
Keep in mind that:
• One should not conclude that the lowest-cost location will
always be the maximum profit location, unless the price
and volume are to be the same for all locations.
• Some locations other than the one with minimum costs
might result in sufficient additional volume to increase
revenue more than costs.
• For instance:
Higher cost location can provide higher profit
Another option: Considering Revenue Vs Total Cost
Clarify your idea:
• Location of a factory or warehouse has no
effect on the volume of demand.
• Instead, Location choice have a great
effect on the volume of sales for retail
establishment or a service operation.