Table of Contents:-
- Meaning of Facility Location
- Definition of Facility Location
- Need for Selection of Location
- Importance of Facility Location
- Types of Facility Location
Meaning of Facility Location
Plant location determines where the plant should be located for maximum operating economy and effectiveness. The locations where firm set up their operations are called facility locations. Selecting a place to find a plant is one of the most critical problems entrepreneurs face while launching a new enterprise.
A section on pure economic simply considerations will ensure an easy and regular supply of raw materials, labour force, efficient plan layout, proper utilization of production capacity and reduced cost of production. An ideal location may not guarantee success by itself, but it certainly contributes to an organization’s smooth and efficient working. A wrong location, on the other hand, is a severe handicap for any enterprise, and it finally bankrupts it. Utmost care must be exercised initially to select a proper place.
Definition of Facility Location
According to Prof. R. C. Davis, “The function of determining where the plant should be located for maximum operating economy and effectiveness”.
According to Bethel Smith and Alwater, “Facility location stands for that spot where in consideration of business as a whole, the total cost of production and delivering goods to all the consumers is the lowest”.
Need for Selection of Location
The necessity to choose an appropriate location arises due to three primary situations:
- Starting New Organization
- Existing Organization
- Global Location
1) Case of Selecting a Location for the First Time for New Organizations
Cost economies are always crucial while selecting a location for the first time, but one should consider the cost of long-term business/organizational objectives. The following factors should be considered when selecting the location for the new organization:
i) Identification of Region
The organizational objectives and the various long-term considerations about marketing, technology, internal organizational 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.
ii) Choice of a Site within a Region
Once the suitable region is identified, the next step is to choose the best location from the available set. The choice of a site is less dependent on the organization’s long-term strategies. Evaluating alternative locations for their tangible and intangible costs will resolve the facility-location problem.
The problem of the location of a site within the area can be approached with the following cost-oriented and non-interactive model, i.e., dimensional analysis.
iii) Dimensional Analysis
If all the costs were quantifiable and tangible, the comparison and selection of a site would be easy. The location with the least cost is then determined. In most cases, intangible costs have to be considered, expressed in relative rather than absolute terms. The relative merits and demerits of sites can also be easily compared. Dimensional analysis is used since both tangible and intangible costs must be considered when selecting a place.
2) In Case Selecting a Location for an Existing Organization
In this case, a manufacturing plant has to fit into a multi-plant functions strategy. That is, additional plant locations within the same premises and elsewhere under the following possibilities:
i) Plants Manufacturing Distinct Products
Each plant serves the whole market area for the organization. This strategy is essential when the technological and resource inputs required for additional product lines are specialized or distinctly different.
For example, a high-quality precision product line should not be located along with other products. It requires a bit of emphasis on precision. It may not be appropriate to have too many contradictions under one roof and with one set of managers, such as a mix of sophisticated and old equipment, highly skilled and semi-skilled personnel, delicate processes, and those that permit rough handling. Such a setting leads to more clarity regarding the required emphasis and the management policies.
Specializing in a specific product may be necessary in a highly competitive market. It may be required to expand the unique resources of a particular geographical area. The more decentralized these pairs are intent of the management and in terms of their physical location, the better the planning and cons and the utilization of the resources.
ii) Manufacturing Plants Supplying to a Specific Market Area
Each plant manufactures nearly all of the company’s products. This strategy is suitable when market proximity considerations precede resources and technology considerations. This approach demands a great deal of coordination from the corporate office. An extreme example of this strategy is seen in soft drink bottling plants.
iii) Organizing Plants Based on Manufacturing Processes or Stages
Each product 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 is expected to understand the different technological aspects of all the plants.
iv) Plants Emphasizing Flexibility
This requires extensive coordination between plants to address evolving needs while ensuring the efficient utilization of facilities and resources. Frequent changes in the long-term strategy to temporarily improve the plant’s efficiency are healthy for the organization. In any facility location problem, the central question is: ‘Is this a location where the company can remain competitive for a long time’?
To enhance the capacity of an established organization, the following methods can be used:
a) Expanding Facilities at the Current Site
This is acceptable when it upholds the primary business and managerial outlines, i.e., philosophies, purposes, strategies, and capabilities. For example, expansion should maintain quality, delivery, or customer service.
b) Relocating Facilities (Closing Down Existing Ones)
This is a drastic step that can be called ‘Uprooting and Transplanting’. Unless there are very compelling reasons, relocation is not undertaken. The grounds will radically change technology, resource availability, or destabilization.
All these factors apply to service organizations whose objectives, priorities, and strategies may differ from the use of hardcore manufacturing organizations.
3) In Case of Global Location
Because of globalization, multinational companies are setting up their organizations in India, and Indian companies are extending their operations to other countries. In the case of global locations, there is scope for.
i) Virtual Proximity
With the advances in tele-communications technology, a firm can be in virtual proximity to its customers. Much of the logistics for a software services firm is through the information/communication pathway. Many firms use the communications highway to conduct a large portion of their business transactions. Logistics is undoubtedly essential 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 customers’ land is reasonably necessary.
ii) Virtual Factory
Many firms based in the USA and UK in the service and manufacturing sectors often outsource part of their business processes to foreign locations such as India. Thus, a firm could use its business associates’ operations facilities instead of one’s operations.
The Indian BPO company is a foreign-based company’s ‘virtual service factory’. A location could be one’s own or that of one’s business associates. The location decision does not necessarily need to pertain to own operations.
Whatever the reason, the selection of the location has to be made after considering all the economic factors which have a bearing on it. It may be impossible to find a place that abounds in all the facilities required to start a factory, but a search must be made for a place that enjoys as many facilities as possible. The guiding principle in the search should be for a place where the cost of the raw material and fabrication, plus the cost of the marketing of the finished product, will be minimal.
Importance of Facility Location
The selection of a facility location is a strategic decision for any organization. Therefore, it has to be made after considering all the elements which have a bearing on it. Location decisions are essential for several reasons.
1) Determine Nearness of Location from the Market
The importance of plant location depends on the scope and nature of the business. A small-scale firm normally selects a location near the local market. However, for big firms, the amount of investment required largely depends on the location selected. Since these investments are irreversible at least in the short run, the management of the firm should be careful in selecting a site. For example, an automobile manufacturing unit cannot be shifted from one place to another.
2) Withstand Competition
The location decision is also important for a firm to withstand competition. Thus, an optimum location that reduces the transportation costs of raw materials and goods has low labour costs, and is nearer to the markets, always giving the company an edge over its competitors.
3) Fix Production Technology and Cost Structure
The location of a plant will improve the production technology and cost structure. For example, a manufacturing plant, which is located in an underdeveloped country, will choose a labour-intensive process to utilize the availability of low-cost labour.
4) Select the Best Location
Facilities location helps in finding the best geographic location for operations. Related decisions include the number of locations, size of facility, type of operation, and so on. This is an important decision that has effects over the long term, and a poor location can cause low productivity, unreliable deliveries of materials, high costs, poor quality products, poor customer service, and a host of other problems. And, if an organization makes a mistake in location it cannot often write off its investment in the site, close down and move to a better place.
5) Serve Customers in a Better Manner
The location of the plant affects the company’s ability to serve its customers quickly and conveniently. For example, a nationwide commercial trucking business wants to locate a truck terminal. Since the trucking business is highly dependent on inter-state highways, the truck terminals must be located along highways or as close to highways as possible.
In practice, many factors have an impact on location decisions. The relative importance of these factors depends on whether the scope of a particular location problem is international, national, state-wide, or community-wide.
For example, if we are trying to determine the location of a manufacturing facility in a foreign nation. Factors such as political stability, foreign exchange rates, business climate, duties, and taxes play a role in that case. Suppose the scope of the location problem is restricted to a few communities. Community services, property tax incentives, local business climate, and government regulations are more important.
Types of Facility Location
Location decision pertains to the choice of an appropriate geographical site for locating various facilities of an organization. At one extreme, it is possible to have a single location where all the facilities could be located. On the other stream, many facilities are located in as many markets so that it is easy to access customers. Each of these streams has its particular problems and its specific characteristics.
Single Facility Location
The following steps serve as a guideline for making a single-location decision:
1) Define the Objectives and Associated Constraints for the Location
The location objectives and associated constraints are defined based on the views and requirements of the firm’s owners, promoters, employees, suppliers and customers.
2) Identify the Relevant Decision Criteria
Companies should select a location by formulating relevant decision criteria. The criteria should include several economic factors such as labour and material costs, and non – economic factors, such as the impact of the plant on the surrounding environment.
3) Align Objectives with Criteria Using Suitable Models
The relevant decision criteria should be evaluated using models like break-even analysis, linear programming, and qualitative factor analysis. Though it is preferred to model the location decision process systematically and quantitatively, it isn’t easy to quantify the intangible criteria. Therefore, responsible managers’ judgment is considered to obtain a solution.
4) Evaluate the Alternative Locations
Companies should collect primary and secondary data to evaluate alternative locations. Primary data is the data that is collected for a specific purpose for the first time. Firms mainly use survey methods like telephonic, personal, and mail interviews to collect the primary data.
Secondary data is already available but might have been collected for some other purpose or by some other institutions. Publications of the Center for Monitoring Indian Economy (CMIE), journals of the Federation of Indian Chambers of Commerce and Industry (FICCI), and Central Statistical Organization (CSO) are some of the secondary data sources. Firms collect the possible primary and secondary data and evaluate different alternative locations based on this data using the given decision criterion.
5) Select the Location that Best Aligns with the Criteria
A location that can meet the defined objectives, satisfy the criteria and provide benefits to the community should be selected.
Multi-Facility Location
There are three strategies for organizations to have more than one facility for pursuing their operations:
1) Separate Facilities for Different Products/Services
Companies which are into diversified product/service ranges prefer to have separate facilities for each of these. Each facility takes care of the entire population (markets) or total geographical area for a particular service or product. This is done to avoid confusion and bring about economies of scale. While goods manufacturing companies such as LG, Videocon, BPL, etc., have separate plants for colour TVs, washing machines, microwave ovens, refrigerators, etc.
2) Separate Facilities to Serve Different Geographical Areas
Pepsi and Coca-Cola provide a perfect example of this strategy. This strategy reduces the overall transportation cost and the lead time for supplying goods in the markets. Prompt action can be taken to address sudden changes in demand. Service sector organizations such as banks, insurance companies, hospitals, and courier services also have multiple offices to serve different regions/geographical areas.
3) Separate Facilities for Different Processes
Many colour TV manufacturers have separate facilities for manufacturing picture tubes, which are major components used in the manufacture of a TV set. The Aditya Birla group has a separate factory at Jagdishpur (UP) for manufacturing plastic sacks, which are supplied to the Indo-Gulf Fertilizers Factory, also at Jagdishpur. These sacks are used to package the urea manufactured by them. Similarly, companies such as Reliance Industries, which are in backward integration, i.e., which manufactures their raw materials, also tend to have separate facilities for the production of such items.