Selecting a plant location plays a vital role in the success of the organisation. The various factors that influence the site location and the techniques used for rating the plant sites.

1. PLANT LOCATION
Dhamodharan M

2. WHAT IS PLANT LOCATION ?
• A Plant should be located at a place where inhabitants are interested
in its success, the product can be sold profitably and production cost is
minimum.
- Dr. Vishweshwarya
• Plant location is often result of compromise among conflicting social,
economic and geographical conditions.
- Lansburg

3. NEED FOR PLANT LOCATION
• When a new plant is to be established.
• Old plant undergoes expansion, decentralization &diversification to meet
increased demands for its products.
• The existing factory is not in a position to obtain renewal of lease.
• An undesirable location is to be abandoned.
• The tendency of shifting the market, depletion of raw materials, changes in
transportation facilities, new processes requiring a different location are
observed in the factory.
• A new branch or branches are to be opened for increasing the volume
of production or distribution or both.

4. SUPPLY CHAIN CONSIDERATIONS
A supply network perspective means setting an operation in the context of all the other
operations with which it interacts, some of which are its suppliers and its customers.
Why consider the whole supply network?
 It helps to provide an understanding of competitiveness
 It helps identify significant links in the network
 It helps focus on long-term issues
Design decisions in supply networks
 How should the network be configured?
 Where should each part of the network be located? The location decision.
 What physical capacity should each part of the network have? The long-term capacity
management decision.

5. SAMPLE
OPERATIONS
NETWORK

6. CHANGING THE SHAPE OF THE SUPPLY
NETWORK
Disintermediation - Companies within a network bypassing customers or suppliers to make contact directly with
customers’ customers or suppliers’ suppliers. ‘Cutting out the middle men’ in this way is called disintermediation.
Co-opetition - One approach to thinking about supply networks sees any business as being surrounded by four types of
players: suppliers, customers, competitors and complementors. Complementors enable one’s products or services to be
valued more by customers because they can also have the complementor’s products or services, as opposed to having
yours alone. Competitors are the opposite: they make customers value your product or service less when they can have
their product or service, rather than yours alone. Competitors can also be complementors and vice versa. It is important
to distinguish between the way companies co-operate in increasing the total size of a market and the way in which they
then compete for a share of that market. Customers and suppliers, it is argued, should have ‘symmetric’ roles.
Harnessing the value of suppliers is just as important as listening to the needs of customers. Destroying value in a
supplier in order to create it in a customer does not increase the value of the network as a whole. So, pressurizing
suppliers will not necessarily add value. In the long term it creates value for the total network to find ways of increasing
value for suppliers and well as customers. All the players in the network, whether they are customers, suppliers,
competitors or complementors, can be both friends and enemies at different times. The term used to capture this idea is
‘co-opetition’.

7. Outsourcing - No single business does everything that is required to produce its products and services.
Retaining the services of specialist organisations that have the specialized expertise to do it better; this
process is called outsourcing. The outsourcing debate is just part of a far larger issue which will shape
the fundamental nature of any business. Namely, what should the scope of the business be? In other
words, what should it do itself and what should it buy in? This is often referred to as the ‘do-or-buy
decision’ when individual components or activities are being considered, or ‘vertical integration’ when it
is the ownership of whole operations that are being decided. Vertical integration is the extent to which an
organization owns the network of which it is a part. It usually involves an organization assessing the
wisdom of acquiring suppliers or customers. And different companies, even in the same industry, can
make very different decisions over how much and where in the network they want to be. Organizations
in different circumstances with different objectives are likely to take different decisions. ‘Does in-house
or outsourced supply in a particular set of circumstances give the appropriate performance objectives
that it requires to compete more effectively in its markets?’
Two supply network strategies that are often confused are those of outsourcing and offshoring.
Outsourcing means deciding to buy in products or services rather than perform the activities in-house.
Offshoring means obtaining products and services from operations that are based outside one’s own
country.

8. DECISION
LOGIC OF
OUTSOUR
CING &
OFFSHORI
NG

10. STEPS IN PLANT LOCATION
Within the Country or outside
Selection of Region
Selection of Community
Selection of Plant site

11. 1. WITHIN THE COUNTRY OR OUTSIDE
• Plant to be located Domestically or Internationally.
• Globalization has opened the barriers of business, so that the business
can be started according to the comfort and need of the Plant.
• Choice of country depends upon factors like political stability, Export
and import quotas, exchange rates and needs of people.

12. 2. SELECTION OF REGION
• Proximity to Raw Materials
• Proximity to Customers (Markets)
• Availability of Power
• Transportation Facilities
• Environmental and Climate Suitability
• Government Policies

13. A. PROXIMITY TO RAW MATERIALS
It is categorized into two:
1. Ubiquities i.e., existing everywhere like clay, water etc.
2. Localized materials i.e. minerals, coal, sugarcane etc. & it is sub-divided into pure (cotton,
raw silk) & gross materials (iron-ore, limestone, sugarcane
• If the raw materials are bulky, and huge shipping costs will be
incurred in transporting them. Where it becomes absolutely necessary
to transport them, it is found that cost of the material is equal to the
shipping cost thus making the raw materials very costly at the point
where they are used.

14. B. PROXIMITY TO CUSTOMERS (MARKETS)
Market : A place where particular products are sold.
Nearness to market influences:
• Reduced cost of transporting finished goods & promotional expenses.
• Enables to study the consumers.
• Enables to render quick service & after-sales services.
• Execute replacement orders without delay.
• Perishable nature of goods.
• Fragile nature of goods.

15. C. AVAILABILITY OF POWER
• It is a decisive factor in plant location to move the vehicles of the
industry.
• It is necessary to ensure that the phase, voltage, frequency, rates,
regularity, special discounts allowed are suitable to factory.

16. D. TRANSPORTATION FACILITIES
• Getting raw materials to plant, transporting finished goods to market,
carrying employees to the factory & sales representatives to the
consumers are functions of transport.
• Ideal plant from the point of view of transportation is one which is
centrally located & directly connected by water, rail, road & air.
• Cost, dependability, time required totransport finished goods, prompt
availability, shift in the market &speed are factors considered for
choosing particular mode.

17. E. ENVIRONMENTAL AND CLIMATE
SUITABILITY
• The effect of climate upon the efficiency in the case of
working force required to work outdoors, as in case of
quarries, constructional industries etc cannot be minimised.
• A cool climate develops the best of worker.
• Climate has a direct affect on the efficiency of the labour.

18. F. GOVERNMENT POLICIES
• Relaxed taxation policies, excise duty exemption and various other
promotional efforts attract industrial activities in a region.
• The political situation in potential locations should be considered
while selecting a locality for establishing a factory.

19. 3. SELECTION OF COMMUNITY
• Availability of Labour
• Finance and Research facilities
• Availability of Water
• Local Taxes and Restrictions
• Government Assistance

20. A. AVAILABILITY OF LABOUR
The need of adequate supply of labour is obvious, but a number of considerations such
as cost of living & the character of labour available as to both skill &temperament
should be taken into account.
According to labour, factory may be located as follows:
• Semi-skilled/ Unskilled – Rural areas.
• Skilled – Urban areas.
The need of management is to face less strikes or lockouts. A stable labour force, the
right type of labour, reasonable wage rates, adequate number of employees, reliability
of labour supply, proper attitude towards work are features that influence supply
of labour.

21. B. FINANCE AND RESEARCH FACILITIES
• Adequate capital are essential for the success of any
organisation.
• Factory expansion needs funds to meet the requirements.
• Existence of banks will exert influence over location of
plants.

22. C. AVAILABILITY OF WATER
• Water should be available in adequate quantity &proper
quality.
• The factors in this connection are stability in its supply,
mineral content of water, cost of transporting water if it is
not readily available

23. D. LOCAL TAXES AND RESTRICTIONS
• Factories must be located in a placewhere taxes, insurance
costs are comparatively low.

24. E. GOVERNMENT ASSISTANCE
• Assistances provided by the appropriate government like feasibility
study subsidy; investment subsidy; concession on term loans,
processing fee, working capital loan; stamp duty exemption; sales tax
exemption to some extent; subsidy on electricity tariff; Technical
guidance; raw materials; marketing facilities; allotment of land &
sheds must be also considered while choosing the state of the plant
location and must be used effectively.

25. 4. SELECTION OF PLANT SITE
• Price of land • Type of soil
• Waste disposal • Expansion potential
• Availability of commercial services • Communication
• Availability of amenities • Health of the locality
• Statutory consideration • Flood & drought
conditions
• Right & title of the land • Good scenery
• Attitude of local people • Technology know-how
• Existence of religious & social institutions

26. LOCATING FOREIGN OPERATIONS
FACILITIES
Globalization has made consumers expect the best products at the lowest
prices irrespective of where they are produced. So while considering the
location of a facility in a foreign country, in addition the following factors
should also be considered
• Cheap, Skilled and Efficient Labour
• Trade Barriers
• Local Customers
• Incentives
• Operations in Competitor’s Home

27. 1. CHEAP, SKILLED AND EFFICIENT
LABOUR
• Many multinational companies are locating their branches in country
where the labour is cheap and the people are more disciplined,
efficient and skilled.
• This reduces the cost of labour and increases the unit produced per
labour cost

28. 2. TRADE BARRIERS
• The Import Export Policy of the Government may imposes some
restrictions on the import of certain goods and for some goods import
duties may be levied, which make these products expensive in the
local market.
• In such situations, companies overcome these trade barriers by
producing the goods in other countries.

29. 3. LOCAL CUSTOMERS
• If a foreign company has a large customer base in a country, it may be
beneficial for it to start operations locally in that country.
• This way the company can serve the customers better and take
advantage of their brand loyalty.

30. 4. INCENTIVES
• To increase the inflow of Foreign Direct Investment, certain countries
provide industrial infrastructure, insurance, tax
exemptions/reductions, interest – free/subsidized loans, etc. to foreign
companies that are willing to establish operations facilities in their
region

31. 5. OPERATIONS IN COMPETITOR’S HOME
• Initiating operations at the competitor’s home country may at times
force the competitor to concentrate more on the home turf and wind
up or downsize its international operations.

33. MULTIPLE PLANT MANUFACTURING
STRATEGIES
Product Plant Strategy - With this strategy, entire products or product lines are produced in separate
plants, and each plant usually supplies the entire domestic market. This is essentially a decentralized
approach, with each plant focusing on a narrow set of requirements that entails specialization of labor,
materials, and equipment along product lines. Specialization often results in economies of scale and,
compared with multipurpose plants, lower operating costs. Plant locations may be widely scattered or
clustered relatively close to one another.
Market Area Plant Strategy - With this strategy, plants are designed to serve a particular geographic
segment of a market. Individual plants produce most if not all of a company’s products and supply a
limited geographical area. Although operating costs tend to be higher than those of product plants,
significant savings on shipping costs for comparable products can be made. This arrangement is
particularly desirable when shipping costs are high due to volume, weight, or other factors. Such
arrangements have the added benefit of rapid delivery and response to local needs. This approach
requires centralized coordination of decisions to add or delete plants, or to expand or downsize current
plants due to changing market conditions.

34. Process Plant Strategy - With this strategy, different plants concentrate on different aspects of a
process. Automobile manufacturers often use this approach, with different plants for engines,
transmissions, body stamping, and even radiators. This approach is best suited to products that have
numerous components; separating the production of components results in less confusion than if all
production were carried out at the same location. When an organization uses process plants,
coordination of production throughout the system becomes a major issue and requires a highly
informed, centralized administration to achieve effective operation. A key benefit is that individual plants
are highly specialized and generate volumes that yield economies of scale. However, this approach
usually involves additional shipping costs.
General-Purpose Plant Strategy - With this strategy, plants are flexible and capable of handling a
range of products. This allows for quick response to product or market changes, although it can be less
productive than a more focused approach.

35. CLUSTERS
Similar companies with similar needs often cluster together in the same geographical area. Why? For a
number of reasons. A firms’ geographical proximity helps to promote economies of scale, learning and
productivity, as well as boosting innovation and encouraging the growth of new supplier firms. Here are
just a few examples:
Financial services. These are clustered in a relatively few centres globally, even after the recent
turbulence in financial services. London, New York, Hong Kong, Singapore, Tokyo, Chicago and Zurich
dominate the industry. According to Deutsche Bank: ‘Big is beautiful – and will remain so.’ It is far easier
to build on existing market strength than start afresh. Banks have to trade with each other and, even in
an increasingly globalized world, being close helps. Combine this with good regulation and free markets
and it becomes a significant competitive advantage.
High-tech Industries. These industries provide one of the most famous location clusters in the area
south of San Francisco known as Silicon Valley, probably the most important intellectual and commercial
hub of technological innovation. Yet other locations are developing. For example, Bangalore in India is
fast becoming a cluster for the computer industry; because of the ready availability of well-educated, low-
cost English-speaking software technicians, it has now attracted more, and more sophisticated, business.
Something similar is happening in Shanghai in China.

36. RECENT TRENDS IN PLANT LOCATION:
• To locate plants away from cities.
• The development of industrial estates.
• Competition among states to develop industries.
• Trend towards decentralization.
• Pollution control.
• Location of industries leading to balanced regional development.
• Growth of multinational firms, thereby transcending the geographical areas
of the country.

37. THE LOCATION DECISION PROCESS

38. TECHNIQUES OF FACTOR RATING AND
LOCATION RATING
This is the simplest method for arriving at the best location.
In this method, two types of ratings are given
1. Every factor that is relevant to the industry is given a rating
between 1 and 5. These factors are relevant to the industry,
irrespective of the location. This is called Factor Rating.
2. Every factor that has been listed in (1), is given a relative rating
between 1 and 5 for each of the locations proposed to be selected.
This is called Location Rating.

39. • M/s Indiana Leathers has identified three locations, Kanpur, Chennai and Noida, to
set up a leather goods manufacturing facility. The factor ratings and locations
ratings have been given. Arrive at the best location using the Factor and Location
Rating methods.
Factor Factor rating Location Rating
Kanpur Chennai Noida
Proximity to market 3 4 6 3
Proximity to raw
material
5 10 5 4
Transportation facility 4 9 10 5
Basic amenities 2 6 7 6
Acceptance of leather
factory by locals
4 8 3 7
Availability of cheap land 3 7 2 8
Low construction costs 1 5 1 6
Easy availability of cheap
and skilled labour
3 3 8 4

40. • SOLUTION :
For each location find the product of factor and location ratings. Add them up for each location. The location
having the highest product will be the best location.
Product of factor and location ratings.
The highest score is for Kanpur. So it is the best location.
Factor Kanpur Chennai Noida
1 12 18 9
2 50 25 20
3 36 40 20
4 12 14 12
5 32 12 28
6 21 6 24
7 5 1 6
8 9 24 12
TOTAL 177 140 131

41. BREAK-EVEN ANALYSIS METHOD
• This method is based on the concept of break-even analysis. There are
two elements of cost, i.e., Fixed cost and Variable cost.
• Fixed cost includes capital expenditure land, building manufacturing
and equipment. This is irrespective of the volume of production and
will be incurred even if there is no production.
• Variable cost includes raw material, labour, etc., which are directly
involved in the production process and are proportional to the volume
of production.
Total Cost = Fixed Cost + Variable Cost.

42. BREAK-EVEN ANALYSIS METHOD
• When volume of production is low, fixed cost is high and variable cost
is low.
• When the volume of production increases, the variable cost increases
and fixed cost reduces.
• The volume of production at breakeven point is called breakeven
volume.

43. M/s Vignesh Steels intends to set up a rolling mill to roll different
grades of high carbon steels. Potential locations selected by the
company are Ahmedabad, Bangalore and Chennai. The cost
structures for each of these locations are shown below. The
product is expected to sell at Rs. 130 per kg.
(a) Find the most economical location for an expected volume of 6000 kgs per
year.
(b) Expected profit at that location.
(c) For what output is the range in each location best?
Location Fixed Cost Variable Cost /
Kg
Ahmedabad 150000 75
Bangalore 200000 50
Chennai 400000 25

44. Most economical location for an expected
volume of 6000 kgs per year.
Location Fixed Cost Variable
Cost / Kg
Variable
Cost for 6000
kg
Total Cost
Ahmedabad 150000 75 450000 600000
Bangalore 200000 50 300000 500000
Chennai 400000 25 150000 550000
The place having the least total cost for the volume of 6000
kg is the best location is Bangalore.

45. Expected profit at Bangalore
• Total no of kg to be sold = 6000
• Selling price of each kg = Rs.130
• Total cost at the plant = Rs.500000
Profit = Revenue – Cost
= ( Total Kg sold * Selling price of each
) – Cost
= ( 6000 * 130 ) – 500000
= 780,000 – 500,00
= Rs. 280,000

46. Output range in Best location
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
0 1000 2000 3000 4000 5000 6000 7000 8000 9000
TOTALCOST
TOTAL PRODUCTION (UNITS)
Total Production Vs Total Cost
Ahmedabad Banglore Chennai

47. THE CENTER OF GRAVITY METHOD
• The center of gravity method is a method to determine the location of a facility
that will minimize shipping costs or travel time to various destinations. For
example, community planners use the method to determine the location of fire
and public safety centers, schools, community centers, and such, taking into
consideration locations of hospitals, senior living centers, population density,
highways, airports, and retail businesses. The goal for police and firefighters is
often to minimize travel time to answer emergency calls. The center of gravity
method is also used for location planning for distribution centers, where the
goal is typically to minimize distribution costs. The method treats distribution
cost as a linear function of the distance and the quantity shipped. The quantity
to be shipped to each destination is assumed to be fixed (i.e., will not change
over time). An acceptable variation is that quantities are allowed to change, as
long as their relative amounts remain the same (e.g., seasonal variations).

48. The method includes the use of a map that shows the locations of destinations. A
coordinate system is overlaid on the map to determine relative locations. If the
quantities to be shipped to every location are equal, the coordinates of the center
of gravity (i.e., the location of the distribution center) can be obtained by finding
the average of the x coordinates and the average of the y coordinates. These
averages can be easily determined using the following formulas.
x =
𝑥 𝑖
𝑛
y =
𝑦 𝑖
𝑛
𝑥𝑖 = x coordinate of destination, i
𝑦𝑖 = y coordinate of destination, i
n = Number of destinations

49. Find the location of new raw material distribution center for the
already existing 4 manufacturing units located so that transportation
cost is minimised. Equal amount of raw material is supplied to each site
location.

50. X = ( 2 + 3 +5 + 8 ) / 4 = 4.5
Y = ( 2 + 5 +4+ 5 ) / 4 = 4.0
The Distribution center can be located in the point ( 4.5 , 4 ).

51. When the number of units to be shipped is not the same for all
destinations a weighted average must be used to determine the center of
gravity, with the weights being the quantities to be shipped.
• 𝑥 =
𝑄𝑥 𝑖
𝑄
• 𝑦 =
𝑄𝑦 𝑖
𝑄
• Q = Quantity to be shipped to destination
• 𝑥𝑖 = x coordinate of destination
• 𝑦𝑖 = y coordinate of destination

52. • A company which operates four out-of-town centres has decided to
keep all its stocks of products in a single warehouse. The location of
each garden centre is shown.
Location X -
Coordinate
Y -
Coordinate
Containers
Shipped
Atlanta 60 40 2000
Chicago 30 120 2000
New York 130 130 1000
Pittsburgh 90 110 1000

53. Chicago
New York
Pittsburgh
Atlanta
0
20
40
60
80
100
120
140
160
0 20 40 60 80 100 120 140 160
Graphical Location

54. LOCATION OF WARE HOUSE
• 𝑿 =
𝟔𝟎 ∗𝟐𝟎𝟎𝟎 + 𝟑𝟎 ∗𝟐𝟎𝟎𝟎 + 𝟏𝟑𝟎 ∗ 𝟏𝟎𝟎𝟎 + ( 𝟗𝟎 ∗ 𝟏𝟎𝟎𝟎)
( 𝟐𝟎𝟎𝟎 + 𝟐𝟎𝟎𝟎 + 𝟏𝟎𝟎𝟎 + 𝟏𝟎𝟎𝟎 )
= 66.66667
• 𝒀 =
𝟒𝟎 ∗𝟐𝟎𝟎𝟎 + 𝟏𝟐𝟎 ∗𝟐𝟎𝟎𝟎 + 𝟏𝟑𝟎 ∗ 𝟏𝟎𝟎𝟎 + ( 𝟏𝟏𝟎 ∗ 𝟏𝟎𝟎𝟎)
( 𝟐𝟎𝟎𝟎 + 𝟐𝟎𝟎𝟎 + 𝟏𝟎𝟎𝟎 + 𝟏𝟎𝟎𝟎 )
= 93.33333
The best location to build ware house is ( 66.6667 , 93.3333 ), which is Central
Ohio.

55. LOAD DISTANCE METHOD
• In this technique, a single set of location coordinate is not
identified as like in Center of Gravity method.
• Here number of locations are evaluated using load distance
values which is a measure of weight and distance.

56. • Matrix Manufacturing is considering where to locate its warehouse in
order to service its four Ohio stores located in Cleveland, Cincinnati,
Columbus, Dayton. Two sites are being considered; Mansfield and
Springfield, Ohio. Use the load-distance model to make the decision.
CITY LOAD
Cleveland 15
Columbus 10
Cincinnati 12
Dayton 4

57. Calculating load distance score between
cleveland and springfield
• STEP – 1
Calculate the Rectilinear Distance between the two cities Cleveland ( 11 , 22 ) and
Springfield ( 6 , 6.5 )
D = |(x of Cleveland) – ( x of Springfield)| + |(y of Cleveland) – ( y of Springfield)|
= | ( 11 – 6 ) | + | ( 22 – 6.5 ) | = 20.5
• STEP – 2
Load Distance score = Load to the City * Rectilinear Distance between
cities
= 15 * 20.5
= 307.5

58. LOAD-DISTANCE SCORE FOR
SPRINGFIELD
City Load Rectilinear
Distance
LD score
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total LOAD DISTANCE SCORE 456.5

59. LOAD-DISTANCE SCORE FOR
MANSFIELD
City Load Rectilinear
Distance
LD score
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total LOAD DISTANCE SCORE 504
The load-distance score for Mansfield is higher than for
Springfield. The warehouse should be located in Springfield.

60. REFERENCES
• Operations Management 10th edition – Jay Heizer, Barry
Render (Pearson 2011)
• Operations Management 7th edition – Nigel Slack
• Operations Management 11th edition – Stevenson, William J