LOCATION STRATEGY

MODULE 2
Plant Location
 Plant location may be understood as the
function of determining where the plant
should be located for maximum operating
economy and effectiveness.

 The locations where firms set up their

operations is simply called plant location.
 Why study plant location?
 Establishment of new venture.

 Expansion of existing business.

 Significant change in existing demand, supply

and market location.

 Significant change in cost structure.

 Government policies.
Importance of location

 The importance of location cannot be

separated for a New firm, Existing firm or a firm
going Global.
 Importance of Location… points
 Location of a plant will fix the production technology and
cost structure.
 Eg: Manufacturing plant located in under-developed region, will be labour
intensive.
 The significance of plant location depends on the size and
nature of business.
 Eg: Small firm and Large firm.
 Location of the plant affects the company’s ability to serve its
customers quickly and conveniently.
 Eg: Courier main stocking office located outskirt of city.
 Location decision is also important for a firm to withstand
competition.
 Factors influencing Plant Locations
GENERAL FACTORS
 Availability of land, land development cost, future
development.
 Availability of inputs – labour, raw materials
 Proximity to the market place.
 Availability of communication facilities.
 Availability of necessary modes of transportation.
 Availability of infrastructure facilities.
 Waste disposal.
 Government support.
 Housing and recreational facilities.
 Demographic factors
 Culture of society, security etc
 SPECIFIC FACTORS

 Economic stability of the country and the concern of

the country towards outside investments.

 The success of operation of a firm depends upon

cultural factors, language and cultural differences.

 Analysis on wage rate, policies and duties.

 Joint venture or Strategic alliances. May solve many

operational problems
Selection of Locality
Define the Location Objectives and
Associated Constraints

Identify the Relevant Decision Criteria

Relate the Objectives to the criteria using

Appropriate Models

Evaluate the Alternative Locations

Select the Location that Best Satisfies the

Criteria
 Plant Location Models
 1. Point Rating Method

 2. Factor Rating Method

 3. Break Even Analysis

 4. Qualitative Factor Analysis

 1. Point Rating Method

 The relative weight a company assigns to each objective

or to each location factor may be represented by the
number of points a perfect site would receive in each
category.
 In short, relative points are assigned to the factors
which the company considers important w.r.t the plant
location.
 Points are assigned to intangible factors and the relative
importance of tangible cost factors is taken for
consideration.
 Factors Rated Maximum Points assigned to
Possible Points Locations

Location Location
A B
Future Availability of Fuel 300 200 250

Transportation flexibility 200 150 150

and growth

Adequacy of Water Supply 100 100 100

Labour Availability 250 220 200

Pollution Regulations 30 20 20

Site Topology 50 40 30

Living Conditions 150 100 125

Total 1080 830 875

 2. Factor Rating Method

 List the most relevant factors

 Rate each factor (1 – low, 5- high)
 Rate each location (1 – low, 10 - high)
 Compute the product rating by multiplying the factor
rating by the location rating for each factor.
 Compute the sum of the product of ratings for each
location.
 Factor Factor Location Rating Product Rating
Rating Location Location Location Location
A B A B

Tax Advantage 4 8 6 32 24

Labour Skills 3 2 3 6 9

Proximity to customers 3 6 5 18 15

Proximity to suppliers 5 2 4 10 20

Adequacy of water 1 3 3 3 3

Receptive of Community 5 4 3 20 15

Quality of educational 4 1 2 4 8
system

Access to Transport 3 10 8 30 24

Climate 2 7 9 14 18

Power 2 6 4 12 8

149 144
 3. BREAK EVEN ANALYSIS
 The Break-even analysis or cost-volume-profit analysis
(c-v-p analysis) helps in finding out the relationship of
costs and revenues to output. It enables the financial
manager to study the general effect of the level of
output upon income and expenses and, therefore, upon
profits.

 It helps in understanding the behaviour of profits in

relation to output. Such an understanding, among other
things, is significant in planning the financial structure of
a company.
 Fixed costs:

 For manufacturing and selling a product or service, every

business has to incur costs. Some of these are fixed
which may represent financing outlays to be made
regardless of sales.

 They may be salaries of the company’s principal officers.

 They would be the same during any designated period

regardless of the level of output accomplished during
the period.
 Variable costs:

 Variable costs are related to the activity itself rather

than to the physical and administrative framework which
makes the activity possible.

 These costs expand or contract as the activity rises or

falls.

 For instance, the number of items produced in a period

directly determines the amount of material used in their
production.
 TC = FC + VC

 Fixed cost – Rs. 500; variable cost – Re. 1 per unit

Selling price – Rs. 2 per unit; Normal volume – 750 units

 In this situation, total cost (TC) at normal volume

would be Rs. 500 (fixed cost) + Re. 1 x 750 (variable
cost) = Rs. 1,250

 The revenue by selling 750 units at Rs. 2 per unit would

be Rs. 1,500.

 Thus the profit would be Rs. 1,500 – Rs. 1,250 =

Rs. 250.
 Break Even Analysis…contd

 Used to find the economic location and the range of

annual volume.
 Steps involved:
◦ Determine all relevant costs that vary with each location.
◦ Categorize the cost for each location – Fixed (FC),Variable (VC),
Total (TC)
◦ Plot the total cost associated with each location – Annual Cost
v/s Annual Production Volume.
◦ Select the location with the lowest annual TC at the expected
production volume per annum (Q)
 Eg: Problem on Break Even Analysis
 Locations A,B and C have cost structures as shown,
producing a product expected to sell at Rs.100 per unit.
Find the most economic location for an expected
volume for 2000 units/year. Also determine the range of
annual volume of production for which each of the
locations A,B and C would be most economical.

Location Fixed cost/year Variable

in Rs cost/unit in Rs
A 25,000 50

B 50,000 25

C 80,000 15
 Sol: -
 Total cost = Fixed cost p.a+ (Variable cost /unit x
Quantity produced)

 Location A = 25000 + (50 x 2000) = Rs.1,25,000

 B = Rs.1,00,000 & C = Rs.1,10,000.

 Which location is feasible?

 To determine break even volume:

 Between location A and B:

 Total cost QAB , 25000 + 50 QAB = 50000 + 25 QAB
 QAB = 1,000 units

 Similarly do it for B & C.

 QBC = 3,000 units
More Examples

Eg 1) Rs.5,00,000 total yearly fixed costs.

Rs.150 per unit variable costs
Rs.200 per unit sale price.
Compute when the system can be economical?
 Sol: QBEP=500,000/(200-150) =10,000
units

 If our market research indicates that if

the present demand is > 10,000, then
this manufacturing system is
economically feasible.
 BEA for Multiple Alternatives
I can buy

1) A General Purpose machine

Total Fixed Cost F = $10,000,
Variable cost V = $10 per unit

2) A Multi Purpose machine

Total Fixed Cost F = $60,000,
Variable cost V = $5 per unit

3) A Single Purpose machine

Total Fixed Cost F = $150,000,
Variable cost V = $2 per unit

Tell me what to do: In terms of the range of

demand and the preferred choice…
Break-Even for Alternatives (1) and (2)

 Sol:
F1=10000 V1=10
F2=60000 V2=5
Break-even of 1 and 2

F1+ V1 Q = F2+ V2 Q
10000+10Q = 60000 + 5Q

Q= 60000  10000
 10000
10  5
Break-Even for Alternatives (2) and (3)

F2=60000 V2=5
F3=150000 V3=2
Break-even of 2 and 3
F2 + V2 Q = F 3 + V3 Q
60000 + 5Q = 150000+2Q
Q= 150000  60000
 30000
52
Recommendations to Management

Demand Recommended Alternative

D < =10000 Alternative 1

10000 < D < =30000 Alternative 2

D > 30000 Alternative 3

 Eg: A firm plans to begin production of a new small
appliance.
Management should decide whether to make the small
engine for this product in-plant, or buy it from an outside
source.

If management decides to make the engine, then there are 2

alternatives:
(1) Build it with a simple manufacturing system
Fixed Cost: Rs.10,000/year
Variable Cost: Rs.8 per unit
(2) Build it with an advanced manufacturing system.
Fixed Cost: Rs.30,000/year
Variable Cost: Rs.5 per unit
The selling price of the engine is Rs.10 per unit.
 Assume 100 units/yr
 Sol: a)Total cost = 10,000 + (8x100) = Rs.10,800

 b) Total cost = 30,000 + (5x100) = Rs.30,500

 Which manufacturing system is feasible?

 To calculate BEP:

 1.QBEP = = = 5,000 units

 2. QBEP = 6,000 units

 Conclusion????
Eg:
Fixed cost=Rs.100,000,Variable Cost = Re.1 per unit,
Selling Price= Rs.5 per unit
Maximum capacity output= 2,00,000 units per year

 Calculate : Break even output, Margin of safety, Profits

at maximum output
 Answer:
Calculate the Contribution per unit = Rs.5-Rs.1=Rs.4

Break even output = FC/contribution per unit=

Rs.1,00,000/Rs.4 = 25,000 units

Therefore this business has to produce 25,000 units to

breakeven. In other words, at 25,000 units of output the
business will have neither profit nor loss.
Problems on Locational Economics
 The main consideration of Locational Economic Analysis
is to minimize the total cost, operating cost and
distribution cost.

 1) Capital Cost: cost of land, land development, building

and services, effluent disposal, water electricity etc.

 2) Operating Cost: material cost, labour cost and

certain VC and FC.

 3) Distribution Cost: Transportation and sales cost.

 The most advantageous location may be selected on the
basis of rate of return which is expressed by the
formula
 Problems
 1. Calculate the ROR and compute for the
most advantageous location for the
following data:

Sl. No Particulars Site A (Rs) Site B (Rs)

1 Total Investment 30,00,000 30,00,000

2 Total Sales 45,00,000 37,50,000

3 Total Expenses(Variable 28,00,000 32,00,000
costs)
  2. An entrepreneur has collected the data about the various costs
involved in producing a product and worked out the expected sales,
in view to select the plant site. From the following data, advise him
which is the best site:
Sl. No Particulars Site X Site Y Site Z
(Rs) (Rs) (Rs)

1 Total Initial Investment 2,00,000 2,00,000 2,00,000

2 Expected sales in the year 2,25,000 3,00,000 2,25,000

3 Distribution Expenses 50, 000 40,000 60,000

4 Raw material & other 80,000 75,000 60,000

supplies
5 Power & Water supply 20,000 30,000 25,000

6 Wages & Salaries 20,000 20,000 25,000

7 Miscellaneous Expenses 40,000 25,000 30,000

 4. Qualitative Factor Analysis
 Steps involved are:

◦ Develop a list of relevant factors

◦ Assign weight to each factor (weights total upto 1.0)
◦ Assign a common scale to each factor (0 - 100) for the
location considered
◦ Multiply the weight with the common scale to arrive at
the weighted scores
◦ Total the points for each location and choose the
location with maximum points
 Factors Assigned Locations Scores
Weights
A B C D

Production cost 0.35 50 40 60 30

Raw materials supply 0.25 70 80 80 60

Labour availability 0.20 60 70 60 50

Cost of Living 0.05 80 70 40 80

Environment 0.05 50 60 70 90

Markets 0.10 70 90 80 50
Total 1.00
 STEPS IN LOCATION
SELECTION - Assignment
 Within the country or outside

 Selection of the region

 Selection of the locality or community

 Selection of the exact site

LAYOUT STRATEGY
Meaning

 A plant layout refers to the arrangement of machinery,

equipment and other industrial facilities – such as
receiving and shipping departments, tool rooms,
maintenance rooms and employee amenities – for the
purpose of achieving the quickest and smoothest
production at the least cost.
Definition
 “Planning and manufacturing machinery, equipment
and services for the first time in completely new
plants”
 Objectives of a good Layout
 Provide enough production capacity.
 Reduce material handling cost.
 Reduce congestion – people, material, machines.
 Reduce hazards.
 Utilize labour efficiently.
 Increase employee morale.
 Reduce accidents.
 Proper space utilization.
 Product flexibility.
 Ease of supervision.
 Facilitate co-ordination.
 Allow ease of maintenance.
 Optimum machine / capacity utilization.
 Improve productivity.
Factors influencing Layout
 Materials – light, heavy, bulky, solid, liquid, small, large…
 Product – small, big, solid, liquid
 Workers
 Machinery – related to workers & product
 Type of industry – Synthetic, Analytical, Conditioning, Extractive
 Location – size & terrain, transportation, fuel
requirements, future expansion
 Managerial / State Policies
 Connectivity
 Types of Layout
1) Process Layout

2) Product Layout

3) Fixed Position Layout

4) Combination Layout

5) Service Facility Layout – Special arrangements for

particular types of layouts.
 1) Process Layout
 Is also called as functional layout or job shop layout.
 The machines and services are grouped on functional
basis and operations of the same type are performed in
the same area.

 Functions are organized into departments.

 Similar equipments and operations are grouped

together.

 Ex: All painting is carried out at one place and all testing is
carried out at its own place.
 Is useful where the volume of manufacture is low and
the variety of job is great.

 It should provide tremendous flexibility.

 Hence work areas are grouped under their functions.

 Grouping principles

 Distance between the departments need to be short.

 Though like machines are grouped in one department,

these departments should be located in accordance with
their operation principles.
 Ex: Textile mill – Spinning,Weaving and Dyeing.

 Convenience for inspection.

 Layout must be advantageous.

 Suitability – adopted when,

 Products are not standardized.

 Quantity produced is small and intermittent.

 There are frequent changes in design and style of the

product.
 ASSIGNMENT
 Advantages and Disadvantages of Process
Layout
 2) Product Layout
 Also called as straight line layout or layout for serialized
manufacturing.

 The raw materials enter at one end of the line and

individual operations are performed in a pre-fixed
sequence and get converted into the final shape.

 The emphasis is on special purpose machines rather

than general purpose machines.

 Investment on the machines is high.

 Ex: Wafers, Soft drinks.
 Grouping principles

 All the machine tools or other equipments must be

placed at the point demanded in the sequence of
operations.

 No line crossing at any point.

 Materials are fed into the first machine and finished

products come out of the machine at the other end.

 All operations should be included in the line – including

testing, packing.
 Suitability – adopted when,

 Mass production of standardized products.

 Simple and repetitive manufacturing process.

 Operation time and quantity for each process is

defined.

 Reasonably stable demand for products.

 Continuous supply of materials.

 ASSIGNMENT
 Advantages and Disadvantages of Product
Layout
 3) Fixed Position Layout

 Involves the movement of men and machines to the

product which remains stationary.

 The movement of men and machines to the product is

advisable because the cost of moving them would be less
than the cost of moving the product which is very bulky.

 Also called as Static layout.

 Ex: Aircraft assembly

 Suitability – adopted when,

 The product is heavy and bulky.

 Not relevant for small scale entrepreneur.

 Operations need frequent changes and spot decisions

are necessary.
 4) Combination Layout

 Also known as Group or Hybrid layout.

 As such it is very difficult to have only one type of

layout in any plant.

 Combination of the layout works out to be feasible and

becomes necessary to use for the activities to function
smoothly.
 5) Service Facility Layout
 Service facility layouts exist to bring together customer
and services.

 It should provide easy entrance to service facilities from

freeways and easy thoroughfares.

 Technology forms the major component as the service

may be implemented fast or slow.
 Assignment 3

 Special arrangement for particular types of plants.

 Cellular manufacturing layout.