One of the major strategy decisions that must be made by any organization is where to locate its producing and storage facilities. For manufacturers, the problem is broadly categorized into factory location and ware house location; within this categorization, we may be interested in locating the firm’s first factory or warehouse or locating a new factory or warehouse relative to the locations of existing facilities. The general objective in choosing a location is to select that site or combination of sites that minimizes two classes or costs — regional and distribution or sites that minimizes two classes or costs — regional and distribution costs. Regional costs are those associated with a given locate and include land, construction, manpower, and state and local expenses and regulations. Distribution costs are those directly related to the shipping of supplies and products to customers and other branches of the distribution network. Since the location of the firm, economic analysis of facility location has focused on the problem of adding warehouses or factories to the existing production-distribution system.
In service organizations, the facility location decision is also a major one, but as a rule, the choice of a location is based upon nearness to the customer rather than on resource considerations.
Location of Facilities
Location decisions represent an integral part of the strategic planning process of every organization. Although it might appear that location decisions are mostly one-time problems pertaining to new organizations, the fact is that existing organizations often have a bigger stake in these kinds of decisions than new organizations have.
Existing organizations become involved in location decisions for a variety of reasons. Firms such as banks, fast food restaurants, super market and retail stores view locations as a marketing strategy, and they look for locations that will help them to expand their markets. A similar situation occurs when an organization experiences a growth in demand for its products or services that can not be satisfied by expansion at an existing location. The addition of a new location to complement an existing system is often a realistic alternative.
Some firms become involved in location decision through depletion of raw materials. For example, in the case of mining, in the long run, the company has to change its place of operation due to reduced availability of minerals.
Location decisions for many types of businesses are made rather infrequently, but they tend to have a significant impact on the organization. There are two primary reasons that make location decisions a highly important part of production systems design. One is that they entail long-term commitment, which makes mistakes difficult to overcome. The other is that location decisions often have an impact on operating costs (both fixed and variable) and revenues as well as on operations. For instance, a peer choice of location might result in excessive transportation costs, shortage of qualified labor, loss of competitive advantage, inadequate supplies of raw materials or some similar conditions which would be detrimental to operation.
Profit oriented organizations base their decisions on profit potential, while non-profit organization strive to achieve a balance between cost and the level of customer service they provide. The organizations will try to identify the best location available.
- Availability of Raw Material: Nearness to the place of the raw material will give advantage on the transportation cost, so that overall profitability can be improved. When the raw material is heavy or is consumed in bulk, then plant location has to be nearer to the raw material site.
- Nearness to Markets: It reduced the cost of transportation as well as the chances of the finished products getting damaged and spoiled on the way, especially the perishable products. Moreover, a plant being near to the market can capture a big market share and render quick service to the customers.
- Transport Facilities: A lot of money is spend both in transporting the raw materials and the finished goods. Depending upon the size of raw material and finished goods, a suitable method of transportation like roads, rail, water or air is selected and accordingly the plant location is decided. One point which must be kept in mind is that cost of transportation should remain fairly small in proportion to the total cost.
- Availability of Labor: Stable labor force, of right kind, of adequate size and at reasonable rates with its proper attitude towards work are a few factors which govern plant location to a major extent.
- Availability of Fuel and Power: The main sources of energy are electrical power, coal, oil, etc. In the case of power intensive industries like steel manufacturing units or continuous process industries like petrochemical and cement, the availability of fuel and power will be one of the major deciding factories in plant location.
- Climate: Depending on the type of industry and the products that are being manufactured, this is a different factor. For instance, in the case of textile mills climatic conditions with adequate humidity is a basic essential criterion.
- Water Availability: In industries like textile dying, paper or chemicals, the requirements of good quality water is one of the basic requirement for plant location. The water is required for processing or for effluent rejection into the rivers or specifically for waste disposal.
- Government Policies: The central and state governments may declare many talks as backward and give numerous concessions like tax holiday, uninterrupted power supply, capital subsidy, easy availability of loans, etc. for balanced development of regions in the country.
- Land: Topography, area, the shape of the site, cost, drain age and other facilities, the probability of floods and earthquakes will influence the selection of the location.
- The presence of related industries will give many advantages like availability of skilled laborers and standard components.
These factors, depending on the product to be manufactured or the industry, may separately or collectively have to be given the required weightage. In the process, many alternatives may emerge. The management decisions will be taken after weighing all the alternatives and selecting the best among them.