The location of a plant or facility is the geographical positioning of an operation relative to the input resources and other operations or customers with which it interacts. Three main reasons are identified why a location strategy is required. The first reason is that a new company has been created and needs a facility to manufacture products or deliver a service to its customers. The second reason is that there is a decision to relocate an existing business due to a number of factors such as the need for larger premises or to be closer to a particular customer base. The third reason is relocate into new premises in order to expand operations.
Decisions with regards to where an organisation can locate its plant or facility are not taken often, however they still tend to be very important for the firm’s profitability and long-term survival. An organisation which chooses an inappropriate location for its premises could suffer from a number of factors, and would find it difficult and expensive to relocate. Location decisions tend to be taken more often for service operations than manufacturing facilities. Facilities for service related businesses are usually smaller in size, less costly, and are located in a location that is convenient and easily accessible to customers. When deciding where to locate a manufacturing facility different reasons apply, such as the cost of constructing a plant or factory. Although the most important factor for a service related business is access to customers, a set of different criteria are important for a manufacturing facility. These include the nature of the labor force, proximity to suppliers and other markets, distribution and transportation costs, the availability of energy and its cost, community infrastructure, government regulations and taxes, amongst others.
Factors Influencing Location Strategy Decisions
The facilities location problem is one of major importance in all types of business. It is important to notice the different problems that may arise whilst trying to choose a suitable location. Normally, the decision on siting proceeds in two stages: in the first, the general area is chosen; and then a detailed survey of that area is carried out to find suitable sites where the plant or facility could be located. However, the final decision as to where to locate a facility is made by taking into consideration more detailed requirements. The following are a number of factors which might influence the choice of location.
- Proximity to market: Organisations may wish to locate their facility close to their market, to be able to lower transportation costs, and most importantly, to be able to provide their customers with a better service. If the plant or facility is located close to the customer, the organisation would be in a better position to provide just-in-time delivery, to respond to fluctuations in demand and to react to field or service problems.
- Availability of labor and skills: A number of geographical areas have traditional skills but it is very difficult for an organisation to find a location which has the appropriate skilled and unskilled labor, both readily available and in the desired quantities. Even so, new skills can be tought, processes simplified and key personnel moved from one area to another.
- Availability of amenities: Organisations would prefer to locate their facilities in a location which provides good external amenities such as housing, shops, community services and communication systems.
- Availability of inputs: A location which is near main suppliers will help to reduce cost and allow staff to meet suppliers easily to discuss quality, technical or delivery problems, amongst others. It is also important that certain supplies which are expensive or difficult to procure by transport should be readily available in the locality.
- Availability of services: There are six main services which need to be considered whilst a location is being chosen namely; gas and electricity, water, drainage, disposal of waste and communications. An assessment must be made of the requirements for these, and a location which provides most or all of these services will be more attractive than another which does not.
- Room for expansion: Organisations should leave room for expansion within the chosen location unless long term forecast convey very accurately that the plant will never have to be altered or expanded. This is often not the case and thus adequate room for expansion should be allowed.
- Safety requirements: Certain production and manufacturing units may present potential hazards to the surrounding neighborhood. For example certain plants such as nuclear power stations and chemical factories should be located in remote areas.
- Site cost: The cost of the site is a very important factor, however it is necessary to prevent immediate benefit from jeopardizing the long-term plans of an organisation.
- Political, cultural and economic situation: It is also important to consider the political situation of potential locations. Even if other considerations demand a particular site, knowledge of the political, cultural and economic difficulties can assist in taking a number of decisions.
- Special grants, regional taxes and import/export barriers: It is often advantageous for an organisation to build its plant or facility in a location where the government and local authorities often offer special grants, low-interest loans, low rental or taxes and other grants.
Location Selection Techniques
The location selection process involves the identification of a suitable region/country, the identification of an appropriate area within that region and finally comparing and selecting a site from that area which is suitable for an organisation. The following are a number of analytical techniques from the several that have been developed to assist firms when choosing a location.
1. Weighted Score
The weighted scoring technique tries to take a range of considerations into account, including cost. This technique, which is also referred to as ‘factor rating’, consists of determining a list of factors that are relevant to the location decision. Each factor is then given a weighting that conveys its importance compared with the other factors. Each location is then scored on each factor and this score is multiplied by the factor value. The alternative with the highest score is then chosen.
2. Locational Break-Even Analysis
This technique makes use of cost-volume analysis to make an economic comparison of location alternatives. An organisation would have to identify the fixed and variable costs and graphing them for each location, thus determining which one provides the lowest cost. Locational break-even analysis may be carried out mathematically or graphically. The procedure for graphical cost-volume analysis is as follows:
- Determine the fixed and variable costs for each location.
- Plot the total cost (i.e. the fixed + the variable) lines for the location alternatives on the graph.
- Choose the location with the lowest total cost line at the expected production volume level.