Selection of factory location

The selection of a place for locating a factory is one of the problems, perhaps the most important ,which is faced by an entrepreneur while launching a new enterprise.

An ideal location may not , by itself ,guarantee success , but it certainly contributes to the smooth & efficient working of an organisation.

Once a mistake is being made in locating a factory is become extremely difficult & costly to correct it, specially where large plants are concerns.

Need for the selection of the locationWhen the business is newly

started.The existing business unit has

outgrown its original facilities & expansion is not possible. hence a new location has to be found

The volume of business or the extent of market necessitates the establishment of branches.

When a company thinks that there is a possibility of reducing manufacturing cost shifting from one location to another location.

Other social & economic reason: inadequate labor supply ,shifting of the market.

Steps in location selectionWith in country or outsideSelection of regionSelection of the locality or

community.Selection of exact site.

Deciding on domestic or international location-facility

should be located domestically/internationally

Selection of regionAvailability of raw material. A firm that depends on heavy raw materials

locates nearer to availability of raw material. Bihar & up in sugarcane industryNearness to market A company that want to reduce the

transportation cost locates near markets.Availability of power-eg iron & steel industry

in Germany. jamshedpur in india.

Transport

Suitability of climate-suitability of climate is very important for setting up location facilities-humid climate for cotton & jute industry.

Government policy-any firm that is looking for subsidy or incentives has to locate factory in states which provide them.

Licensing policyInstitutional finance & govt

subsidy .

Competition between states

Selection of communityAvailability of labour .-an

adequacy of labour supply at reasonable wages is very essential for the smooth functioning.

Civic amenities for workers.- availability of civic amenities for workers also plays

role in facility location. Clubs,theatres,parks.

Existence of complementary & competing industries.- favourable

Labour marketBank become familiar.A group of plant attract a variety

of repair plants.

Finance & research facilities.Availability of water & fire

fighting facilities.-influences the location decision.

Local taxes & restriction-they imposed charges for the supply of water ,electricity,& other facilities. industrlist should prefer an area where such taxes & restrictions are less.

Momentum of early start-railway,banking,repair & maintenance.

Personal factors

Selection of the siteSoil & size & topographyDisposal of waste-leather &

chemical industries locate where there is a provision of disposal of waste.

Location modelsFactor rating methodPoint rating methodBreak –even analysisQualitative factor analysis

Factor rating method

Factor rating are used to evaluate alternative locations

Steps involved areList the most relevant factors in

the location decision.Rate each factor ( from 1 to

5)according to its relative importance.

Rate each location (from 1 to10) according to its merits on each factor.compute the product of rating by multiplying the factor by location rating for each factor

Compute the sum of the products of ratings for each location./selection

factor Factorrating

Location rating Product of rating

Location A Location B Location A Location B

1.Tax advantage2.Suitability of Labour skills3.Proximity of Customer4.Adequacy of water5.Receptivity of Community6.Proximity To supplier7.Quality ofEducational system8.Access to rail air transportation9.Climate10.power

43

3

5

1

5

4

3

22

82

6

2

3

4

1

10

76

63

5

4

3

3

2

8

94

326

18

10

3

20

4

30

1412

249

15

20

3

15

8

24

188

Total score 149 144

Point rating methodIn selecting a site or

location ,companies have several objectives but not are equal important.

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.

Each potential site is then evaluated with respect to every factor.

The site with highest points considered is better.

factor MaximumPossible points

Points assigned to location

Location A Location B

1.Future availabilityOf fuel2.Transportation3.Water supply4.Labour 5.PollutionRegulations6.Site7.Living condition

300

200

10025030

50150

200

150

10022020

40100

250

150

10020020

30125

1080 830 875

Locational break -even analysisStepsDetermine all relevant costs that

vary with each locationCategorize the cost for each

location into annual fixed costs(FC) & VC & calculate the TC for the desired volume of production per annum.

Plot the total costs associated with each location on the single chart or graph

Select the location with the lowest annual cost at the expected production volume per annum.(Q).

TOTAL COST=(fixed cost per annum)+(variable cost per unit)*(quantity produced)

Qualitative factor analysis methodDevelop a list of relevant factors.Assign weight to each factor to

indicate its relative importance.Assign a common scale to each

factor (0 to 100) & designate any minimum point to be scored by each location

Score each potential location according to the designed scale.

Total points of each location/selection