PLANT LOCATION

1. KIOT
Plant Layout and Facility Design
Course code: Greg 4181
Target group: 4th year GED
Chapter two
Plant location
By: Endashaw Yohannes
Kombolcha/Ethiopia
Nov, 2019
1/29/2020 1

2. CHAPTER TWO OUTTLINE
o Concept of plant location
o Factors governing plant location
o Theories of industrial location
o Economic survey of the site selection

3. 1. Concept of Plant Location
o Plant location meaning: is the establishment
of an industry at a particular place.
oThe fundamental objective of location
analysis is to maximize the profits by
minimizing the total cost of production
associated with the production process.

4. 1. Concept of Plant Location cont...
oThe principle of plant location
 is that the sum of manufacturing and distributing cost
should be at minimum for best location.
oThe necessary factors in selection of plant location
vary among industries and with changing technical and
economical conditions.

5. 2. Circumstances for plant location decision
Four situations require an answer to the question of
plant locations:
1. New facility establishment
2. Expansion of existing facility
3. Additional facility in new territory due to growth
4. Change of existing facility location outweighed due
to new developments, economic, social, legal or
political factors

6. 3. Mistakes in location decision Cause
o Higher investment
o Higher cost of production,
o Difficult marketing and transportation
o Dissatisfied and frustrated employees
and consumer
o Frequent interruption production
o Abnormal wastages
o Delays and substandard quality etc

7. 4. Location Planning
o Before a location for a plant is sought, long-range forecasts
should be made anticipating the future needs of the company.
o These should be based on the
 Company’s expansion policy,
 The anticipated diversification of products,
 The changing market,
 The changing source of raw materials, and any other
foreseeable influences.
o Careful attention should be given to all the economic factors
that influence the need for the new plant and the size and
location of the plant.

8. o Seven basic steps in locating and building every new plant:
1. Establish the need for a new plant.
2. Determine the best geographical area for the plant on the
basis of the company’s business needs.
3. Establish the requirements
o Product to be made,
o Equipment and Buildings needed,
o Utilities necessary
oTransportation necessary,
o Number of employees, and etc.
4. Location Planning cont...

9. o Seven basic steps in locating and building every new plant
cont..
4. Screen many communities within the general area
decided on
5. Pinpoint a few communities for detained studies.
6. Select the best location.
7. Build the plant.
4. Location Planning cont...

10. Location decision has two stages
1. General location of the plant
 Factors must be considered for selecting a
region where a factory is to be located
2. The selection of a particular site
 Factors must be considered for selecting a
suitable site in that region.
5. Factors governing plant location

11. 5.1. Factors governing General location of the plant
1) Availability of raw materials
o The site should be near to the source of raw material
o Transportation cost should be minimum
2) Proximity to markets
o The cost of transporting finished goods, advertising
and distribution cost reduced if it is near to markets
o Quick service to customer and their needs

12. 3) Transport facilities
o Availability of road ,rail, air and ship transport
4) Availability of productive labor
o Low wages often over-emphasized
o Labor productivity important
o Labor cost per unit should be criterion: (Labor cost/day/
Units made/day)
Eg. Hourly Compensation ($)Mfg. Workers (1994)
Germany 27.37
Japan 21.38
U.S. 17.10
Hong Kong 4.79
Mexico 2.57

13. 5) Availability and rate of power
o Electricity, coal mines, solar, wind, etc
6) Climatic and atmospheric condition
o It is a governing factor for several industries to
reduce the cost of air conditioning
E.g.. Cotton textile industries require moist climate
7) Availability of water
o All factories need soft and pure water

14. 8) Availability of capital
o Amount of capital available determines size of a plant
and its future
9) Social and recreational facilities
o During off hours employees need amenities like parks,
retail stores, cinemas ,education centers for worker
health and work interest.
10) Business and Commercial Facilities
o Availability of financial and banking facilities for
factories constant feeding of working capital

15. 11) Existence of related industries
• Especially for small scale industries to have common
facilities like maintenance and repairing service.
12) Other factors
o Taxes
o Government incentives
o Fire protection facilities
o Postal service
o Internet and telecommunication services

16. 5.1. Factors governing selection of a particular
site
1) Community attitude
o The attitude of the people and the state
government
o Most communities usually welcome setting up of
industries as it provide direct and indirect job
opportunities to the local community
o However in case of polluting and adverse working
condition the local community provide resistance

17. 2) Community facilities
o Facilities which affect quality of life like schools,
hospitals, housing, banking ,communication and other
facilities.
3) Geographical topography
o This includes subsoil conditions for building
foundation, the cost of leveling and developing the
area, laying water supply, electricity, and sewage
system.

18. 4) Transportation facility
o Transport infrastructure for quick access and
movement.
5) Waste disposal
o Including solid, liquid and gaseous wastes disposal
Eg. The plant should be positioned so that winds
carry out fumes away from populated areas .

19. 6) Ecology and pollution
o Check if there is any restrictions on local
administration regarding ecology and pollution
7) Size of land
o Size of land should meet current facility
needs and future expansion plans.
8) Supporting industries
o Availability of supporting industries and other
services.

20. 6. THEORY OF INDUSTRIAL LOCATION
o The location of an industry is based on a unique set of
circumstances – these factors will enable to business to
operate at a lower cost giving them an advantage over
competitors.
o The factor that offers the most significant cost saving
will be the most important one to determine final
location

21. o In most plant location models, the objective is to
minimize the sum of all costs affected by location.
o Some items of cost may be higher at location A but
others may be higher at location B.
o The main aim is to seek the location that minimizes
the total cost.
o In attempting to minimize costs we should not only
consider today costs but also long run costs.

22. 6.1. Techniques used for best plant location
1) Subjective techniques
a) Industrial precedence
o New facility is located in an area previously
selected by similar industry.
 assumption “if the location was best for similar industry
in the past it must be best for us now”.
b) Preferential Factor:
o Usually involves personal preferences
o It is not professional approach and is not good business
decision making.

23. C) Dominant Factor
o This occurs when one factor dominates any other
factors and could influence location decision .
Eg. Mining and petroleum drilling operations must be
located in the areas where the mineral resources are
available.

24. 2) Qualitative techniques
o Also known as “factor ranking system”
o No comparative relationships for values with in the
factor other than position in the list is established
o Ranking is therefore unsatisfactory

25. 3) Semi- Quantitative techniques
o Also known as “factor weighting system”
o Rating scales are used to compare locations to
locations using factors
o Variable weights are assigned to each of the factors
1. Intangible (qualitative) factors
Example: Education quality, labor skills
2. Tangible (quantitative) factors
Example: Short-run & long-run costs

26. 4) Quantitative techniques
Important quantitative techniques
1) Break-Even Analysis
• Helps to relate costs and revenues to facility location
• It shows relation ship among volume of output, costs
and revenues.
• Costs can be generally divided as fixed and variable
cost

27. a. Fixed costs are the same regardless of volume of out
put.
Eg. Heating ,lighting administrative cost
b. Variable costs fluctuate directly with volume of out
put.
Eg. Direct labor and material
o Break even point indicates the level of volume for
which the total costs equals total revenues.
o BEP analysis identifies the level of out put that must
be reached in order to recover all costs of operation
through revenues.

28. The break even chart
To understand the role & purpose of break
even analysis

29. 2) Economic/Cost Analysis
o It shows relation ship among volume of
output, costs and revenues among different
location .
3) Transportation Model
o This and other quantitative techniques can
be dealt more on Operation research
subjects

30. Examples

31. Criterion Weighting
Possible Factory Location
A B C D E
PROXIMITYTO:
Skilled labour 7 2 14 3 21 0 0 1 7 4 28
A pool of unskilled labour 8 5 40 2 16 0 0 4 32 2 16
A motorway 7 3 21 2 14 1 7 3 21 4 28
An airport 4 1 4 3 12 4 16 2 8 2 8
The sea / a river 0 2 0 5 0 5 0 2 0 1 0
Housing 5 4 20 3 15 0 0 3 15 4 20
Amenities 5 3 15 2 10 0 0 2 10 3 15
Potential for expansion 7 2 14 1 7 5 35 3 21 2 14
Availability of grants/incentives 8 1 8 2 16 5 40 1 8 3 24
Safety 2 3 6 2 4 5 10 2 4 2 4
Planning constraints 5 2 10 3 15 5 25 4 20 2 10
Environmental impact 4 3 12 2 8 4 16 1 4 2 8
TOTAL 164 138 149 150 175
Example Factor Weight Rating System

32. 8-32
Example 1: Cost-Volume Analysis
Fixed and variable costs for four potential
locations
L o c a t i o n F i x e d
C o s t
V a r i a b l e
C o s t
A
B
C
D
$ 2 5 0 , 0 0 0
1 0 0 , 0 0 0
1 5 0 , 0 0 0
2 0 0 , 0 0 0
$ 1 1
3 0
2 0
3 5

33. 8-33
Example 1: Solution
Fixed
Costs
Variable
Costs
Total
Costs
A
B
C
D
$250,000
100,000
150,000
200,000
$11(10,000)
30(10,000)
20(10,000)
35(10,000)
$360,000
400,000
350,000
550,000

34. 8-34
Example 1: Solution
800
700
600
500
400
300
200
100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
B
C
B Superior
C Superior
A Superior
D

35. Plant lay out and material handling
(R.B Choudary)
1) Determination of total cost/unit Page #11
2) Example 1.2 Page #12
3) Fig 1.2 page #16
4) Table 1.2 & table 1.3 page#20,21
5) Example 1.3 # page 21

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