Strategic significance of Plant location

by Sree Rama Rao on January 14, 2008

The strategic significance of facility location is connected with capacity decisions. Indeed, the issue of capacity expansion immediately raises the companion issue of where to expand in order to tie in effectively with the distribution network. We have separated the materials into two areas because the approaches to the sub-problems are quite different and to divide the materials into manageable units.

The location of facilities involves a commitment of resources to a long-range plan. Thus, predictions of the size and location of markets are of great significance. Given these predictions, we establish facilities for production and distribution that require large financial outlays. In manufacturing organizations, these capital assets have enormous value, and even in service organizations, the commitment of resources may be very large. Location and distribution take on even greater significance because these plans represent the basic strategy for accessing markets and may have significant impacts on revenue, costs, and service levels to customers and clients.

It is not immediately obvious that location is a dominant factor in the success or failure of an enterprise. Indeed, it is not uniformly important for all kinds of enterprises. Decentralization within industries must mean that many good locations exist or that the location methods used could not discriminate among alternative locations.

General technological constraints will commonly eliminate most of the possible locations. Or, to take the opposite point of view, a technological requirement may dominate, so that activity is then oriented toward the technical requirement. For example, mining is raw material oriented, beer is water oriented, aluminum reduction is energy oriented, and service activities, including sales, are consumer or client oriented in their locations. If some technological requirements, such as the location of raw materials, water, or energy, does not dominate, then manufacturing industries are often transportation oriented.

The criterion for the choice of location should be profit maximization for economic activities. If the prices of products are uniform in all locations, then the criterion becomes one of minimizing relevant costs.

If the costs of all inputs are independent of location, but product prices vary, then the criterion for location choice becomes maximum revenue. In such instances, locations will gravitate to the location of consumers, and the general effect will be to disperse or decentralize facilities.

If all processes and costs are independent of location then choice will be guided by proximity to potential customers or clients or to similar and competing organizations and to centers of economic activity in general.

Industrial Plant Locations:

In most plant location models, the objective is to minimize the sum of all costs affected by location. Some items of cost, such as freight may be higher for city A and lower for city B, but power costs, for example, may have the reverse pattern. We are seeking the location that minimizes costs on balance. In attempting to minimize costs, however, we are thinking not only of today’s costs but of long-run costs as well. Therefore, we must be interested in predicting the influence of some of the intangible factors that may affect future costs. Thus, factors such as the attitudes of city officials and town people toward a new factory site in their city may be an indication of future tax assessments. Poor local transportation facilities may mean future company expenditures to counterbalance this disadvantage. A small labor supply may cause labor rates to be bid up beyond rates measured during a location survey. The type of labor available may indicate future training expenditures. Thus, although a comparative cost analysis of various locations may point toward one community, an appraisal of intangible factors may be the basis of the decision to select another. The result is an excellent example of a managerial decision with multiple criteria, where trade-offs must be made between the various values and criteria.





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