PLANT LOCATION

The problem of how many facilities to have and where they should be located is encountered by service and product organization in both the public and private sectors. Banks, restaurants, recreation agencies, and manufacturing companies are all concerned with selecting sites that will best enable them to meet their long-term goals. Since the operation managers fixes many costs with the location decision, both the efficiency and effectiveness of the conversion process are dependent upon location. This chapter will examine the facilities location issues in details by taking into account the reasons for location changes and the factors affecting the selection of location. We shall also discuss the procedure for facility location and related issues in the sections to follow. REASONS FOR LOCATION CHANGES Different situations for location change could be (i) a new plant is just being started, (ii) a new branch of an existing plant is to be located, or (iii) a new location for an existing plant is being sought. In addition to the need for greater capacity, there are other reasons for changing or adding locations: Changes in resources may occur. The cost or availability of labor, raw materials, and supporting resources (such as subcontractors) may change. The geography of demand may shift. As product markets change, it may be desirable to change facility location to provide better service to customers. Some companies may merge, making facilities location redundant. New products may be introduced, changing the availability of resources and markets. Political and economic conditions may change. Location decision should be based on long range policy and forecasts, e.g. companys expansion policy, anticipated diversification of products, changing markets, changing sources of raw materials, etc. Other decisions to be made before a plant selection/construction are: (a) products or services to be made or offered in the plant, (b) type of equipment required, (c) type of structure needed, and (d) location of the plant. GENERAL FACTORS INFLUENCING LOCATION The factors to be taken into account depend on the type of industry to be located. Thus the factors important for locating a steel plant may be different from the factors to be considered in locating a computer assembly plant. However, the general factors affecting the location of plant or facility are as mentioned below. Proximity to Good Highways This consists of the quality of highway system, its relationship to markets, raw materials, and labor supply. It is obvious that availability of inter state super highways makes the suburbs, small communities, and country easily accessible. Abundant Labor Supply It is always preferable to locate the plant in an area where skilled, semi-skilled, an unskilled labor are available. This explains why the glass and bangles industries are located in Firozabad (India) where skilled manpower in this field are available. The same reasons are true for carpets industry in Mirzapur, and silk sarees in Kanziwaram. It is also desirable to have no labor problem. Location of facility will also depend on the prevalent wage rate, facilities for labor,

history of relationship between trade-union and management in the area under consideration. Rural labors can be hired at lower wages and Steel industry needs a lot of rural labor. Perhaps this is why most of the steel plants in India are located in rural areas. Proximity to Markets Plant should be located nearer to the consumers market. Plants related to cement, bricks, roofing, and gypsum board are located nearer to the market. However, for those companies producing items like fountain pens, jewelry, and watches in which the costs of materials and labor are high, shipping costs are of secondary importance, and the location of plant is not on the basis of proximity of markets. For many firms it is extremely important to locate the plant near customers. Specially, service organizations, like drugstores, restaurants, post offices, or barbers, find proximity to market as the primary location factor. Manufacturing firms find it useful to be close to customers when transporting finished goods is expensive or difficult (perhaps because they are bulky, heavy, or fragile). Further, with the trend toward JIT production, suppliers want to locate near users to speed up deliveries. Availability of Suitable Land and Land Cost Cost of land is usually a minor factor in the location of a plant. In the communities that are interested in attracting new plants, land may be offered at a reduced price or at no cost, which may influence some plants to locate there. Adequate Water Supply Water is necessary for almost all kinds of plants. However, some plants heavily depend on water supply. For example, thermal power plant, Hydroelectric power plant, steel plant need lots of water for its day to day operation. This needs the plant to be located nearer to the water sources like lake or river. Nearness to Raw Materials and Suppliers In general, bulky or perishable products manufacturing companies are located near to the source of the raw materials. For example, food processing industry should be located nearer to canning factories, meat packing plants and creameries. Firms locate near their suppliers because of the perishability of raw materials and products, and transportation costs. Bakeries, dairy plants, and frozen seafood processors deal with perishable raw materials, so they often locate themselves close to suppliers. The Guiding principle in such cases is weight losing. If the raw material loses a lot of weight in processing, then the plant should be located nearer to the source of raw materials. Another principle is weight balancing i.e. relative cost of transporting raw materials must be weighed against the cost of shipping the finished products. Thus, steel industry should be located near the coal and iron ore supply. Most of the steel plants in India are located in the region where coal, iron ores, and other raw materials are available. Tata steel, and steel plants under SAIL are also examples to justify this guidelines. Nearness to an Existing Plant It is advisable to keep the new plant reasonably close to the parent plant. Thus the truck assembly plant can be kept close to a steel plant because the two plants can act as complementary to each other. Product of one becomes the raw materials for the other. Again one can see why Telco and Tata steel in Jamshedpur are located nearer to each other. This way, executive supervision and staff consultations can be made common and cost reduction will be possible. Engineers and executives can make frequent trips to do the consultation and supervision work.

Transportation Some companies find it desirable to be located near the seaport or near one of the inland waterways to take advantage of the lower cost of transporting materials (e.g., coal, iron ore, petroleum products, etc.) by boat, barge, or ship. Access to railroad or trucking facilities is also desirable. Power Supply It is desirable to have power supply at low cost for the operation of the plant. Cost of power supply per unit is generally cheaper in rural location than its urban counterpart. Some companies prefer to maintain their own standby power station. Water Disposal and Pollution Anti-pollution law should be followed to avoid water pollution. Waste materials dumped into the rivers or stream may create problems for new company needing a supply of fresh and pure water. For example, companies manufacturing antibiotics, steel, chemicals, and those using radioactive materials are confronted with waste disposal problems. Some of the examples related to environment issues include: three mile island (USA), Cello field (UK), Chernobyl (USSR), and Union carbide (India). Most countries have laws to prevent the companies from dumping the industrial wastes into rivers. Some of the site related problems in India that have surfaced in media are: Mathura oil refinery vs The Taj Mahal, Barauni oil refinery vs The Ganges river, Paradip port vs Cyclone effect, Narmada dam vs environmental issues. Similarly, the environment issues in Mugher Cement Plant in Addis Ababa (Ethiopia) calls for relocation of this plant or convert the plant into an environment friendly one. Taxes Kinds and amounts of taxes (e.g., excise duty, sales tax, income tax, etc.) levied by a state should also be considered in locating a plant. The kinds of taxes and the basis for fixing them should be investigated before hand. Some states and territories offer tax exemption for a stipulated period of time to attract the investors to set up their plants to produce certain priority products. Climate Companies requiring controlled temperature, humidity, and ventilation should consider the climatic factor while locating the plant. For example, textile factories in India needing high humidity are located in Maharashtra, Gujarat, etc which are near the sea coast and have adequate humidity for the textile mills. Even the choice of the executives may affect the plant location. Similarly, companies interested in manufacturing computer components may be interested in a place with moderate climate and dust free environment. National Defense Industry related to defense or military hardware should be located on the basis of national defense interest and may preferably be away from the countrys borders. Community Administration and Attitude Local authorities and people should be willing to have the plant located in their area. Community should also provide the necessary municipal services, e.g. police and fire protection, maintenance of streets, waste disposal, etc. Worker attitude may also differ from country to country, region to region, and small town to city. Worker views about turnover, unions, and absenteeism are all relevant factors.

Schools, Churches, Parks, and Residential Area It makes sense to pick up a town or locality that will provide the best services and living conditions for their employees and their families. Excellent schools, parks, hospitals, residential areas, etc. should be desirable. Space for Future Expansions Demand of products is dynamic in nature. It may be required to increase the production capacity of the plant in future if the demand increases or change the product altogether if the demand is very low. Thus, there should be an adequate space for future expansion or diversification of the plant. RURAL AND URBAN SITES COMPARED It has been seen above that some points are favorable in rural site, and some are good in an urban site. None of them is entirely good or bad from all points of view. A comparison between a rural and a urban sites with respect to various factors can be done as shown in Table 2.1. Urban site (located in city) Rural site (located in village) Very well connected by rail, roads, and air. Just the opposite. Rural sites are not easily accessible. Provides good market for the final products. Products need to be transported to some nearby markets.