The Location Evaluation Methods

Published Date: 02 Nov 2017

Ques. Visit the websites of three major organizations in your region. Find out where their facilities are located. Explain some factors which should be considered while evaluating location options for a facility because globalization has made consumers expect the best products at the lowest prices irrespective of where they are produced. Companies are under competitive pressure to engage in global production and service operations due to the rapid growth of global markets.

Ans. Plant location may be understood as the function of determining where the plant should be located for maximum operating economy and effectiveness. The selection of a place locating a plant is one of the problems, perhaps the most important, which is faced by an entrepreneur while launching a new enterprise. A selection on pure economic considerations will ensure an easy and regular supply of raw materials, labor force, efficient plant layout, proper utilization of production capacity and reduced cost of production. An ideal location may not, by itself, guarantee success; but it certainly contributes to the smooth and efficient working of an organization. A bad location, on the other hand, is a severe handicap for any enterprise and it finally bankrupts it. It is, therefore, very essential that utmost care should exercised in the initial stages to select a proper place. The need for the selection of the location may arise under any of the following conditions-

When the business is newly started.

The existing business unit has outgrown its original facilities and 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.

A lease expires and the landlord does not renew the lease.

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

Other social or economic reasons; for instance, inadequate labor supply, shifting of the market etc.

It is difficult to set down rules whereby the problem of facilities location can be programmed but there are a number of factors which should be considered. The location is the general area, and the site is the place within the location. The decision on siting thus probably 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 possible sites. The decision is made by taking into account more detailed requirements.

Examples-

Information Technology/BPO/Software Industries such as Wipro Ltd., HCL Technologies Ltd. depend largely on availability of skilled personnel, infrastructure etc. Because of these reasons most of such organizations operate in urban areas such as Delhi, Chennai, Hyderabad, Bangalore, etc. In these urban areas, all type of technical and commercial institutions and universities for the training of the staff and workers are available. Proper facilities like banking, transport, repair and related services are available in these areas. Other most important factor for setting up of these industries in Delhi, Bangalore, Chennai, Hyderabad, etc. is plenty of skilled employees are available.

Tata Iron & Steel Company (TISCO) had selected their plant location at Jamshedpur after extensive geographical survey which established the existence of coal, iron, ore, and other minerals. The site was selected at the confluence of two small rivers amidst thick jungle. Between the two rivers, a city had to be planned. As the jungles were cleared, in place of towering trees, steel chimneys arose. This choice of site is mainly because of other reason also, that is, more economical transport of the finished goods as compared to basic raw materials.

The glass bangles that we get from various outlets /shops nearby us are actually manufactured in Firozabad. The location of the glass industry at Firozabad is because of the supply centers of skilled labor. Labor is an important factor in the production of good. An adequacy of labor supply at reasonable wages is very essential for the smooth and successful running of an organization.

Other examples are like Most of the textile mills are found in or near Mumbai and Ahmadabad because of the humidity conditions that prevail there. Sites for nuclear power plants to be located in different parts of the country largely depend upon environmental, safety, socio-economic and also the engineering factors affecting the construction and operation of such plants. The plants which manufacture cement; such plants are located near the lime and the coal deposits.

Namroop and Thal Vaishet, both act as very important sites for the gas-based fertilizer plants. Coal based fertilizer plants at Ramagundum are located near the source of raw materials (coal). Naptha / oil based fertilizer plants at Mangalore, Madras, Cochin have been located near ports, which act as a great source for the import of the raw materials.

Proximity to market’ forms a major factor which affects plant location decisions in case of machine tool industries. In case of such industries, sites are scattered over different parts of the country such as Ludhiana, Bangalore, Calcutta, Mumbai etc.

The Amul brand is located In Gujarat because of the hub of several dairies and of the state Gujarat has been dominated by Gujarat Co-operative Milk Marketing Federation (GCMMF).

The following are some of the factors which will influence the choice of location-

Proximity to market.

Integration with the organization.

Availability of labor and skills.

Availability of amenities.

Availability of transport.

Availability of inputs.

Availability of services.

Suitability of land and climate.

Regional regulation.

Room for expansion.

Safety requirements.

Site cost.

Political, cultural and economic situation.

Special grants, regional taxes and import/export barriers.

Proximity to market- Organizations may choose to locate facilities close to their market, not merely to minimize transportation costs, but to provide a better service. The closer the plant or facilities are to the consumer, the easier it is to provide just-in-time delivery, to respond to changes in demand and to react to field or service problems. The choice of market proximity is clearly restricted for those providing a pure service, which is not easily transported. Consumer-based services such as retail stores, health care, theatres and restaurants clearly must be located close to the market.

Integration with other parts of the organization- If the new plant or facility is one of a number owned or operated by a single organization or group, it should be so situated that its work can be integrated with that of the associated units. This will require that the group should be considered as an entity, not as a number of independent units.

Availability of labor and skills- Labor may be more readily available in some cases than in others. Certain geographical areas have traditional skills but it is very rare that a location can be found which has appropriately skilled and unskilled labor, both readily available, in the desired proportions or quantities. The choice often has to be made between a location where skilled people exist, but are not readily available and one where there is a supply of unskilled labor. Of course, new skills can be taught, processes simplified and/or made less exacting, and key personnel moved.

Availability of amenities- A location which provides good external amenities housing, shops, community services, communication systems- is often more attractive than one which is more remote. One important amenity in this connection is good personnel transport- buses and trains- and some companies find this so vital that they provide special company transport facilities.

Availability of transport- It is important that good transport facilities are readily available. There are five basic modes of physical transportation: air, road, rail, water and pipeline. Goods intended largely for export may indicate a location near a seaport or a large airport, but the choice of transport method, and therefore location, will clearly depend on relative costs, convenience and suitability. Mail-orders businesses, delivery services, and operations like Disney world tend to make location decisions based very much on entry to a good transportation network.

Availability of inputs- Good transport facilities will enable goods and services to be obtained and delivered readily, but a location near main suppliers will help to reduce cost and permit staff to meet suppliers easily to discuss quality, technical or delivery problems. Any purchaser who has tried to improve the delivery performance of an inaccessible supplier will bear witness to the considerable difficulties involved. Important suppliers that are expensive or difficulties to obtain by transport should be readily available in the locality.

Availability of services- There are six main services which need to be considered:

Gas

Electricity

Water

Drainage

Disposal of waste

Communications

Certain industries use considerable quantities of water, e.g. food preparation, laundries, chemicals, metal planting, etc. Others use a great deal of electricity, e.g. steel and smelting processes. An assessment must be made of the requirements for these, for as far ahead as possible. Under-estimating the needs of any of the services can prove to be extremely costly and inconvenient. Financial services often require rapid communications throughout the world. Hence, large banks often locate in large, well-developed cities with excellent telecommunication networks.

Suitability of land and climate- The geology of the area needs to be considered, together with the climatic conditions (humidity, temperature and atmosphere). Modern building techniques are such that almost all disadvantages of terrain and climate can be overcome but the cost of so doing may be high and a different locality could avoid these initial costs. Clearly, services based on ocean resorts, ski resorts and other outdoor health pursuits present severe geographical or environmental constraints on location.

Regional regulations- It is important to check at an early stage that the proposed location does not infringe any local regulations. A study must be made of the appropriate by-laws and of any special regulations concerning the disposal of effluents, hiring, etc.

Room for expansion- It is most unwise to build to the limit of any site unless the long-range forecast indicates very definitely that the initial building will never be required to increase in size. This is a most unlikely circumstance and adequate room for genuine expansion should be allowed.

Safety requirements- Some production units may present, or may be believed to present, potential dangers to the surrounding neighborhood; for example, nuclear power stations, chemical and explosives factories are often considered dangerous. Location of such plants in remote areas may be desirable.

Site cost- As a first charge, the site cost is important, although it is necessary to prevent immediate benefit from jeopardizing long-term plans.

Political, cultural and economic situation- The political situation in potential locations should be considered. Even if other considerations demand a particular site, knowledge of the political, cultural and local prejudice (e.g. restriction of women or foreign workers) or economic difficulties can assist in taking decisions. For some service organizations, such as insurance companies, gambling casinos and private educational institutions, the 'business climate' of an area or city may be a major factor in site location.

Special grants, regional taxes and import/export barriers- Certain government and local authority’s often special grants, low-interest loans, low rental or taxes and other inducements in the hope of attracting certain industries to particular locations. As these are often areas with reservoirs of labor or natural resources, such offers can be most attractive. Location of facilities in foreign countries to avoid exportation difficulties is now well accepted, and some Japanese companies have used this method successfully throughout the world.

Village, suburban or city site-

The site selected may be an urban, a suburban or a rural one. All these offer advantages as industrial sites.

Rural site- The facilities available at a village site are not as many as are found in a city; but they are more attractive. For example,

Land is available at cheaper rates.

The rates and taxes are negligible.

Spacious layout available and open spaces are possible.

Advantages of single-storey buildings are available.

Low wages for unskilled workers but high wages for skilled workers because they have to be mobilized from elsewhere.

Fewer labor troubles.

Avoidance of danger from fire and other hazards resulting from the operations of neighboring units.

Avoidance of undesirable neighbors.

Absence of restrictions on smoke and disposal of waste.

Against this, a country site raises such problems as-Lack of supply of skilled workers, Lack of civic amenities for employees, Lack of transport facilities, etc.

Suburban site- Suburban sites offer a compromise between the city and the village and have the advantages of both. They are less costly. All the rail and road transport facilities are available; labor can be drawn from the nearby city or villages; quarters for workers are provided by the local authorities or by private entrepreneurs; and such facilities as parks, schools and clubs easily be provided, for land is available at fairly cheap rates.

Urban site- A big city has all the facilities which favor a location for a plant. For example:

Transport facilities are no problem.

Labor is available in plenty.

Municipal services for water, sewage disposal, public health and education available.

All type of technical and commercial institutions and universities for the training the staff and workers are available.

Banking, repair and related services are available.

Facilities for contracting out a portion of the work are available.

A large local market is available.

High advertising value is available.

These are some of the advantages available in a big city. On the other hand, sites in cities suffer from certain drawbacks. They are-

The cost of land is exorbitant.

House taxes, water taxes, sanitation taxes and other similar taxes and rates are fairly high.

Labor unions are many and labor unrest is frequent.

The cost of labor is high.

Because of limited space, factory buildings are awkwardly shaped, ill-lighted and ill-ventilated.

Several restrictions have been imposed in regard to smoke and the disposal of effluents.

Thus, all the three types of sites, namely village, suburban and city, offer advantages as well as disadvantages. Sometimes, it becomes a problem for an entrepreneur to choose one from among these three. A city location is preferable for small plants. A country location is best suited for very large plants, provided that skilled labor can be easily drawn from nearby places.

Location evaluation methods-

In most location problems there are some 'mandatory' factors which must be fulfilled. Thus an oil refinery must have excellent main services, in particular fresh water. Once these key factors are identified, the location problem ceases to be open and becomes a choice from a number of sites. Here, an evaluation technique, based on ranking the various weighted factors, can be helpful. There are a number of methods, but the principles are similar:

Examine the various factors and assign to them weights presenting their importance to the situation being changed. The least important factor may be give a weighting of 1 and all other factors then expressed as multiples of this, as whole numbers. It may be that a rather coarse scale is produced, but time should not be wasted striving after unnecessary accuracy and precision; a crude indicator is all that is required.

Each of the locations is examined and 'ranked' for each factor, this ranking being, carried out factor by factor, not location by location.

Each ranking is then multiplied by the appropriate weighting factor and the scores totalled for each possible location. These totals indicate the desirability of the possible locations compared with each other.

The matrix form is convenient: the rank is placed in the left-hand side of the cell above the diagonal, while the result of multiplying the ranking by the weight is placed in the right-hand side, below the diagonal. The total score is the sum of these right-hand entries. The problem of selecting a location is characterized by numerous factors with complex interrelationships, which can be evaluated only qualitatively. Moreover, the information required to make the decisions is often incomplete and the prediction of future conditions difficult. Various techniques developed to solve parts of the total problem include linear programming, and heuristic and simulation models based on a particular aim, such as minimizing transport costs.

Linear programming (LP) may be helpful after an initial screening phase has narrowed down the feasible alternative sites to a small number. The remaining candidates are then evaluated, one at a time, to identify the one that provides the best overall system performance. Most frequently, overall transportation cost is the criterion used for performance evaluation. A special type of linear programming called the transportation method has been found to be used in plant location. The most common example of this type of problem is that where a plant or facility ‘feeds’ a number of units or, inversely, where a producing or operating unit is ‘fed’ from a number of sources- and the site location must be chosen to give a minimum total transportation cost. If the cost of transportation is directly proportional, both to the distance travelled and to the number of units, then mathematical equations can produced relating the source to the distance between the 'feeder' and the 'fed'. The equations may then be solved to give the location which will minimize total transportation costs, and this location is then accepted as the recommended site for the plant or facility. In any but the most trivial of examples, the manipulations are tedious to perform manually and a computer is generally used for this purpose. Many standard programs are available and readily adaptable to specific situations.

Single and multiple facility locations-

Multiple facility location decisions differ in some important aspects from single facility locations. For example, a new competitor to the recreational organizers of 'Centre Parks' could lay out a plan for locations all over Europe taking into account many factors. When Centre Parks adds a new location, however, consideration must be given to its present locations and the specific recreations offered at each one. Banks, TV companies, hotel chains and motor-car dealerships are some examples of organizations which all face multiple location decision problems. Plant or facilities location and transport or distribution decisions are obviously very interdependent, and for large companies, supplying many products or service from multi-site locations to thousands of customers, the problems are staggering in their complexity. The most effective planning systems are those that tackle the complete location and distribution problem. Owing to recent technological advances, the use of micro-processors, computers and containerization, comprehensive computerized, planning and distribution systems are available to aid production/operations managers determine the following factors related to distribution centers:

Number

Location

Size

Allocation by customers

Allocation by manufacturing or service centers

Quantities involved

Modes of transport.

Other questions (for example, what savings will be derived from improving the system) should also be answered. To determine these answers and factors, large quantities of data are required to be obtained and manipulated and this will require considerable effort. The benefits of a good system are, however, so great that the effort is worthwhile. One of the most powerful applications of computerized location and distribution planning systems is the simulation of the potential changes in the environment and policies, controllable or otherwise, and the study of their effects. This provides information for the decision maker about the combinatorial effects of changes in such fundamental matters as:

The market and demand structure

Plant capacity (expansion and contraction)

Products, services and their mix

Prices

Material costs

Fuel or energy availability and costs

Resource availability, including labor

Modes and organization of transportation

The number of distribution centers

The weather.

Factors in the design of plant or facilities-

The detailed design of plant or facilities should be undertaken by an operations management team, including an architect, working within a brief which indicates-

Accommodation required, both immediate and potential.

Latest possible completion date.

Life of the plant or facilities.

Proposed site.

Maximum cost.

All the above should derive explicitly from the long-term plans for the organization; if they are not so derived, then it could well follow that the 'Immediately useful' plant could, in the long term, be a useless embarrassment to the company. It should be noted that it is unlikely that the brief will be finalized at the first attempt: management is unlikely to be able to estimate the cost of new facilities unless very recent and comparable experience is to hand. The factors which should be considered include the following-

Site- Identification with, and commitment to, a place of work are powerful productivity increasing forces. The larger the unit, the more difficult it is to rally these forces- everybody, at some time, has experienced with distress the 'small cog in a large machine' feeling. Generally, the smaller the unit the better and it is often better, considering the total situation, to create a number of small discrete units rather than one large one. Economies of scale here are often illusory.

Number of floors- A problem requiring very early resolution concerns the number of floors. The Choice between a single- and a multiple-storey building, unless it is resolved by the circumstances of the site, is difficult to make.

Access- Free movement of goods in and out of the unit is as important as free movement within the building. It will, therefore, be necessary to know the anticipated frequency and weight of all movement between the unit and its environment and it is most important to try to forecast these for as long ahead as possible. The availability of cat parking space for staff and customers may also be a very important consideration.

Services- An essential estimate required before detailed design begins is the type and quantity of power and other supplies to be used. Gas, water, electricity and compressed air may need to be freely available, and ample provision made for computer terminal points, telephones, and public address, burglar and fire-alarm systems. Fire prevention and control systems- fireproof doors, sprinkler systems, hoses, fire escapes- are invariably best 'built- in' rather than applied as afterthoughts.

Headroom required- Many modern production techniques require the use of overhead movement, suspended plant and storage above head-height; in fact, a plant can often be considered to be formed in two layers, one from the floor upwards and one from the ceiling downwards. Inadequate headroom cannot easily be remedied after the building is complete and it is unwise to curtail the distance between floor and ceiling too severely.

Loads to be carried- The loads developed in a work area arise not only from the immediate equipment itself, but also from the storage of materials. If a floor is the ceiling of a lower storey it may also be required to carry the weight of any suspended conveyors, tools, trunking or similar fixtures.

Lighting- There may be special requirements on lighting which must consider; for example, color-matching processes are most easily carried out in daylight, whilst some photographic processes require a complete absence of light. Wherever possible, it seems desirable to provide natural lighting with a sight of the outside world.

Heating and ventilation- These require to be treated at the start of the design costs of heating often form a substantial part of total running costs, and every effort should be made to conserve, and distribute usefully, heat and fresh air. Insulation, draught screens, warm-air blankets and heating ducts are best installed during construction, and not later when their installation can be costly, unsightly and disruptive. This is particularly true if it is necessary to incorporate air-cleaning, humidifying or drying plant within the ventilation system, and location of noxious processes should be determined early in order that outlet flues may be well clear of any fresh-air intake points, and of any locations where the effluent itself might be harmful.

Disposal of waste- The social consequences of uncontrolled waste disposal are rapidly and sadly becoming apparent, and all waste products and effluents must be readily dispersed without damage or inconvenience. Reference must be made to local regulations here, since there may be restrictions on emissions, the use of rivers as receivers of waste water, or other special regulations. Specialist advice on these matters is usually available from government sources.

Special process requirements- If possible, any special process requirement should be known at the outset. Typical examples of such requirements are:

Need for particularly close temperature control, for example in calibration or measuring departments.

Need for stable floors, for example on laboratories, where transferred vibrations can upset accurate readings and cause considerable waste of time and efforts.

Need for special security measures, e.g. in noisy, dangerous or secret processes, or when dealing with large sums of cash.

Need for special lighting requirements.

Need for any special amenities.