Plant Location, Importance, Factors considered in Location and Methods

Plant location is an important decision for businesses as it can have a significant impact on the success of the organization. The process of plant location involves analyzing various factors and selecting a site that is optimal for the organization’s operations. Some of the key factors that are considered in plant location include:

• Proximity to customers: The location of the plant should be in close proximity to the customers it serves to minimize transportation costs and improve customer service.
• Availability of labor: The availability of a skilled and unskilled labor force is an important factor to consider when selecting a plant location. The labor force should be adequate in size and have the required skills to meet the production needs of the organization.
• Availability of raw materials: The plant location should be close to the source of raw materials to reduce transportation costs and ensure a reliable supply of inputs.
• Transportation infrastructure: The plant location should have good transportation infrastructure, including access to highways, railroads, ports, and airports.
• Legal and regulatory environment: The legal and regulatory environment in the plant location should be favorable to the organization’s operations.
• Availability of utilities: The plant location should have access to reliable and affordable utilities, including water, electricity, and gas.
• Quality of life: The plant location should be in a desirable location with a high quality of life to attract and retain a skilled workforce.

Once these factors have been analyzed, the organization can use various decision-making techniques to select the optimal plant location. These techniques include factor rating, cost-benefit analysis, and location quotient analysis.

The process of plant location is an important decision for organizations and should be carefully considered to ensure that the location selected is optimal for the organization’s operations. By considering various factors and using decision-making techniques, organizations can select a plant location that is well-suited to their needs and maximizes their chances of success.

Plant location importance

Plant location is of utmost importance to businesses for several reasons:

• Cost savings: The location of the plant can have a significant impact on transportation costs, access to raw materials, and availability of labor. By selecting a plant location that is optimal for these factors, businesses can save on costs and improve their profitability.
• Efficiency: The location of the plant can also affect the efficiency of the production process. A plant that is located closer to the source of raw materials, transportation infrastructure, and customers can result in faster and more efficient production.
• Access to markets: The plant location can also affect the organization’s ability to access markets. By selecting a plant location that is closer to customers or in a location that provides easy access to target markets, businesses can improve their market share and increase sales.
• Regulatory environment: Different regions may have different regulatory environments, including taxes, laws, and policies, that can impact business operations. Therefore, selecting a plant location that has a favorable regulatory environment can help organizations minimize legal and regulatory risks and reduce costs associated with compliance.
• Workforce availability: The availability of a skilled workforce is crucial for the success of any business. Therefore, selecting a plant location that has a sufficient and skilled workforce can help organizations improve their production capabilities and reduce labor costs.

Factors considered in Plant Location

The decision of plant location involves analyzing various factors to select an optimal site for the organization’s operations.

Once these factors have been analyzed, the organization can use various decision-making techniques to select the optimal plant location. These techniques include factor rating, cost-benefit analysis, and location quotient analysis. By considering various factors and using decision-making techniques, organizations can select a plant location that is well-suited to their needs and maximizes their chances of success.

Some of the key factors that are considered in plant location include:

• Proximity to customers: The location of the plant should be in close proximity to the customers it serves. This helps to minimize transportation costs, improve customer service, and reduce lead times.
• Availability of labor: The availability of a skilled and unskilled labor force is an important factor to consider when selecting a plant location. The labor force should be adequate in size and have the required skills to meet the production needs of the organization.
• Availability of raw materials: The plant location should be close to the source of raw materials to reduce transportation costs and ensure a reliable supply of inputs. If the raw materials are perishable, then it is essential to consider the location of the plant with respect to the shelf life of the raw materials.
• Transportation infrastructure: The plant location should have good transportation infrastructure, including access to highways, railroads, ports, and airports. This helps to reduce transportation costs, improve logistics, and increase access to markets.
• Legal and regulatory environment: The legal and regulatory environment in the plant location should be favorable to the organization’s operations. This includes factors such as taxes, laws, regulations, and policies that can impact the organization’s ability to operate effectively.
• Availability of utilities: The plant location should have access to reliable and affordable utilities, including water, electricity, and gas. This helps to reduce operating costs and ensure uninterrupted production.
• Quality of life: The plant location should be in a desirable location with a high quality of life to attract and retain a skilled workforce. This includes factors such as housing, education, healthcare, and cultural amenities.
• Economic incentives: Many regions offer economic incentives such as tax breaks, subsidies, and grants to attract businesses. These incentives can be a factor in plant location decisions.

Plant Location Methods

There are various methods used for selecting a plant location, including:

Factor rating method:

The organization identifies the relevant factors to be considered in the plant location decision, such as labor availability, transportation costs, and quality of life. Each factor is then assigned a weight based on its importance to the organization. The organization then rates each potential location on each factor and multiplies the rating by the weight to calculate a score for each location. The location with the highest score is selected.

Pros:

• Comprehensive: The factor rating method allows for the consideration of a wide range of factors that can affect plant location decisions. This ensures that the decision is based on a comprehensive analysis of all relevant factors.
• Customizable: The factor rating method can be customized to suit the specific needs and preferences of the organization. Factors can be added, removed or weighted differently to reflect the organization’s priorities.
• Objective: The use of weights and scores helps to introduce objectivity into the decision-making process. This reduces the risk of personal bias or subjective opinions influencing the final decision.

Cons:

• Limited information: The factor rating method relies on the availability and accuracy of information on each factor. In some cases, the information may not be readily available, leading to incomplete or inaccurate analyses.
• Simplistic: The factor rating method may oversimplify the complexities of plant location decisions. The method assumes that all factors are equally important and can be reduced to a single score or rating. This may not be the case in reality.
• Assumptions: The factor rating method is based on certain assumptions, such as the independence of factors and the linearity of their relationship with the location decision. These assumptions may not hold in all cases, leading to flawed analyses and decisions.

Cost-benefit analysis:

This method involves comparing the costs and benefits of each potential location. The costs include factors such as labor, transportation, utilities, and taxes, while the benefits include factors such as access to markets, proximity to customers, and quality of life. The costs and benefits are then compared to determine the location that provides the greatest net benefit to the organization.

Pros:

• Comprehensive: The CBA method provides a comprehensive analysis of the benefits and costs of each plant location alternative. This approach considers all the relevant factors, including economic, environmental, and social impacts.
• Quantifiable: The CBA method relies on the quantification of benefits and costs. This helps decision-makers to make informed decisions based on objective criteria rather than subjective judgments.
• Flexibility: The CBA method is flexible and can be customized to suit the specific needs of an organization. This allows organizations to include additional factors that may not be included in traditional methods.

Cons:

• Subjectivity: The CBA method may be subject to subjective judgments when estimating costs and benefits. This can occur if the data used in the analysis is incomplete, inaccurate or biased.
• Time and Resource-Intensive: The CBA method can be time and resource-intensive as it requires a significant amount of data collection and analysis. This can be a limitation for organizations with limited resources.
• Difficulties in comparing alternatives: The CBA method can be challenging when comparing different plant location alternatives because of differences in the scale, scope, and timing of benefits and costs. It is often challenging to compare different alternatives accurately.

Location quotient analysis:

This method involves comparing the availability of labor in each potential location to the availability of labor in the industry as a whole. The organization calculates the location quotient, which is the ratio of the percentage of employment in the industry in the potential location to the percentage of employment in the industry as a whole. A location quotient greater than one indicates that the potential location has a greater availability of labor than the industry as a whole, which may make it an attractive location for the organization.

Pros:

• Easy to use: The LQ analysis is relatively easy to use and does not require a lot of data or specialized skills. It can be used by local governments, economic development organizations, and other stakeholders to identify industries or sectors that have a competitive advantage in a particular region.
• Provides insights: The LQ analysis provides insights into the economic strengths and weaknesses of a region. It helps to identify the sectors that are driving the local economy and can be used to develop strategies to enhance the competitiveness of these sectors.
• Comparison: LQ analysis allows for the comparison of a region’s industry concentration to the national average. This comparison can be used to identify areas of opportunity for economic growth.

Cons:

• Limited Scope: The LQ analysis only provides information on the concentration of industries or sectors within a particular region. It does not provide information on other factors that may influence plant location decisions, such as access to transportation or availability of resources.
• Limited Data: LQ analysis relies on employment data and may not capture the full picture of the local economy. Other economic factors such as the number of businesses or revenue generated may not be captured.
• Inaccurate interpretation: LQ analysis can be misinterpreted if it is not used correctly. For example, a high LQ for a particular industry may not necessarily mean that the industry is profitable or growing. It may be driven by factors such as low wages or a lack of competition.

Break-even analysis:

This method involves calculating the minimum production level required to cover the fixed and variable costs of each potential location. The location with the lowest break-even point is selected.

Pros:

• Provides valuable insights: Break-even analysis provides valuable insights into a company’s financial health. It helps to determine the level of sales a company needs to achieve to cover its costs and make a profit.
• Simple and easy to use: Break-even analysis is a simple and easy-to-use tool that can be used by businesses of any size.
• Helps in decision making: Break-even analysis can help in decision making, such as determining pricing strategies, deciding on the volume of production, and selecting a new plant location.

Cons:

• Assumes constant cost and revenue: Break-even analysis assumes that costs and revenues are constant, which may not be true in reality. Costs may increase due to inflation, or competition may cause a decrease in prices, leading to changes in the break-even point.
• Ignores other factors: Break-even analysis ignores other factors that may affect a company’s profitability, such as changes in demand, competition, and economic conditions.
• Limited applicability: Break-even analysis may not be applicable to all types of businesses or industries, such as those with high fixed costs or those with fluctuating demand.

Delphi method:

This method involves soliciting the opinions of a panel of experts on the most suitable location for the organization. The experts provide their opinions anonymously, and the responses are compiled and analyzed to identify the optimal location.

Pros:

• Anonymity: The Delphi method allows experts to provide their opinions anonymously, which can encourage more honest and open responses.
• Expert opinions: The Delphi method gathers expert opinions, which can be valuable in situations where there is limited information or expertise available.
• Iterative process: The Delphi method is an iterative process, which means that participants can revise their responses based on the feedback of others. This can lead to more accurate and refined results.

Cons:

• Time-consuming: The Delphi method can be a time-consuming process as it involves multiple rounds of feedback and revisions.
• Limited group of experts: The Delphi method relies on a limited group of experts, which may not represent a diverse range of perspectives or expertise.
• Potential for bias: The Delphi method can be susceptible to bias, as participants may be influenced by the opinions of others or may have their own biases.