Plant Location Selection

Posted on Jul 7 2019 - 6:48pm by Preeti

General Conditions for Site Selection/Plant Location Selection

An ideal location is one where the cost of the product is kept to a minimum, with a large market share, the least risk, and the maximum social gain. Every entrepreneur is faced with the problem of deciding the best site for locating of his plant or factory. Selection of plant location is important for the success of an organization. The various factors affecting plant location selection decision are discussed below:

  1. Nature of Product and Industry
  2. Nearness to raw material
  3. Proximity to market
  4. Workforce Requirement
  5. Availability of Power and Fuel
  6. Availability of Water
  7. Land
  8. Transport and communication facilities
  9. Climate
  10. Total costs
  11. Availability of Infrastructure
  12. Suppliers Industries Location
  13. Free Trade Zones
  14. Political Risk
  15. Government Policies
  16. Environmental Regulation
  17. Host Community
  18. Competitive Advantage
  19. Goodwill of Place
  20. Personal Factors
  21. Historical Religious Factors
  22. Other Factors

1. Nature of Product and Industry

Plant location decision is dependent on the nature of product to be produced and the nature of an industry. For example, if it is a chemical product, like sugar, where the manufacturing process emits a particular type of smell, this type of industry needs to be located far from the human communities. While if the industry is a chemical industry, which involves toxic element in manufacturing process, it must be located very far from cities to avoid tragedies like Bhopal Gas Tragedy.

2. Nearness to raw material

If a raw material is heavy then it is also difficult to transport and if it is required in large quantity then the manufacturing plant has to be located at the site where such material is available. Otherwise cost of loading and transportation is huge. The time consumed and managerial inputs are more. As a result the economics of manufacturing goes out of scale and the product become uncompetitive. This is the same reason why Steel mills are located at Bihar and Sugar Mills near the sugarcane producing fields like Kolhapur in Maharashtra. Further natural products like fruits, milk undergo changes after harvesting and milking respectively. Their quality starts deteriorating and contamination begins to multiply. This results in low recoveries and higher cost of production. In such cases plant is located at the origin of the raw materials.

3. Proximity to market

If the volume of a product is much bigger than the raw materials, like plastics products, or if the product is perishable, then the manufacturing plant is located near the market. Nearness to potential market minimizes the risk of deterioration and damage in transport. The organization needs to produce product which is close to the customer due to a time-based competition, trade agreements, and shipping costs benefits. Examples are, bottling plant of cold drinks, which are always near to the city. Some more examples are: Sub-contractors/Vendors-Automobile Industry (TATA,GM), Confectioneries, Food Products, Plastics Products, Electronic items (like T.V., Fridge) etc.

4. Workforce Requirement

Some of the manufacturing operations require skilled workforce in its manufacturing operations. Skilled workforce itself requires well-cultured surrounding, opportunities of advancement through further studies and experience sharing, opportunities of advancement through further studies and experience sharing, recognisation, competition and recreational facilities. Normally such a facilitating environment is there in urban areas. One can establish such environment in rural areas but it is very costly and time-consuming process. Skilled workforce is available are urban places. So such plants are located very near to city. For example most of the software industries are located in Bangalore, Hyderabad and Pune. These cities have good educational and training institutions along with other promotional factors. Which are providing ample skilled workforce for the software industry. Some manufacturing operations require unskilled labour force which is available in rural areas. Hence labour intensive plants are located very away from the city in rural area.

5. Availability of Power and Fuel

Industries consume power in large quantity. An industry will choose a site where there is uninterrupted and cheap power supply available. In place of power if coal or other materials are used as fuel their availability will locate the plants nearby.

6. Availability of Water

Chemical industries, food industries use lot of water in their process. similarly, waste and bi-products of these industries are hazardous and required to be discharged in flowing water after treatment, So, one finds that chemical and pharmaceutical industries are located near to sea or river.

7. Land

Locating a plant requires land. The land must be plane and good. Water should drain naturally. It should be free from all encroachments. It must have free and easy access. Land must be available not only as per present requirement but land must be available for future expansion. It should be available at very low cost, as it will reduce the capital investment.

8. Transport and communication facilities

To gain the advantages of the nearness to the raw material or market, the most important thing is transport and communication facility. Every industry requires transport of raw materials, finished products as well as their workforce and support services. Availability of transport network facilitates the site selection. Cheaper transport reduces production costs. Similarly communication facilities form an integral part of any business.

9. Climate

For the particular type of industry, the climate plays a very important role. Textile industries are located near coastal areas as the weaving of threads needs high humidity.

10. Total costs

The basic objective of a plant location is to maximize the profits by minimizing the total cost of production.

Total costs = Fixed costs + Operational costs

Fixed costs include land and building cost and machines costs. Operational costs are the expenditures incurred on inputs, transformation process cost, and the distribution cost. Hence, the location is selected where the total cost is kept at a minimum.

11. Availability of Infrastructure

Basic facilities of land, roads, power and water are called as infrastructure. Such facilities are not only essential but are backbone of the industry. Presence of these facilities makes management of manufacturing easy and at less cost whereas absence of the infrastructure makes manufacturing very difficult and costly.

12. Suppliers Industries Location

Many times the well-established industrial areas attract new industries. For example, when General Motors started its operation in India, they chose Pune as their location, as all necessary part suppliers are available in the region.

13. Free Trade Zones

India signed Free Trade Agreement (FTA) with Thailand in October 2003. Under the FTA, 82 auto components are covered under the Early Harvest Scheme, which will have zero custom duty when traded between India and Thailand. Such an agreement attracts industries to establish plants in either of the countries to get benefit of it.

14. Political Risk

Political uncertainties have great impact on plant location decision. Political stability is essential for industrial growth. That political stability fosters industrial activity. The political stability builds confidence and political instability causes lack of confidence among the prospective and present entrepreneurs to venture into industry which is filled with risks.

15. Government Policies

The policies of the state governments and local bodies concerning labour laws, building codes, safety, etc., are the factors that demand attention. In order to have a balanced regional growth of industries, both central and state governments in our country offer the package of incentives to entrepreneurs in particular locations. The incentive package may be in the form of exemption from a safes tax and excise duties for a specific period, soft loan from financial institutions, subsidy in electricity charges and investment subsidy. Some of these incentives may tempt to locate the plant to avail these facilities offered.

16. Environmental Regulation

Due to recent issues of global warming, it is mandatory for all type of industries to follow the environmental regulation. Hence, the organizations are selecting locations decisions.

17. Host Community

Plant location decision is greatly dependent on the nature of host community/society. It is political, supportive, or non-supportive.   Community’s perception about a factory is that either the product is for their development, if not they are against the product. What type of community facilities are provided in the region is also taken into consideration for a plant location. For example:

i. Accommodation for employees

ii. Public transport like railway station, bus stand etc.

iii. Schools, post, banks, telephone, medical facilities

18. Competitive Advantage

When new markets are coming up, organizations are selecting a plant location in that area to get competitive advantages. For example many MNCs are coming to India and China to tap this new upcoming market. Indian Management Institutes started their first offshore centers in UAE. Similarly Harvard Business School started MDO centre in Hyderabad.

19. Goodwill of Place

Apart from all above factors, sometimes plant location is selected at some well-known places or prestigious places. Some examples are:

i. Offices at Nariman Point In Mumbai

ii. IT industry in Pune/Bengaluru

iii. A company in Silicon Valley.

20. Safety Requirements

Plant location must meet all essential safety requirements. Due to air, water and sound pollution, some factories have a bad effect on the health of the people. Therefore, these factories must be located away from residential areas. Safety of environment must also be given priority in this regards.

21. Personal Factors

Sometimes personal factors play a very important role in selecting plant location. For example, Henry Ford started his factory in Detroit (USA) because he started his career there, where he created his Quadricycle. Most of the cooperative sugar factories are located in the political constituency of the chairman of the factory.

22. Historical Religious Factors

With respect to service industry or related industry, where visitors number is important, he plant location is selected near a historical/religious places. For example, idol carving factory is always near historical temples.

23. Other Factors

Apart from the above discussed factors, there may be one or more factors which can influence plant location decision. For example, special grants or Import.Export needs, the location might be selected in memories of someone for the purpose of rural development as part of a corporate social responsibility of big industrial houses or any other reason, availability of finance, facilities for expansion  etc.

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B.Tech Biotechnology,MBA(HR and Marketing), UGC/CBSE NET Qualified

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