Location Decisions

Decision regarding Plant Location is important as it is a long term decision and non-repetitive in nature.
It involves long-term commitment about geographically static factors that affect a business organization.
Some changes and adjustment in capacity at the location are always possible, however, it is not easy to
change the location of the operations base once it has been established. Hence, at the time of starting
any industry, one should generate several alternate sites for locating the plant. After a critical analysis,
the best site is to be selected for commissioning the plant.

Objectives of Location Planning:
The basic objective while selecting a location should be that Combined cost of all four elements (input,
resource, process and output) should minimize.
a) Cost of procuring raw material
b) Cost of procuring resources
c) Cost of processing
d) Cost of distribution of finished goods.

Following are the main factors of ideal location:
a) Minimum cost of transporting materials and products,
b) Easy availability of raw materials and other factors of production,
c) Convenience in accessibility to markets,
d) Sufficient scope for further expansion,
e) Possibility of the unit being started to pick up momentum early,
f) Integration with the economic, social and cultural traits of the community of the region.

In words of Shubin In selecting a general location management must investigate the present and
possible future adequacy of markets for the product, sources as raw materials, labour, transportation,
power and fuel supply and proximity both to allied and to necessary service industries. In addition, it
must consider the climate of the locality, the character of the community, local and state tax rates, the
advantages of decentralization.

The factors that shall be considered at the time of location decision can be classified into two categories:
A) Primary Factors:
1. Availability of raw material: The region in which plant is proposed to be set up should
provide at least a greater part of the raw material required, as
a) It ensures continuity in supply.
b) Prices will be minimal because of competition.
c) Storage cost will be minimal because of less storage and easy availability.

2. Proximity to markets: Industry should be close to market where sufficient demand of the
concerned product exists.
a) Location of industry in the heart of market enables to dispatch the finished products with
minimum costs of transport.
b) Nearness to market will also make it possible to render rapid services to the consumers, to
provide after-sale servicing facilities and to execute replacement orders without delay.
c) If finished goods are perishable in nature then also the nearness to market is important.

3. Availability of labor: It should be carefully studied that labor is easily available at the location
where the plant is commissioned. If the organization is using labor intensive technique of
production then availability of skilled labor shall be keenly observed as labor is less mobile in
comparison to other factors.

4. Cheap transport facility: The need for transportation arises because
(i) raw material and fuel are to be moved to factory site;
(ii) Finished products are to be dispatched from factory to the market. The ideal plant is one
centrally located and directly served by water, rail, trucking, and air facilities. For example,
for an industry involved in exports, the ideal site will be near the port.

5. Power, fuel, water supply: The area should provide cheap power, soft water and adequate
sewage disposal facilities. Power failure has been one of the important reasons for industrial
break-down.

6. Local taxes and restrictions: Taxes levied by state governments vary from one state to
another. So the location shall be planned in the state where maximum benefit of tax subsidies
may be availed. Some states grant certain benefits and tax holidays to attract industries in their
states, which makes a firm cost efficient and helps in achieving the objective of minimizing cost.

7. Suitability of Climate: The climate varies from one place to another, which also effects the
end product. Humid climate is good for cotton textiles so coastal areas may be a good location
for cotton textiles. Dry climate is essential for flour milling industries, therefore, they are located
in Kanpur, Pune etc. which do not have damp climate.

8. Industry Concentration: Sometimes industry of same type gets concentrated in a particular
area. So, all the factors of production providers like skilled labor, raw-material provider, etc also
get collected around that area creating economies in operations. It also affects the location
planning decision of the firm as it minimizes the overall cost of the firm.

B) Secondary Factors: These factors do not have any direct impact on the cost of operations but
are indirectly related with it.
1. Political Factors: Policy of local government towards specific industry also effects the decision
of selecting the location. For example, Gujrat government does not allow sale of alcohol in
Gujrat.

2. Legal Factors: Poor law & order conditions prevailing in a particular location is also a decisive
factor. As industrialization was worst hit in Punjab at the time of terrorism.

3. Natural Factors: Factors like temperature, possibilities of Rain, Snowfall, etc are the natural
factors in deciding plant location. For example, J&K lacks industrialization due to these factors.

4. Religious/Social Factors: Decision of plant location will also depend on social values of local
society. It happened in case of Mc Donald when they were using cow beef in their burgers.