Pamantasan ng Cabuyao

Laguna, Philippines 4025

COLLEGE OF ENGINEERING

Plant Location
and
Buildings

5IE – 1

Amano, Thea Criselle O.

Migriño, Angelica E.
 Pamantasan ng Cabuyao
Laguna, Philippines 4025

COLLEGE OF ENGINEERING

Plant Location and Buildings

Learning Objectives:

o Define plant location.

o Identify the steps in selecting location.
o Explain the trends in plant location.
o Enumerate the major factors that affect the location decision.
o Learn and analyze the single-facility location.

Definition:

“The function of determining where the plant should be located for maximum
operating economy and effectiveness.”

- R. C. Davis

“The spot where, in consideration of the business as a whole, the total cost of
production and delivering goods to all the consumers is the lowest.”

- Bethel Smith and Atwater

Objective: The location strategy is to maximize the benefit of location to the firm
since the location is a significant cost and a revenue driver.

Plant location or the facilities location problem is an important strategic level

decision-making for an organisation. One of the key features of a conversion process
(manufacturing system) is the efficiency with which the products (services) are
transferred to the customers. This fact will include the determination of where to
place the plant or facility.

The selection of location is a key-decision as large investment is made in

building plant and machinery. It is not advisable or not possible to change the
 Pamantasan ng Cabuyao
Laguna, Philippines 4025

COLLEGE OF ENGINEERING
location very often. So an improper location of plant may lead to waste of all the
investments made in building and machinery, equipment.

Before a location for a plant is selected, long range forecasts should be made
anticipating future needs of the company. The plant location should be based on the
company’s expansion plan and policy, diversification plan for the products, changing
market conditions, the changing sources of raw materials and many other factors
that influence the choice of the location decision. The purpose of the location study is
to find an optimum location one that will result in the greatest advantage to the
organization.

Plant location means deciding a suitable location, area or place where the
plant will start functioning. It refers to the area where the plant will operate to produce
goods or services.

For instance, depending on the product and the type of production or service
taking place, transportation cost alone can total as much as 25% of the product’s
selling price. Other costs that may be influenced by location include taxes, wages,
raw material costs, and rents. When all costs are considered, location may alter total
operating expenses as much as 50%.

Why do the companies look for a plant location?

1. Expansion
Expanding an existing facility instead of moving from another place.

2. Additional facilities
Maintaining current sites while adding other facilities elsewhere.

3. Moving to another place

Closing the existing facility and moving to another location.

According to the type of business:

o Industrial Location – strategy is minimizing cost

o Retail or Professional Service – strategy is maximizing revenue
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COLLEGE OF ENGINEERING
o Warehouse Location – combination of cost and speed of delivery

Steps in Selecting Location

1. Country Decision
o The first step is to decide whether the plant is located domestically or
internationally.
o Due to globalization, the issue of local or foreign is gaining more
relevance.
o The choice of country depends on these following factors:
✓ Political risk, government rules, attitude, incentives
✓ Cultural and economic issues
✓ Location of markets
✓ Labor talent, attitude, costs, productivity
✓ Availability of supplies, communication, energy
✓ Exchange rates and currency risk

2. Region or Community Decision

o Factors to consider:
✓ Availability of raw materials
- It is very essential that the plant is in a place where the
supply of raw material is in maximum level to help reduce
the transportation cost, to have a proper and regular
supply of materials, and to save the cost of material
storage.
✓ Market Influence
- Since goods are produced for sale, it is very essential that
a plant should be located near the market. It reduces the
cost of delivery and promotional expense, enables to
render quick services, and can easily know and adjust to
the trends and needs of the consumers.
✓ Labor availability
- Sufficient skilled and knowledgeable workers at
reasonable wages are essential for smooth and successful
industry since man is the most important asset of a
company.
✓ Government Policies
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- The policies in the place should not be a hindrance in the
production of the industry. Consider the licensing policy,
freight rate policy, institutional finance and government
subsidies, etc.
✓ Availability of other sources like water, energy, power, fuel, oil, etc
- Industries that require other sources for their production
should be located near its supply.
✓ Attractiveness of region through its climate, facilities offered, etc.
- A place where facilities for raising capitals are available
attracts new industries. It should be advance in aspects
like finance and research facilities.
- Also, there are certain industries that needs to consider the
climate or mainly depends on the nature production.
✓ Environmental Regulation
- When putting up a business, we should always consider
the effect in the environment that’s why every town
implement policies that should obey and follow by all the
people around the community.
✓ Land and construction cost
- Expenses that may require to have land, buildings and
facilities should be considered. Constructions really
much money so anyone who wants to build up
business should choose a perfect location that suits to
their chosen industry.

3. Site Decision
o Factors to consider:
- Site cost and size
- The price of the site should be reasonable, and the area of
the land should accommodate not only its existing purpose
but offer a scope for future expansion.
✓ Air, rail, highway, and waterway systems
- Ideal plant is one which is centrally located and directly
connected by water, rail, road and air. Cost, dependability,
time required to transport goods, prompt availability, and
speed are the good effects in having good way systems.
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✓ Environmental Issues
- Proper waste disposal, flood conditions, pollution control,
etc. should be given attention to avoid harming the
environment. The plant location should have regular
management in the environment by having policies.
✓ Availability of services and supplies
- A good location is where you can get the sources and
supplies you need near your place. It would be a big help
to have a fast and good production and services and to
reduce large amount of cost especially when it comes to
transportation.

Trends in Plant Location

o Suburban Areas
- A suburban area is a community outside of an urban center and
its outskirts. Common features of these communities are single-
family homes interspersed with shopping malls and strips, as well
as office buildings. They are considered to be fairly quiet, provide
quality schools and are safer than urban areas.
- From 2001 to 2006, approximately 90 percent of population
growth occurred within the suburban areas. During the same
period, job growth occurred six times as quickly in the suburban
areas as in urban centers. Unlike when suburban areas were first
being developed, many working people commute from one
suburban area to another as opposed to commuting from the
suburban area to a city center. And with telecommuting jobs
becoming more prominent, the concern regarding commuting is
becoming less significant. With these considerations in mind, it is
believed suburban areas will continue to be a popular option for
deciding in which plant location to choose.
o Industrial Estate
- An industrial estate is a place where the required facilities and
factory accommodation are provided by the government to the
entrepreneurs to establish their industries there. Its objectives are
to provide infrastructure and accommodation facilities to the
entrepreneurs, encourage the development of small-scale
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COLLEGE OF ENGINEERING
industries in the country, decentralise industries to the rural and
backward areas, develop entrepreneurship by creating a
congenial climate to run the industries in these estates, area,
towns, etc.
o Increase the Role of the Government and Institutions
- Industrial location has received closer attention of the government
and policy planners in recent times. Location policy is an
extension of the policy of development backward areas and
industrial disposal. It deals with negative and positive aspect. The
negative aspect is concerned with preventive measures for
developing new units in the already advanced areas and urban,
metropolitan centers with the dictates of then government from
time to time. But positive thrust deals with instruments like
concessional finance, investment tax incentives subsidies etc.
which are being used by the government to develop new units in
backward and zero industries districts of different states. With the
help of positive strategy, government is trying to ensure effective
dispersal of industrial units to backward areas.

Globalization
Globalization is a process of interaction and integration among the people,
companies, and governments of different nations, a process driven by international
trade and investment and aided by information technology. This process has effects
on the environment, on culture, on political systems, on economic development and
prosperity, and on human physical well-being in societies around the world.

Globalization has taken place because of the following development:

1. Market economics
2. Better international communications
3. More rapid, reliable travel and shipping
4. Ease of capital flow between countries
5. High differences in labor costs
 Pamantasan ng Cabuyao
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Factors Affecting Location Decision

1. Labor Productivity
- When deciding a location, management may be tempted by an area’s low
wage rage. Management must also consider productivity. Differences
exist in productivity in various countries. What management is really
interested in is the combination of production and wage rate.
𝐿𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑑𝑎𝑦
= 𝐿𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 (𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦)

The low labor cost per unit, the better.

2. Cost

We can divide location cost into two categories, tangible and intangible.
Tangible costs are those cost that are readily identifiable and precisely measured.
They include utilities, labor, materials, taxes, depreciation and other costs that the
accounting department and management can identify. In addition, such costs as
transportation of raw materials, transportation of finished goods, and site
construction are all factored into the overall cost of a location.
Intangible costs are less quantified. They include quality of education, public
transportation facilities, community attitudes toward the industry and the company,
and quality and attitude of prospective employees. They also include quality of life
variables, such as climate change and sport teams, that may influence personnel
recruiting.

3. Political Rules, Values, and Culture

The political risk associated with national, state, and local governments’ attitudes
toward private and intellectual property, zoning, pollution, and employment stability
may be in flux. Governmental positions at the time a location decision is made may
not be lasting ones. However, management may find that these attitudes can be
influenced by their own leadership.
Worker values may also differ from country to country, region to region, and
small town to city. Worker views regarding turnover, unions, and absenteeism are all
 Pamantasan ng Cabuyao
Laguna, Philippines 4025

COLLEGE OF ENGINEERING
relevant factors. In turn, these values can affect a company’s decision whether to
make offers to current workers if the firm relocates to a new location.
One of the greatest challenges in global operations decision is dealing with
another country’s culture. Cultural variations in punctuality by employees and
suppliers make a marked difference in production and delivery schedules. Bribery
and other forms of corruption also create substantial economic efficiency, as well as
ethical and legal problems in the global arena. As a result, operations managers face
significant challenges when building effective supply chains across cultures.

4. Proximity to Markets

For many firms, locating near customers is extremely important. Particularly,

service organizations, like drugstores, restaurants, post office or barbers, find the
proximity to market is the primary location factor. Manufacturing firms find it useful to
be close to customers when transporting to finished goods is expensive or difficult
(perhaps because they are bulky, heavy, or fragile). In addition, with Just-In-Time
production, suppliers want to relocate near users.

5. Proximity to Suppliers

Firms locate near their raw materials and suppliers because of:

1. Perishability
2. Transportation cost
3. Bulk

Bakeries, dairy plants and frozen seafood processors deal with perishable raw
materials, so they often locate close to suppliers. Companies dependent on inputs of
heavy or bulky raw materials (such as steel producers using coal and iron ore) face
expensive inbound transportation cost, so transportation cost become a major factor.
And goods for which there is a reduction in bulk during production like trees to
lumber typically need facilities near the raw materials.
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6. Proximity to Competitors (Clustering)

Clustering often occurs when a major resource is found in that region. Such
resources include natural resources, information resources, venture capital
resources and talent resources. Italy may be the true leader when it comes to
clustering, however, with northern zones of that country holding world leadership in
such specialties as ceramic tile (Modena), gold jewelry (Vicenza), machine tools
(Busto Arsizio), cashmere and wool (Billena), designer eyeglass (Belluma) and pasta
machines (Parma).

Problems on Single-Facility Location

1. Minisum Location Problem
- Minimizing the sum of the weighted distance between the new facility and
other existing facilities.
Pamantasan ng Cabuyao
Laguna, Philippines 4025

COLLEGE OF ENGINEERING
Pamantasan ng Cabuyao
Laguna, Philippines 4025

COLLEGE OF ENGINEERING
Pamantasan ng Cabuyao
Laguna, Philippines 4025

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 Pamantasan ng Cabuyao
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2. Minimax Location Problem

- Minimizing the maximum distance between the new facility and any
existing facility.
Pamantasan ng Cabuyao
Laguna, Philippines 4025

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 Pamantasan ng Cabuyao
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References

o Operations Management – Eleventh Edition by J. Heizer and B. Render

o Production Management – Third Edition by E. Martinez

o A. Khalique. (2017, December 29). Production and Operations Management

[Blog Post]. Retrieved from https://notespro.info/plant-location/

o D. Rocking. (2011, April 24). Plant Location. Retrieved from

https://www.slideshare.net/DheepakRocking/plant-location-7720564

o A. G. Diaz & J. M. G. Smith. (n.d.). Facilities Planning and Design [PDF File].