4a+plant location

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OPERATIONS MANAGEMENT

PLANT LOCATION


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Plant Location

Table of Contents

Introduction...................................................................................................................................... 2

Factors Affecting the Plant Location:............................................................................................... 4

Primary Factors:.........................................................................................................................4Secondary Factors : ...................................................................................................................8

Selection of Site............................................................................................................................. 11

Comparing Chinese & Indian Manufacturing Environments ......................................................... 18

Location Models............................................................................................................................. 21

Factor Rating Method...............................................................................................................21

Point Rating Method.................................................................................................................23

Location Break-even Analysis:.................................................................................................25

Qualitative factor analysis method...........................................................................................28

Government Control on Location of Industries.............................................................................. 31

The objectives of state intervention and control are: ...............................................................31

Recent Trends in The Location Of Industries ................................................................................ 32

Gujarat Ambuja Case Study.......................................................................................................... 35

Conclusion..................................................................................................................................... 45

Bibliography & Webliography ........................................................................................................ 46

Webliography ...........................................................................................................................46


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IntroductionEvery entrepreneur is faced with the problem of deciding the best site for

location of his plant or factory.

What is plant location?

Plant location refers to the choice of region and the selection of a particular

site for setting up a business or factory.

But the choice is made only after considering cost and benefits of different

alternative sites. It is a strategic decision that cannot be changed once

taken. If at all changed only at considerable loss, the location should be

selected as per its own requirements and circumstances. Each individualplant is a case in itself. Businessman should try to make an attempt for

optimum or ideal location.

What is an ideal location?

An ideal location is one where the cost of the product is kept to minimum,

with a large market share, the least risk and the maximum social gain. It is

the place of maximum net advantage or which gives lowest unit cost of

production and distribution. For achieving this objective, small-scale

entrepreneur can make use of locational analysis for this purpose.

Locational analysis is a dynamic process where entrepreneur analyses and

compares the appropriateness or otherwise of alternative sites with the aim

of selecting the best site for a given enterprise. It consists the following:

Demographic Analysis:

It involves study of population in the area in terms of total population (in

no.), age composition, per capita income, educational level, occupational

structure etc.


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Trade Area Analysis:

It is an analysis of the geographic area that provides continued clientele to

the firm. He would also see the feasibility of accessing the trade area from

alternative sites.

Competitive Analysis:

It helps to judge the nature, location, size and quality of competition in a

given trade area.

Traffic analysis:

To have a rough idea about the number of potential customers passing by

the proposed site during the working hours of the shop, the traffic analysis

aims at judging the alternative sites in terms of pedestrian and vehicular

traffic passing a site.

Site economics:

Alternative sites are evaluated in terms of establishment costs and

operational costs under this. Costs of establishment is basically cost incurred

for permanent physical facilities but operational costs are incurred for

running business on day to day basis, they are also called as running costs.


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Factors Affecting the Plant Location:Plant location studies are conducted in three phases :

Regional factors ,

Community factors , and

Site factors

Regional Factors:

Regional factors decide the overall area within the country. Such factors

are : proximity to markets, proximity to sources of raw materials, availability

of utilities, transport facilities, climatic conditions , industrial and taxation

laws , etc .

Community Factors:

Community factors influence selection of the plant location within the region.

Such factors are: availability of labour, industrial and labour attitudes, social

structure, service facilities etc.

Site factors:

Site factors favour specific site within the community. Such factors are

availability and cost of the land, suitability of the land, etc

The location of an industry is determined by taking into consideration the

following factors:

Primary Factors:

Supply of raw materials:

Since raw materials usually constitute 50 to 60 percent of the product cost ,

it important that the firm should get its requirements of raw materials at the

right time and at the reasonable price for which the plant must be located in

the neighbourhood of some sources which can meet the raw materials

requirements of the unit .time of receipt of raw materials is important since


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inventory carrying costs rise pretty high if lead time is large due to distance

factors besides transport cost , distance can pose other problems.

Follow up the suppliers become costlier.

The buyer is unable to keep track of what is being dispatched by the

suppliers.

Replacement of defective materials is costlier, time consuming and

affects delivery commitments.

Raw materials can be classified in to two categories:

Gross materials , and

Pure Materials

Gross materials:

Gross materials are those weigh in the process of transformation in to

finished goods e.g. Iron ore, coal, limestone , sugarcane , timber etc .

Industries requiring gross materials therefore are located near the soures of

availability, e..g. steel mills are located nearer to places of iron ore and coal

deposit. The location of mentioned industry is justified because bulky rawmaterials can delivered economically if the unit are located close by.

Transporting these materials to distant places would be expensive.

Moreover, since these materials lose weight in the process of manufacture,

the transportation of finished products to market is comparatively cheaper.

Pure Materials:

Pure materials are those materials which add their weigh to finished

products in the process of manufacture e.g. cotton textile , woolen , silk

fabrics , ice factories, etc. plants requiring pure materials , depend upon the

other factors , may be located away from the soures of raw materials . the

place of production of these industries is usally the place of consumption


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where the final products is more expensive to carry because it is more bulky

and more perishable than its raw materials.

Supply of raw materials is equally important for small units. This is because

usally small units are not considered important customers. They get least

priority. The availability of materials to small units to a large extent thus

depends on their follow up and personal visits to the suppliers plants which

is possible only if the buyers plant is closely.

Nearness to the market :

Since goods are produced for sale, it is very essential that the factory should

be located near their market. A reduction in the cost of transporting finished

goods to the market; the ability to adjust the production programmed to suit

the likes and dislikes of consumers; the ability to render prompt service to

the consumers, provides after sale service and execute replacement orders

without delay. Industries using pure or non-weight- losing raw materials

,bulky products and servicing units tends to be located near their market .To

be specific concerns manufacturing wooden accessories for electrical wiring ,

must be located near their market.

Transport Facilities :

Speedy transport facilities are needed for the regular and timely supply of

raw materials at low cost and for transporting finished products on time to

the market. Transport facilities with good speed and capacity are needed for

transporting laborers and establishing contacts in the market, and

controlling supply according to change in demand. A producer has to choose

a speedy and cheap means of transport after making a comparative cost

study of different means of transport, e.g. roads , railways, waterways, etc.

transporting facilities are important for getting control over foreign markets.


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Supply of Labour :

Plant location should be such that required labor is easily available in the

neighourhood. Importing labour from outside is usually costly and it cause a

lot of administrative problems. Availability of required labor locally is better

since problem of arranging accommodation and other related problems do

not arise. Since normally workers with specific skills are required, some sort

of training facility should also available in the neighbourhood . skilled

employees are easily available if ITI s or Engineering colleges are in the

neighbourhood .

When thinking of starting an industry area , special attention should be paid

to the availability of infrastructure . however a backward area completely cut

off from any township is likely is likely to pose endless problems.

Productivity of labour is a factor of equal important .

Availability of power :

Power is necessary for process of production and for transporting finishing

goods and raw materials. Power may be diesel and atomis energy. All type

of power like electricity , diesel and atomic energy are localized and mobile .power shortage lead to tremendous losses due to the stoppage of

machinery. Therefore industry must have sufficient supply of power .

usually, heavy industries like machines tools and coal mining industries are

located near soures of power .in underdeveloped areas industry depends on

the diesel power or local availability of electricity.

Supply of Capital :

Industries require capital for initial promotion and expansion . therefore, a

capital market must be developed in industries centres. Large production ,

mechanization and big industries requires large amounts of equity capital

and debenture capital for a long period. Commercial banks should also be

developed for the supply of current or short term or working capital.


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Capital is more mobile than labour and , therefore nearer to capital is not

required for the purpose of industrialization.

Secondary Factors :

Facilities:

An enterprising spirit innovation , technical know how and an industrious

nature of population all these factors taken tighter and a favourable

Government policy create a favourable atmosphere for the purpose of the

establishment of industries . Heavy industries in India are the result of

personal factors like enterprise , industrious nature of one man creating an

industrial group or a family , e.g., Tatas , Kirloskars , etc.

Natural Factors:

Climatic factor may not have a major influence these days because of

modern air conditioning facilities available today. However it is important for

some industries like textiles mills which require high humidity, sugar and

jute. These industries depend on a good climate and source of natural raw

materials.

Government Subsidies and Facilities :

The Government may encourage the dispersal of industries in

underdeveloped areas by making capital , land , power and water available

at subsidized rates .The Government may give such such facilities as

developed rebate , tax exemption , price subsidies , banking , insurance and

postal facilities at low rates , priority in transport and supply of raw

materials etc. By giving these facilities , the Government may bring about

the development of industries in backward area and this will result in the

regional balancing of industries .


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Personal Factors :

There are entrepreneurs, specially small industrialists , who locate their

plants purely on personal grounds , disregarding economic considerations.

Such location sometime totally disapprove the many current theories of

plant location . M/s A , unit making ropes is located at naraina , 45 kms from

Jaipur Rajasthan . they manufacture sisal ropes , manila ropes and jute

twines. There are very few rope making units in the country and the unit at

naraina is the third biggest . It is located in a place where there are no

resources and no markets .It gets fibre from Maharashtra Karnataka and the

Philippines , and the suppliers rope to the navy. Moreover Naraina is a small

place and has no particular advantage of economic or social facilities . This is

clearly an examples of an enterprise which has been set up purely on the

basis of personal factors.

Miscellaneous Factors :

The following factors also affect the location of the industrial unit :

Suitability of the land :

Site selection should also take into account topography and soil structure of

the land . The soil structure must be capable of bearing loads of foundations.

Though modern building techniques can overcome the limitations of the soil ,

but if considerable improvement is required then selection of a low cost land

may ultimately turn out be expensive.

Disposal of waters :

The problems of the disposal of effluents is common to many industries ,

particularly chemical , sugar , steel and leather industries . The site selected

for the location of the plant should have provision for the disposal of waste .

There must be enough vacant land for the dumping of solid waste . For liquid

waste , satisfactory sewer connections connections and an effective drainage

system should be available .


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The site selected should , as far as possible , be in the midst of a good

environment . The question of its beauty should not be ignorned.

Availability of Water and Fire-fighting Facilities :

Some industries require plentiful supply of water for water for their working.

Some of these are : fertilizer units , bleaching , dyeing , and screen printing

units. These factories must be located in places where , water is available in

abundance . Water may be obtained from the local authority , from the canal

, from a river or a lake , or borewell . In any case , the supply of water

should be considered with respect to its regularity , cost and purity .

Industrial units are exposed to fire hazards .In such case , adequate fire-

fighting facilities must be available. Otherwise , the loss from a pire will be

considerable . Thought the availability of fire-fighting facilities is not a

decisive factor in the plant location, the fact remains that the existence of

such facilities will enhance the suitability of a location.

Community attitudes :

Community attitudes towards work ( i.e. whether the people in the location

are hard working or otherwise ) as well as their attitudes towards the

incoming entrepreneurs (helpful and co-operative or otherwise) can make or

mar an industry . Locational decisions , therefore , must take such factors

also into account particularly while setting up labour intensive units.


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Selection of SiteThere are broadly three possible alternatives open for selection of the

locality of the industrial unit:

Urban or City area.

Rural area.

Suburban area.

Urban or City area

Due to certain typical advantages available only in the city area, promoters

show preference for the city area as the location of the industrial unit.

Advantages of Urban area

Good transport facilities are available for the movement of raw-materials

and finished products by rail and road and at times, by water and air.

Good and prompt postal and communication services are available.

Banking and credit facilities available.

Services of insurance companies are available in city areas.

Sufficient storing facilities including cold-storage , are available.

Ample availability of skilled and unskilled workers.

Advantages of vicitinty of the market for the product. Due to large

population,

The local demand for the product is fairly high.

Facility of the ancillary and services units, which develop around the

industrial strip of the city area.

Sufficient passenger transport facilities by road and railways are available

to employees.


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Development of the training institutes for workers and management

institutes for executives put the city area units into privileged position.

Educational, medical and recreational institutes increase the amenities of

lives in the city area .

Certain specific municipal services facilities are available only in the city

areas, like water supply, drainage, fire fighting facilities, sufficient police

protection etc.

Disadvantages of Urban or City Area

The cost of land is very high as compared to rural areas

Even at high cost, sufficient land is not available, which puts constraints

on the arrangement of plants and machines. Sometimes multi-story

buildings are used which are not suitable for the installation of heavy

plant and machines

Due to high standard of living in city area, the cost of labour is relative

high

Due to possibilities of changing jobs from one unit to another, and

tendency of competitors to snatch away the good employees, the rate of

labour turnover is very high in city area

The trade union movement is very strong in city area. Militant trade

unionists disturd the amicable industrial relations, which gives rise to

strikes and lockouts

Various types of taxes is levied in city areas. The rates of taxes are

relative high. Eg. Octroi is a typical tax of the city area which is not levied

in rural areas.

Certain municipal restrictions put constraints and involve extra cost due

to height of the building, disposal of waters, treatment of affluent water ,

elimination of air pollution caused by smoke etc.


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The industrialization in the city areas gives birth to slumps and dirty

residence which creates the typical problems of sanitation and health.

Rural Area

In certain situations, a rural area is also preferred as a site for the industrial

unit.

Advantages of Rural area

As compared to the city area, the land is available at cheaper rates.

Large plots of the land area available which can be developed for a

factory sites, office buildings and residential quarters. Horizontal

arrangement of plant machines in the vast areas of land is possible.

Due to lower standard of living, the rates of labour are relatively lower.

As compared to the city area, the labour force is more or less stable

which reduces the rate of labour turnover.

The industrial relations between labour and management are relatively

amicable.

The local taxes which are found in the city areas are practically non-

existent in rural areas.

The municipal restrictions which are found in city areas do not exist in

rural areas. E.g. height of buildings.

Slumps and dirty residence are not found in rural areas. The rural areas is

conducive to good health of workers.

Due to lack of congestion, there is danger of fire caused by surrounding

units.


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Disadvantages of Rural Area

Transportation facilities are not available in good condition and sufficient

quantities.

Banking and credit facilities are also not available. The indigenous

money-lenders are charging exorbitantly for these services.

Absence of insurance facilities.

Storing and warehouse facilities are not available in rural areas.

Passenger transport facilities are not available, as are available in city

area.

Like in city areas, the advantage of ancillary and service units is not

available.

Such units are very far from the market place and this increases the cost

of distribution of finished goods.

Sometimes the means of transport are not available.

It is not possible to tap the advantage of industrial training institutes or

management development pragrammes which is possible in city areas.

It is generally not easy to get skilled workers in rural areas.

Municipal facilities like water supply, drainage, fire-fighting etc. are not

available in rural areas.

There is absence of recreation facilities, good educational institutes, good

and sufficient medical facilities.

Suburban Area

The city area as a location of industrial unit has got many negative aspects.

The other extreme is the rural area, which again is not free from many

limitations. The better compromise in the decision is the selection of

suburban area as the location of the industrial unit. Suburban area is the


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area which is located on the outskirts of the city area. Suburban area

matches the advantages of the rural area with those of city area which is

located at a short distance, e.g. Odhav, Narol, Kathawada, Naroda, vatva,

are the suburban areas of Ahmedabad City.

Advantages of Suburban Area

Land is available at a cheaper rate as compared to urban areas.

Adequate land is available for future expansion unit. The machines can be

installed horizontally and still the provision for future expansion can be

made.

Infrastructure facilities like road, water supply, drainage, banking, ware-housing, insurance etc. are developed Government, municipal authorities

or industrial associations.

As city area is nearest, the skilled and unskilled, both type of labour are

available.

It is possible to tap the advantage of industrial training institutes,

management development programmes, research institutes etc. which

are available in nearby city area.

The nearby city area provides a substantial market for the products of the

unit. This reduces the cost of marketing the finished products and other

ancillary advantages of marketing are available.

Educational institutes, medical facilities and other recreational facilities

are available in the suburban area itself as well as in the nearby city area.

The limitation of Suburban area as a site for industry is that in the

development process, it may be converted into a part of the urban area with

all its merits and demerits.


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In general, the big city (urban area ) offers particular benefits to the small

enterprise. Rural areas offer benefits to a large manufacturing firm and

suburban areas offer suits medium sized industries.

Comparison between Urban and Rural area in Connection with the Selection

of Site

URBAN RURAL

1.Availability of local market:

Due to large population the localdemand for the product is fairlyhigh.

2. Labour:Ample availability of diversified

labour.

3. Transport Facilities:Good transport facilities are

available.

4. Cost of Land:The cost of land is high. Even at

high cost sufficient land is not

available which puts constraintson the arrangement of plants

and machines.

5. Allied Industries:Proximity to allied industries and

services units.

6. Availability of Facilities:Availability of educationalrecreational

and social facilities.

7. Cost of Labour:Due high cost of living the cost

of labour is relatively high.

8. Rates of Taxes:

The market place is far away fromthe industries; therefore cost ofdistribution of finished products ismore.

It is rather difficult to get skilled

labour in rural areas.

Adequate transport facilities are not

available.

Sufficient land is available at

cheaper rates.

Absence of allied industries.

There are fewer educational,

recreational and social facilities.

Labour is available at cheaper rates.


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The rates of taxes is relatively

high.

9. Postal and CommunicationService:

Good and prompt postal andcommunication services are

available.

10. Labour Turnover:High labour turnover because of

large number of industries.

11. Training Facilities:Development of the training

facilities for workers andmanagement instiutes forexecutives put the city area into

privileged position.

12. Trade Union Movement:The trade union movement is

very high which often results instrikes, lockouts etc.

13. Others:

Government policy Storage facilities

Problems of Pollution

Restriction on Construction

The rates of taxes are quite low.

Prompt postal and communicationservices are not available.

Labour force is more stable.

Absence of training facilities and

management institutes.

Trade union movement is not very

strong.


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Comparing Chinese & Indian Manufacturing Environments

Labour Issues

24 hours shift Industries in China are allowed to operate all 24 hours.

This drastically brings down the investment in plant & machinery. In India,

production units cannot operate after 7 p.m. We can, therefore, take only

1/3 of production, in comparison to China. Obviously, it adds to the cost of

production in India.

Overtime basis In India, workers have to paid double wages for

overtime. In China, there are no such provisions. Hence, the cost of labourin China is less than that in India. The workers work in China is based on

the output target and not on the number of hours.

Work culture In China, workers are highly disciplined and are committed

to work. In India, the work culture leaves ample scope for improvement.

There is a need for Indian workers to be more disciplined and committed.

Chinese workers are 1517% more productive than Indian workers.

Labour Laws In China, labour laws are not restrictive. Industrial units are

permitted to dismiss a worker, if his productivity is not up to the mark.

Whereas in India, in an industrial unit, a person cannot be dismissed easily.

In India, even if a factory is closed, workers cannot be discharged.

Minimum wages In China, there are no laws related to minimum wages,

a worker is given his salary according to his performance. Whereas in India,

a worker has to be paid the minimum salary irrespective of the work done byhim.

Trade Unions There are no trade unions in China. Therefore, there are no

strikes/agitations on behalf of workers. This has benefited the workers, in

terms of higher wages due to increased productivity.


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Cost of Production

There are many industrial units in China that are manufacturing all types of

raw material and components/parts. This means good quality inputs are

available at very competitive prices. This leads to low cost of production.

Whereas in India, in segments such as clocks and calculators, the end

product manufacturer has to opt for integration, which is not his core

competence, which means higher capital investment, increased wastages

and higher cost of production.

Working Capital Requirements

In China, most production units run on the basis of just in time inventory. All

inputs such as raw material and components are received by the production

units, only on the day of production and finished goods are dispatched from

the units the same day. Whereas in India, inventory carrying cost is very

high, since producers have to risk raw material for at least two to three

months.

Problems of Supply Chain

In India, suppliers do not maintain delivery schedule, because they are not

disciplined. Besides, the delivery schedule cannot be maintained because of

labour problems, strike by transporters, or due to power problems. Whereas

in China, suppliers are given the time and date of delivery and the

production units receive the input on time.

Export & Import

Chinas import procedure is very simple, which leads to faster clearance of

consignments. Goods imported are cleared within 24 hours with the Customs

and Ports working continuously for all 365 days in a year. In India, due to

the complex procedures, consignments take a long time at the clearance

stage. In India, the Customs and Ports work for about 250 days, leading to

delays and resulting in huge inventories


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Government subsidy

In China, the government provides 19-27% subsidy for export. Further, the

import of inputs for export purposes are duty free. A large area has been

declared as a free zone.

Duty structure

In India, there are several anomalies in the duty structure. Customs duty on

raw material/components/parts is higher than the duty on finished products.

Excise duty is required to be paid in retail by local industries, while excise

duty on imported goods is paid on the invoiced price. The burden of sales

tax, octroi, etc. and also income tax is very high, which add to the cost.

Infrastructure

The quality of roads in China is very good. Therefore, material can be

transported from one place to another place very quickly. While in India, the

roads are in a very bad condition, leading to delay in transportation. For

example, for a distance of 800 km between Bombay and Rajkot it takes two

to three days to get the material. In China, the distance of 800 km can be

covered in 10 hours. The communication system in China is very reliable and

cheaper than India. In China, there are no power failures and good quality

electric energy is available at around Rs 2/ per unit. While in India, the

quality of electric energy is poor, there are frequent breakdowns and the

cost is Rs 4/- per unit.


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Location Models

Various models are available which help identify a near ideal location. The

most popular models are:

1. Factor Rating Method

2. Point rating Method

3. Break-even Analysis

4. Qualitative Factor Analysis

Factor Rating Method

In this method, factor ratings are used to evaluate alternative locations. The

method has following advantages:

Simplicity which facilitates communication about why location/site is

better than another.

Enables bringing diverse locational considerations into the evaluation

process.

Foster consistency of judgement about location alternatives.

The steps involved are:

List the most relevant factors in the location decision.

Rate each factor ( say from 1 for every low and to 5 for very high )

according to its relative importance, i.e a factor rating is given to each

factor, based on its importance, the higher the ratings the more

important is the factor.

Rate each location (say 1 for very low and to 10 foe very high) according

to its merits on each factor,

Compute the product of ratings multiplying the factor rating by the

location rating for each factor.


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Compute the sum of the product of ratings for each location.

Decision: Select the location alternative which has maximum sum of product

ratings as the choice.

Illustration : Table gives the various factor considered for location decision

and the factor rating assigned to each factor based on its importance for

location decision and locating rating for the location alternatives based on

the merits of each location in each of the factor considered.

TABLE: FACTOR RATINGS AND LOCATION RATINGS FOR LOCATION

ALTERNATIVES.

LOCATION RATING PRODUCT OF RATINGFACTOR FACTOR

RATING

LOCATIONA

LOCATIONB

LOCATIONA

LOCATIONB

1. TAXADVANTAGE

2. SUITABILITYOF LABOUR

SKILL

3. PROXIITYTO

CUSTOMERS

4. PROXIMITY

TO SUPPLIERS5. ADEQUACY OF

WATER

6. RECEPTIVITYOF

COMMUNITY

7. QUALITY OFEADUCATION

AL SYSTEM

8. ACCESS TORAIL AND AIR

TRANSPORTATION

9. SUITABILITYOF CLIMATE

10.AVAILABILITYOF POWER.

4

3

3

5

1

5

4

3

2

2

8

2

6

2

3

4

1

10

7

6

6

3

5

4

3

3

2

8

9

4

32

6

18

10

3

20

4

30

14

12

24

9

15

20

3

15

8

24

18

8


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TOTAL SCORE 149 144

Since the total score for location A is higher than that of location B, location

A is the choice.

Point Rating Method

In selecting a site or location, companies have several objectives, but not all

are of equal importance. The relative weight a company assigns to each

objective or to each location factor may be representative by the number of

points a perfect site would receive in each category. Each potential site is

then evaluated with respect to every factor a company is looking for and

points are assigned to each factor. The site with the highest number of

points is considered superior to other sites. The drawback of this method is

that the high score in any factor can overcome the score of any other factor.

Since some factors are considered as important or essential, any site that

does not have at least a specified number of points for those essential

factors will be excluded from further consideration.

What is significant in the point rating system is the relative importance of

tangible cost factors compared to intangible factors. Points are usually

assigned only to intangible factors and an evaluation is made to determine

whether the difference between the intangible score is worth the difference if

any, between the tangible costs of the competing locations.

If two alternative potential location are found to be equally attractive by

comparing the costs (based on tangible factors) then, these two locations

may further be evaluated, based on the intangible factors using the point

rating method.

ILLUSTRATION:


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After evaluating two potential sites A & B by comparing costs and finding

them approximately equal from cost point of view, a manufacturer decided

to evaluate the intangible factors for these two location by using the point

rating method. Comparative rating assigned to major intangible location

factors to determine the relative importance for each factor and the points

assigned to each location alternative for each of the factors are given in the

table:

Points assigned tolocations

Factors RatedMaximum

Possible PointsLocationA

LocationB

Future availability offuel 300 200 250

transportation flexibilityand growth 200 150 150

Adequacy of watersupply 100 100 100

Labour availability 250 220 200

Pollution regulations 30 20 20

Site topography 50 40 30

Living conditions 150 100 125

Total 830 875

From the table, it is seen that location B has slight advantage over location

A.


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Location Break-even Analysis:

In comparing several potential locations on an economic basis, (i.e, tangible

factors) only the revenue and costs that need to be considered are the ones

that that vary from one location to another. If revenue per unit is the same,

regardless of where the goods are produced the total revenue can be

eliminated from consideration. An economic comparison of location can be

made by identifying the fixed costs and the variable costs and plotting the

break even analysis on the graph for each location.

This graphical approach can easily identify the range of annual production

volume over which a location is preferable.

The steps involved in this method are :

(a) Determine all relevant costs that vary with each location.

(b) Categorize the costs for each location into annual fixed cost (FC) and

variable cost per unit (VC) and calculate the total cost (TC) for the desired

volume of production per annum, for each location.

(c) Plot the total costs associated with each location on a single chart or

graph of annual cost versus annual production volume.

(d) Select the location with the lowest total annual cost (TC) at the

expected production volume per annum (Q).

Note: If revenues vary from one location to another, then comparison of

location should be made on the basis of profits (i.e. Total revenue-Total

cost) at each location.

Illustration: Potential locations A,B and C have the cost structures shown for

producing a product expented to sell at Rs.100 per unit. Find the most

economical location for an expected volume of 2000 units/year. Also

determine the range of annual volume of production for which, each of the

location A, B and C would be most economical.


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Locationfixedcost/year

Variable costper unit

A Rs.25000 Rs.50

B Rs.50000 Rs.25

C Rs.80000 Rs.15

Sollution

(a) To determine the most economical location for an expected annual

volume of production of 2000 units, calculate the total cost of production at

each of the locations for the annual production volume Q= 2000nos.

Total cost = ( Fixed cost per annum) + (Variable cost per unit) x (Quantity

produced)

Total cost at location A, TC = (FC) + (VC) x Q

TC=25000 + 50 x 2000

=125000

Similarly

Total cost at location B, TC = 50000 + 25 x 2000

= 100000

Total cost at location C, TC = 80000 + 15 x 2000

= 110000


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By comparing the total costs at each of the three location, it is seen that

location B is the most economical location for the volume of production of

2000 nos. per year.

(b) To determine the range of annual volume of production at which each

of the three locations would become most economical, it is necessary to

determine the break-even volumes either by graphical method or by

analytical method.

Analytical Method

To determine the break even volume between location A and location B, the

total cost for producing the break even quantity say

Qab at each of location A & B are equated i.e

25000 + 50Qab = 50000 + 25Qab

50 Qab -25Qab = 50000 25000

25Qab = 25000

Qab = 25000 / 25

Qab = 1000

To determine the break even volume between location B & C, the total cost

for producing the break even quantity say Qbc at each of location B and C

are equated i.e,

50000 + 25Qbc = 80000 + 15Qbc

25Qbc 15Qbc = 80000 50000

10Qbc = 30000

Qbc = 3000

The above break even quantities are shown graphically below.


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Qualitative factor analysis method

If economic criteria are not sufficiently influential to decide the location

alternatives, a system of weighing the criteria might be useful in making a

plant location decision. This approach is referred to as qualitative factor

analysis. The steps involved are:

(a) Develop a list of relevant factors.

(b) Assign a weight to each factor to indicate its relative importance

(weights may total upto 1.0)

(c) Assign a common scale to each factor (say 0 to 100) and designate

any minimum points to be scored by any location.

(d) Score each potential location according to the designated scale and

multiply the scores by the weights to arrive at the weighted scores.

Annual Volume (Unit) (Q)

500 1000 1500 2000 2500 3000

80000

50000

25000

Location A

Location B

Location C

AnnualTotalCost


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Government Control on Location of IndustriesThe basic objective of the private sector is to obtain maximum profits out of

the business operations. So the private sector industries select such a sites

which reaps maximum economic advantage. Such a policy results in the

concentration or localization of industries in certain areas leaving the other

areas underdeveloped.

Such a policy distorts the quality of income , wealth and opportunity. So the

government being the custodian of public interest , intervenes in the

locational decisions as under:

Through the licensing policy, it restricts the concentration of industries in

developed areas;It provides certain tempting incentives for the spread of

the industries in the industrially backward areas ;

It establish the giant public sector units in the relatively less developed

areas

The objectives of state intervention and control are:

To attain balanced regional development.

To narrow down the gap of inequality of income and wealth through

creating and providing employment opportunities to less developed areas

To reduce the concentration of population and congestion of industries in

city areas

As strategic defence policy, spread of industries reduces the chances of

heavy losses in war time.


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Establishment of Industrial Estate

Industrial estate is a piece of vast land subdivided into different industrial

plots where in factories shades are constructed. The Govt of India has

planned a national policy for the development of industrial estates. It

assigned the responsibility of development of industrial estates to state

government. In each State, the State development corporation has

developed many industrial estates practically in all districts of the states.

Industrial estates have also been developed by private entrepreneurs and

chambers of commerce. The plots of land along with factory shades and

infrastructure facilities are developed in the industrial estate and are sold to

prospective promoters. The establishment of industrial\rail has greatly

affected the location of industries

Decentralisation of Industries:

Under the conscious policy of the government, concentration of industrial

unit is prevent through licensing policy. New units are not permitted to be

started in certain industrially congetsted areas. Similarly existing units either

establish their additional plants in less developed areas or sometimes

relocate the whole unit in such areas.

Increased Role of the Government in the Decision of Location of

Industries

Government through its persuasive and compulsive method, greatly affects

the location decision in recent times. It provides certain attractive incentives

to the promoters to establish their units in less developed area at the same

time it does not permit excessive industrialization in certain developed

areas.

Competition between Government and Institution:

As industry provides job opportunity to the local population, many local

organization attempts to tempt the prospective promoters to establish the


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units in their areas. They provide different type of incentives like cheap land,

relief in local taxes etc. Sometime objectives of local organizations and

government comes in conflict on the issue of location of industries. Thus, the

whole pattern of decision about the location of industries has undergone

substantial changes in recent times.


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Gujarat Ambuja Case Study

Working Hard Towards Operational Excellence

According to analysts, GACLs strategic farsightedness was evident in its

decision to locate its plants in backward areas, so as to take advantage of

substantial sales tax and income tax incentives[2] . GACLs units in the

states of Gujarat, HP and Punjab also received sales tax incentives.

This was possible as all new investments in cement after 1986 enjoyed a

sales tax benefit of up to 90% of the value of fixed assets for a period of 14

years. To get the sales tax incentives on a continual basis, companiesneeded to incur constant capital expenditure. Thus, GACL continually

expanded capacities in Gujarat and Punjab.

The Himachal Pradesh plant had the advantage of prioritized power supply at

a guaranteed cost for five years from the date of commissioning. The

decision to set up a plant in HP made all the more sense because the region

was cement deficit at that point of time. Also, the plant was closer to the

mines and the Punjab grinding unit.

Another reason GACL finalized the plant location in HP was that the area had

substantial limestone deposits. However, there were three hills directly

between the quarries and the nearest piece of flat land large enough for the

plant. Though the actual distance was just a few kilometres away, the only

way existing was a 17 km stretch of road full of potholes.

This would have involved time delays and large fuel bills for transporting thelimestone to the plant location. GACL engineers decided to get a conveyor

belt built across the three valleys, through the mountains. After many big

construction firms refused to do the job, GACL built the conveyor belt on its


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own, in just 18 months. The distance was cut down to just 2.8 kms and the

belt moved 800 tonnes of limestone every hour.

Even the companys latest plant at Chandrapur was set up to take advantage

of substantial sales-tax benefits for almost 18 years. This unit was situated

at the pit-head of coal mines, to save on freight costs. GACLs management

realized that the time taken to set up a plant was not entirely in its hands.

The companys actual work began after it had identified the right location,

acquired the necessary license, power and water supply connections and

machinery.

From this point onwards, the work at the site was something the company

could control. GACL decided to let its engineers define their own jobs and

gave them the authority to take on-the-spot decisions regarding capital

expenditure and schedules for achieving targets. The engineers were also

allowed to set daily, weekly and monthly tasks for themselves.

This empowerment of engineers proved to be very advantageous for the

company: job functions were more clearly defined and response time was

reduced by as much as 90% since engineers did not have to wait for

approvals. GACLs plant engineers placed orders for machinery well before

the site was chosen. So the equipment was ready for installation by the time

the site engineers had acquired the land.

As a result, GACL was able to cut down substantially on the commissioning

time of its plants. The very first plant at Ambuja Nagar was commissioned in

just 22 months. This was a significant achievement, as a plant of similar size

normally took three years to install. Even the second plant wascommissioned in a record time of 13 months. GACL was able to save a lot of

money just in terms of inflationary costs.


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Anil Singhvi (Singhvi), Treasurer, GACL said, By squeezing the project time,

you save 10 per cent on account of inflation alone; plus we estimated an

interest cost savings of around Rs 250 million. Once GACL got the plants

running, it realized that to compete with the established players, who had

larger plants and economies of scale, cost control would be important.

The major cost components of cement are fuel (20%), freight and raw

material (17% each) and power (16%), with other components accounting

for the balance 30%. GACL decided to adopt a two-pronged strategy to

achieve total cost management (TCM): enhancing plant productivity and

reducing costs on each of the cost components individually.

Enhancing Productivity

GACL worked hard to reduce mining expenses. Cement companies normally

operate their own limestone mines. Mines were not only extremely

destructive environmentally, they were also expensive to operate. The

explosives used for mining were on the negative list of imports and

substantial costs were involved in implementing safety measures.

In 1997, GACL sent its engineers to Australia to study the extraction ofmetals. On their return, GACL implemented new technologies that could

access limestone in smaller areas where blasting was not possible. To reduce

the noise and vibration that occurred during the conventional drilling,

blasting and crushing process, the company introduced an Australian device

called Surface Miner.

The Surface Miner was not only energy efficient, it also recovered more

material from a given area. GACL engineers found that by focusing on kiln

operations, they could not only ensure cement quality, but could also reduce

power consumption. A company official said, You have to make sure that

the reactivity is such in the burning zone that whatever you burn is

converted into clinker[3] minerals.


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And all this depends on the burning process, which we had no way of

monitoring from the outside. Inadequate heating yielded inferior quality

cement and over cooking made the clinker harder to grind.

In the early 1990s, during a visit to a cement plant in Japan, GACL

engineers learnt that factors like retention time (time elapsed in the kiln and

the speed of burning), temperature, and rate of cooling could be judged

from the microstructure of the clinker minerals. The Japanese engineers

physically scanned the clinker pieces extracted from the kiln under a

microscope to determine on the basis of their experience, whether the

clinker had been heated to the right temperature.

After undergoing extensive training, GACLs engineers tried the above

procedure at their own plants and successfully brought down power costs

from 120 units/ton to 90 units/ton. At GACLs second plant in Ambuja Nagar,

kiln productivity ranged between 2800-3000 tonnes.

While setting up the third plant in the area, GACL engineers realized that if

they had a larger pre-heater (in which the limestone was heated before

being fed into the kiln), they would be able to put more material into the kiln

and thereby increase production. However, the companys supplier of pre-

heaters said it was not possible to make a bigger pre-heater without

modifying the kiln. The engineers told the supplier to make a bigger pre-

heater, while they themselves modified the existing kiln.

Cutting Costs

POWER

Power accounted for a large part of GACLs cost of production. GACL realized

that a captive power plant would increase savings substantially as power

sourced from the power grids was both unreliable and costly. So it set up

fuel based captive power plants in Gujarat (40 MW) and Himachal Pradesh

(12 MW) in 1998.


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GACLs captive power generation cost was only Rs 1.30 per kilowatt

(excluding interest and depreciation), compared to Rs 4.50 per kilowatt for

power supplied by the Electricity Boards. Soon, the company was not only

getting around 60.3% of its total power requirement from these plants, it

was also selling the excess power it generated to the local state

governments.

B S Dulani, Vice President, Operations, at the Gujambuja plant said, Small

measures like modifications in higher capacity motors for fans, coolers etc.

Soon, the company was not only getting around 60.3% of its total power

requirement from these plants, it was also selling the excess power it

generated to the local state governments.

B S Dulani, Vice President, Operations, at the Gujambuja plant said, Small

measures like modifications in higher capacity motors for fans, coolers etc.

according to specific requirements (shifting from AC to DC drive, which

allows regulation of current) wherever possible, and many other simple

steps helped reduce GACLs power consumption from 120 units/tonne of

cement in 1987 to 88-90 units per tonne in 1995 against an industry

average of 121 units per tonne.

Fuel

Coal is an important source of energy for the cement industry. However,

while most of the coal production in India is located in the central and

eastern parts, the cement industry is concentrated in western and southern

parts. Thus, the cost of transporting coal to the cement plants was very

high. Moreover, the quality of coal was also very poor. Cement companieshad to decide whether to use imported coal or substitutes like lignite, natural

gas and oil.

GACL decided to import cheaper, higher quality coal from South Africa. The

company also began importing better quality furnace oil for its diesel


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generator (DG) sets for its power requirements. This led to a considerable

reduction in the operating costs of their power plants. GACL consumed only

96 kwh of power per tonne of cement against the industry average of 110-

115 kwh per tonne.

The companys coal consumption was also the lowest in the industry. GACL

consumed 170 kg per tonne of cement while the industry average was 250

kg per tonne. Since the companys Ambuja Nagar plants were located in the

agricultural belt of Saurashtra, where groundnut husk was available in

plenty, GACL engineers tried to use groundnut husk instead of coal to fire

the kilns in one of the plants.

The idea worked wonderfully and the company was able to bring down the

overall coal consumption by 3%. In another plant, GACL replaced coal with

crushed sugarcane. The use of sugarcane however, created problems

because the water content differed with every batch, leading to fluctuations

in kiln temperature. So the companys engineers designed a special

mechanical system that could adjust the rate of feeding to ensure a stable

temperature in the kiln. In the process, GACL brought the energy bill down

by Rs 20 for every tonne of crushed sugarcane.

GACL also began using fluorspar[4], a waste dumped by Gujarat Mineral

Development Corporation to reduce fuel consumption. They modified many

higher capacity motors for fans, coolers, and other equipments to reduce

power requirements by 1 to 1.5 units per tonne. The company also replaced

V belt drives (which consumed more energy due to friction) with flat belt

drives. Even though mechanical conveyors gave rise to problems like

spillages and breakdowns, GACL did not shift to pneumatic conveyors, which

consumed more power. Instead, the company devised an improved version

of the mechanical conveyor to eliminate its drawbacks.


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Freight

According to analysts, the most successful of GACLs innovative strategies

was the development of a sea transportation route for its cement. At a

company meeting in the early 1990s, a Marketing Manager said, As we all

know, Bombay is the countrys largest cement market. It consumes a vast 2

lakh tonnes a month.

The city is also 1060 kms away by rail. The transportation and packing costs

alone will be phenomenal. Road transport was very costly and rail transport

was not feasible due to the limited number of wagons available with Indian

Railways. Just when it seemed that the company would have to agree to

bear the road/rail transportation costs, an employee in the Logistics

department said, I can bring Bombay closer to our plant.

This marked the birth of the idea of using the sea route, instead of land. The

sea route would bring down the distance to 315 kms. GACL set up a special

cell to develop this idea. The company invested Rs 1 billion to set up modern

ports and freight-handling terminals at Muldwarka and Surat (south Gujarat)

and Panvel (near Bombay)

In addition, it bought three special ships (one designed in Singapore and the

other two in India) to transport the cement. The vessels, custom made for

Indian conditions and requirements, had the capacity to transport 2500

tonnes of cement each.

The port terminal at Muldwarka was an all-weather port, handling ships with

40,000 DWT[5]. It was also equipped to export clinker and cement and

import coal and furnace oil. A fleet of five ships, with a capacity of 2500

DWT each, ferried bulk cement to the packaging units from this port. The

bulk cement terminal at Surat had bulk cement unloading capacity with a

storage capacity of 15,000 tonnes.


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The terminal at Panvel had a storage capacity of 17,500 tonnes. To facilitate

transportation by ship, GACL sent cement in sealed road tankers from the

plant site to the shipping terminal, where it was transferred to silos.[6] From

these silos, it was transferred into airtight holds in the ships. At the

destination, the cement was unloaded from ship holds and again placed in

silos, before being pumped into the sealed road tankers.

Customers were provided small storage tanks into which cement was

pumped from the sealed tankers by a fluidization process[7]. For customers

who preferred bagged cement, GACL arranged special packing facilities at

the unloading terminals. GACL had conveyor belts running up to the dispatch

yard for loading the trucks and wagons. A fleet of around 350 self-financed

trucks and a railway siding on the factory premises provided flexibility in the

mode of transportation.

The cost of transporting cement to Bombay worked out to about Rs 400 per

tonne as compared to over Rs 1800 per tonne by road. Since the cement

was now being moved in bulk, packaging costs were also reduced. Thus,

GACL was able to save roughly Rs 160 million annually. Besides, there was

far less wastage and spillage, and since the cement was untouched by

human hand, it of the finest quality.

GACLs shipping facilities brought many coastal markets within easy reach

and made it one of the largest exporters of cement. Because of the port, it

was now much more convenient for the company to import coal. A strong

focus on logistics management helped GACL reduce finished goods inventory

levels also. A Mumbai dealer could obtain stocks within eight hours because

of the company-owned jetty[8]. The cement was packed at a plant at the

jetty itself, at the rate of 100 tonnes per hour.


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The Future

The continual capacity build-up in the Indian cement industry led to an

excess capacity situation by the beginning of the 21st century. During the

same period, growth in the cement industry declined from 21% (April-

September 1999) to 11% (October 1999-March 2000) because of drought in

many parts of the country.

Prices dropped because people feared that construction activities would

decline due to the drought. At the same time, the cost of production

continued to increase because of hikes in power, rail freight, and coal and

diesel prices. As a result of the above factors, cement companies were

affected negatively.

According to some analysts, even GACL seemed to have exhausted its

armory of cost-cutting and productivity enhancing strategies. For the third

quarter ended March 31, 2002, the company registered a 9.27% decline in

net profit. Its profits had come down from Rs 600 million to Rs 544 million in

2002 for the same period last year.

This was despite a 11% increase in turnover: Rs 4.3 billion in 2002 asagainst Rs 3.9 billion in 2001 for the corresponding quarter. The operating

margin also came down to 32% as compared to 38% in the previous year.

Critics even commented that GACLs cost efficiencies were more driven by

market compulsions rather than a strategic cost focus.

GACL however did not seem to be very worried, because the decline in

profitability was caused by factors that were beyond its control. Singhvi said,

We have put up a good show despite low cement prices during the quarter

by around Rs 300 per tonne. Lower cement prices have not been reflected in

the bottomline. At the same time, the company was not taking things

lightly.


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GACL realized that while its traditional cost-saving methods would continue

to prove valuable, they were not enough. As stated in the companys

Directors report, The route to higher profitability lay elsewhere: Namely,

better sales realization. Thus, GACLs marketing team began focusing its

attention on the retail market. The company believed that the retail market

offered it the opportunity to build loyalty through higher standards of

service. The company asked its marketing teams to push for better prices.

Because of these marketing initiatives, GACL was able to maintain its market

share in Gujarat, even while commanding a high price. The company posted

an increase in sales in the highly competitive and complex Mumbai market

even as demand growth slowed down and prices declined. Similarly, this

focus on marketing led to an 8% increase in sales in the northern region

during 1999-00.

GACL continued to seek ways to reduce costs. It planned to use a captive

thermal (coal-based) power plant to meet the power requirements of its

Chandrapur plant. As the power plant was close to coal mines, the company

expected the variable cost of power to be significantly lower.

Refuting the claims that the companys drive for achieving operational

excellence was totally market-driven, Singhvi said, We eat, live and breathe

cement and we are completely focused on the business. We try and bring in

global best practices into a commodity business. This obsession is important

for survival.


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ConclusionSite selection is an important activity which decides the fate of the business.

A good location may reduce the cost of production and distribution to

considerable extent.

If the site selection is not proper, all the money spent on the factory

building, machinery and their installation will go in waste and the owner has

to suffer a great loss. So the site selection plays a very important role.

The changes are occurring in the site selection , the importance is

given to the suburban areas rather than urban areas in the old times.Some

factors like govt. regulations the law and order situation in the state shouldbe given more importance in the selection process.

The SEZS are the new trend in the location of the industries, it gives

many kind of exemptions to industry so, the industries are keen to enter

into the SEZ.


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Bibliography & Webliography

Operation And Production Management By :

Chunnawala

Operation And Production Management By:

Ashwadh Thapa


Bhatt


L . C. Jhamb

Webliography

www.wikipedia.com

4a+plant location

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