Page 236 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Unit 12: Facility Location

12.1 Need for a Facility Location Planning Notes

Facilities location may be defined as selection of suitable location or site or place where the
factory or plant or facilities to be installed, where plant will start functioning.

The development of a location strategy depends upon the type of firm being considered. Industrial
location analysis decisions focus on minimising costs; retail and professional service organisations
typically have a focus of maximising revenue. Warehouse location, on the other hand, may be
determined by a combination of cost and speed of delivery. The objective of location strategy is
to maximise the benefit of location to the firm.
Facility planning has developed, in the past decade, into a major thriving business sector and
discipline. One of the major reasons for new facilities is the global economic boom that has been
accompanied by an enhancement of capacity worldwide.
In addition to the global economic boom, there are several other reasons for changing or adding
locations:
1. The cost or availability of labour, raw materials, and supporting resources often change.
These changes in resources may spur the decision.
2. As product markets change, the geographical region of demand may shift. For example,
many international companies find it desirable to change facility location to provide
better service to customers.
3. Companies may split, merge, or be acquired by new owners, making facilities redundant.
4. New products may be introduced, changing the requirement and availability of resources.

5. Political, economic and legal requirements may make it more attractive to change location.
Many companies are moving facilities to regions where environment or labour laws are
more favourable.

Well-planned facilities enable an organization to function at its most efficient and effective
level, offering real added value improvements to the organization’s core business.

Self Assessment

Fill in the blanks:

1. The development of a location strategy depends upon the ………………… of firm being
considered.
2. The objective of location strategy is to ………………… the benefit of location to the firm.

12.2 Nature of Location Decisions

One of the most important long-term cost and revenue decisions company makes is where to
locate its operation. Location is a critical element in determining fixed and variable costs for
both industrial and service firms. Depending on the product and type of production or service
taking place, transportation costs alone can total as much as 25% of the selling price. That is one-
fourth of the total revenue of a firm may be needed just to over freight expenses of the raw
materials coming in and the finished product going out. Other costs that may be influenced by
location include taxes, wages and raw material costs. The choice of locations can alter total
production and distribution costs by as much 10%. Lowering costs by 10% of total production
costs through optimum location selection may be the easiest 10% savings management ever
makes.

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