Page 248 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes Choice of equipment for making a particular product essentially depends on the basic
manufacturing process. The decision-maker must, therefore, familiarise himself with the
production process to be adopted.
Another consideration in the choice of new equipment for a plant is the type and degree of
operating skill required and presently available skills within the organisation. Other factors
worth consideration are the ease with which the equipment can be operated and the safety
features of the equipment.

Equipment Investment

Acquisition of equipment involves capital expenditure which will have long-term effects on the
financial position of the company. Hence, before taking a final decision regarding investment in
a machine, detailed analysis of such investment in terms of cost-benefits must be made and its
desirability and worthwhileness should be evaluated with the help of internal rate of return or
net present value method.

The decision to replace the existing machine is equally important to the enterprise. In this
regard the management has to decide when the replacement should be made and the best
replacement policy that must be considered while making comparisons between an existing
unit of equipment and its possible replacement. In order to make a sound economic comparison,
all the factors must be converted into cost considerations. The rate of return so obtained is
compared with the cut-off rate to ascertain whether the replacement is economically viable.
Thus, clear-cut policy guidelines regarding methodology or computation of net investment
outlay, incremental operating expenditure and income, depreciation, obsolescence, salvage
value etc. will help management in taking decisions regarding acquisition and/or replacement
of machines.

Physical Facilities Decisions

Facilities strategy covers plans for location analysis and selection, design and specifications
including layout of equipment, plant, warehouses and related services. Facilities Planning deals
with the separate but interrelated costs of material, supplies, manpower, services and facilities.
Its Mission is to find ways to minimise the aggregate of such costs in making and distributing
the products at the proper time.

Plant Location

Plant location is essentially an investment decision having long-term significance. Once a plant
is acquired, it is a permanent asset that cannot readily be sold. The management may also
contemplate relocation of the plant when business expansion and advanced technology require
additional facilities to serve new market areas, to produce new products, or simply to replace
the old, obsolete plants to increase the company’s production capacity.
The selection of an appropriate plant site calls for location study of the region in which the
factory is to be situated, the community in which it should be placed and finally, the exact site in
the city or countryside.

Plant Building

Once the company has chosen the plant site, due consideration must be given to providing
physical facilities. A company requiring extensive space will always construct new buildings.

242 LOVELY PROFESSIONAL UNIVERSITY