Production and Operations Management 2: Plant Location and Layout

This report delves into the critical aspects of plant location and layout within production and operations management. It begins by defining plant location and its strategic importance, emphasizing the need for careful site selection to optimize efficiency and investment returns. The report outlines the situations that necessitate location decisions, including starting a new organization, expanding an existing one, and considering global locations. It explores factors influencing plant location, such as regional identification, site selection, and the use of dimensional analysis to evaluate tangible and intangible costs. The report also addresses the implications of plant location for existing organizations, covering strategies for multi-plant operations, including product specialization, market-specific plants, process-based divisions, and flexible operations. Furthermore, it examines global location strategies, virtual proximity, and virtual factories, highlighting tangible and intangible reasons for establishing facilities abroad, such as market access, cost advantages, and overcoming trade barriers. Overall, the report provides a comprehensive overview of plant location and layout, equipping readers with the knowledge to make informed decisions in production and operations management.

PRODUCTION AND OPERATIONS MANAGEMENT
2.1 INTRODUCTION AND MEANING
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 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.
2.2 NEED FOR SELECTING A SUITABLE LOCATION
The need for selecting a suitable location arises because of three situations.
PLANT LOCATION AND LAYOUT
2
2.1 Introduction and Meaning
2.2 Need for Selecting a Suitable Location
2.3 Factors Influencing Plant/Facility Location
2.4 Location Theories
2.5 Location Models
2.6 Locational Economics
2.7 Plant Layout
2.8 Classification of Layout
2.9 Design of Product Layout
2.10 Design of Process Layout
2.11 Service Layout
2.12 Organisation of Physical Facilities
• Exercises
• Skill Development
CHAPTER OUTLINE

PLANT LOCATION AND LAYOUT !
I. When starting a new organisation, i.e., location choice for the first time.
II. In case of existing organisation.
III. In case of Global Location.
I. In Case of Location Choice for the First Time or New Organisations
Cost economies are always important while selecting a location for the first time, but should
keep in mind the cost of long-term business/organisational objectives. The following are the
factors to be considered while selecting the location for the new organisations:
1. Identification of region: The organisational objectives along with the various long-term
considerations about marketing, technology, internal organisational strengths and weaknesses, region-
specific resources and business environment, legal-governmental environment, social environment
and geographical environment suggest a suitable region for locating the operations facility.
2. Choice of a site within a region: Once the suitable region is identified, the next step
is choosing the best site from an available set. Choice of a site is less dependent on the
organisation’s long-term strategies. Evaluation of alternative sites for their tangible and intangible
costs will resolve facilities-location problem.
The problem of location of a site within the region can be approached with the following
cost-oriented non-interactive model, i.e., dimensional analysis.
3. Dimensional analysis: If all the costs were tangible and quantifiable, the comparison and
selection of a site is easy. The location with the least cost is selected. In most of the cases
intangible costs which are expressed in relative terms than in absolute terms. Their relative merits
and demerits of sites can also be compared easily. Since both tangible and intangible costs need
to be considered for a selection of a site, dimensional analysis is used.
Dimensional analysis consists in computing the relative merits (cost ratio) for each of the
cost items for two alternative sites. For each of the ratios an appropriate weightage by means
of power is given and multiplying these weighted ratios to come up with a comprehensive figure
on the relative merit of two alternative sites, i.e.,
C1M, C2M, …, C zM are the different costs associated with a site M on the ‘z’ different cost
items.
C1N, C2N, …, C zN are the different costs associated with a site N and W 1, W2, W3, …, W z
are the weightage given to these cost items, then relative merit of the M and site N is given by:
( ) ( ) ( )×
1 2 zW W WM N M N M N
1 1 2 2 z zC / C C / C , ..., C / C
If this is > 1, site N is superior and vice-versa.
When starting a new factory, plant location decisions are very important because they have
direct bearing on factors like, financial, employment and distribution patterns. In the long run,
relocation of plant may even benefit the organization. But, the relocation of the plant involves
stoppage of production, and also cost for shifting the facilities to a new location. In addition to
these things, it will introduce some inconvenience in the normal functioning of the business.
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.
Location of warehouses and other facilities are also having direct bearing on the operational
performance of organizations.

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The existing firms will seek new locations in order to expand the capacity or to place the
existing facilities. When the demand for product increases, it will give rise to following decisions:
l Whether to expand the existing capacity and facilities.
l Whether to look for new locations for additional facilities.
l Whether to close down existing facilities to take advantage of some new locations.
II. In Case of Location Choice for Existing Organisation
In this case a manufacturing plant has to fit into a multi-plant operations strategy. That is,
additional plant location in the same premesis and elsewere under following circumstances:
1. Plant manufacturing distinct products.
2. Manufacturing plant supplying to specific market area.
3. Plant divided on the basis of the process or stages in manufacturing.
4. Plants emphasizing flexibility.
The different operations strategies under the above circumstances could be:
1. Plants manufacturing distinct products: Each plant services the entire market area for
the organization. This strategy is necessary where the needs of technological and resource inputs
are specialized or distinctively different for the different product-lines.
For example, a high quality precision product-line should not be located along with other
product-line requiring little emphasis on precision. It may not be proper to have too many
contradictions such as sophisticated and old equipment, highly skilled and semi-skilled personnel,
delicates processes and those that could permit rough handlings, all under one roof and one set
of managers. Such a setting leads to much confusion regarding the required emphasis and the
management policies.
Product specialization may be necessary in a highly competitive market. It may be necessary
to exploit the special resources of a particular geographical area. The more decentralized these
pairs are in terms of the management and in terms of their physical location, the better would
be the planning and control and the utilization of the resources.
2. Manufacturing plants supplying to a specific market area: Here, each plant
manufactures almost all of the company’s products. This type of strategy is useful where market
proximity consideration dominates the resources and technology considerations. This strategy
requires great deal of coordination from the corporate office. An extreme example of this
strategy is that of soft drinks bottling plants.
3. Plants divided on the basis of the process or stages in manufacturing: Each
production process or stage of manufacturing may require distinctively different equipment
capabilities, labour skills, technologies, and managerial policies and emphasis. Since the products
of one plant feed into the other plant, this strategy requires much centralized coordination of the
manufacturing activities from the corporate office that are expected to understand the various
technological aspects of all the plants.
4. Plants emphasizing flexibility: This requires much coordination between plants to meet
the changing needs and at the same time ensure efficient use of the facilities and resources.
Frequent changes in the long-term strategy in order to improve be efficiently temporarily, are not
healthy for the organization. In any facility location problem the central question is: ‘Is this a
location at which the company can remain competitive for a long time?’

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For an established organization in order to add on to the capacity, following are the ways:
(a) Expansion of the facilities at the existing site: This is acceptable when it does not
violate the basic business and managerial outlines, i.e., philosophies, purposes, strategies and
capabilities. For example, expansion should not compromise quality, delivery, or customer service.
(b) Relocation of the facilities (closing down the existing ones): This is a drastic step
which can be called as ‘Uprooting and Transplanting’. Unless there are very compelling reasons,
relocation is not done. The reasons will be either bringing radical changes in technology, resource
availability or other destabilization.
All these factors are applicable to service organizations, whose objectives, priorities and
strategies may differ from those of hardcore manufacturing organizations.
III. In Case of Global Location
Because of globalisation, multinational corporations are setting up their organizations in India
and Indian companies are extending their operations in other countries. In case of global locations
there is scope for virtual proximity and virtual factory.
VIRTUAL PROXIMITY
With the advance in telecommunications technology, a firm can be in virtual proximity to its
customers. For a software services firm much of its logistics is through the information/
communication pathway. Many firms use the communications highway for conducting a large
portion of their business transactions. Logistics is certainly an important factor in deciding on a
location—whether in the home country or abroad. Markets have to be reached. Customers have
to be contacted. Hence, a market presence in the country of the customers is quite necessary.
VIRTUAL FACTORY
Many firms based in USA and UK in the service sector and in the manufacturing sector often out
sources part of their business processes to foreign locations such as India. Thus, instead of one’s
own operations, a firm could use its business associates’ operations facilities. The Indian BPO firm
is a foreign-based company’s ‘virtual service factory’. So a location could be one’s own or one’s
business associates. The location decision need not always necessarily pertain to own operations.
REASONS FOR A GLOBAL/FOREIGN LOCATION
A. Tangible Reasons
The trangible reasons for setting up an operations facility abroad could be as follows:
Reaching the customer: One obvious reason for locating a facility abroad is that of
capturing a share of the market expanding worldwide. The phenomenal growth of the GDP of
India is a big reason for the multinationals to have their operations facilities in our country. An
important reason is that of providing service to the customer promptly and economically which
is logistics-dependent. Therefore, cost and case of logistics is a reason for setting up manufacturing
facilities abroad. By logistics set of activities closes the gap between production of goods/services
and reaching of these intended goods/services to the customer to his satisfaction. Reaching the
customer is thus the main objective. The tangible and intangible gains and costs depend upon the
company defining for itself as to what that ‘reaching’ means. The tangible costs could be the
logistics related costs; the intangible costs may be the risk of operating is a foreign country. The

$ PRODUCTION AND OPERATIONS MANAGEMENT
tangible gains are the immediate gains; the intangible gains are an outcome of what the company
defines the concepts of reaching and customer for itself.
The other tangible reasons could be as follows:
(a) The host country may offer substantial tax advantages compared to the home country.
(b) The costs of manufacturing and running operations may be substantially less in that
foreign country. This may be due to lower labour costs, lower raw material cost, better
availability of the inputs like materials, energy, water, ores, metals, key personnel etc.
(c) The company may overcome the tariff barriers by setting up a manufacturing plant in a
foreign country rather than exporting the items to that country.
B. Intangible Reasons
The intangible reasons for considering setting up an operations facility abroad could be as
follows:
1. Customer-related Reasons
(a) With an operations facility in the foreign country, the firm’s customers may feel secure
that the firm is more accessible. Accessibility is an important ‘service quality’ determinant.
(b) The firm may be able to give a personal tough.
(c) The firm may interact more intimately with its customers and may thus understand their
requirements better.
(d) It may also discover other potential customers in the foreign location.
2. Organisational Learning-related Reasons
(a) The firm can learn advanced technology. For example, it is possible that cutting-edge
technologies can be learn by having operations in an technologically more advanced
country. The firm can learn from advanced research laboratories/universities in that
country. Such learning may help the entire product-line of the company.
(b) The firm can learn from its customers abroad. A physical location there may be essential
towards this goal.
(c) It can also learn from its competitors operating in that country. For this reason, it may
have to be physically present where the action is.
(d) The firm may also learn from its suppliers abroad. If the firm has a manufacturing plant
there, it will have intensive interaction with the suppliers in that country from whom there
may be much to learn in terms of modern and appropriate technology, modern management
methods, and new trends in business worldwide.
3. Other Strategic Reasons
(a) The firm by being physically present in the host country may gain some ‘local boy’ kind
of psychological advantage. The firm is no more a ‘foreign’ company just sending its
products across international borders. This may help the firm in lobbying with the government
of that country and with the business associations in that country.
(b) The firm may avoid ‘political risk’ by having operations in multiple countries.
(c) By being in the foreign country, the firm can build alternative sources of supply. The firm
could, thus, reduce its supply risks.

PLANT LOCATION AND LAYOUT %
(d) The firm could hunt for human capital in different countries by having operations in those
countries. Thus, the firm can gather the best of people from across the globe.
(e) Foreign locations in addition to the domestic locations would lower the market risks for the
firm. If one market goes slow the other may be doing well, thus lowering the overall risk.
2.3 FACTORS INFLUENCING PLANT LOCATION/FACILITY LOCATION
Facility location is the process of determining a geographic site for a firm’s operations. Managers
of both service and manufacturing organizations must weigh many factors when assessing the
desirability of a particular site, including proximity to customers and suppliers, labour costs, and
transportation costs.
Location conditions are complex and each comprises a different Characteristic of a tangible
(i.e. Freight rates, production costs) and non-tangible (i.e. reliability, Frequency security, quality)
nature.
Location conditions are hard to measure. Tangible cost based factors such as wages and
products costs can be quantified precisely into what makes locations better to compare. On the
other hand non-tangible features, which refer to such characteristics as reliability, availability and
security, can only be measured along an ordinal or even nominal scale. Other non-tangible
features like the percentage of employees that are unionized can be measured as well. To sum
this up non-tangible features are very important for business location decisions.
It is appropriate to divide the factors, which influence the plant location or facility location
on the basis of the nature of the organisation as
1. General locational factors, which include controllable and uncontrollable factors for all
type of organisations.
2. Specific locational factors specifically required for manufacturing and service
organisations.
Location factors can be further divided into two categories:
Dominant factors are those derived from competitive priorities (cost, quality, time, and
flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are
important, but management may downplay or even ignore some of them if other factors are more
important.
2.3.1 General Locational Factors
Following are the general factors required for location of plant in case of all types of organisations.
CONTROLLABLE FACTORS
1. Proximity to markets
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Labour and wages

Fig. 2.1 Factors influencing plant location.

PLANT LOCATION AND LAYOUT '
6. External economies
7. Capital
UNCONTROLLABLE FACTORS
8. Government policy
9. Climate conditions
10. Supporting industries and services
11. Community and labour attitudes
12. Community Infrastructure
CONTROLLABLE FACTORS
1. Proximity to markets: Every company is expected to serve its customers by providing
goods and services at the time needed and at reasonable price organizations may choose to locate
facilities close to the market or away from the market depending upon the product. When the
buyers for the product are concentrated, it is advisable to locate the facilities close to the market.
Locating nearer to the market is preferred if
• The products are delicate and susceptible to spoilage.
• After sales services are promptly required very often.
• Transportation cost is high and increase the cost significantly.
• Shelf life of the product is low.
Nearness to the market ensures a consistent supply of goods to customers and reduces the
cost of transportation.
2. Supply of raw material: It is essential for the organization to get raw material in right
qualities and time in order to have an uninterrupted production. This factor becomes very important
if the materials are perishable and cost of transportation is very high.
General guidelines suggested by Yaseen regarding effects of raw materials on plant location
are:
• When a single raw material is used without loss of weight, locate the plant at the raw
material source, at the market or at any point in between.
• When weight loosing raw material is demanded, locate the plant at the raw material
source.
• When raw material is universally available, locate close to the market area.
• If the raw materials are processed from variety of locations, the plant may be situated
so as to minimize total transportation costs.
Nearness to raw material is important in case of industries such as sugar, cement, jute and
cotton textiles.
3. Transportation facilities: Speedy transport facilities ensure timely supply of raw materials
to the company and finished goods to the customers. The transport facility is a prerequisite for

! PRODUCTION AND OPERATIONS MANAGEMENT
the location of the plant. There are five basic modes of physical transportation, air, road, rail,
water and pipeline. Goods that are mainly intended for exports demand a location near to the port
or large airport. The choice of transport method and hence the location will depend on relative
costs, convenience, and suitability. Thus transportation cost to value added is one of the criteria
for plant location.
4. Infrastructure availability: The basic infrastructure facilities like power, water and
waste disposal, etc., become the prominent factors in deciding the location. Certain types of
industries are power hungry e.g., aluminum and steel and they should be located close to the
power station or location where uninterrupted power supply is assured throughout the year. The
non-availability of power may become a survival problem for such industries. Process industries
like paper, chemical, cement, etc., require continuous. Supply of water in large amount and good
quality, and mineral content of water becomes an important factor. A waste disposal facility for
process industries is an important factor, which influences the plant location.
5. Labour and wages: The problem of securing adequate number of labour and with skills
specific is a factor to be considered both at territorial as well as at community level during plant
location. Importing labour is usually costly and involve administrative problem. The history of
labour relations in a prospective community is to be studied. Prospective community is to be
studied. Productivity of labour is also an important factor to be considered. Prevailing wage
pattern, cost of living and industrial relation and bargaining power of the unions’ forms in
important considerations.
6. External economies of scale: External economies of scale can be described as
urbanization and locational economies of scale. It refers to advantages of a company by setting
up operations in a large city while the second one refers to the “settling down” among other
companies of related Industries. In the case of urbanization economies, firms derive from locating
in larger cities rather than in smaller ones in a search of having access to a large pool of labour,
transport facilities, and as well to increase their markets for selling their products and have
access to a much wider range of business services.
Location economies of scale in the manufacturing sector have evolved over time and have
mainly increased competition due to production facilities and lower production costs as a result
of lower transportation and logistical costs. This led to manufacturing districts where many
companies of related industries are located more or less in the same area. As large corporations
have realized that inventories and warehouses have become a major cost factor, they have tried
reducing inventory costs by launching “Just in Time” production system (the so called Kanban
System). This high efficient production system was one main factor in the Japanese car industry
for being so successful. Just in time ensures to get spare parts from suppliers within just a few
hours after ordering. To fulfill these criteria corporations have to be located in the same area
increasing their market and service for large corporations.
7. Capital: By looking at capital as a location condition, it is important to distinguish the
physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs
as building and construction costs vary from region to region. But on the other hand buildings can
also be rented and existing plants can be expanded. Financial capital is highly mobile and does
not very much influence decisions. For example, large Multinational Corporations such as Coca-

PLANT LOCATION AND LAYOUT !
Cola operate in many different countries and can raise capital where interest rates are lowest
and conditions are most suitable.
Capital becomes a main factor when it comes to venture capital. In that case young, fast
growing (or not) high tech firms are concerned which usually have not many fixed assets. These
firms particularly need access to financial capital and also skilled educated employees.
UNCONTROLLABLE FACTORS
8. Government policy: The policies of the state governments and local bodies concerning
labour laws, building codes, safety, etc., are the factors that demand attention.
In order to have a balanced regional growth of industries, both central and state governments
in our country offer the package of incentives to entrepreneurs in particular locations. The
incentive package may be in the form of exemption from a safes tax and excise duties for a
specific period, soft loan from financial institutions, subsidy in electricity charges and investment
subsidy. Some of these incentives may tempt to locate the plant to avail these facilities offered.
9. Climatic conditions: The geology of the area needs to be considered together with
climatic conditions (humidity, temperature). Climates greatly influence human efficiency and
behaviour. Some industries require specific climatic conditions e.g., textile mill will require humidity.
10. Supporting industries and services: Now a day the manufacturing organisation
will not make all the components and parts by itself and it subcontracts the work to vendors.
So, the source of supply of component parts will be the one of the factors that influences the
location.
The various services like communications, banking services professional consultancy services
and other civil amenities services will play a vital role in selection of a location.
11. Community and labour attitudes: Community attitude towards their work and towards
the prospective industries can make or mar the industry. Community attitudes towards supporting
trade union activities are important criteria. Facility location in specific location is not desirable
even though all factors are favouring because of labour attitude towards management, which
brings very often the strikes and lockouts.
12. Community infrastructure and amenity: All manufacturing activities require access
to a community infrastructure, most notably economic overhead capital, such as roads, railways,
port facilities, power lines and service facilities and social overhead capital like schools, universities
and hospitals.
These factors are also needed to be considered by location decisions as infrastructure is
enormously expensive to build and for most manufacturing activities the existing stock of
infrastructure provides physical restrictions on location possibilities.
2.3.2 Specific Locational Factors for Manufacturing Organisation
DOMINANT FACTORS
Factors dominating location decisions for new manufacturing plants can be broadly classified in
six groups. They are listed in the order of their importance as follows.

! PRODUCTION AND OPERATIONS MANAGEMENT
1. Favourable labour climate
2. Proximity to markets
3. Quality of life
4. Proximity to suppliers and resources
5. Utilities, taxes, and real estate costs
1. Favorable labour climate: A favorable labour climate may be the most important factor
in location decisions for labour-intensive firms in industries such as textiles, furniture, and consumer
electronics. Labour climate includes wage rates, training requirements, attitudes toward work,
worker productivity, and union strength. Many executives consider weak unions or al low probability
of union organizing efforts as a distinct advantage.
2. Proximity to markets: After determining where the demand for goods and services is
greatest, management must select a location for the facility that will supply that demand. Locating
near markets is particularly important when the final goods are bulky or heavy and outbound
transportation rates are high. For example, manufacturers of products such as plastic pipe and
heavy metals all emphasize proximity to their markets.
3. Quality of life: Good schools, recreational facilities, cultural events, and an attractive
lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but it can
make the difference in location decisions.
4. Proximity to suppliers and resources: In many companies, plants supply parts to other
facilities or rely on other facilities for management and staff support. These require frequent
coordination and communication, which can become more difficult as distance increases.
5. Utilities, taxes, and real estate costs: Other important factors that may emerge
include utility costs (telephone, energy, and water), local and state taxes, financing incentives
offered by local or state governments, relocation costs, and land costs.
SECONDARY FACTORS
There are some other factors needed to be considered, including room for expansion, construction
costs, accessibility to multiple modes of transportation, the cost of shuffling people and materials
between plants, competition from other firms for the workforce, community attitudes, and many
others. For global operations, firms are emphasizing local employee skills and education and the
local infrastructure.
2.3.3 Specific Locational Factors for Service Organisation
DOMINANT FACTORS
The factors considered for manufacturers are also applied to service providers, with one important
addition — the impact of location on sales and customer satisfaction. Customers usually look
about how close a service facility is, particularly if the process requires considerable customer
contact.

PLANT LOCATION AND LAYOUT !!
PROXIMITY TO CUSTOMERS
Location is a key factor in determining how conveniently customers can carry on business with
a firm. For example, few people would like to go to remotely located dry cleaner or supermarket
if another is more convenient. Thus the influence of location on revenues tends to be the
dominant factor.
TRANSPORTATION COSTS AND PROXIMITY TO MARKETS
For warehousing and distribution operations, transportation costs and proximity to markets are
extremely important. With a warehouse nearby, many firms can hold inventory closer to the
customer, thus reducing delivery time and promoting sales.
LOCATION OF COMPETITORS
One complication in estimating the sales potential at different location is the impact of competitors.
Management must not only consider the current location of competitors but also try to anticipate
their reaction to the firm’s new location. Avoiding areas where competitors are already well
established often pays. However, in some industries, such as new-car sales showrooms and fast-
food chains, locating near competitors is actually advantageous. The strategy is to create a
critical mass, whereby several competing firms clustered in one location attract more customers
than the total number who would shop at the same stores at scattered locations. Recognizing this
effect, some firms use a follow –the leader strategy when selecting new sites.
SECONDARY FACTORS
Retailers also must consider the level of retail activity, residential density, traffic flow, and site
visibility. Retail activity in the area is important, as shoppers often decide on impulse to go
shopping or to eat in a restaurant. Traffic flows and visibility are important because businesses’
customers arrive in cars. Visibility involves distance from the street and size of nearby buildings
and signs. High residential density ensures nighttime and weekend business when the population
in the area fits the firm’s competitive priorities and target market segment.
2.4 LOCATION THEORIES
ALFRED WEBER’S THEORY OF THE LOCATION OF INDUSTRIES
Alfred Weber (1868–1958), with the publication of Theory of the Location of Industries in 1909, put
forth the first developed general theory of industrial location. His model took into account several
spatial factors for finding the optimal location and minimal cost for manufacturing plants.
The point for locating an industry that minimizes costs of transportation and labour requires
analysis of three factors:
1. The point of optimal transportation based on the costs of distance to the ‘material
index’—the ratio of weight to intermediate products (raw materials) to finished product.
2. The labour distortion, in which more favourable sources of lower cost of labour may
justify greater transport distances.
3. Agglomeration and degglomerating.