Food Processing Plant Design & Layout 2(1+1)

Lesson 4. Introduction to plant location

4.1.1 When does a need of location decision arise?

The impetus to embark upon a plant location study can be attributed to reasons as given below:

• It may arise when a new plant is to be established.

• In some cases, the plant operations and subsequent expansion are restricted by a poor site, thereby necessitating the setting up of the facility at a new site.

• The growing volume of business makes it advisable to establish additional facilities in new territories.

• Decentralization and dispersal of industries reflected in the industrial policy resolution so as to achieve an overall development would necessitate a location decision at a macro level.

• It could happen that the original advantages of the plant have been outweighed due to new developments.

• New economic, social, legal or political factors could suggest a change of location of the existing plant.

Some or all the above factors could force a firm or an organization to question whether the location of its plant should be changed or not.

Whenever the plant location decision arises, it deserves careful attention because of the long-term consequences. Any mistake in selection of a proper location could prove to be costly. Poor location could be a constant source of higher cost, higher investment, difficult marketing and transportation, dissatisfied and frustrated employees and consumers, frequent interruptions of production, abnormal wastage, delays and substandard quality, denied advantages of geographical specialization and so on. Once a plant is set up at a location, it is very difficult to shift later to a better location because of numerous economic, political and sociological reasons.

4.1.2 Raw material

On the basis of availability, the raw materials can be categorized into:

1. Ubiquitous-to denote those available almost everywhere and
2. Localized materials, having specific locations, which are further, divided into pure material which contributes nearly the total weight of it to the finished products, and gross material, which contributes only a small fraction of total weight to the finished products. It is obvious that ubiquitous hardly influence the decision of location. A material index has been proposed, which equals the weight of localized material used in the finished product divided by the weight of the finished product.

Material Index (MI)	=	Weight of local market material used in the finished product
		Weight of the finished product

 

If the material index is greater than unity, location should be nearer to the source of raw material and if it is less than unity, then a location nearer to market is advised.

4.2 Location selection decision process

Possible formal steps in a plant/facility location decision process given below. The actual approach varies with the size and scope of operations.

1. Define the location objectives and associated variables.

2. Identify the relevant decision criteria

• quantitative-economic

• qualitative-less tangible.

3. Relate the objectives to the criteria in the form of a model, or models (such as break-even, linear programming, qualitative factor analysis).

4. Generate necessary data and use the models to evaluate the alternative locations.

5. Select the location that best satisfies the criteria.

The objectives are influenced by, owners, suppliers, employees and customers of the organization influence the objectives. They may stem from opportunities (or concerns) with respect to any phase of the production system (i.e. inputs, processing, or outputs). The following sections describe the variables, criteria and models relevant to the location decision process.

4.3 Factors involved in the plant location decision

Location studies are usually made in two phases namely,

1. the general territory selection phase and

2. the exact site / community selection phase amongst those available in the general locale. The considerations vary at the two levels, though there is substantial overlap as shown in the following Table.

Table 4.1 Factors involved in the two stages of plant location study

Location factors	General territory selection	Selection of specific site
Market	*
Raw material	*
Power	*	*
Transportation	*	*
Climate and fuel	*
Human resource and wages	*	*
Regulatory laws and taxes	*	*
Community services		*
Water and waste		*
Ecology and pollution		*
Capital availability	*	*
Site characteristics		*
Security	*	*

A typical team studying location possibilities for a large project might involve economists, accountants, town planners, marketing experts, legal experts, politicians, executives, industrial engineers, ecologists etc. It is indeed an interdisciplinary team that should be set up for undertaking location studies.

4.4 Territory Selection

For the general territory / region / area, the following are some of the important factors that influence the selection decision.

4.4.1 Markets: There has to be some customer / market for the product. The market growth potential and the location of competitors are important factors that could influence the location. Locating a plant or facility nearer to the market is preferred if promptness of service is required particularly if the product is susceptible to spoilage. Also if the product is relatively inexpensive and transportation costs add substantially to the cost, a location close to the market is desirable.

4.4.2 Raw materials and supplies: Sometimes accessibility to vendors/suppliers of raw materials, equipment etc. may be very important. The issue here is promptness and regularity of delivery and inward freight cost minimization.

If the raw material is bulky or low in cost, or if it is greatly reduced in bulk viz. transformed into various products and by-products or if it is perishable and processing makes it less so, then location near raw material source is important. If raw materials come from a variety of locations, the plant / facility may be situated so as to minimize total transportation costs. The costs vary depending upon specific routes, mode of transportation and specific product classifications

4.4.3 Transportation facilities: Adequate transportation facilities are essential for the economic operation of production system. For companies that produce or buy heavy bulky and low value per ton commodities, water transportation could be an important factor in location plants.

4.4.4 Manpower supply: The availability of skilled manpower, the prevailing wage pattern, living costs and the industrial relations situation influence the location.

4.4.5 Infrastructure: This factor refers to the availability and reliability of power, water, fuel and communication facilities in addition to transportation facilities.

4.4.6 Legislation and taxation: Factors such as financial and other incentives for new industries in backward areas or no-industry-district centres, exemption from certain state and local taxes, octroi etc. are important.

4.5 Site / community  selection

Having selected the general territory / region, one would have to go in for site / community selection. Some factors relevant for this are:

4.5.1 Community facilities: These involve factors such as quality of life which in turn depends on availability of facilities like education, places of worship, medical services, police and fire stations, cultural, social and recreation opportunities, housing, good streets and good communication and transportation facilities.

4.5.2 Community attitudes: These can be difficult to evaluate. Most communities usually welcome setting up of a new industry especially since it would provide employment opportunities to the local people directly or indirectly. However, in case of polluting industries, they would try their utmost to locate them as far away as possible. Sometimes because of prevailing law and order situation, companies have been forced to relocate their units. The attitude of people as well as the state government has an impact on location of polluting and hazardous industries.

4.5.3 Waste disposal: The facilities required for the disposal of process waste including solid, liquid and gaseous effluent need to be considered. The plant should be positioned so that prevailing winds carry any fumes away from populated areas and that the waste may be disposed off properly and at reasonable costs.

4.5.4 Ecology and pollution: These days, there is a great deal of awareness towards maintenance of natural ecological balance. There are quite a few agencies propagating the concepts to make the society at large more conscious of the dangers of certain available actions.

4.5.5 Site size: The plot of land must be large enough to hold the proposed plant and parking and access facilities and provide room for future expansion.

4.5.6 Topography: The topography, soil structure and drainage must be suitable. If considerable land improvement is required, low priced land might turn out to be expensive.

4.5.7 Transportation facilities: The site should be accessible preferably by road and rail. The dependability and character of the available transport carriers, frequency of service and freight and terminal facilities is also worth considering.

4.5.8 Supporting industries and services: The availability of supporting services such as tool rooms, plant services etc. need to be considered.

4.5.9 Land costs: These are generally of lesser importance, as they are non- recurring and possibly make up a relatively small proportion of the total cost of locating a new plant.

Generally, the site will be in a city, suburb or country location. In general, the location for large scale industries should be in rural areas, which helps in regional development also. It is seen that once a large industry is set up (or even if a decision to this effect has been taken), a lot of infrastructure develops around it as a result of the location decision. As for the location of medium scale industries is concerned, these could be preferably in the suburban / semi-urban areas where the advantages of urban and rural areas are available. For the small- scale industries, the location could be urban areas where the infrastructural facilities are already available. However, in real life, the situation is somewhat paradoxical as people, with money and means, are usually in the cities and would like to locate the units in the city itself.

Some of the industrial needs and characteristics that tend to favour each of this location are.

Requirements governing choice of a city location are:

• Availability of adequate supply of labour force

• High proportion of skilled employees

• Rapid public transportation and contact with suppliers and customers

• Small plant site or multi floor operation

• Processes heavily dependent on city facilities and utilities

• Good communication facilities like telephone, telex, post offices

• Good banking and health care delivery systems

Requirements governing the choice of a suburban location are:

• Large plant site close to transportation or population centre

• Free from some common city building zoning (industrial areas) and other restrictions

• Freedom from higher parking and other city taxes etc.

• Labour force required to reside close to the plant.

• Community close to, but not in large population centre

• Plant expansion easier than in the city

Requirements governing the choice of a rural location are:

• Large plant site required for either present demands or expansion

• Dangerous production processes

• Lesser effort required for anti-pollution measures

• Large volume of relatively clean water

• Lower property taxes, away from Urban Land Ceiling Act restrictions

• Protection against possible sabotage or for a secret process

• Balanced growth and development of a developing or underdeveloped area

• Unskilled labour force required

• Low wages required to meet competition

Major problems related to regional location/plant site factors summarised in Table 4.1.

4.6 Techniques used in location decision

Three subjective techniques used for facility location are Industry Precedence, Preferential Factor and Dominant Factor. In the industry precedence subjective technique, the basic assumption is that if a location was best for similar firms in the past, it must be the best for the new one now. As such, there is no need for conducting a detailed location study and the location choice is thus subject to the principle of precedence - good or bad.

However, in the case of the preferential factor, the location decision is dictated by a personal factor. It depends on the individual whims or preferences e.g. if one belongs to a particular state, he / she may like to locate his / her unit only in that state. Such personal factors may override factors of cost or profit in taking a final decision. This could hardly be called a professional approach though such methods are probably more common in practice than generally recognized.

However, in some cases of plant location there could be a certain dominant factor (in contrast to the preferential factor) which could influence the location decision. In a true dominant sense, mining or petroleum drilling operations must be located where the mineral resource is available. The decision in this case is simply whether to locate or not at the source.

For evaluating qualitative factors, some factor ranking and factor weight rating systems may be used. In the ranking procedure, a location is better or worse than another for the particular factor. By weighing factors and rating locations against these weights a semi-quantitative comparison of location is possible. Let us now discuss some specific methods.

4.6.1 Equal weights method

Assign equal weights to all factors and evaluate each location along the factor scale. For example, a manufacturer of fabricated foods selected three factors by which to rate four sites. Each site was assigned a rating of 0 to 10 points for each factor. The sum of the assigned factor points constituted the site rating by which it could be compared to other site.

Table Decision matrix

Factor/Potential Sites	SI	S2	S3	S4
FI	2	5	9	2
F2	3	3	8	3
F3	6	2	7	3
Site rating	11	10	24	8

Sample calculation: 11 = 2 + 3 + 6

Looking at the above Table, one can see that site S3 has the highest site rating of 24. Hence, this site would be chosen.

4.6.2 Variable weights method

The above method could be utilized on account of giving equal weight age to all the factors. Now, think of assigning variable weights to each of the factors and evaluating each location site along the factor scale. Factor Fl might be assigned 300 points, factor F2 100 points and factor F3 50 points. The points scored, out of the maximum assigned to each of the factors, for each possible location site could be obtained and again the site rating could be derived as follows:

Table Decision matrix

Factor	Maximum points	Potential sites
		S1	S2	S3	S4
FI	300	200	250	250	50
F2	100	50	70	80	100
F3	50	5	50	10	40
Site rating		255	370	340	190

Sample calculation: 255 = 200 + 50 + 5

Looking at the above Table, it can be seen that site S2 has the highest site rating of 370. Hence, this site would be chosen.

4.6.3 Weight-cum-rating method

This is another method of evaluating a potential location site. One can assign variable weights to each factor. A common scale for each factor then rates the locations. The location point assignment for the factor is then obtained by multiplying the location rating for each factor by the factor weight. For example, rating weights of one to five could be assigned to the three factors F1 (human resource), F2 (community facilities) and F3 (power availability and reliability), as 5, 3, 2 respectively. Now for each of the factors, sites SI, S2, S3 or S4 could receive 0 to 10 points as follows and the site rating could be obtained.

Table Decision matrix

Factor	Factor rating points	Potential sites
		S1	S2	S3	S4
FI	5	2	5	9	2
F2	3	3	3	8	3
F3	2	6	2	7	3
Site rating		31	38	83	25

Sample calculation 3l = 5 x 2 + 3 x 3 + 2 x 6

As shown in the above Table, the sample calculation should hopefully suffice to obtain the site rating. Hence, site S3 with the highest rating of 83 is chosen.

4.6.3.1 Another  weight-cum-rating method         

Another weight-cum-rating method establishes a subjective scale common to all factors. This involves assigning points against the subjective scale for each factor and assigns the factor points of the subjective rating for each factor. For example, five subjective ratings-Poor, Fair, Adequate, Good and Excellent are selected to be used in evaluating each site for each factor. For each of the factors, adequate was assigned a value zero and then negative and positive relative worth weights are assigned the subjective ratings below and above adequate for each factor as given in following Table.

Table Decision matrix

	Poor	Fair	Adequate	Good	Excellent
Fl Water supply	-15	-12	0	6	10
F2 Appearance of site	-3	-1	0	1	2

 The range between minimum and maximum weight assigned to a factor in effect weights that factor against all other factors in a manner equivalent to the weight-cum-rating method described previous to this one. Each location site S1 to S4 are then rated by selecting the applicable subjective rating for each factor for each location and the equivalent points of that subjective factor rating assigned to the factor. Thus one can now obtain the following Table.

Table Decision matrix

Factor	Potential sites
	S1	S2	S3	S4
FI	0	-12	6	0
F2	0	-3	2	-1
F3	0	0	0	0
Site rating	0	-15	8	-1

Sample calculation: -15 = (-12) + (-3) + (0)

Accordingly, site S3 with the highest rating of 8 would be chosen.

The location analyst presents to the management both the cost and the intangible data results. In such cases, management could take a decision based on a simple composite measure method illustrated below with the aid of a numerical example.

4.7 Composite measure method and location break-even analysis composite measure method

The steps of the composite measure method are:

• Develop a list of all relevant factors

• Assign a scale to each factor and designate some minimum

• Weigh the factors relative to each other in light of importance towards achievement of system goals. .

• Score each potential location according to the designated scale and multiply the scores by the weights.

• Total the points each location and either (a) use them in conjunction with a separate economic analysis, or (b) include an economic factors in the list of factors and choose the location on the basis of maximum points.

The following illustrates the composite measure method with a numerical example. There are three potential sites and five relevant factors like transportation costs per week, labour costs per week, raw material supply, maintenance facilities and community attitude. The costs are in rupees whereas for the last three factors, points are assigned on 0-100 scale. The data collected is shown in the following Table.

Table Payoff matrix

Factor		Potential sites
		S1	S2	S3
Transportation cost/week Rs Labour cost/week, Rs.	FI F2	800 1180	640 1020	580 1160
Raw material supply Maintenance facilities Community attitude	F3 F4 F5	30 60 50	80 20 80	70 30 70

The location analyst has pre-established weights for various factors. This includes a standard of 1.0 for each Rs.10 a week of economic advantage. Other weights applicable are 2.0 on raw material supply, 0.5 on maintenance facilities and 2.5 on community attitudes. Also the organization prescribes a minimum acceptable score of 30 for maintenance facilities.

First of all, look at the economic factors Fl and F2 for which monetary values were possible. If one totals the costs for each site, one gets the costs for sites S1, S2 and S3 as Rs. 1980, Rs. 1660 and Rs. 1740, respectively. Thus, site S1 would be the worst cost wise. Site S2 would have an economic advantage over site S1 to the extent of RS. (1980-1660) = Rs.320. Similarly, site S3 would have an economic advantage over site SI to the extent of Rs. (1980-1740) = Rs.240. Now the monetary value in Rupees can be converted to a point scale using the fact that a standard of 1.0 is to be assigned for each Rs.10 per week of economic advantage. Thus one can get the following Table.

Table Decision matrix

Factors	Weightage	Potential sites
		S1	S2	S3
Economic advantage (Fl + F2) F3 F4 FS	1.0 2.0 0.5 2.5	0 30 60 50	32 80 20 80	24 70 30 70
Composite site rating		215	402	354

Sample calculation: 215 = (1.0 x 0) + (2.0 x 30) + (0.5 x 60) + (2.5 x 50)

4.8 Locational Break-Even Analysis

Sometimes, it is useful to draw location break-even charts, which could aid in deciding which location would be optimal. The location of a food factory in a South Delhi site will result in certain annual fixed costs, variable costs and revenue. The 0 figures would be different for a South Mumbai site. The fixed costs, variable costs and price per unit for both sites are given below in the Table.

Table Cost data

Location site	Fixed costs	Variable Costs	Price per tonne
South Delhi (Sl)	40,00,000	30,000	75,000
South Mumbai (S2)	60,00,000	24,000	82,000

Let us assume that the expected sales volume as estimated by a market

research team is 95 tonnes.

Now the break-even point is defined to be the point or volume where the total costs equal total revenue. Thus for each site Sl and S2, the break-even point can be determined by using a simple formula as follows:

Break-even volume (BEP)	=	Total fixed costs
		Revenue per unit – Unit’s variable costs

 

At the South Delhi Location S1

BEP	=	40,00,000	88.88	89 tonnes
		75,000-30,000

 

and at the South Mumbai location S2

BEP	=	60,00,000	103.448	104 tonnes
		82,000-24,000

 Let us see what would be the profit or loss for the two sites at the expected volume of 95 tonnes. The calculations are shown in the following Table.

Table Cost comparisons

South Delhi (S1)	South Mumbai (S2)
Costs Fixed : 40,00,000 Variable: 28,50,000 Total : 68,50,000	Costs Fixed : 60,00,000 Variable : 22,80,000 Total : 82,80,000
Revenue: 75,000 x 95 = 71 ,25,000	Revenue: 82,000 x 95 = 77,90,000
Profit : = (71 ,25,000 - 68,50,000) = 2,75,000	Loss : = (77,90,000 - 82,80,000) = 4,90,000