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.
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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, â€¦, CzM are the different costs associated with a site M on the 'z' different cost items.
C1N, C2N, â€¦, CzN are the different costs associated with a site N and W1, W2, W3, â€¦, Wz are the weightage given to these cost items, then relative merit of the M and site N is given by:
( ) ( ) ( ) Ã- 1 2 z W W W M N M N M N 1 1 2 2 z z C /C C /C ,...,C /C
If this is > 1, site N is superior and vice-versa.
When starting a new facility location decisions are very important because they have direct bearing on factors like, financial, employment and distribution patterns. In the long run, relocation of facility may even benefit the organization. But, the relocation of the facility involves 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 facility or plant. Location of warehouses and other facilities are also having direct bearing on the operational performance of organizations.
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:
Whether to expand the existing capacity and facilities.
Whether to look for new locations for additional facilities.
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 premises and elsewhere 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:
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.
Always on Time
Marked to Standard
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.
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.
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.
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?'
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.
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.
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 tangible reasons for setting up an operations facility abroad could be as follows:
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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 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.
(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.
Visit the websites of three major organizations in your region. Find out where their facilities are located. Explain some factors which should be considered while evaluating location options for a facility because globalization has made consumers expect the best products at the lowest prices irrespective of where they are produced. Companies are under competitive pressure to engage in global production and service operations due to the rapid growth of global markets
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The Academy of Commerce (AOC) has been a pioneer in CA education. After 31 years of excellence it is now considered to be a premier institute for all levels of training. A career in CA is a blend of both theoretical education and practical expertise. The institute has benefited more than 85,000 students, producing top rank holders of India every year. AOC believes in delivering knowledge solutions with respect to a career driven approach of learning. The academy focuses on shaping students to become world-class CA professionals enabling them to choose from a range of career options that are available. AOC prescribes performance based sessions divided in modules which are regularly upgraded to suit the standards of the Institute of Chartered Accountants of India (ICAI). They can either adopt public practice or join a public or private organization. AOC gives them the advantage to specialize in different areas with concrete expertise.AOC trains students to have a strong base of fundamentals. AOC understands the need of consistent result-oriented education and thus provides complete and assured standards of excellence.
The AOC through its transformation process converts its inputs, the students into educated students as output by providing adequate facilities to them . there are many factors which they have to consider while deciding the place of the facility location .the factors upon which their decision depends are centrally located , availability of transport facilities , infrastructure availability, skilled teachers availability etc.
FACTORS INFLUENCING FACILITY LOCATION
Facility location is the process of determining a geographic site for a firm's operations. Managers of service organizations must weigh many factors when assessing the desirability of a particular site, including proximity to customers , labour costs, and transportation costs.
Location conditions are complex and each comprises a different Characteristic of a tangible (i.e. Freight rates(office furniture & office assessories, 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 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 which are specifically required for 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.
General Locational Factors
Following are the general factors required for location of facility for an organisation.
1. Centrally located
2. Supply of materials
3. Transportation facilities
4. Infrastructure availability
5. Workers and salaries
6. External economies
8. Government policy
9. Climate conditions
10. Supporting services
11. Community attitudes
12. Community Infrastructure.
Every company is expected to serve its customers by providing 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 service. When the customers for the service are concentrated, it is advisable to locate the facilities their.
Locating the facility centrally is preferred because
you can show your presence to the masses
easy to fetch more customer
healthy completion with their competitors
Supply of indirect material:
It is essential for the organization to get material in right qualities and time in order to have an uninterrupted transformation process in providing services. This factor becomes very important if the materials are perishable and cost of transportation is very high. While deciding location for providing facility one should also consider the availability of regular supply of indirect material. For an educational institution one need blackboard , chalk , stationary , projector ,chair ,desk , fans etc likewise in hospitals one need medicines , beds stationary etc.
So there should be adequate supply of these material in providing better facilities from the location. And one should give importance to the above said factor in order to provide best services with the minimum cost so to increase the customer base.
Speedy transport facilities ensure timely supply of raw materials to the company and services to the customers. The transport facility is a prerequisite for 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 facility location. If the transportation is not available to the customers of the service , they will not be able to avail that service.
The basic infrastructure facilities like power, water and waste disposal, etc., become the prominent factors in deciding the location. Certain types of service industries are power hungry e.g., BPO's etc they should be located close to the location where uninterrupted power supply is assured throughout the year. The non-availability of power may become a survival problem for such industries. Supply of water in large amount and good quality, and mineral content of water becomes an important factor.
Worker and salaries:
The problem of securing adequate number of worker and with skills specific is a factor to be considered both at territorial as well as at community level during facility location. Importing worker is usually costly and involve administrative problem. The history of worker relations in a prospective community is to be studied. Prospective community is to be studied. Productivity of worker 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. Education, experience and skill of available labor are another important, which determines facility location.
External economies of scale:
The lowering ofÂ a firm's costs due to external factors. External economies of scale willÂ increase theÂ productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company, and encompass positive externalities that reduce the firm's costs.
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 skilled worker, transport facilities, and as well to increase their markets for selling their services and have access to a much wider range of business services.
By looking at capital as a location condition, it is important to distinguish the physiology of fixed capital in buildings and equipment ( projector in educational institution , new techniques used in hospitals , etc ) 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. Financial capital is highly mobile and does not very much influence decisions. For example, large consultancy firms such as Tata Consultancy operates in many different places and can raise capital when 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.
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.
The geology of the area needs to be considered together with climatic conditions (humidity, temperature). Climates greatly influence human efficiency and behaviour. Good climate and natural resources is important for the industries. Some industries require specific climatic conditions.
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. Today these services play a very vital role in deciding any facility location as in today's world people are giving more advantage to these basic amenities.
Community and worker 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.
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.
Specific Location Factors for Service Organisation
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.
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.
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 night time and weekend business when the population in the area fits the firm's competitive priorities and target market segment.