In company’s strategy formulation, the type of goods and services it shall offer, the markets in which it will compete will be determined. Demand forecasts are made to estimate the demand for a particular product in various markets. In this regard the company’s strategy will also include selecting the facility location from which potential markets will be served. The facility location of a service operation will help determine how conveniently customers can conduct business with the company.
Facility Location for production and service operations can have a great impact on investment and operating costs, thereby affecting profits and perhaps the price at which goods or services can be offered, as well as some aspects of the production system design. Even though facility location is a factor of importance, ordinarily many alternative locations can be equally good. Normally plant location is considered or reconsidered consciously only periodically, but in some sense broad alternatives are considered whenever an expansion or contraction is necessary.
Factors in location
Rational decisions concerning plant location are intended to minimize relevant costs. Normally, however, we are thinking of not only operating costs but also costs in the long term. Thus, differences in operating cost might be compensated for in the long term by differences in capital investment.
A wide variety of subjective factors can influence location decisions. Therefore, it is common to rate alternative locations on such subjective factors as
- Labor supply
- Type of labor
- Labor union activity
- Community attitude
- Availability of utilities
- Recreational facilities
Even though these factors are subjective, a thought should be given to the long term costs in attempting to rate alternative locations on the basis of these dimensions. Thus, a tight labor supply or heightened union activity could mean higher labor costs in the future. A community attitude oriented against industry could mean a future tax loading on intruding business.
Given a general area of location, a site within the area must then be chosen. The following requirements must be met:
- A site zoned for the activity contemplated.
- A site large enough to accommodate present floor plan needs and room for expansion, parking, transportation facilities and the like. Normally, a site size five times the actual plant area is regarded as the minimum.
- A provision for necessary transportation facilities, utilities and waste disposal.
- A soil structure that can carry the required bearing foundation loads.
Alternative sites also need to be studied from the point of view of the relocation of investment versus operating cost effects. The concept of break-even analysis can be used to compare various sites on the basis of total costs relative to the volume of operation. Thus, a site that may require large capital expenditure but that makes possible low operating costs may be a more economical site than one that has the reverse cost characteristics.
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