At the global level, we select a site location. This initial planning stage involves selecting the region or general area in which the plant or facility should be located. The decision on where to add capacity, called the location decision, is complex and involves many factors.
Some of the factors are:
The geographic coverage of your production capacity
The source of inputs like raw materials, manpower and skill availability
The location of the market
It is strategically important because it commits significant resources of the organisation. Great care and consideration should be given to the long-term implications.
Manufactured Products: Manufactured products differ from many service products as production may take place at a location, and then the goods are distributed to the customer. Often the source of raw materials is an important factor in deciding locations. Very often, you want to locate your operation close to that source of raw material. In aquaculture, for example, the incubation of salmon eggs and the first stage lifecycle of the fish are done in fresh water. Therefore, it is advantageous to locate hatcheries where there is an abundance of fresh water.
Location of markets: Locating plants and facilities near the market for a particular product or service may be of primary importance for many products in the sense that location may impact the economics of the manufacturing process. This may be because of:
Increased bulk or weight of the product.
Product may be fragile.
It susceptible to spoilage.
Add to transportation costs.
Increase transit time.
Affect the promptness of service.
Affect the selling price of the product—the transportation cost often makes the product expensive.
Assembly-type industries, in which raw materials are gathered together from various diverse locations and are assembled into a single unit, often tend to be located near the intended market. This becomes especially important in the case of a custom-made product, where close customer contact is essential.
Location of materials: Access to suppliers of raw materials, parts, supplies, tools, equipment, etc., are very often considered to be of paramount importance. The main issue here is the promptness and regularity of supply from suppliers and the level of freight costs incurred. In general, the location of materials is likely to be important if:
Transportation of materials and parts represent the major portion of unit costs.
Material is available only in a particular region.
Material is bulky in the raw state.
Material bulk can be reduced in various products and by products during processing.
Material is perishable and processing increases the shelf life.
Keeping in mind those materials may come from a variety of locations; the plant would then be located such as to minimize the total transportation costs. Transportation costs are not simply a function of distance—they can vary depending on the specific routes as well as the specific product classifications.
For example, a Delhi-Patna consignment would be much more expensive than a Delhi-Mumbai consignment, though the distances are similar. Sea freight from an Australian port to an Indian port is comparable to the sea freight from an Australian port to an English port, though the distances are not comparable.
Transportation facilities: Adequate transportation facilities are essential for the economic operation of a production system. These can include—road, rail waterways airports. The bulk of all freight shipments are made by rail since it offers low costs, flexibility and speed.
For companies that produce or buy heavy and bulky low-value-per-ton commodities as are generally involved in import and export activities, shipping and location of ports may be a factor of prime importance in the plant location decision. Truck transport for intercity transport is increasing as is airfreight and executive travel. Traveling expenses of management and sales personnel should also be considered in the equation.
Labour supply: Manpower is the most costly input in most production systems. An ample supply of labour is essential to any enterprise. The following rule of thumb is generally applied:
The area should contain four times as many permanent job applicants than the organisation will require.
There should be a diversification between industry and commerce—roughly 50/50.
Organisations often take advantage of a location with an abundant supply of workers. Labour costs and/or skills are often a very important consideration for locating a facility. The type and level of skill possessed by the workforce must also be considered. If a particular required skill is not available, then training costs may be prohibitive and the resulting level of productivity inadequate.
In the call center business, the need of English speaking workers becomes a factor in deciding the location of your business capacity. India has come on the map for software development because it has a large number of skilled software personnel. Microsoft, Texas Instruments, Cisco Systems, Oracle, etc., some of the best-known names in software applications, have located facilities in India.
Many countries, like China and India, are turning out to be attractive locations for industries that require large contingents of unskilled labour. Hyundai Motors recently announced that India would be its hub for supply of small cars and automobile components worldwide. Companies like Nike, Reebok, etc., are setting-up supply chains in Asia and South America. Many US automobile manufacturers are moving production facilities to Mexico. Though, this is often very appealing, you need to bear in mind that conditions can change in time. For example, while labour costs may be low in a certain geographic location now, this will change if the demand for labour grows significantly.