When Does A Location Decision Arise?

The impetus to embark upon a facility location study can usually be attributed to various reasons:

• It may arise when a new facility is to be established.
• In some cases, the facility or 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 of a developing country 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 wastages, delays’ and substandard quality, denied advantages of geographical specialization and so on. Once a facility 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. Economic reasons could include total costs, profits, availability of raw materials, labour, and power. Transportation facilities, markets etc Social reasons could include employee welfare, employment opportunities etc. Political reasons could be because of pursuance of a policy of decentralization, regional and developmental planning especially in a developing country like ours. There could be security considerations or risk of military invasions, sabotage from anti-social elements etc. and some may be prone to natural calamities like floods, earthquake etc. Policy matters like anti-pollution etc. would have to be given their due consideration.

Alfred Weber’s analysis was one of the first attempts to base location decisions on some sort of analysis, its imperfections notwithstanding. Besides discussing the importance of transport and labour cost differentials in deciding location, the main burden of Weber’s analysis is transport cost of raw material which was least mobile

One the basis of availability, categorise raw materials into: (a) ubiquities-to denote those available almost everywhere like sand, water etc. and (b) localised materials, having specific locations, which are further divided into pure material which contributes nearly the total weight of it to the finished goods, and gross material, which contributes only a small fractions of total weight to the finished goods. It is obvious that ubiquities hardly influence the decision of location. Weber then proceeds to formulate the material index which equals the weight of localised material used in the finished product divided by the weight of the finished product.

Material Index (MI) =Weight of local is immaterial use din finished product/Weight of the finished produce

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 location nearer to market is advised. The commonsense involved in such conclusion is unquestionable. But such an approach tacitly assumes the existence of a static point of lowest transportation cost for raw material.

Later analyses by various other authors, like, Weigman, Palander, Losch, Ohlin and others have been attempted on increasingly comprehensive bases such as the interrelationship between factors like, (a) economic differences-(prices, market), (b) cost differences-(productivity, transport cost and accessibility), (c) human differences-(attitudes of founders and wage-earners), (d) national characteristics, and (e) various barriers-(political, geographic and transportation). Let us now see how a location study is made.