State those various evaluating criteria and discuss them by assuming suitable data to support your answer.

Various factors are considered for site selection of an industrial plant and the evaluation of these factors is essential. Depending on the type of industry to be installed, different evaluating criteria were evolved. State those various evaluating criteria and discuss them by assuming suitable data to support your answer.

Answer. Facility location is the process of determining a geographic site for a firm’s operations. Managers of both service and manufacturing organizations must weigh many factors when assessing the desirability of a particular site, including proximity to customers and suppliers, labour costs, and transportation costs.

Location factors can be divided into two categories:
• Dominant factors
• Secondary factors

Dominant factors in manufacturing
Favorable labor climate: A favorable labor climate may be the most important factor in location decisions for labour-intensive firms in industries such as textiles, furniture, and consumer electronics. Labour climate includes wage rates, training requirements, attitudes toward work, worker productivity, and union strength. Many executives consider weak unions or al low probability of union organizing efforts as a distinct advantage.

Proximity to markets: After determining where the demand for goods and services is greatest, management must select a location for the facility that will supply that demand. Locating near markets is particularly important when the final goods are bulky or heavy and outbound transportation rates are high. For example, manufacturers of products such as plastic pipe and heavy metals all emphasize proximity to their markets.

Quality of life: Good schools, recreational facilities, cultural events, and an attractive lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but it can make the difference in location decisions.

Proximity to suppliers and resources: In many companies, plants supply parts to other facilities or rely on other facilities for management and staff support. These require frequent coordination and communication, which can become more difficult as distance increases.

Utilities, taxes, and real estate costs: Other important factors that may emerge include utility costs (telephone, energy, and water), local and state taxes, financing incentives offered by local or state governments, relocation costs, and land costs.

Other factors: There are some other factors needed to be considered, including room for expansion, construction costs, accessibility to multiple modes of transportation, the cost of shuffling people and materials between plants, competition from other firms for the workforce, community attitudes, and many others. For global operations, firms are emphasizing local employee skills and education and the local infrastructure.

Location Factors
Materials, markets and transportation: Factories which produce products for different markets usually are threatened by transportation costs. These costs include procurement costs, i.e. the costs considered for bringing raw materials or semi products to the company. On the other hand the finished products needs to be distributed to the markets, which incurs distribution costs. Therefore locations near inputs lower procurement costs and locations near markets lower distribution costs. Transportation costs comprise direct freight charges, while transfer costs refer to both direct costs and indirect costs such as insurance costs and losses resulting from damage in transit. Basically transportation costs are determined by physical characteristics like value of product and quantity of goods on the one hand and are determined also by freight rates on the other hand. Consequently, average transport costs decline significantly with distance.

Labor: Labor costs comprise wages and non-wage benefits, like contributions to medical plans, vacation time and pay, and pension schemes. Labor costs vary by industry, country, region, unionized and non-unionized sectors. In a country with high taxes and wages you usually will find sophisticated infrastructure and educational system and therefore skilled workers. By focusing on China, India and the US we can recognize how low wages do not necessarily mean high competitiveness and high living standards. The main figure which determines competitiveness is productivity.

External economies of scale: 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 labor, transport facilities, and as well to increase their markets for selling their products and have access to a much wider range of business services.

Energy: Energy sources were a significant factor of location before the Industrial Revolutions. Companies needed access to water energy, electricity for their operations. Now electricity and other energy sources like oil can be transformed and shipped very easily and cheaply and therefore Energy as being a main factor of location has decreased in its meaning.

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.

Capital: By looking at capital as a location condition, it is important to distinguish the physiology of fixed capital in buildings and equipment 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 and existing plants can be expanded. Financial capital is highly mobile and does not very much influence decisions. For example, large Multinational Corporations such as Coca-Cola operate in many different countries and can raise capital where 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 (i.e. Silicon Valley).

Example: Global Facility Location at DEC
Digital Equipment Corporation (DEC) is a large computer manufacturer based in the United States. More than half of its revenues comes from over 80 countries outside the United States, principally Europe. DEC has operated over 30 plants in more than a dozen countries.
In deciding on the international locations of new manufacturing plants and distribution centers, DEC considers a number of factors:
• Location of customers and suppliers
• Location and availability of inexpensive skilled labour
• Length of material pipeline in distance in distance and time
• Transit time and cost of various transportation modes
• Cost of materials in different nations
• Significance and location of tax havens (taxfree trade zones)
• Offset trade (value of goods and services purchased in a country to balance the sale of products in that country)
• Local content targets (percentage of components, by value, for a product)
• Export regulations, duty rates, and drawback policies

Based on these factors, DEC uses a linear programmingbased approach to develop 18 month and fiveyear plans for facility locations, capacity plans, and sourcing strategies around the world.