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PLANT / FACILITY

LOCATION

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LEARNING OBJECTIVES -1

• Importance of location.

• Problems due to wrong location.

• Factors in deciding the location of plant.

• Sources of information for decision making.

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LEARNING OBJECTIVES - 2

• Tools used in location planning.

• Model for assessing competitiveness of a location.

• Other issues in location planning

• Location decision in service sector

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Inputs:- Raw Materials- Plant & Machinery- Spare parts & Consumables- Manpower

FACILITY OPERATION

AND OPERATING

COST

Output: Product or Service

FACILITY OPERATION & OPERATING COST DEPEND ON INPUTS

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PLANT LOCATION• Location of plant has direct impact on operating

cost of the plant.• Future growth of the plant depends upon its

location.• A location initially looking very attractive may

prove to be a constraint for further growth of the plant.

• There can be number of options for the location of the plant. Each needs to be evaluated in depth for making a choice for locating the plant.

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IMPORTANCE OF PLANT LOCATION

Has direct impact on:• Cost of raw materials.• Cost of spare parts and consumables.• Cost of manpower.• Transportation cost of finished goods.• Transportation cost for sending plant and

machinery for repairs or replacement.• Lead time of materials.• Movement of men (regular work force / experts).• Operation and maintenance costs of transport

vehicles.

Wrong location can be a constraint for further growth of the plant.

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PROBLEMS DUE TO WRONG LOCATION

• Cracks in buildings and foundations in case of earth quake prone areas.

• Heavy rotating M/Cs or hydraulic presses in a nearby plant may generate ground vibrations, which may require frequent setting of M/Cs.

• Frequent transport disruptions in areas with history of heavy rains / floods.

• Traffic jams in congested area affect normal operations.

• Frequent work disruptions in areas with militancy.

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FACTORS TO BE CONSIDERED IN DECIDING THE LOCATION OF PLANT• Technical • Economical • Industrial environment • Social • Political • Government policies

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TECHNICAL 1 CAPACITY REQUIREMENTS

• Location must have area suitable to meet the plant capacity planned. For example, enough space should be available to accommodate plant & machinery, dispatch section and parking of trucks etc.

• In addition enough space should be available for future expansion of the capacity of the plant.

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TECHNICAL FACTORS IN DECIDING THE LOCATION OF THE PLANT - 2

VIBRATIONS:• Nature of industry (Precision equipment

factory is sensitive to vibrations).• Nearness to other facilities generating

vibrations (Railway station and plant with heavy machinery).

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TECHNICAL FACTORS IN DECIDING THE LOCATION OF THE PLANT - 3

SOIL CONDITION• Sinking of plant and machinery in loose

soil.• Cracks in civil construction & foundations

due to stresses from sinking of the structure.

• Misalignment of machines.• Serious maintenance problems.• Heavy cost of repairs.

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TECHNICAL FACTORS IN DECIDING THE LOCATION OF THE PLANT - 4

CLIMATIC CONDITION – EXTREME HOT CONDITIONS:

• Adverse effect on the quality of the rubber materials of belt conveyors.

• Heating up of bearings.• Heating of electrical contacts.• Erratic behavior of electronic items.• Risk of fire in use of inflammable materials.• Disruption in work if temperature exceeds 50°C.

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TECHNICAL FACTORS IN DECIDING THE LOCATION OF THE PLANT - 5

CLIMATIC CONDITION – EXTREME COLD CONDITIONS:

• Starting problems in engines and oil pumps.• Very difficult to work.• Busting of pipes due to freezing of water.• Difficulty in lubrication of plant and

machinery.• Difficulty in casting work.

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TECHNICAL FACTORS IN DECIDING THE LOCATION OF THE PLANT - 6

AREAS WITH HISTORY OF FLOODS• Floods adversely affect the

transportation of raw materials, spares, plant & machinery, finished goods and men.

• Cement plant generating dust would create slush with flood water thus affecting operations adversely.

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ECONOMIC FACTORS 1 AVAILABILITY OF POWER

• Disruption in plant operation due to shortage of power, low voltage, and fluctuations in frequency.

• Installation of standby generating sets adds to the cost, increases operating and maintenance cost.

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ECONOMIC FACTORS 2 AVAILABILITY OF WATER

• Water is required for the operation of conditioning tower in electrostatic precipitator for cooling the exhaust gases.

• Initial investment very high in ESP without conditioning tower. Their maintenance is also difficult.

• Adequate water is required for operation of turbines and power house.

• Water is required for cooling of bearing temperature, drinking, and other industrial operations like spraying of water in grinding operations.

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ECONOMIC FACTORS 3 NEARNESS TO RAW MATERIALS

• Plants are usually preferred near the source of raw materials i.e. lime stone in case of cement plant.

• Other raw materials for making the clinker are bauxite, iron ore, sand & gypsum. Source of fuel like coal should also be near the plant location.

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ECONOMIC FACTORS 4 NEARNESS TO MARKET

• Low delivery cost to a nearby market helps to keep low sale price.

• Shorter delivery help the customer in maintaining lower inventory.

• Quick after sales service could be arranged.• Higher customer satisfaction possible.• Concept of split location plants where production

facility is near the raw-material and finishing/packing operations are near market. Example of Narmada Cement in Gujrat.

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ECONOMICAL FACTORS - 5 MANPOWER AVAILABILITY

• Availability of skilled & trained manpower.• Manpower of different trades or of different

backgrounds needed.• Contractual labor should be available.• Number of Multi National Companies (MNC)

have set up plants in countries with cheap labor cost. India, China, Malaysia have low cost of labor.

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MANUFACTURING FACILITIES IN COUNTRIES WITH CHEAP LABOR

MNC PRODUCT COUNTRY WITH

FACILITYRefratechic,

GmbHRefractory China,

Collaboration in India

Toyo, Japan Castings & grinding media

China

Maggotteaux, Belgium

Grinding media

Malaysia

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INDUSTRIAL ENVIRONMENT 1

• Industrial units of the same industry i.e. if there are cement units already installed in the area and a new unit is being considered in the area. Three cement plants in Rajasthan (CCI Plant at Neemach, J K Cement at Nimbahera and Udaipur Cement at Udaipur)

• Industrial unit of other industrial sectors. For example, a cement plant may be considered in an area where a steel plant is already operating. Slag, a waste product of steel plant is used as raw material for cement plant. A cement plant in eastern region near Jamshedpur is using slag of the steel plant as raw material for producing cement.

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INDUSTRIAL ENVIRNMENT 2AVAILABILITY OF SERVICE PROVIDERS - 1

• Inspection agencies.• Transport service providers.• Courier service.• Repair facilities for various requirements:

– Rewinding of electrical motors.– Welding, machining and repair shops.– Contract labor for various jobs.– Computer maintenance services.

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INDUSTRIAL ENVIRONMENT 2AVAILABILITY OF SERVICE PROVIDERS - 2

• Cleaning services.• Security services• Testing services• Condition monitoring services like vibration

analysis, oil testing• Industrial gases and lubricant suppliers

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OTHER FACTORS

• Proximity to airport• Proximity to sea port• Good banking facilities• Good network of roads and rails.

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SOCIAL FACTORS• Good housing facilities.• Recreation and entertainment facilities.• Schools and colleges.• Medical facilities.• Noise, gas or dust pollution in the region.• Law and order situation.• Future threats such as:

– Fear of flooding near a dam, or– Leakage of gas from a chemical factory

(Bhopal Tragedy Union Carbide Factory), or– Fear of loosing local jobs by installation of an

industry. Narmada dam project got delayed due to court case on the height of the dam and opposition by the local population.

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POLITICAL FACTORS• Labor unrest.• Militancy in the region (Kashmir, Naxal

areas).• Political differences (Dabhol power project in

Maharashtra where the project was approved by Congress Government but when Shiv Sena & BJP combine came, some of the decisions were reversed while the project was in full swing thus delaying the project. A serious situation was faced as Dabhol company wanted to back out of the project).

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NANO CAR PROJECT OF TATA AT SINGUR IN WEST BENGAL

CONTROVERSY OVER LAND ACQUISITION - 1• Location: Singur, a block in West Bengal’s

Hoogly district.• Site: About 60 Km away, Singur is a 75 min

car drive from Kolkata. • Tata’s investment about 1500 Crores in the

project, schedule to produce car by Oct.,08.• Total land acquired for the project: 997.11

acres.• Compensation: Rs 118.96 crores for 8890

land owners.

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NANO CAR PROJECT OF TATA AT SINGUR IN WEST BENGAL

CONTROVERSY OVER LAND ACQUISITION - 2• More than 2000 villagers have not claimed

compensation.• Nano car is priced at Rs1 lakh and is for general

masses, who can not afford other costly cars.• Agitators led by Trinumal Congress leader Mamta

Banerjee wants return of 400 acres of land to farmers.

• None of the 800 odd engineers and executives, none of the workers could report for work due to threat by the agitators.

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NANO EFFECT- 3• The Singur branch of Hoogly District Co-

operative Bank (HDCCB) had 5,346 account holders till December 31, 2006. Now (October 3, 2008) it has 8,613.

• Bank’s turnover grew by about 33% between 2006-07 and 2007-08.

• Gift shop and motor cycle reported rise in sales by 50-70% in the past two years.

• Foreign liquor sales grew by 50% during the same period.

• In places, marginal farmers pooled in their compensation money to form a syndicate that supplies sand, red soil and ash to the plant.

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NANO CAR PROJECT OF TATA AT SINGUR IN WEST BENGAL

CONTROVERSY OVER LAND ACQUISITION - 4• Some of the engineers are from Japan,

Singapore & Korea. They are being terrorized.• Tata is frustrated with daily threats and

intimidation by the agitators and have indicated to shift the plant to another site, forgiving their investment of Rs 1500 crores.

• If Tata pulls out of West Bengal, it will be a huge setback for the industrial investments and development of the country and disaster for the economy of the state.

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NANO CAR PROJECT OF TATA AT SINGUR IN WEST BENGAL

CONTROVERSY OVER LAND ACQUISITION - 5• The project that could pull many out of poverty

and help the general masses is struggling to carry on due to controversy over land acquisition.

• Some local youths recruited by Tata Motors for the small car plant were worried for their jobs.

• Due to agitation work at the plant remained suspended for more than a month.

• CPM led West Bengal government wants Tata project to go on but unable to settle the matter due to political interests of others.

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DEAL: WIN-WIN FOR TATA, GUJRAT

• Tata wants only:– Rs 2,900 Cr for Nano plant, including the relocation

cost of Rs 700 Crores.– Infrastructure cost of Rs 6,670 cr also billed to

Tatas. Infrastructure development include road and rail, gas pipeline, effluent treatment plant, electricity, water etc.

– Repayment of Rs 9,570 cr loan @0.1% over 20 years.

– Size of the loan would be a quarte of Gujrat Government’s budget of Rs 40,000 cr

Reference: TOI dated November 12, 2008

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THE SWEETNERS OF THE DEAL

• 100% exemption on electricity duty concessional power tarrif.

• 1100 acre land comes cheap• No stamp duty, registration and transfer

charges• Payment for land in 8 equal annual

installments.

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CASE OF AIRPORT AT KOCHIN

• Airport is 25 Km from Kochin• Decision to set up the airport taken in 1991• Airport was inaugurated in 1999• Project came after years of protests from

local farmers fearing:– Loss of livelihood– Legal hurdles– Political interference

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DETAILS OF KOCHIN AIRPORT

• Government agencies involved in the airport project: 32

• Cost of construction: Rs 303 crores• Financed by: Rs 900m equity; Rs 1,680m

in loans; Rs 250m in deposits.• Individual investors: 11,000 from 30

countries.

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CASE OF PRIVATE AIRPORT OF WORLD CLASS AT KOCHIN

• Problem:– Faced a fund crunch: barely had Rs 20,000 as

capital and immense opposition as evicting people was like uprooting a well grown tree.

– To acquire 1,300 acres from 2,300 land owners and evict and rehabilitate 822 families in a state where land is precious asset.

– People were to be displaced at a compensation of Rs. 3500 per cent (a cent is one-hundredth of an acre) for dry-land and Rs 500 per cent for wet land

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AGREEMENT REACHED FOR AIRPORT AT KOCHIN

• At Rs 12,000 per cent for dry land• At Rs 3,000 per cent for wet land

Much higher than the market rates.

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WHAT BROUGHT SUCCESS TO AIRPORT AT KOCHIN?

• Offering jobs and land to the displaced:– Airport cleaning contract jobs and taxi

permits.– Developed 60 acres and compensated those

giving up their lands by distributing six free cents to each of them.

– Those , who refused were offered Rs 50,000.– Displaced received other benefits such

asshares in the new company and one free air ticket to a nearby location.

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LAND ACQUISITION FOR INDUSTRY IS EMERGING AS THE MOST BURNING ISSUE - 1

• India has chosen the path of industrialization to break out the curse of mass poverty.

• Huge industrial projects are suffering due to various local problems.

• At stake are investment worth of 2.43 lakh crores or $54 billion – roughly equal to seven years’ FDI (Foreign Direct Investment) inflow in India – an amount ,which is more than the GDP of over 100 countries.

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LAND ACQUISITION FOR INDUSTRY IS EMERGING AS THE MOST BURNING ISSUE - 2

• Combined land of big projects in India is 92,000 acres – half the size of Mumbai and twice the size of Calcutta or Chenai.

• This land is scattered at different places across the country and is not much.

• Land acquisition is becoming a big problem for the growth of industry and needs urgent attention.

• Details of projects faced with land disputes are given in the Table.

Source: TOI dated August 30, 2008

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GOVERNMENT POLICIES

• If the area has the clearance of the government for setting up the industrial unit.

• If incentives are given by the government for new ventures.

• If the area is backward area and government has plans to build infra-structure and roads etc.

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SOURCES OF INFORMATION FOR DECIDING ON THE LOCATION

• Industry associations such as ASSOCHAM, CII (Confederation of industry), CMA (Cement Manufacturers Associations).

• Ministry of Industry.• Local municipality.• Research organizations.• Ministry of information• Consultants • Metrological Department (weather, climatic

conditions).

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TOOLS USED IN LOCATION PLANNING

• Location factor rating method

• Centre of gravity method.

• Load-distance method

• Models such as Transportation Models.

• Application of Break Even Analysis (BEA).

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THREE TIER MODEL FOR ASSESSING THE COMPETITIVENESS OF A LOCATION

TIERS COMPETITIVENESS

1st Country competitiveness

2nd Sector competitiveness

3rd Company competitiveness

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COUNTRY COMPETITIVENESS

• Government budget & regulation.• Quality of judicial & political institutions.• Openness to international trade & finance.• Development of financial market.• Extent of which a national environment is

conducive or detrimental to business.

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SECTOR COMPETITIVENESS

• Labor market flexibility• Quality of infrastructure.• Quality of technology.• Extent to which a business sector offers

potential for growth and attractive returns on investment.

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COMPANY COMPETITIVENESS

Ability to design, produce & market products superior to competitors quality of business management.

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FACTORS AND RATING ON A SCALE OF 1-100 FOR LOCATION OF GARMENT

FACTORY OUT OF 3 CHOICES

S No. Factors Ratings

1 Availability of infrastructure 90

2 Size of market 60

3 Industrial climate 50

4 Tax benefits and concessions 30

5 Availability of cheap labor 30

6 Nearness to port 65

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RATING OF EACH LOCATION AGAINST EACH LOCATION ON A SCALE OF 1-100

Factors Location 1 Location 2 Location 3

Availability of infrastructure 20 40 60

Size of market 30 30 40

Industrial climate 80 30 50

Tax benefits and concessions

80 20 10

Availability of cheap labor 70 70 45

Nearness to port 20 40 90

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CALCULATING THE RELATIVE WEIGHTS

S #. Factors Ratings Relative weights

1 Availability of infrastructure 90 0.282 Size of market 60 0.183 Industrial climate 50 0.154 Tax benefits and

concessions30 0.09

5 Availability of cheap labor 30 0.096 Nearness to port 65 0.207 Sum of all factor ratings 325 1.00Relative weights = (Rating/Sum of all factors) . For S.# 1 = 90/325 = 0.28

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CALCULATING THE RELATIVE WEIGHTS

Factors Relative weights

Location 1

Location 2

Location 3

Availability of infrastructure 0.28 20 40 60

Size of market 0.18 30 30 40

Industrial climate 0.15 80 30 50

Tax benefits and concessions 0.09 80 20 10

Availability of cheap labor 0.09 70 70 45

Nearness to port 0.20 20 40 90

Overall score for the locations

41.23 37.54 54.77

Ranking of the locations 2 3 1

Location 3 is the best, followed by location 1. It is a rough cut and quick evaluation.

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CENTRE OF GRAVITY METHOD

• All the demand points (or the supply points, if the raw material is supplied from several locations) are represented on Cartesian coordinate system.

• Weight of each demand (or supply) point per unit time is also indicated.

• Work out the centre of gravity of various demand (or supply) for locating the new facility.

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DISTANCE OF COORDINATES AND THE ANNUAL SUPPLY FROM SUPPLY POINTS

Point of supply

X (m)

Y(m)

Annual supply

(tonnes)A 125 550 200

B 350 400 450

C 450 125 175

D 700 300 150

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WORKING OUT OF THE CENTRE OF GRAVITY OF SUPPLY

700

600

500

400

300

200

100

100 200 300 400 500 600 700

A (125, 550), 200

B (350,400), 450

C (450, 125), 175

D (700, 300), 150

Centre of gravity (x = 366, y = 376)

Distance in kilometers

Dis

tanc

e in

kilo

met

ers

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CALCULATION OF CENTRE OF GRAVITY (XC, YC)

XC = (125x200 + 350x450 + 450x175 +700x150) / (200 + 450 + 175 + 150) = (25000 + 157500 + 78750 + 105000) / (975) = (366250) / (975) = 375.64 m

YC = (550x200 + 400x450 + 125x175 + 300x150) / (200 + 450 + 175 + 150) = (110000 + 180000 +21875 + 45000) / (975) = (356875) / (975) = 366 m

Centre of gravity of supply or the location of the new facility is (375.64, 366).

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OTHER ISSUES IN LOCATION PLANNING

• Recent trend in international market is to have fewer facilities that could serve markets world wide. Example is:HP Deskjet printers are manufactured at 2 places, Vancouver in US and Singapore.

• Availability of good transportation infrastructure enables to give high level of service to customers with fewer large scale facilities.

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GOOD INFRASTRUCTURE - 1

• All weather high speed road network.

• Good railway infrastructure capable of transporting bulk cargo.

• Ports having faster turnaround times.

• Good connectivity to the ports.

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GOOD INFRASTRUCTURE - 2• Good internet system and IT for useful interface

for the customers.• Locating a good number of suppliers in the

vicinity (20-40 km radius) of the manufacturers. Examples are:– Toyota, Japan, in the context of JIT manufacturing.– Ambattur and Guindy industrial estates in Chennai

cater to all major automobile manufacturers in Chennai.

– Maruti has several suppliers in the Gurgaon-Faridabad belt on the outskirts of Delhi

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CONSIDERATION IN LOCATION DECISION IN SERVICE SECTOR• Locate service outlets as close to the

demand point as possible to give good response of the service delivery system.

• Nearness to the market is more important than the cost of the cost of the site.

• In case of manufacturing system, the cost of the site takes precedence over the location.

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GUIDELINES IN SELECTION OF LOCATION

• Proper technical evaluation of the probable sites.

• Optimum operating cost.• Consider if the project meets government

policies and guidelines.• Take clearance of local governments.• Consider social factors.• Possibility of future growth.• Strategic decision for ultimate value to

customer.