Plant Location and

Layout
By Dr. Nitya Khurana
Assistant Professor
IITM, Janak Puri
 Need for selection of Plant
Location
Plant location is a strategic, long term and non-repetitive decision.
Selection of plant is needed in the following cases-
• When a new plant is to be established
• When the operations of the existing plant are to be expanded
• If the lease expires and landlord is not willing to renew it
• The original advantages of the plant have been out-weighed due to
new developments
• New economic, social, legal or political factors necessitate change
 Steps in Selection of Location
1. Domestic or International Location- if an international location is
chosen then factors such as political stability, export import policies,
currency and exchange rate, cultural economic and natural
situations must be considered
2. Selection of Region-
Availability of raw materials
Nearness to market
Availability of Power
Transport Facilities
Government Policies
 Steps in Selection of Location
(Cont’d)
3. Selection of Locality
 Availability of labour- adequate supply at reasonable wages. Required skills.
For e.g. location of glass industry in Ferozabad is because of the availability of
skilled labour there
Local Taxes and restrictions- local taxes on supply of water, electricity, etc.
imposition of certain restrictions in public interest.
Finance Facilities- a place where facilities are available for raising capital. This
is particularly true in developing countries where capital is not available
uniformly
Availability of water- some industries like paper, fertilizer, bleaching, Dying
require a lot of water. They must be located where water is available
 Steps in Selection of Location
(Cont’d)
4. Selection of the site
Disposal of waste- chemical, sugar, steel, leather industries have problem of
waste disposal. They must be located at sites where there is enough vacant
land for dumping solid waste. For liquid waste satisfactory sewer connections
Soil, Size and Topography- a fertile soil is necessary for agro based industries.
Size should ne such that it allows for expansion in future if needed. In terms
of topography, usually a hilly and rocky terrain is not suitable
 Factors affecting Plant Location
• Supply of raw material
• Nearness to market
• Transport Facilities
• Supply of labour
• Power
• Supply of capital
• Facilities
• Natural factors
• Political factors
• Government subsidies and facilities
• Initial start and goodwill
• Personal Fcators
 Recent Trends in Plant Location
• Priority for sub urban areas- Government does not allow establishment
or expansion of existing units in city areas
• Industrial development in notified backward areas- In order to have
balanced regional growth, central and state government have notified
certain backward area. Various incentives such as tax relief, cash
subsidy, cheaper land and power supply are provided to encourage
development of industries in these areas
• Establishment of industrial estate- Industrial estate is a piece of vast
land sub divided into different industrial plots wherein factory sheds are
constructed. Plots of land along with factory sheds and infrastructure
facilities are developed in industrial estates and are sold to promoters.
These are developed by the state government
 Recent Trends in Plant Location
(Cont’d)
• Decentralization of Industries- to prevent concentration of industries
in certain areas, new units are not permitted to be started in certain
industrially congested areas
• Increased role of govt. in decision of location of industries- through
its persuasive and compulsive methods government greatly affects
the location decisions of industries
Methods of evaluating different plant
locations
1. Factor Rating Method
2. Point Rating Method
3. Locational break-even analysis
4. Centre of Gravity Method
5. Delphi Method
 Factor Rating Method
1. List the most relevant factors in the location design
2. Rate each factor (1 for very low and 5 for very high) according to
their relative importance
3. Rate each location according to merits on each factor (1 for very
low and 10 for very high)
4. Compute the product of ratings by multiplying the factor rating by
location rating
5. Compute the sum of product of ratings of each location
 Factor Factor Location rating Product of Rating
rating
A B A B

Tax advantage 4 8 6 32 24
Labour skill 3 2 3 6 18
Proximity to 3 6 5 18 15
customers
Proximity to 5 2 4 10 20
Suppliers
Adequacy of 1 3 3 3 3
water
Availability of 2 6 4 12 8
power
Suitability of 2 7 9 14 18
climate
Access to rail and 3 10 8 30 24
transportation
Total Score 125 130
 Point Rating Method
• In selecting a site or location, companies have several objectives but not are equally
important.
• The relative importance of each objective is represented by number of points a
perfect site would receive in each category
• Each potential factor is evaluated with every factor the company is looking for
• The drawback of this method is that high score in any factor can overcome a low
score in any other factor. Therefore, the factors that are considered essential have a
least specified number of points assigned to those. Sites that do not have the least
specified points for those essential factors are excluded from further evaluation
• What is significant in point rating system is the relative importance of tangible cost
factors to intangible factors. Points are usually assigned to only to intangible factors
to determine whether the difference b/w intangible scores is worth the difference,
if any, b/w the tangible costs of competing locations
After evaluating two potential sites, A and B by comparing costs and finding them approximately equal from
cost point of view, a manufacturer decided to evaluate the intangible factors for these two locations using
point rating method. The details of the same are in the following chart

Factors Rated Maximum Points Assigned to Locations

possible points Location A Location B

Future Availability of fuel 300 250 200

Transportation Flexibility 200 150 150

Adequacy of water supply 100 100 100

Labour availability 250 200 220

Pollution regulation 30 20 20

Site Topography 50 30 40

Living Condition 150 125 100

Total 1080 875 830

 Locational Break-even Analysis
• Total cost (TC)= Fixed Cost (FC) + Variable Cost (VC)
• Money received from total sales= total revenue (TR)
• Breakeven Point-> TR=TC (No profit no loss)
• In comparing several locations on an economic basis only those costs
or revenue need to be considered that vary across locations.
Therefore, if per unit revenue from all locations is same, comparison
can be based only on TC using break-even analysis graph.
Potential locations A, B and C have cost structures shown for producing a product
expected to sell as 100 per unit. Find the most economical location for an expected
volume of 2000 units/year. Also determine the range of annual volume of production
for which, each location A, B and C would be most economical
LOCATION FIXED COST/YEAR VARIABLE COST PER UNIT
A 25000 50
B 50000 25
C 80000 15

TC= FC + VC per unit x Quantity Produced

TC at A= 25,000 + 50X 2000 =1,25,000
TC at B= 50,000 + 25X 2000= 1,00,000
TC at C= 80,000 + 15X2000= 1,10,000
By comparison, the most economical site is site B
For determining the range of annual volumes for all locations a break-even analysis by
analytical or graphical method is required
The switch from one site to another takes place as per following order
Site A to B to C

Let Q be the volume at which we switch form site A to B

Total cost at Site A>= Total cost a Site B
25000+50Q >= 50000+25Q
50Q - 25Q >= 50000-25000
25Q >= 25000
Q>=1000

Similarly, for the switch from site B to site C

Total Cost of Site B>= Total site at C
50000 + 25Q>= 80000 + 15Q
25Q - 15Q >= 80000-50000
10Q >= 30000
Q >= 3000
 Center of Gravity Method
• Center of gravity method is primarily based on cost considerations
• It takes into consideration location of plant and market, the volume of goods moved and
transportation cost in arriving at the best location for single intermediate warehouse
• Steps
1. Place the existing locations on a coordinate grid. The origin of the coordinate system and
scale used are arbitrary as long as the relative distances are correctly represented. This can
be done by placing a grid over the map
2. Use the following equations
/
/
Where,
= x-coordinate of center of gravity
= y-coordinate of center of gravity
= x-coordinate of location i
= y-coordinate of location i
Suppose a company wants to expand its logistics network and locate a facility within
a network of three existing facilities. The details of the outbound volume of goods for
the three warehouses are as follows:

Warehouse 1 = 2500 units

Warehouse 2 = 1300 units
Warehouse 3 = 5000 units

The current coordinates of the warehouses are as follows:

Warehouse 1 = 200, 50
Warehouse 2 = 300, 100
Warehouse 3 = 100, 150
D1x = 200 D1y = 50 W1 = 2500
D2x = 300 D2y = 100 W2 = 1300
D3x = 100 D3y = 150 W3 = 5000

Cx= (200x2500)+(300x100)+(100x5000)/(2500+1300+5000)= 158

Cy= (50x2500)+(100x1300)+(150x5000)/(2500+1300+5000)= 114
 Analytical Delphi Method (ADM)
• Delphi is a systematic method to evoke expert opinion. It is a
qualitative method of location determination. It involve the following
steps:
1. Form two delphi panels- An in-house or outside consultant team
acts as coordinator to design questionnaires and conduct the Delphi
inquiries. This team then selects two panels from within the
organization to participate in two Delphi inquiries - one to forecast
the trends in social and physical environments affecting the
organization (the forecasting Delphi panel), and the second to
identify the strategic goals and priorities of the organization (the
strategic Delphi panel).
 Analytical Delphi Method (Cont’d)
2. Identify Threats and Opportunities- The coordinating team, through
several rounds of questionnaires and feedback, asks the forecasting
Delphi panel to identify major trends, opportunities in the
marketplace, and any threats the organization must guard against.
This is carried out many times till consensus is arrived (A small
monitor team designs a questionnaire which is sent to a larger
respondent group. After the questionnaire is returned, the monitor
team summarizes the results and, based upon the results, develops
a new questionnaire for the respondent group. The respondent
group is given at least one opportunity to re-evaluate its original
answer based upon examination of the group response)
 Analytical Delphi Method (Cont’d)
3. Determine directions and strategic goals of organization- The coordinating
team conveys the findings of the forecasting Delphi inquiry (as above) to
the strategic Delphi panel, which then uses them in the second Delphi
inquiry to determine the organization’s direction and strategic goals.
4. Develop Alternatives- Once the strategic Delphi panel establishes the long-
term goals, it should focus its attention on developing various alternatives.
(The alternatives as applied to location selection could be expansion
and/or contraction of the existing plant (s) facilities, and/or developing
alternative locations for some parts or the entire organization).
5. Prioritize the alternatives- The set of alternatives developed in Step 4
should be presented to the participants of the strategic Delphi panel to
obtain their subjective value judgements for the pairwise comparison
matrix.
 Plant Layout
• A plant layout refers to an optimum arrangement of different facilities
including man, machines, equipment, material, etc. It involves
determining the space requirement for the facilities and arranging
them in a manner to ensure steady flow of operations with minimum
overall cost.
• Since layout once made cannot be modified without incurring
substantial cost on one hand and disrupting operations on the other
hand, layout decisions are strategic decisions
• A poorly planned layout causes congestion, disruption of flow of men
or material, accidents, delays, rejections and inefficiency.
 Objectives of a good Layout
• Proper utilization of cubic space (i.e. length, width and height). For e.g. conveyer belts
can run overhead
• Waiting time of semi finished goods is minimized
• Working conditions are safer and better (well ventilated, lighted etc.)
• Material handling and transportation minimized
• Movement of workers minimized
• Suitable space allocated to production centers
• Plant maintenance simpler
• There is increased flexibility for changes in product design and future expansion
• Better supervision and control
• Facilitate coordination and face to face communication where appropriate
• Higher material turnout due to shorter operating cycle
 Factors affecting Layout
• Type of Material- liquid or solid, light or heavy, small or large. Storage
and movement of RM will depend on its nature. For e.g. overhead
cranes are required for very heavy RM, pipelines are used to transport
crude oil etc.
• Type of Product- stationary layout for heavy products like ship
wherein men and material will be transported to the product. Line
layout for light products that can be easily moved from one work
station to other
• Employees- Employee facilities like washrooms, water cooler, dining
room, locker room, feeding room for women. Employee safety must
also be given due consideration
 Factors affecting Layout (Cont’d)
• Nature of plant location-
Size and terrain of the site will determine the type of building
Plant location determines mode of transportation depending on distance
from source of RM and market. The layout should provide for exact type of
transportation required
Layout must consider the requirement of power generation. If power is to be
generated using coal or oil then adequate storage facilities for the same are
must
The demand for future expansion. For eg if a rural site is chosen then future
expansion is possible by adding an additional wing to the existing single storey
construction. If an urban site is selected expansion can be made possible by
adding more storeys to the present structure
 Factors affecting Layout (Cont’d)
• Type of Machinery- production is a combination of men, material and
machines. The ratio is which different factors are combined depend
on their relevant cost and production process selected. Before laying
out a plant it is necessary to determine which of these elements are
to be stationary or fixed. Various alternatives are:
To move the product and the worker from work station to work station
To move the product from work station to work station, keeping the machines
and workers stationary
To move the worker and the machine to the product, which is held at the
location.
 Factors affecting Layout (Cont’d)
• Type of Industry process- Industry process is of two types
(a) Intermittent (b) Continuous
The former type of industries manufacture different components on different
machines and assemble them to get end-products (Functional layout). Continuous
industries on the other hand produce one or more standardized product using
highly mechanized processes (Line layout).
• Management policies- Management policies with respect to
(a) Volume of production and provision for expansion
(b) The extent of automation
(c) Making or buying a particular component
(d) Purchasing Policy
(e) Desire for rapid delivery of goods to consumers
 Factors affecting Layout (Cont’d)
• Type of machine and equipment – Machine could be general purpose
or special purpose. In addition, each machine has different
requirements in terms of their speed, space, material handling
process, etc.
• Characteristics of building- space of building, covered area an open
area, number of storeys, facilities like elevators, parking area, storing
place and so on influence layout plan.
 Principles of Layout
• The principle of minimum travel- men and material should travel the shortest
distance between operations to avoid waste of labour and time
• Principle of sequence- machinery and operations should be arranged in a sequential
order
• Principle of Usage- every foot of available space must be effectively utilized
• Principle of integration- there should be a harmonious fusion of all the relevant
factors so that final layout looks well integrated and compact
• Principle of safety- layout should contain built in provisions for safety of workmen
• Principle of flexibility- layout should permit revisions with least difficulty at minimum
cost
• Principle of minimum investment- layout should result in savings in fixed capital
investment, not by avoiding installation of necessary facilities but by an intensive use
of available resources.
 Benefits of Layout
Minimization of Minimization of Optimum utilization
Optimum use of area
material handling delays of labour

Improved Quality Control by better supervision Avoidance of Bottlenecks

Good production control

 Types of Layout
• Process layout, functional of job-shop layout
• Product layout, Line processing or flow-line layout
• Static or fixed position layout
• Combined or hybrid layout
• Cellular or group technology layout
 Process Layout
• All machines performing similar types of operations are grouped at one location.
For e.g. all lathes, milling machines, cutting machines, etc. will be clustered in
their like groups
• This type of layout is usually applied in industries engaged in job order production
and non-standardized products.
• Several products may share a machine
• The operations vary from product to product. So layout depends more on process
than on product
• PRINCIPLES
Distance between departments should be short
There should be convenience of materials
There should be convenience of supervision
The department must be located as per sequence of operations
 Advantages of Process Layout
• Eliminates duplication of machines
• Facilitates flexibility in production
• Breakdown of one machinery does not interrupt the entire workflow
• Specialization in supervision becomes possible
• Individual incentive schemes can be developed
 Disadvantages of Process Layout
• Higher cost of material handling due to long-routing and back-tracking
between processes
• Longer processing time reduces inventory turnover and increases
investment in inventory
• Increases supervision cost
• Complicated production planning and control due to complexities in
routing, scheduling, dispatching and follow up
• More space required for internal storing of material
 Product Layout
• Machines are laid out in the sequence required by the product
• Not necessarily in a straight line
• A product goes through all the machines in the given sequence
• To make this layout successful, the workload on various machines must be
balanced i.e. the time required to perform task at each workstation should
be the same
• Unlike in process layout, here product is given primary importance. Process
is determined as per product requirement
• PRINCIPLES
Machine tools must be placed at the point near the sequence of operation
One line of production must not cross another
Materials should be placed at a point near the assembly line
 Advantages of Product Layout
• Reduced material handling cost
• Mechanization of material handling is possible due to handling
between fixed points
• Line balancing may eliminate idle capacity
• Shorter operating cycle
• Reduced supervision requirements
• Effective production planning and control because routing,
scheduling, dispatching and follow up are relatively easier
• facilitates implementation of group incentives
 Disadvantages of Product Layout
• Duplication of machines necessitates increased investments
• Production flow is highly inflexible
• Breakdown of one machine in the line will interrupt the entire
production
• a change in product requires re-balancing of line
 Static or Fixed Position Layout
• In such a production system, the product remains static and men and
machine mover performing the operation on product
• Usually adopted in case heavy goods like ship or aircraft
• ADVANTAGES
Men and machines can be used for a wide variety of operations
Investment in layout is very small
High cost of and difficulty in transporting a bulky product are avoided
Sequence of operations can be change if some materials do not arrive or if
some men are absent
 Combined or Mixed Layout
• Mixture or combination of main three layouts
• For e.g. one firm may utilize a process layout for the majority of its
process along with assemble in one are
• Similarly, a firm may utilize a fixed position layout for the assembly of
its final product, but use assembly lines to produce the components
and sub-assemblies that make up the final product (aircraft)
 Cellular or Group Layout
• Here machines are placed in groups
• Each machine group makes a family of parts which require similar
treatment
• This layout lies between process and line layout