The selection of an area and finally the site for a plant needs a careful study if a proper location is to be selected. The analysis can be divided into two categories (i) Involving quantitative factors (a) Comparative cost analysis (b) Break-even analysis (ii) Comparison of qualitative factors.
1. Analysis based on Quantitative factors
(a) Comparative cost analysis. This is based on location cost summary chart. A comparative chart of total costs involved in setting up a plant of desired size is prepared. Consider four locations A, B, C and D and five factors 1, 2, 3, 4 and 5 on which the choice of location depends. These can be expenditures on land, building and other moving expenses. In the following figure the relevant operative cost factors are taken on vertical axis and the locations on horizontal axis.
Some units of output is chosen and the cost per unit of out-associated with various factors at each location is listed. The total cost for each location is then added and is represented by the height of the column for each location. We select a location for which the total cost is minimum.
The cost summary chart has the advantage of clarity in presentation and comprehensibility. However the analysis is restricted to certain specified factors only.
(b) Break-even chart : The concept of break-even analysis can be used to contrast the objective cost factors of individual locations i.e. contrast between operating costs and the value of capital required at different levels of output is made. The break-even chart can be drawn in two ways. (1) Chart to evaluate the relative importance of various cost factors to determine which location would be most advantageous. The slope of the variable cost line reflects the behavior of costs that vary with the level of output. Operational factors can also be power, taxes, water, insurance etc.
(ii) Another break-even chart can be drawn for different locations showing the relationship between total costs at different levels of output.
If total cost lines for various locations intersect then it indicates that the advantage of each location is not absolute but will vary according to the level of output.
2. Comparison of Qualitative factors.
Qualitative factors related with location analysis are also known as initial factors. These are the factors to which cost value cannot be assigned e.g. lack of good schools, union activity, community attitude etc. These factors can be termed as adequate or inadequate, significant or insignificant, good, excellent etc. for respective locations. The overall contribution of intangible factors for the choice of a particular location can be evaluated by –
(a) drawing a comparative chart for various locations
Locations Factors A B
Labor Supply adequate excellent
Recreation good very good
Union activity significant not significant
Education good very good.
Evidently in this case location C appears to be better than location A.
(b) ranking and weight method : Here the various locations are ranked according to the contribution of the corresponding factors. Various factors are assigned weights according to their importance in location analysis. The weights of each factor are multiplied with the corresponding rank of a location and the total of these products over all the factors for each location is calculated. The location having maximum total is considered to be most suitable. The following are the steps in the method
Step (i). Examine the various factors and assign to these weights representing the significance of the factor to the situation being studied. It is convenient to isolate the least significant factor and give it a weight one. All other factors are then expressed as a multiple of this factor and appropriate weights are assigned. Evidently extreme accuracy cannot be expected in assignment of weights.
Step (ii). Each location is examined and ranked for each factor.
Step (iii). Each ranking is then multiplied by the corresponding weight and the scores so obtained are totaled over factors for each location. The location having maximum total is considered to be most suitable.
It is observed that a location selected on the basis of quantitative factors may not tally with the choice based on comparison of qualitative factors. In case both the choices agree then the final selection is made otherwise the management may make a subjective choice. Generally cost criterion is given preference.