5.2 Key Factors in Facility Location Decision-Making
When deciding on the optimal location for a facility, organizations must carefully evaluate several critical factors that can significantly impact their operational efficiency, cost structure, and market responsiveness. The following are some of the key determinants that drive facility location decisions:
- Proximity to Raw Materials and Suppliers: Organizations that process bulk raw materials often prioritize locating their facilities near the sources of supply. This strategic positioning helps minimize transportation costs associated with procuring raw materials. Examples include paper mills near forests, canneries in farming regions, and fish processing plants near harbours where fishing vessels dock.
- Labour: Research indicates that labour factors are among many organizations’ most influential determinants in facility location decisions. Key labour considerations include prevailing wage rates for similar jobs in the area, the availability of a qualified workforce, the average education level of the local population, the degree of union activity, and the community’s general work ethic and productivity. Other factors, such as absenteeism rates and employee retention, can significantly impact an organization’s location strategy.
- Transportation Infrastructure: Efficient transportation networks, including roads, railways, and ports, are essential for the timely and cost-effective distribution of finished goods to the target market.
- Utility and Energy Costs: The cost and reliability of utilities, such as electricity, water, and natural gas, can significantly impact the overall operating expenses of a manufacturing facility.
- Tax Incentives and Regulations: Local and regional tax incentives and regulatory environments can influence a particular location’s financial viability and operational feasibility.
- Proximity to Customer Market: For certain industries, being close to end customers is crucial. Service firms like grocery stores, gas stations, fast-food restaurants, and hospitals must be conveniently accessible to their target markets. Additionally, products with high transportation costs or perishable nature may necessitate locating production facilities near the final consumer markets to reduce logistics expenses and maintain product quality. Examples include concrete manufacturing plants and bakeries.
- Community Factors: Local communities can play a significant role in attracting businesses by offering incentives such as tax waivers or reductions, access to infrastructure (roads, water, sewer, and utilities), and other enticements. Furthermore, community attitudes towards specific industries can influence location decisions. While some communities may discourage firms associated with potential environmental or social impacts, others may actively welcome them for the economic benefits they bring, including job creation, tax revenue, and economic diversification.
By carefully evaluating and prioritizing these factors based on the specific manufacturing requirements and market conditions, organizations can make informed location decisions that balance cost efficiency and market responsiveness, ultimately enhancing their overall performance and competitiveness.
Video: “Plant location, Factors affecting Plant Location [Animated video]” by Educationleaves [5:33] is licensed under the Standard YouTube License.Transcript and closed captions available on YouTube.
“8 Facility Location” from Introduction to Operations Management Copyright © by Hamid Faramarzi and Mary Drane is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.—Modifications: used section Key Factors in Facility Location Decision-Making, some paragraphs rewritten; added additional explanations and video.
