Factors Affecting the Location Decisions
The selection of location is influenced by a number of factors. These factors can be broadly classified as market related factors such as proximity to market, tangible or cost factors such as transportation availability, and intangible or qualitative factors such as environmental aspects. Some of the factors that influence the location decision are discussed below.
Locating facilities close to the market helps firms not only reduce transportation costs, but also serve their customers better. The firms can provide just-in-time delivery, respond to changes in demand and react quickly to field or service problems. Market proximity is a prime consideration for pure service organizations such as hotels, hospitals, retail stores and theatres. Therefore, they should always be located close to the market.
Integration with Other Parts of the Organization
An organization/group that already has some plants and wants to start or establish a new plant would like to locate it near to the existing plants so that its work can be integrated with that of other plants. This helps firms view the entire group as a single entity rather than as a number of independent units.
Availability of Labor and Skills
The availability of labor and skills is one of the important factors in production. Labor may be readily available in some areas than in other areas. Availability of skilled as well as unskilled labor in the required proportion in one area is usually not possible. Firms that emphasize more on technology require skilled people and so prefer a location where the skilled people are available. On the other hand, firms with more labor intensive processes prefer the area where the cost of labor is cheap and the labor is available plenty in number.
The management of the firm should ensure that the cost of the site is reasonable for the benefits that it is going to provide.
Availability of Amenities
Locations with good external amenities such as housing, shops, community services, communications systems, etc. are more attractive than those located in the remote areas. For instance, personal transport system like bus and train service is considered very important by many companies.
Availability of Transportation Facilities
The five basic modes of physical transportation are air, road, rail, water and pipeline. Firms consider the relative costs, convenience and suitability of each mode and then select the transportation method. For instance, firms that produce goods that are to be exported may choose a location near a seaport or a large airport.
Availability of Inputs
Though goods transportation helps in obtaining and delivering goods and services readily, a location near to the suppliers helps the firms reduce costs. It also enables the management of the firm to meet the suppliers easily and discuss aspects like quality, technical or delivery problems.
Availability of Services
Electricity, water, gas, drainage, and disposal of waste are some of the important services that need to be considered while selecting a location. For example, the food and textile units require considerable quantities of water and power. Rapid communication network is required for financial services, and effective drainage and disposal system is required for process industry as it produces lot of waste.
Suitability of Land and Climate
Climatic conditions such as humidity, temperature and atmosphere, and the geology of the area should be considered while selecting a location. If geographic conditions are not favorable, firms have to use modern building techniques (and incur high costs) to overcome these disadvantages. For instance, a hilly, rough and rocky terrain is not suitable for a plant location, since leveling the area needs a lot of expenditure.
Firms should ascertain that the proposed location does not violate any local regulation and laws. The laws and regulations concerning the recruitment of employees and the disposal of affluents have to be carefully studied while selecting the location.
Room for Expansion
While selecting a location, firms should ensure that there is adequate room for expansion of the firm's operations in the future.
Some units such as nuclear power stations and other chemical and explosive factories may present potential threat to the surrounding neighborhood. So firms should ensure that such units are located in remote areas where the damage will be minimal in case of an accident.
Political, Cultural and Economic Situation
Firms should be aware of the political, cultural and economic environment of the proposed location as these factors might affect the smooth running of the plant. For instance, firms suffer losses if their plants are located in politically and socially sensitive places.
Regional Taxes, Special Grants and Import / Export Barriers
For developing production facilities in locations such as export promotion zones, technology parks and industrial estates, governments offer some special grants like tax holidays, infrastructure support, low-interest loans, etc. Firms can prefer to locate their units in these places. For instance, Andhra Pradesh government is offering special incentives for export oriented firms willing to establish in special export zones.
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