Location Evaluation Methods
Before selecting a location or locations, a company should consider certain factors. For instance, a manufacturing company may opt to have a single central plant that produces all the products of the company. This decision can help the company achieve economies of scale by reducing the unit cost through better utilization of equipment and dispersion of fixed costs over more units. However, transportation costs incurred in obtaining inputs from highly dispersed suppliers, and distributing finished goods from the plant to a highly dispersed market, will be very high. In case of a strike or a disaster such as fire or flood, complete operations of the company will come to a standstill.
On the other hand, the company may opt to have different small plants, each specialized in one product in a product line. This may reduce the risk of fire, flood or a strike, but the fixed costs will increase enormously as the volume at each plant will not be sufficient to fully utilize some equipment.
Each possible decision will have advantages as well as disadvantages. The company should select a location that best suits the products it offers, the location of its customers and materials, and other criteria that are specific to the company.
Several models and techniques are available that help managers make appropriate location decisions.
1. Cost-Profit-Volume or Break-Even Analysis
2. Point Rating Method
3. Transportation Method of Linear Programming
4. Center of Gravity Method of Plant Location
5. Analytic Delphi Method
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