Mechanics

Location

The geographical location of the plant contributes a lot to the success of any chemical business
venture .Utmost care and judgment is required for selecting the plant site, and many different factors
must be considered while selecting the plant site. The plant site should be ideally located where the cost
of production and distribution can be at a minimum level .Also there has to be a good scope for plant
expansion and a conducive environment, safe living conditions for easy plant operation.But other factors,
such as safe living conditions for plant personnel as well as the surrounding community are also
important.

Eg:Selection of plant location for establishing a chemical industry

By Prashantkumar Kudli Shrinivas

The geographical location of the plant contributes a lot to the success of any chemical business
venture .Utmost care and judgment is required for selecting the plant site, and many different factors must
be considered while selecting the plant site.

The plant site should be ideally located where the cost of production and distribution can be at a minimum
level .Also there has to be a good scope for plant expansion and a conducive environment, safe living
conditions for easy plant operation.But other factors, such as safe living conditions for plant personnel as
well as the surrounding community are also important.

The major factors in the selection of chemical plant sites are (1)raw materials, (2) markets, (3) energy
supply, (4)climate, (5) transportation facilities, and (6)water supply. For a preliminary survey, the first four
factors should be considered. On the basis of raw materials availability, market survey, energy supply,
and climate, acceptable locations can usually be reduced to one or two general geographical regions.

In the second step, the effects of transportation facilities and water supply are taken into account. This
permits reduction of the possible plant location to few general target areas. These areas can be reduced
further by considering all the factors that have an influence on plant location.

As a third step, a detailed analysis of the remaining sites can be made. Exact data on items such as
freight rates, labor conditions, tax rates, price of land, and general local conditions can be obtained. The
various sites can be inspected and appraised on the basis of all the factors influencing the final decision.
The final decision on selecting the plant site should take into consideration all the factors that can affect
the ultimate success of the overall plant operation.

The choice of the final site should be based on a detailed survey of various geographical areas, and
ultimately, on the advantages and disadvantages of available real estate. An initial outline regarding the
plant location should be obtained before a design project reaches the detailed estimate stage, and a firm
location should be established upon completion of the detailed estimate design The factors that must be
evaluated in a plant location study indicate the need for a vast amount of information.

The following factors should be considered in selecting a plant site:

1. Raw materials availability

2. Energy availability

3. Meteorological data

4. Market study

5. Transportation facilities

6. Water supply

7. Waste disposal

8. Labor supply

9. Taxation and legal restrictions

10. Site characteristics

11. Safety and Environmental measures

12. Community factors

1. Raw materials availability:

The source of raw materials is one of the most important factors influencing the selection of a plant site
.This is particularly true if large number of raw materials source permits considerable reduction in
transport and storage charges. Attention should be given to the purchased price of the raw materials,
distance from the source of the supply, freight or transportation expenses, availability and reliability of
supply ,purity of the raw materials, and storage requirements.

2. Energy availability:
Power and steam requirements are high in most of the chemical plants, and fuel is ordinarily required to
supply these utilities .Power and fuel can be combined as one major factor in the choice of a plant site.If
the plant requires large quantities of coal or oil, location near a source of fuel supply may be essential for
economic operation. The local cost of power can help determine whether power should be purchased or
self generated.

3. Meteorological data:
If the plant is located in a cold climate, costs may be increased by the necessity for construction of
protective shelters around the process equipment, and special cooling towers or air-conditioning
equipment may be required if the prevailing temperatures are high. Excessive humidity or extremes of hot
or cold weather can have serious effect on the economic operation of the plant, and these factors should
be examined when selecting a site.

4. Market study:

The location of markets or distribution centers affects the cost of product distribution and the time required
for shipping .Proximity to the major markets is an important consideration in the selection of a plant site
,because the buyer usually finds it advantageous to purchase from near by sources. It should be noted
that markets are needed for by products as well as for major final products.

5. Transportation facilities:

Water, railroads, and highways are common means of transportation used by major industrial concerns.
The kind and quantity of products and raw materials determine the most suitable type of transportation
facilities. Careful attention should be given to local freight rates and existing railroad lines. The proximity
to railroad centers and the possibility of canal, river, lake or ocean transport must be considered. Motor
trucking facilities are widely used and can serve as a useful supplement to rail and water facilities. If
possible, the plant site should have access to all three types of transportation and, certainly, at least two
types should be available. There is usually a need for convenient air and rail transportation facilities
between the plant and the company head quarters, and effective transportation facilities for the plant
personnel are necessary.

6. Water supply:

The process industries use large quantities of water for cooling, washing, steam generation, and as a raw
material in process.Hence,the plant must be located where a dependable supply of water is available. A
large river or lake is preferable, although deep wells or artesian wells may be satisfactory if the amount of
water required is not too great. The level of the existing water table can be checked by consulting the
state geological survey ,and information on the constancy of the water table and the year round capacity
of local rivers or lakes should be obtained .If the water supply shows seasonal fluctuations, it may be
desirable to construct a reservoir or to drill several standby wells. The temperature, mineral content, silt or
sand content, bacteriological content, and cost for supply and purification must also be considered when
choosing the water supply.

7. Waste disposal:

In recent years, many legal restrictions have been placed on the methods for disposing of waste materials
from the process industries. The site selected for a plant should have adequate capacity and facilities for
correct waste disposal. In choosing a plant site, the permissible tolerance levels for various methods of
waste disposal should be considered carefully, and attention should be given to potential requirements for
additional waste-treatment facilities.

8. Labor supply:

The type and supply of labor available in the vicinity of a proposed plant site must be examined
.Consideration should be given to prevailing pay scales ,restrictions on number of hours worked per
week, competing industries that can cause dissatisfaction or high turnover rates among the workers, and
variations in the skill and productivity of the workers.
9. Taxation and legal restrictions:

State and local tax rates on property income, unemployment insurance, and similar items vary from one
location to another.Similarly,local regulations on zoning, building codes, nuisance aspects, and
transportation facilities can have a major influence on the final choice of a plant site. In fact, zoning
difficulties and obtaining the many required permits can often be much more important in terms of cost
and time delays than many of the factors discussed in the preceding sections.

10. Site characteristics:

The characteristics of the land at a proposed plant site should be examined carefully. The topography of
land and the soil structure must be considered, since either or both may have a pronounced effect on
construction costs. The cost of the land is important, as well as local building costs and living conditions.
Future changes may make it desirable or necessary to expand the plant facilities.Therefore, even though
no immediate expansion is planned, a new plant should be constructed at a location where additional
space is available.

11. Safety and Environmental measures:

Many industrial plants are located along rivers or near large bodies of water, and there are risks of flood
or hurricane damage. Before selecting a plant site, the regional history of natural events of this type
should be examined and the consequences of such occurrences considered. Protection from losses by
fire is another important factor for selecting a plant location. In case of a major fire, assistance from the
fire departments should be available. Fire hazards in the surrounding area of plant site must not be
overlooked.

12. Community factors:

The nature and facilities of a community can have an effect on the location of the plant. If minimum
number of facilities for satisfactory living of plant personnel do not exist, it becomes a burden for the plant
to subsidize such facilities. Cultural facilities of the community are important to sound growth.Facilities
such as religious centers, libraries, schools, civic theatres, concert associations, and other similar groups
do much to make a community progressive. The efficiency, character, and history of both state and local
governments should be evaluated. The existence of low taxes is not in itself a favorable situation unless
the community is already well developed and relatively free of debt.

During the last decade, two strategies - globalization and time-based competition - have fundamentally altered

the way companies do business. Globalization has created a "borderless organization" in which production and

distribution facilities and even the supply

base is geographically dispersed while time-based competition (defined as the speed with which products are

manufactured, delivered to market, and serviced) has led to exacting customer demands for a wide variety of

products with short lead times.

In such a complex environment of global scope and short product life cycles, the ability to manage global

supply chains efficiently is considered as a vital source of competitive advantage. In this paper, we define

supply chain as a network of production and distribution facilities that link material, information, and money

flows, from raw material supply to customer delivery in order to deliver a product to the final customer (Jones

and Riley 1985).

A critical decision faced by supply chain managers is the optimal location of production facilities. This decision

has a profound impact on firm competitiveness. In making this decision, the external factors described earlier -

globalization and time-based competition - often impose opposing influences on the firm, and these influences

are not readily apparent when the initial plant location decision is made. For example, a firm that sets up a

manufacturing plant in a third world country to take advantage of lower labor costs may find its time-based

performance eroded because of poor infrastructure or non-availability of skilled personnel. The location

decision is thus a strategically important managerial challenge that significantly impacts the long-term

performance of global firms, and in particular, long-term operational performance of global supply chains. Prior

models reported in the literature to resolve the tradeoffs associated with the plant location decision fall into two

distinct categories. The first set of models predominantly focuses on quantitative analyses based on assumed

costs of land, labor and transport, scale economies, and other cost-based variables. Key qualitative factors

such as availability of skilled workforce, efficient business services and infrastructure, and stability of

government policies are ignored, though these are critical for creating and supporting competitive advantage.

The second category of models on plant location incorporates both quantitative as well as qualitative variables

referred to above. However, there has been little research to assess if managers emphasize different variables

in making the location decision in different countries.

The fundamental research question addressed in this paper is whether firms that eventually locate their plants

in one country versus another differ in their emphasis on different qualitative variables while making the plant

location decision. An empirical study is reported that was conducted to compare plant location procedures in

Malaysia and Singapore. Data were collected from 327 firms located in Singapore and Malaysia. This is an

important comparison from the perspective of international business, since Singapore and Malaysia are direct

competitors in attracting foreign direct investment. Also, these two countries exhibit considerable variation in

terms of level of economic development -Singapore, generally considered a highly developed country and

Malaysia, a developing country. The rest of this paper is organized as follows. First, relevant segments of

literature are reviewed, encompassing models that incorporate both quantitative and qualitative factors in the

plant location decision. This is followed by a discussion of the research framework, hypotheses, and research

methodology. Next, analysis of results and findings are presented. Finally, concluding comments and future

research directions are outlined. Globalization has led to a significant increase in foreign trade and foreign
direct investment. Worldwide exports increased from 12% of world GDP in 1962 to more than 25% of world

GDP (totaling $28.9 trillion) in 1998 (World Development Report 1999/2000). Further, trade in manufactured

goods grew at a faster pace than general trade in the developed economies (The OECD Observer 1998).

Investment in manufacturing facilities and the choices of their locations will therefore be a strategically critical

managerial activity in the future. Are firms that emphasize certain factors in the location decision more likely to

locate in one country versus another? This question is of consequence to both practitioners and academics.

As referred to earlier, prior literature on plant location can be categorized into two streams cost-based models

and models that consider key qualitative variables in the location decision. Table 1 outlines the main segments

of the plant location literature.

Qualitative Variables in Plant Location

From a practical perspective, the most widely used location technique that considers qualitative factors is a

weighted checklist approach in which various important but diverse factors like proximity to customers,

business climate, legislation, tax incentives, and other support factors, are rated on a weighted scale and

combined into a composite score. The selected site is the one with the best composite score. Details and

applications in a wide variety of industries are reported in Ballou (1999), Bowersox and Closs (1996), Bruce

(1985), Chase, Aquilano, and Jacobs (1998), and Krajewski and Ritzman (1999) among others. This approach

is subjective and the outcome often depends on the preferences of the decision maker. Moreover there has

been scant effort in the literature to study the effectiveness of such a weighting mechanism.

Schmenner's (1982) was among the first studies that formally tested the significance of qualitative variables for

the plant location decision and reported a comprehensive survey of the plant location/relocation practices

among Fortune 500 companies in the United States. The study identified favorable labor market, nearness to

market, quality of life in the area, nearness to suppliers, and low labor rates as the most important variables

considered by managers in the location decision. The author reported marked variations in the above

responses (i.e., importance of the variables) among different industry groups. Schmenner (1979) emphasized

that a location strategy focused chiefly on financial assessments could often result in a poor solution involving

recommended relocation and opening of new branches over on-site expansion. Schmenner (1983) outlined the

concept of plant life cycle based on the changing charters that plant managers face over different phases of the

life of the plant.

MacCormack, Newmann, and Rosenfield (1994) examined the impact of the global trading environment, new

production systems, and new technologies on the plant location decision. The authors suggested that existing

literature approached the plant location problem narrowly, focusing on quantitative data such as transport
costs, exchange rates, taxes, and labor rates, as opposed to qualitative factors such as infrastructure, worker

skills, local government regulations, and access to suppliers. For example, plant location decisions that ignore

skill levels of the local workforce could significantly affect the ability of the firm to implement new process

technologies, or limit the effectiveness of total quality management programs. Therefore, companies ought to

emphasize qualitative factors that are required to support overall business strategy. Only after establishing a

set of desirable location options, based on qualitative factors, should companies refine choices using cost-

based algorithms. Khurana and Talbot (1998) proposed that a richer understanding of plant roles could be

obtained by focusing on an assessment of manufacturing capabilities and plant missions in global

manufacturing networks. Using case and survey data in the global color picture tube industry, they found that

plant manufacturing capabilities along with plant location criteria were important factors in defining plant

missions. The authors concluded that, when selecting a plant site, firms that considered the fit between location

factors and their respective capabilities were found to enjoy higher business performance in comparison to

firms that did not consider capabilities in conjunction with plant location factors.

Ferdows (1997) described how superior manufacturers gain competitive advantage by methodically charting

strategic roles for their foreign factories. He suggested that companies that locate plants in foreign countries

merely to benefit from tariff and trade concessions, cheap labor, capital subsidies, and reduced logistics costs

do not tap the full potential of their foreign factories. In contrast, companies that use their foreign plants not only

to gain access to the usual incentives described above, but also to get closer to their customers and suppliers,

to attract skilled and talented employees, and to create centers of expertise for the entire company enjoy higher

levels of performance. Depending on the plant charter, firms would emphasize specific factors in the location

decision, which would then impact the probability of locating along a continuum ranging from developed to

developing countries

Plant Location Factors

Qualitative factors associated with plant location, though difficult to measure, are likely to have an important

impact on organizational performance (MacCormack, Newmann, and Rosenfield 1994). The final list of plant

location items was adapted from previous conceptual and empirical studies (MacCormack, Newmann, and

Rosenfield 1994; Swamidass 1990; Tong 1978; Ulgado 1996). This resulted in 47 plant location-specific

attributes or items. For ease of interpretation of the results, the items were classified into eight categories:

infrastructure, business services, labor, government, proximity to markets, proximity to suppliers, key

competitors' locations, and cost. Table 2 lists the detailed measures used for all eight categories. Respondents

were asked to indicate the relative emphasis placed on each factor on a five-point Likert scale with end points
of I (extremely important for making a plant location decision) and 5 (not important at all for making a plant

location decision).

Assertions and Hypotheses

Relative emphasis on plant location factors at the time of initial manufacturing site location has a significant

effect on the eventual location of the plant in one country as opposed to another. Specifically, the objective is to

identify those factors that significantly predict eventual plant location in Singapore as opposed to eventual plant

location in Malaysia.

The detailed rationale for the hypotheses is set out in Table 3. Broadly, firms interested in minimizing costs or

accessing stable markets are likely to locate their plants in Malaysia. On the other hand, firms emphasizing

quality of labor, infrastructure, business services, and suppliers are likely to locate their plants in Singapore.

Similarly, firms desiring stable government policy with respect to investments, taxation and financing are likely

to locate in Singapore. Finally, firms that are more sensitive to the locations of their key competitors, in

particular, high tech industries, are likely to locate in Singapore to tap into the immense learning potential that

results from locating in contiguous areas.

The following hypotheses summarize our assertions in Table 3:

H1: Firms that place a higher emphasis on cost in making plant location decisions are more likely to locate in

Malaysia rather than Singapore

IMAGE TABLE 44

TABLE 2

H2: Firms that place a higher emphasis on infrastructure in making plant location decisions are more likely to

locate in Singapore rather than Malaysia

H3: Firms that place a higher emphasis on business services in making plant location decisions are more likely

to locate in Singapore rather than Malaysia

H4: Firms that place a higher emphasis on labor in making