Cost Factor in Plant location

11/04/2021 1 By indiafreenotes

Availability of Raw Materials:

Proximity of sources of raw materials is the obvious explanation of the location of majority of sugar mills in Uttar Pradesh. This means that the raw material should be available within the economical distance. Easy availability of supplies required for maintenance and operation of the plant should also be considered.

Proximity to Markets:

Cost of distribution is an important item in the overhead expenses. So it will be advantageous to be near to the center of demand for finished products. Importance of this is fully realized if the material required for the manufacturing of products are not bulk and fright charges are small.

Transport Facilities:

Since freight charges of raw materials and finished goods enter into the cost of production, therefore transportation facilities are becoming the governing factor in economic location of the plant. Depending upon the volume of the raw materials and finished products, a suitable method of transportation like rail, road, water transportation (through river, canals or sea) and air transport is selected and accordingly plant location is decided. Important consideration should be that the cost of transportation should remain fairly small in comparison to the total cost of production.

Location in Proximity of Cities:

First tendency is to locate the industries or enterprises in the proximity of cities rather than in rural or urban areas. These sub-urban sites offer today practically all advantages, facilities and services available in cities and towns with the added advantage of land required for future expansion on cheap rates.

Planned Industrial Centres:

While industrial towns may be planned and developed by big industrial houses or govt., the late trend is to develop areas as industrial estates and sell these to people interested in starting their units at various places. Noida and Faridabad are the examples of this type of development.

Competition for Development of Industries:

In order to generate the employment opportunities the state and central govt. offer concessions to attract industrialists to set up industries in their states or territories.

Appropriate Site Selection:

Appropriate site selection is important because of the following:

(i) A good location may minimize the cost of production and distribution to a considerable extent. Such reduction in the cost of production helps in elevating either the competitive strength or the profit margin of the business.

(ii) Initiation of an enterprise involve a relatively large permanent investment. If the selected site is not proper, all the money invested on factory building, installation of machinery etc. will go waste and the owner will have to suffer a great loss.

(iii) Location put constraints for the physical factors of the overall plant designs heating, ventilation requirements, storage capacity for raw materials, transportation requirements for input material and finished products, energy requirements cost of labour, taxes and construction costs.

(iv) Location of plant decides the nature of investment cost to be incurred.

(v) Government policies sometimes play an important role in site selection.

(vi) Probably no location is so perfect as to guarantee success but locations can be so bad as to bankrupt an enterprise.

Nearness to Markets:

It reduces the cost of transportation as well as the chances of the finished products getting damaged and spoiled in the way (especially perishable products). Moreover a plant being near, to the market can catch a big share of the market and can render quick service to the customers.

Availability of Labour:

Stable labour force, of right kind, of adequate size (number), and at reasonable rates with its proper attitude towards work are a few factors which govern plant location to a major extent. The purpose of the management is to face less boycotts, strikes or lockouts and to achieve lower labour cost per unit of production.

Availability of Fuel and Power:

Because of the wide spread use of electric power, in most cases fuel (coal, oil, etc.) has not remained a deciding factor for plant location. Even then steel industries are located near source of fuel (coal) to cut down the fuel transportation costs.

It is of course essential that electric power should remain available continuously, in proper quantity and at reasonable rates.

Availability of Water:

Water is used for processing, as in paper and chemical industries, and is also required for drinking and sanitary purposes. Depending upon the nature of plant, water should be available in adequate quantity and should be of proper quality (clean and pure). A chemical industry should not be set up at a location which is famous for water shortage.

Climatic Conditions:

With the developments in the field of heating, ventilating and air- conditioning, climate of the region does not present much problem. Of course, control of climate needs money.

Financial and Other Aids:

Certain states give aids as loans, feed money, machinery, built up sheds, etc., to attract industrialists.


Topography, area, the shape of the site, cost, drainage and other facilities, the probabil­ity of floods, earthquakes (from the past history) etc., influence the selection of plant location.

Community Attitude:

Success of an industry depends very much on the attitude of the local people and whether they want work or not.

(11) Presence of related industries.

(12) Existence of hospitals, marketing centres, schools, banks, post offices, clubs, etc.

(13) Local bye-laws, taxes, building ordnances, etc.

(14) Housing facilities.

(15) Security.

(16) Facilities for expansion.