Explain the significance of plant location decision?

[Mohammed]

[Kaseny]

What is plant location?
Plant location refers to the choice of region and the selection of a particular site for setting up a business or factory. But the choice is made only after considering cost and benefits of different alternative sites. It is a strategic decision that cannot be changed once taken. If at all changed only at considerable loss, the location should be selected as per its own requirements and circumstances. Each individual plant is a case in itself. Businessman should try to make an attempt for optimum or ideal location.

What is an ideal location?

An ideal location is one where the cost of the product is kept to minimum, with a large market share, the least risk and the maximum social gain. It is the place of maximum net advantage or which gives lowest unit cost of production and distribution. For achieving this objective, small-scale entrepreneur can make use of locational analysis for this purpose.


Locational analysis is a dynamic process where entrepreneur analyses and compares the appropriateness or otherwise of alternative sites with the aim of selecting the best site for a given enterprise. It consists the following:

a) Demographic Analysis: It involves study of population in the area in terms of total population (in no.), age composition, per capita income, educational level, occupational structure etc.

(b) Trade Area Analysis: It is an analysis of the geographic area that provides continued clientele to the firm. He would also see the feasibility of accessing the trade area from alternative sites.

© Competitive Analysis: It helps to judge the nature, location, size and quality of competition in a given trade area.

(d) Traffic analysis: To have a rough idea about the number of potential customers passing by the proposed site during the working hours of the shop, the traffic analysis aims at judging the alternative sites in terms of pedestrian and vehicular traffic passing a site.

(e) Site economics: Alternative sites are evaluated in terms of establishment costs and operational costs under this. Costs of establishment is basically cost incurred for permanent physical facilities but operational costs are incurred for running business on day to day basis, they are also called as running costs.