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Site selection Process for a Green field Steel plant

• satyendra
• April 3, 2013
• 35 Comments
• Analytic hierarchy technique, Criteria, facilities, factors, objectives, Site selection,

Site selection Process for a Green field Steel plant

Locating of a green field steel plant at a suitable site is an essential activity for the investing organization and it has got several implications. Site selection activity determines where a green field steel plant is to be located so that it can have the maximum effectiveness of its various processes and operations. The process of site selection is a very big challenge in the present day environment.

In present investment environment, site selection issues are characterized by their multi objectives and numerous stake holders. Selection of a suitable site for the steel plant is critical as it involves a large investment. Any inaccuracy in the selection of a facility location can lead to huge losses for the organization. Once constructed and commissioned, the location cannot be changed frequently as it incurs huge costs. Therefore, it is important that a right selection of the site is made before the engineering work for the steel plant starts.

Selection of a proper site requires certain interrelated decisions, such as the scale of operation and the technology to be adopted. This is because selecting a suitable location is important as it decides the fate of the steel plant. A good location can reduce the cost of production and distribution to a considerable extent. As an example, the cost of procuring raw materials is going to be lesser for a plant located near the sources of raw materials as compared to that of a plant located at a distant place. Similarly, the plant which is located near the market has the advantage of having the low cost in the marketing of its products in the market than the plant located in a remote area.

Selection of a suitable site for the steel plant ensures its smooth operation after the plant is constructed and commissioned. However, an ideal plant site cannot, by itself, guarantee success, but it certainly can contribute to the smooth and efficient functioning of the plant. Further, on the other hand, a site unsuitable for the plant can lead to huge financial losses for the plant during its operation after its construction and commissioning is over. Hence, it is essential to exercise utmost care while selecting a site for the steel plant, since once a mistake has been made in selecting the site, it becomes almost impossible to correct it.

The site selection process normally involves two phases consisting of (i) site screening which consists of the identification of a few numbers of likely sites best suiting the selection criteria and (ii) detailed examination of each short listed site to decide the most suitable site. The selection process includes the determination of the most suitable selection criteria, collection of the data for the short listed sites with respect to the selected criteria, and analysis and the evaluation of the collected data with the objective of finding the most suitable site. For this, it is necessary that the team involved in site selection process is required to have fairly good knowledge of the steel plant project.

The site selection process has become increasingly complex in the existing present day situation because of the plethora of environment laws and regulations as well as the greater public awareness and involvement in various issues influencing site selection. The factors which are contributing to the complexity of the site selection process include (i) possibility of a large number of potential sites which can be available satisfying the selection criteria to varying degree, (ii) there can be possibility of contradictions in some of the objectives e.g. the objective of keeping minimum capital investment can contradict with the objective of keeping a long term safe environment, (iii) intangible objectives meaning those objectives which cannot be quantified, (iv) diversity of Interest groups which means that investment decision at a particular site can impact several public groups who can have diversity of interest and as such these groups who are not satisfied with the investment decision can create problems for the plant, and (v) decisions regarding value tradeoffs especially amongst the  multiple contradicting objectives can be challenged and are to be faced during the site selection process.

Factors affecting the selection process

The site for a green field steel plant is not selected on a hit or miss basis. The decision for site selection depends on a variety of factors. The site selection process is considered as a multiple criteria decision-making process due to its nature. There are 39 factors identified in this article, which have influence on the process of the site selection. The final choice during the site selection process is made largely on the basis of the result of a practical analysis of the criteria which tells the investing organizational management where the raw materials can be assembled, processed to produce the finish products, and finish product delivered to the customers at the optimum profit to the organizational stockholders. Hence, any locational advantage or disadvantage a specific site which can influence the probable return on the proposed capital investment, automatically, becomes an important consideration to the management in determining the choice of a site.

There is a genuine need for a broader comprehension and evaluation of the factors which have influence on the site selection process and which tell that a particular site is advantageous over the other site. These factors are known as plant location factors. Some are of basic nature and these are known as primary factors. The primary factors tend to define the general area in which the new plant can be operated profitably. The primary factors include amongst others (i) the availability of an adequate supply of raw materials, manpower, water, power, and fuel, (ii) the availability of transportation facilities, and (iii) the nearness of a site to the present or potential markets for the finish products to be produced. In most cases than not, more than one area can qualify as a potential plant site as long as the selection is based solely on the primary factors.

Once the potential sites are selected, based on the primary factors, the weeding out process begins. This is a process of evaluating the relative desirability of each site until, by elimination, the final choice is made. It is during this elimination process that the individual plant sites are put under the microscope and subjected to careful analysis. And it is at this stage that the so called secondary location factors become important. These factors are, in general, the characteristics peculiar to a given site.

The secondary factors are the ‘plus’ characteristics which the investing organization wants to find in the area of the site in which a long term capital investment is contemplated. The secondary factors are in addition to the primary factors which have their influence on the site selection process.

The secondary factors constitute the qualities which make one site more desirable than the other site. The secondary factors include (i) the availability of desirable land area of sufficient size to not only to accommodate the prospective new plant but also to take care for its future expansion, (ii) availability of physical, environmental, land ownership and investment constraints or risks, and (iii) the availability of adequate infrastructure and the concessional facilities being provided by the local governments etc. In this regards a good infrastructure and a favourable tax structure are important secondary factors in the site selection process.

In addition, there are intangibles which influence the final selection of a new site for the plant. These intangibles can be summarized under the general classification of an acceptable attitude of the local population toward a new plant and its employees. A generally favourable social and cultural atmosphere in the site location is normally desired.

There is another method of characterizing the factors affecting the site selection process. In this method all the 39 factors are grouped into four major categories namely (i) political, (ii) economic, (iii) environmental, and (iv) facilities.

Political category include three factors namely (i) government attitude, (ii) tax structure, and (iii) the regulatory provisions of the area needed to be complied.

Economic category include six factors namely (i) transportation cost, (ii) raw material landed cost, (iii) cost of land, cost of power, (iv) cost of labour, and (v) cost of site preparation, and (vi) income level of people existing around the land site since income levels has a say in determining the capacity of the local market.

Environmental category include four factors namely (i) pollution and environmental constraints of the area due to the regulatory requirements, (ii) issues (including regulations) connected with waste disposal, and (iii)  natural and climatic conditions based on meteorological data and the severity of the climate round the year, and (iv) seismic stability of the site.

Facility category include twenty six factors namely (i) availability of skilled manpower in the area, (ii) availability of transportation facilities around the site, (iii) availability of professionals, (iv) availability of power and the distance of the nearest substation from where the power is to be drawn, (v) availability of the infrastructure like road, and rail network along with the nearest airport and the sea port in the area, (vi) availability of raw materials and fuels, (vii) availability of water and the distance of the water body from the site from where water is to be pumped to the plant, (vii) availability of utilities needed during the plant construction, (viii) availability of the local market, (ix) size of the existing local market, (x) availability of suitable land which is accessible, which can be used for the industry, which needs only reasonable land preparation due to its topography, which is free from afforestation  area, and which needs only normal statutory clearances, (xi) distance from the nearest populated area, (xii) existing use of land and its impact on the land acquisition, (xiii) soil characteristics in the land area, (xiv) availability of the communication network in the site area,  (xv) location of the site with respect to the state capital, (xvi) location of the site with respect to tourist spots, lakes, archeological sites, and forest area etc., (xvii) environment of industrial relations existing in the site area, (xviii) trade unions functioning in the areas, (xix) proximity to nearest city for the availability of the required facilities connected with banking and financial institutions, (xx) proximity to the required ancillary units available in the area, (xxi) proximity to the local consumers, (xxii) proximity to the suppliers, (xxiii) attitude of local population towards the industry, (xxiv) availability of additional land for future expansion, (xxv) quality of life existing in the area, and (xxvi) local competition available.

The site-selection process is conducted to identify possible sites for a proposed green field steel plant and to compare their relative merits based on various criteria. The selection of a suitable site is a very critical activity. The decision of site selection is very important since the investment is very large and it also influences the economies of the area very much. It is a strategic decision which cannot be changed once taken. The changes in selected site can be done only with a considerable loss of time and money. Normally the final site selection is done after the evaluation of several potential sites.

Evaluation of the data obtained from potential sites

Evaluation of the data obtained from the potential sites for the plant is carried out normally using the analytic hierarchy process (AHP). The AHP is a structured technique is based on the mathematics and the psychology and is normally employed for organizing and analyzing complex decisions. This technique is an effective and practical approach which can be used for taking complex and unstructured decisions. This method incorporates qualitative and quantitative criteria. AHP is an ideal method for ranking alternatives when multiple criteria and sub-criteria are present in the decision-making process. Based on the judgments of the decision maker, AHP offers a methodology to rank alternative courses of action concerning the importance of the criteria and the extent to which they are met by each alternative. These judgments are expressed in terms of pair wise comparisons of items on a given level of the hierarchy with respect to their impact on the next higher level. The relative importance of one item versus another is expressed by the pair wise comparisons in meeting a goal or a criterion. Each of the pair wise comparisons represents an estimate of the ratio of the weights of the two criteria being compared. Because AHP utilizes a ratio scale for human judgments, the alternatives weights reflect only the relative importance of the criteria in achieving the goal of the hierarchy.

Establishment of a structural hierarchy for the plant site selection issue

There is no set of procedures for generating the levels to be included in the hierarchy. The degree of detail and complexity of the problem being analyzed determines the number of the levels in a hierarchy. AHP allows the decision issue to be structured into a hierarchy with the objective or goal of the decision placed at the top level of the hierarchy, then criteria and sub-criteria at the intermediate levels and the decision alternatives at the last level of the hierarchy.

To develop the hierarchy for the selection of steel plant site, the goal is placed at the top level of hierarchy. The four strategic factors (political, economic, environmental, and facilities used to achieve this goal) form the second level of hierarchy. The third level of the hierarchy consists of different factors defining the four strategic factors of the second level. There are three political factors, six economic factors, four environmental factors, and 26 factors related to facilities. The strategic consideration factors and factors (criteria) used in these two levels can be assessed using the pair wise comparisons of elements in each level with respect to every parent element located one level above. The fourth level of the hierarchy consists of the rating scale. Here a five point rating scale of 5 (outstanding), 4 (good), 3 (average), 2 (fair), and 1 (poor) is used and the priority weights of these five scales can be determined using the pair wise comparisons. These rating scales are used to determine the local and overall priority weights. The lowest level of the hierarchy consists of the decision alternatives, i.e., different proposed locations to be evaluated to find out the best location. A typical analysis of the data for one site is illustrated in Tab 1.

The AHP technique for analysis of the data for site selection is shown in Fig 1.

Fig 1 Analytic hierarchy process technique