Unit 2 Management of Conversion System Chapter 6: Facility location Lesson 18:- Location selection Learning Objectives After reading

this lesson you would be able to understand Location strategy and its importance Globalization its reasons Global operations management Dominant factors in location selection This lecture describes in detail the factors leading to globalization and the ensuing advantages and disadvantages. We would also focus on the various factors that are dominant in location decisions. So, we start with the first issue at hand and that is:Locations strategy and its importance Dear students, as you all know, selection implies choice and choice presumes the existence of various options available to a decision maker. Choosing where to locate new manufacturing facilities, service outlets, or branch offices is a strategic decision. The location of a businesss facilities has a significant impact on the companys operating costs, the prices it charges for goods and services, and its ability to compete in the marketplace. Analyzing location patterns to discover a firms underlying strategy is fascinating. For example, Why does McDonald locate restaurants in a posh area? Why do competing new-car sales showrooms cluster near one another? McDonalds target customers are those in high-income group. In contrast, managers of new-car showrooms deliberately locate near one another

because customers prefer to do their comparison-shopping in one area. In each case, managements location decision reflects a particular strategy. There are strategic impacts of location decisions. We will first consider the most important trend in location patterns- the globalization of operations. Meaning of Globalization The term globalization describes businesses deployment of facilities and operations around the world. Worldwide exports now account for more than 30 percent of worldwide gross national product, up from 12 percent in 1962. Globalization also results in more exports to and imports from other countries, often called offshore sales and imports. Globalization of services is also widespread. The value of world trade in services is roughly 20 percent of total world trade. Banking, law, information services, airlines, education, consulting, and restaurant services are particularly active globally. For example, McDonalds opened 220 restaurants in foreign countries other than USA in just one year. Steel Authority of India (SAIL) hired Silver Spring, Maryland, consulting firm to design and implement quality systems for its five major steel plants. Friends, the question that emerges from the ongoing discussion forces us to analyze as to what globalization is all about. Many see it as a primarily economic phenomenon, involving the increasing interaction, or integration, of national economic systems through the growth in international trade, investment and capital flows. However, one can also point to a rapid increase in cross-border social, cultural and technological exchange as part of the phenomenon of globalisation. The sociologist, Anthony Giddens, defines globalisation as a decoupling of space and time, emphasising that with instantaneous communications, knowledge and culture can be shared around the world simultaneously. Globalisation can also be defined as a process in which geographic distance becomes a factor of diminishing importance in the establishment and maintenance of cross border economic, political and socio-cultural relations

Left critics of globalisation define the word quite differently, presenting it as worldwide drive toward a globalised economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments. Reasons for globalization There are four developments, which have spurred the trend toward globalization. These are Improved transportation and communication technologies Opened financial systems Increased demand for imports Reduced import quotas and other trade barriers. Disadvantages of globalization Operations in other countries can have disadvantages. A firm may have to give up proprietary technology if it turns over some of its component manufacturing to offshore suppliers or if suppliers need the firms technology to achieve desired quality and cost goals. There may be political risks. Each nation can exercise its sovereignty over the people and property within its borders. The extreme case is nationalization, in which a government may take over a firms assts without paying compensation. Also, a firm may alienate customers back home if jobs are lost to offshore operations. Employee skills may be lower in foreign countries, requiring additional training time. Korean firms moved much of their sports shoe production to low-wage Indonesia and China, but they still manufacture hiking shoes and in-line roller skate in Korea because of the greater skills required. Dear friends, in view of the issues that we have just discussed, it becomes imperative to understand the intricacies involved in Managing global operations. I would now focus on these issues. Managing global operations When a firm sets up facilities abroad it involve some added complexities in its operation. Global markets impose new standards on quality and time. Managers should not think about domestic markets first and then global markets later, rather it could be think globally and act locally. Also, thy must have a good understanding of their competitors. Some other important challenges of managing multinational operations include other languages

and customs, different management style, unfamiliar laws and regulations, and different costs. Dear students, in general Managing global operations would focus on the following key issues:1. To acquire and properly utilize the following concepts and those related to Global Operations, Supply Chain, Logistics, etc. 2. To associate global historical events to key drivers in Global Operations from different perspectives 3. To develop criteria for conceptualization and evaluation of different Global Operations. 4. To associate success and failure cases of Global Operations to Political, Social, Economical and Technological environments 5. To envision trends in Global Operations 6. To develop an understanding of the world vision regardless of their country of origin, residence or studies in a respectful way of perspectives of people from different races, studies, preferences, religion, politic affiliation, place of origin, etc. Let us see what factors in general, affect the location decisions Factors affecting location decisions Facility location is the process of determining a geographic site for a firms operations. Managers of both service and manufacturing organizations must weigh many factors when assessing the desirability of a particular site, including proximity to customers and suppliers, labour costs, and transportation costs. Location factors can be divided into two categories: Dominant factors, and Secondary factors Dominant factors are those derived from competitive priorities (cost, quality, time, and flexibility) and have a particularly strong impact on sales or costs. Secondary factors also are important, but management may downplay or even ignore some of them if other factors are more important.

Friends, let us consider the issue of why firms choose to locate new factories and describes the main factors for their location choice. While location conditions are widely seen as the differences among locations that exist for all industries, location factors refer to the specific importance that is attached to such differences by individual firms when choosing locations for specific factors. Let us examine the key location factors:Eleven location conditions can be distinguished: Transportation facilities Materials Markets Labor External Economies Energy Community Infrastructure Capital, Land Environment and Government policy Location conditions are complex and each comprises a different characteristic of a tangible (i.e. Freight rates, production costs) and nontangible (i.e. reliability, Frequency security, quality) nature. By now, all of you must have realized that location conditions are hard to measure. Tangible cost based factors such as wages and products costs can be quantified precisely into what makes locations better to compare. On the other hand non tangible features which refer to such characteristics as reliability, availability and security can only be measured along an ordinal or even nominal scale. Other non tangible features like the percentage of

employees that are unionized can be measured as well. Generally speaking companies prefer location with low taxes and low wages rather than such where high taxes and wages are charged. But by taking these two factors under considerations low taxes are likely to imply low levels of community services and poor quality supplies of industrial land. While low wages may imply low skills and low purchasing power. To sum this up non-tangible features are very important for business location decisions. Let us consider the effect of factors such as: Materials, markets and transportation Factories which produce products for different markets usually are threatened by transportation costs. These costs include procurement costs, i.e. the costs considered for bringing raw materials or semi products to the company. On the other hand the finished products needs to be distributed to the markets, which incurs distribution costs. Therefore locations near inputs lower procurement costs and locations near markets lower distribution costs. Transportation costs comprise direct freight charges, while transfer costs refer to both direct costs and indirect costs such as insurance costs and losses resulting from damage in transit. Basically transportation costs are determined by physical characteristics like value of product and quantity of goods on the one hand and are determined also by freight rates on the other

hand. Consequently, average transport costs decline significantly with distance. All of us have a fair bit of idea about labor as an important constituent in the overall scheme of things. Let us see how. Labor Labor costs comprise wages and non-wage benefits, like contributions to medical plans, vacation time and pay, and pension schemes. Labor costs vary by industry, country, region, unionized and non-unionized sectors. Tremendous differences in labor costs can be seen between countries with high wages like developed countries on the on hand, and low developed countries like China, India and so on, on the other hand. But even among high developed countries labor costs can vary. So American and other strong companies are threatened by the highest manufacturing wages among the developed countries while wages and labor costs in Canada or the UK are much lower. This is mainly because of strong influence of the unions in the US and Europe compared to other countries. Even though there are large differences in wages and salaries among countries, Europe, and the US as labor expensive countries have prospered and most of this has occured within recent decades. This fact leads us to another important intangible characteristics of skilled labor. In a country

with high taxes and wages you usually will find sophisticated infrastructure and educational system and therefore skilled workers. By focusing on China, India and the US we can recognize how low wages do not necessarily mean high competitiveness and high living standards. The main figure which determines competitiveness is productivity. Another factor of immense importance that all of you must consider is: External economies of scale External economies of scale can be described as urbanization and locational economies of scale. It refers to advantages of a company by setting up operations in a large city while the second one refers to the settling down among other companies of related Industries. In the case of urbanization economies, firms derive from locating in larger cities rather than in smaller ones in a search of having access to a large pool of labor, transport facilities, and as well to increase their markets for selling their products and have access to a much wider range of business services. Location economies of scale in the manufacturing sector have evolved over time and have mainly increased competition due to production facilities and lower production costs as a result of lower transportation and logistical costs. This led to manufacturing districts where many companies of related industries are located more or less in the same area. The emergence of

agglomeration like in the case of the Manufacturing belt in the United States can be explained like this: At the beginning of this century the great bulk of manufacturing was located in relatively small area in the Northeast of the United States. Even though wages were lower in the south of the United States and there were more mineral resources in West and Midwest, companies kept staying within the belt as a result of location economies of scale. Each manufacturing facility stayed there because of having advantages of being near other manufacturers. However this did not only take place in the US but other countries as well such as Germany in the Ruhr area or in Japan - Toyota city. As large corporations have realized that inventories and warehouses have become a major cost factor, they have tried reducing inventory costs by launching "Just in Time" production system (the so called Kaban System).This high efficient production system was one main factor in the Japanese car industry for being so successful. Just in time ensures to get spare parts from suppliers within just a few hours after ordering. To fulfill these criteria corporations have to be located in the same area increasing their market and service for large corporations. Power or energy, as dear students all of us are aware is the commodity that makes the world go round.

Energy Energy sources were a significant factor of location before the Industrial Revolutions. Companies needed access to water energy, electricity for their operations. Now electricity and other energy sources like oil can be transformed and shipped very easily and cheaply and therefore Energy as being a main factor of location has decreased in its meaning. Friends, all of us are a part of the community and society in general. Thus, the factors given below also assume grave significance. Community infrastructure and amenity All manufacturing activities require access to a community infrastructure, most notably economic overhead capital, such as roads, railways, port facilities, power lines and service facilities and social overhead capital like schools, universities and hospitals. These factors are also needed to be considered by location decisions as infrastructure is enormously expensive to build and for most manufacturing activities the existing stock of infrastructure provides physical restrictions on location possibilities. But on the other hand it is worth to mentioning that existing infrastructure does not cause" industry to occur. Another issue which we need to examine is the: Capital

By looking at capital as a location condition, it is important to distinguish the physiology of fixed capital in buildings and equipment from financial capital. Fixed capital costs as building and construction costs vary from region to region. But on the other hand buildings can also be rented and existing plants can be expanded. Financial capital is highly mobile and does not very much influence decisions. For example, large Multinational Corporations such as Coca-Cola operate in many different countries and can raise capital where interest rates are lowest and conditions are most suitable. Capital becomes a main factor when it comes to venture capital. In that case young, fast growing ( or not) high tech firms are concerned which usually have not many fixed assets. These firms particularly need access to financial capital and also skilled educated employees (i.e. Silicon Valley). Dear friends, let us now focus our attention to the conduct of operations of MNCs and see how these have an important bearing on the decisions at hand:Multinational Companies or MNC A MNC is a company which has substantial direct investment in foreign countries, not just an export business (International company). Beeing a MNC means that active management is required at any company and holding outlets in a passive financial portfolio. The main relation between a

Multinational Corporation and an International company is that each subsidiary could be run as its own independent company. By definition of the United Nations a Multinational company is an enterprise: a. which comprises entities in two or more countries, regardless of the legal form and fields of activity of those entity. b. which operates under a system of decision making permitting different policies and a common strategy through one or more decision making centers. c. In which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of the others, and, in particular, to share knowledge, resources, and responsibilities with others. Frinds, in this context I would request you all to answer the following basic question:What motivates companies to expand their operations internationally? Let us probe deeply. Motivations for Internationalization We can classify these as follows:Traditional Motivations

One of the earliest reasons why companies moved abroad was the need to secure key supplies, especially minerals, energy, and scarce raw material resources. Another strong trigger of internationalization could be described as a market seeking behavior. This motivation was particularly strong in companies for which their home markets have become too small and especially for companies who wanted to use economies of scale. Expenses for Research and Development for new High Tech products are so high and the life time so short that companies are forced to meet a sales quota of a certain amount and therefore their home markets have become small. Another traditional and important trigger of internationalization was the desire to access low cost factors of production as cheap labor or lower cost capital (perhaps through a government investment subsidy).

Multinational Companies and national states It is generally argued that over the last few decades Multinational companies have become extremely powerful and the influence of the home country in which MNC operates have decreased over time.

MNC are very important for Host countries because they employee many people and increase GDP of the country. Therefore Host countries try to attract MNC by offering subsidies when they start their operations and providing infrastructure and as well as tax allowances.

MNC work in many countries and have really spread out their home". This means they do not necessarily belong to one host country but they are at home everywhere where they have a headquarters. The power of MNC is rooted because of their technological and managerial expertise and complexity, their financial resources, international marketing channels and differentiated products, reinforced by powerful advertising campaigns. The power of the host country government is related to the size of the domestic markets, resources and skilled labor pools, the availability of infrastructure and the political stability in the country.

Dominant factors in manufacturing Factors dominating location decisions for new manufacturing plants can be broadly classified in six groups. They are listed in the order of their importance as follows. 1. Favourable labour climate 2. Proximity to markets 3. Quality of life 4. Proximity to suppliers and resources

5. Proximity to the parent companys facilities 6. Utilities, axes, and real estate costs Let us consider each of these factors one by one. Favorable labor climate A favorable labor climate may be the most important factor in location decisions for labour-intensive firms in industries such as textiles, furniture, and consumer electronics. Labour climate includes wage rates, training requirements, attitudes toward work, worker productivity, and union strength. Many executives consider weak unions or al low probability of union organizing efforts as a distinct advantage. Proximity to markets After determining where the demand for goods and services is greatest, management must select a location for the facility that will supply that demand. Locating near markets is particularly important when the final goods are bulky or heavy and outbound transportation rates are high. For example, manufacturers of products such as plastic pipe and heavy metals all emphasize proximity to their markets. Quality of life Good schools, recreational facilities, cultural events, and an attractive lifestyle contribute to quality of life. This factor is relatively unimportant on its own, but it can make the difference in location decisions. Proximity to suppliers and resources In many companies, plants supply parts to other facilities or rely on other facilities for management and staff support. These require frequent coordination and communication, which can become more difficult as distance increases. Utilities, taxes, and real estate costs Other important factors that may emerge include utility costs (telephone, energy, and water), local and state taxes, financing incentives offered by local or state governments, relocation costs, and land costs. Other factors There are some other factors needed to be considered, including room for expansion, construction costs, accessibility to multiple modes of transportation, the cost of shuffling people and materials between plants,

competition from other firms for the workforce, community attitudes, and many others. For global operations, firms are emphasizing local employee skills and education and the local infrastructure. Dominant factors in services The factors considered for manufacturers are also applied to service providers, wit one important addition the impact of location on sales and customer satisfaction. Customers usually look about how close a service facility is, particularly if the process requires considerable customer contact. Proximity to customers Location is a key factor in determining how conveniently customers can carry on business with a firm. For example, few people would like to go to remotely located dry cleaner or supermarket if another is more convenient. Thus the influence of location on revenues tends to be the dominant factor. Transportation costs and proximity to markets For warehousing and distribution operations, transportation costs and proximity to markets are extremely important. With a warehouse nearby, many firms can hold inventory closer to the customer, thus reducing delivery time and promoting sales. Location of competitors One complication in estimating the sales potential at different location is the impact of competitors. Management must not only consider the current location of competitors but also try to anticipate their reaction to the firms new location. Avoiding areas where competitors are already well established often pays. However, in some industries, such as new-car sales showrooms and fast-food chains, locating near competitors is actually advantageous. The strategy is to create a critical mass, whereby several competing firms clustered in one location attract more customers than the total number who would shop at the same stores at scattered locations. Recognizing this effect, some firms use a follow the leader strategy when selecting new sites. Site-specific factors Retailers also must consider the level of retail activity, residential density, traffic flow, and site visibility. Retail activity in the area is important, as shoppers often decide on impulse to go shopping or to eat in a restaurant. Traffic flows and visibility are important because businesses customers arrive in cars. Visibility involves distance from the street and size of nearby

buildings and signs. High residential density ensures nighttime and weekend business when the population in the area fits the firms competitive priorities and target market segment. Well, I know you have been following very clearly and must have understood the issues that were discussed. The best way, as usual is through a small case study or case-let, as it is commonly referred to. So, here we go again. POM in practice 6.1* The Radisson Hotels International, with headquarters in Minneapolis, Minnesota, had become by 1995 one of the worlds fastest-growing upscale hotel companies. Its global expansion program was adding one new location every 10 days, on average. In 1991, it opened the four-star Radisson Slavjansksya Hotel in Moscow, which has become a very successful hospitality oasis for Western business travelers. However, opening the Slavjanskaya forced Radisson to weather many storms and deal with every conceivable managerial challenge. Multiple Languages There is great diversity in the language of the hotels managers, employees, supplies, and customers. Most of the managers are expatriates, and most of the employees are Russians. The customer mix is American (55 percent), Western Europe (20 percent), Eastern European (15 percent), Asian (5 percent), and Russian (5 percent) Different Norms and Customs Russian standards of service quality were much lower than those expected by management. To attain and maintain top service quality, employees had to participate in intensive training. Employee attitudes toward work and ethical norms also were different. For example, employees often missed work because of sick leaves, maternal leaves, and vacations. Russian laws allow 24-day vacations and sick leaves of up to four months with pay, which can be renewed by returning to work for only a few days. Security requirements were demanding, with theft being commonplace. Once the entire payroll was lost in a Russian bank. On another occasion, about 500 of the 600 champagne glasses were missing. The nearby train station was said to be controlled by gangs who offered protection to the vendors. Some 70 security guards were employed, many more than at a typical Radisson hotel.

Workforce Management Staffing and training issues arose unexpectedly. For example, the Russian employees were offended by being rotated through various jobs to gain wider experience, viewing rotation as a lack of confidence in their abilities. They believed that Americans were too quick to punish and too slow to understand cultural differences. An important hiring requirement was that the applicant had smiled sometime during the interview and had expressed a willingness to reject bribes. The notion of linking pay and bonuses with performance was a radically new idea to Russian employees. Unfamiliar Laws and Regulations Communist-era job-for-life laws were still in effect, and firing an employee was difficult. The housekeeping people were paid for 8 hours per day, regardless of the actual hours worked. Tax laws were extremely complicated and sometimes were changed retroactively. Russian employees were paid in rubles at a time when inflation was 18 percent per month. Unexpected Cost Mix Labour productivity was low relative to a comparable Western hotel, but salary rates were even lower. The net result was a savings because salaries accounted for only 13.5 percent of total costs, in contrast to the 35 percent in the United States. However, local suppliers were unreliable and procurement costs were quite high. About 93 percent of all products were imported from the West shipped to Helsinki or St. Petersburg and then trucked to Moscow. This importing process was slowed by problems with customs, Russian fuel, truck breakdowns, and the need for expediting payments. These uncertainties and delays created unusually large inventories. The infrastructure, including mail, telephone, banking, and city services, also was inadequate. For example, hot water came from city-run water heating plants. Because this source wasnt always reliable, Slavjanskaya had to pay for the construction of a second hot water pipe to guarantee both heat and hot water. *Source Operations Management Strategy and Analysis (L. J. Krajewski, L. P. Ritzman) Prentice Hall Let us consider another small case.

POM in practice 6.2* Call centers are frequently mistaken for telemarketing operations, when in fact they are not. Most are inbound facilities that take reservations and orders or provide customer service. The industry has boomed during the last decade as more firms decided to outsource such customer service processes. Texas leads the United States in the number of new centers over the past decade its number of call centers doubled in the last decade. By one estimate, 113 centers located there in the 1990s compared with 81 in Florida, the runner-up. In the past, the vast majority of call centers went to the states large metropolitan areas, but now smaller cities such as Big Spring, McAllen, and Brownsville are getting in on the act. Two dominant factors favouring small Texan cities are their ample supply of inexpensive labour and the incentives that thy are tossing in to land the companies. Before Denver-based StarTek opened a call center in Big Spring, a West Texas town of 23,000 where unemployment had been about 6 percent, a job fair attracted 1,200 applicants. Employees started at $6.50 per hour, far less than what would be paid in a bigger city. To seal the deal, Big Springs gave StarTek $2.3 million in interest-free loans. Smaller cities are more likely to get state funds for this type of economic development because the call centers are such an economic-development bonanza for them. In larger cities, companies usually do not qualify for incentives unless they make a substantial capital investment-and many do not, choosing to lease office space. The smaller cities need the jobs more. Call centers employ several hundred people, bringing jobs and a level of technical training and giving smaller cities a foot in the door to the new high-tech economy. Particularly if labour stays in short supply, call centers could be the first step for smaller cities to draw other burgeoning business, such as the distribution centers for e-commerce companies. Other factors that favour Texas are the central time zone (making it convenient to reach markets on both coasts), the availability of advanced telecommunications structures (such as fiber-optic lines and digital switching systems), and the favourable regulatory climate. It is a one-partyconsent state, meaning customers do not need to be notified if their conversations are being recorded; getting permission slows down the calling process. And the state also does not levy excise or sales taxes on out-of-state long distance calls, as some states do. Border cities also offer a supply of bilingual workers to take calls from Spanish-speaking customers. This

advantage is particularly important as more companies expand their markets into Latin America. *Source Operations Management Strategy and Analysis (L. J. Krajewski, L. P. Ritzman) Prentice Hall With that, we have come to the end of todays discussions. I hope it has been an enriching and satisfying experience.

Points to ponder