Chapter 8
Shut down at one location and move to another -
Location Planning and Analysis
THE NATURE OF LOCATION DECISIONS
Location decisions for many types of businesses are made
infrequently, but they tend to have a significant impact on
the organization.
- Location decisions are closely tied to an
organization’s strategies.
- Location choices can impact capacity and
flexibility.
- Location decisions are strategically important for
they entail a long-term commitment, which makes
mistakes difficult to overcome.
- Another is that location decisions often have an
impact on investment requirements, operating
costs and revenues, and operations.
Poor Location. A poor choice of location might result in
excessive transportation costs, a shortage of qualified
labor, loss of competitive advantage, inadequate supplies
of raw materials, or some similar condition that is
detrimental to operations.
For services, a poor location could result in lack of
customers and/or high operating costs.
For both manufacturing and services, location decisions
can have a significant impact on competitive advantage.
And another reason for the importance of location
decisions is their strategic importance to supply chains.
Objectives of Location Decisions
 General rule, profit-oriented organizations base
their decisions on profit potential, whereas
nonprofit organizations strive to achieve a balance
between cost and the level of customer service
they provide - attempt to identify the “best”
location available
 Location criteria can depend on where a business
is in the supply chain
 Web-based retail businesses are much less
dependent on location decisions; they can exist
just about anywhere.
Location Options
1. Expand an existing facility - attractive if there is
adequate room for expansion
2. Add new locations while retaining existing ones -
retail operations, can be a defensive strategy
designed to maintain a market share or to prevent
competitors from entering a market.
3.
must weigh the costs of a move and the resulting
benefits
4. Do nothing
GLOBAL LOCATIONS
Globalization has opened new markets, and it has meant
increasing dispersion of manufacturing and service
operations around the world. In addition, many companies
are outsourcing operations to other companies in foreign
locations.
Facilitating Factors
 Trade Agreements. Barriers to international trade
such as tariffs and quotas have been reduced or
eliminated with trade agreements
 Technology. Technological advances in
communication and information sharing have
been very helpful.
Benefits (MCLFO)
 Markets. Companies often seek opportunities for
expanding markets
 Cost savings. Among the areas for potential cost
saving are transportation costs, labor costs, raw
material costs, and taxes.
 Legal and regulatory. There may be more
favorable liability and labor laws, and
lessrestrictive environmental and other
regulations.
 Financial. Companies can avoid the impact of
currency changes
 Other. Globalization may provide new sources of
ideas
Disadvantages
 Transportation costs. High transportation costs
can occur due to poor infrastructure or having to
ship over great distances
 Security costs. Increased security risks and theft
can increase costs
 Unskilled labor. Low labor skills may negatively
impact quality and productivity
 Import restrictions. Some countries place
restrictions
 Criticisms. Critics may argue that cost savings are
being generated through unfair practices
Risks
o Political. Political instability and political unrest
 o Terrorism. putting personnel and assets at risk
o Economic. Economic instability might create
inflation or deflation
o Legal. Laws and regulations may change
o Ethical. Corruption and bribery, common in some
countries, may be illegal in a company’s home
country
o Cultural. Cultural differences may be more real
than apparent
GENERAL PROCEDURE FOR MAKING LOCATION
DECISIONS
1. Decide on the criteria to use for evaluating location
alternatives, such as increased revenues or community
service.
2. Identify important factors, such as location of markets or
raw materials.
3. Develop location alternatives:
a. Identify a country or countries for location.
b. Identify the general region for a location.
c. Identify a small number of community
alternatives.
d. Identify site alternatives among the community
alternatives.
4. Evaluate the alternatives and make a selection.
Government
a. Policies on foreign ownership of production
facilities Local content requirements Import
restrictions Currency restrictions Environmental
regulations Local product standards Liability laws
b. Stability issues
Cultural differences.
 Living circumstances for foreign workers and
their dependents Ways of doing business
Religious holidays/traditions
Customer preferences Labor
 Possible “buy locally” sentiment
 Level of training and education of workers Wage
rates
 Labor productivity Work ethic
 Possible regulations limiting number of foreign
employees Language differences
Resources
 Availability and quality of raw materials, energy,
transportation infrastructure
Financial Technological Market Safety
 Financial incentives, tax rates, inflation rates,
interest rates
 Rate of technological change, rate of innovations
 Market potential, competition
 Crime, terrorism threat
transfer pricing rules - Some U.S. manufacturing
companies set up foreign subsidiaries to not only take
advantage of low labor rates but also to avoid or delay
paying taxes on their profits
low labor productivity - low wage rates, resulting in a net
cost per unit that is actually higher than what could be
achieved domestically
currency and exchange rate risk - Companies must
transact business in the currency of the country they are
involved in
IDENTIFYING A REGION
Location of Raw Materials. Firms locate near or at the
source of raw materials for three primary reasons:
necessity, perishability, and transportation costs
 Necessity - Mining operations, farming, forestry,
and fishing
 Perishability - Canning or freezing of fresh fruits
and vegetables, processing of dairy products,
baking
 Transportation costs - aluminum reduction,
cheese making, and paper production
Location of Markets. Profit-oriented firms frequently
locate near the markets they intend to serve as part of
their competitive strategy, whereas nonprofit
organizations choose locations relative to the needs of the
users of their services.
Labor Factors. Primary labor considerations are the cost
and availability of labor, wage rates in an area, labor
productivity and attitudes toward work, and whether
unions are a serious potential problem.
Other Factors. Climate and taxes sometimes play a role in
location decisions
IDENTIFYING A COMMUNITY
Microfactory Small factory with a narrow product focus,
located near major markets.
Just-in-time manufacturing techniques which encourage
suppliers to locate near their customers to reduce supplier
lead times.
Ethical Issues. Ethical issues can arise during location
searches
IDENTIFYING A SITE
The primary considerations related to sites are land,
transportation, and zoning or other restrictions.
Multiple Plant Manufacturing Strategies
Product Plant Strategy. With this strategy, entire products
or product lines are produced in separate plants, and each
plant usually supplies the entire domestic market,
decentralized approach.
Market Area Plant Strategy. With this strategy, plants are
designed to serve a particular geographic segment of a
market.
Process Plant Strategy. With this strategy, different plants
concentrate on different aspects of a process.
General-Purpose Plant Strategy. With this strategy, plants
are flexible and capable of handling a range of products.
Geographic Information Systems
A geographic information system (GIS) is a computer-
based tool for collecting, storing, retrieving, and displaying
demographic data on maps.
It relies on an integrated system of computer hardware,
software, data, and trained personnel to make available a
wide range of geographically referenced information
Here are some of the ways businesses use geographical
information systems:
o Logistics companies use GIS data to plan
fleet activities such as routes and
schedules based on the locations of their
customers.
o Publishers of magazines and newspapers
use a GIS to analyze circulation and
attract advertisers.
o Real estate companies rely heavily on a
GIS to make maps available online to
prospective home and business buyers.
o Banks use a GIS to help decide where to
locate branch banks and to understand
the composition and needs of different
market segments.
o Insurance companies use a GIS to
determine premiums based on population
distribution, crime figures, and likelihood
of natural disasters such as flooding in
various locations, and to manage risk.
o Retailers are able to link information
about sales, customers, and demographics
to geographic locations in planning
locations. They also use a GIS to develop
marketing strategies and for customer
mapping, site selection, sales projections,
promotions, and other store portfolio
management applications.
o Utility companies use a GIS to balance
supply and demand, and identify problem
areas.
o Emergency services use a GIS to allocate
resources to locations to provide
adequate coverage where they are
needed.
Clustering Similar types of businesses locate near each
other.
Locational cost-profit-volume analysis Technique for
evaluating location choices in economic terms.
Total cost = FC + V x Q
where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity or volume of output
The Transportation Model Transportation costs
sometimes play an important role in location decisions.
These can stem from the movement of either raw materials
or finished goods.
Factor rating General approach to evaluating locations that
includes quantitative and qualitative inputs.
Center of gravity method Method for locating a
distribution center that minimizes distribution cost.
transportation problem involves finding the lowest-cost
plan for distributing stocks of goods or supplies from
multiple origins to multiple destinations that demand the
goods.