Location

Decisions
Chapter 8
 The Need for Location Decisions
• Location decisions arise for a variety of reasons:
• Addition of new facilities
• As part of a marketing strategy to expand markets
• Growth in demand that cannot be satisfied by expanding existing facilities
• Depletion of basic inputs requires relocation
• Shift in markets
• Cost of doing business at a particular location makes relocation attractive

8-2
Strategic importance of
Location

The objective is to maximize the benefit of location

to the firm
Location Decisions:
Strategically Important
• Location decisions:
• Are closely tied to an organization’s strategies
• Low-cost
• Convenience to attract market share
• Significant impact on fixed and variable cost
• Decisions made relatively infrequently
• Long-term decisions
• Once committed to a location, many resource and cost issues are difficult to change
• Affect investment requirements, operating costs, revenues, and operations
• Impacts competitive advantage
Location
Options
Existing companies generally have
four options available in location
planning:
1.Expanding an existing facility
2.Maintaining current and adding
another sites
3.Closing existing and relocating
another sites
Factors That Affect
Location Decisions
• Labor productivity
 Wage rates are not the only cost
 Lower productivity may increase total cost
• Labor cost per day Productivity (units per day)
•
• $70 = $1.17 per unit 60 units
• = cost per unit Mexico
• $25 = $1.25 per unit 20 units
Factors That Affect Location Decisions
• Exchange rates and currency risks
 Can have a significant impact on cost structure  Rates change over time
•  Costs
 Tangible - easily measured costs such as
• utilities, labor, materials, taxes
•  Intangible - less easy to quantify and include quality of education, public transportation,
community attitudes, quality-of-life
Factors That Affect Location Decisions

• Exchange rates and currency risks  Can have a significant impact on cost
• structure
 Rates change over time
•  Costs
 Tangible - easily measured costs such as
• utilities, labor, materials, taxes
• Location decisions
•  Intangible - less easy to quantify and include quality of education, public transportation,
community attitudes, quality-of-life
Factors That Affect Location
Decisions
• Political risk, values, and culture
•   National, state, local governments attitudes toward private and intellectual property, zoning,
pollution, employment stability may be in flux
•   Worker attitudes towards turnover, unions, absenteeism
•   Globally cultures have different attitudes towards punctuality, legal, and ethical issues
Factors That Affect Location Decisions
• Proximity to markets
•   Very important to services
•   JIT systems or high transportation costs may make it important to manufacturers
•  Proximity to suppliers
 Perishable goods, high transportation costs, bulky
• products
•  Proximity to competitors (clustering)
•   Often driven by resources such as natural,
• information, capital, talent
•   Found in both manufacturing and service industries 20
Methods of evaluating location

• Methods of evaluating location

1. Factor rating method
2. Cost Volume analysis/ Locational break-even analysis
3. Center-of-gravity method
4. Transportation model
Factor rating method
• Popular because a wide variety of factors (both qualitative and quantitative) can be included in the
analysis
• Six steps in the method:
• Develop a list of relevant factors called critical
• success factors
• Assign a weight to each factor
• Develop a scale for each factor
• Score each location for each factor
• Multiply score by weights for each factor for each location
• Make a recommendation based on the highest point score
Thank you!