Angel Carracedo
Unit 4- Location strategy
Location decisions
It must distinguish between:
Industrial business:
Location is based on lower costs.
The costs will include those of production and transport (transport of raw
materials to the plant and finished products from the plant to the point of sale).
In general, few large plants reduce production costs but increase transport costs
and many small plants increase production and reduce transportation.
Service companies:
Proximity to the customer is the key factor.
Factors that affect location decisions
Many factors such as:
Proximity to customers – makes rapid delivery easier
Business climate – can include presence of similar-sized businesses, businesses
in the same industry, and other foreign companies
Total costs – object is to minimize overall cost
Infrastructure – adequate road, rail, air, and sea transportation along with
energy and telecommunications
Quality of labour – educational and skill levels must match needs
Suppliers – proximity of important suppliers supports lean production
Other facilities – location of other facilities can influence a location decision
Free trade zones – a closed facility into which foreign goods can be brought
without being subject to the normal customers requirements
Political risk, values and culture – risks in both the country of location and the
host country influence the decision
Government barriers – barriers in many countries are being removed
Trading blocs – firms locate within a block to take advantage of new markets or
lower total cost
Environmental regulation – these affect a certain industry in a given location
and must be included in the decision
Competitive advantage – the location should provide the company with a
competitive advantage
Labour Productivity
Exchange rates
Proximity to markets
Proximity to suppliers
Proximity to competitors (clustering)
Angel Carracedo
Clusters
Geographic concentrations of interconnected companies, specialized suppliers, service
providers, firms in related industries, and associated institutions that can cooperate
and compete in particular fields.” [Porter, 1998]
Clusters embrace much more than a traditional supply chain or an industry; they also
includes academic institutions providing training, research and consulting services.
Location of service companies
The facilities tend to be more numerous, smaller and cheaper than in industrial
companies.
In the service companies, the proximity to the client or the ease of access to the client
is preferred.
The objective of the location in service companies is to maximize demand and
revenues, while in industrial companies the objective is to minimize the cost.
Frequently it is interesting to get distance from competitors, but there are also clusters
(e.g., shopping centres, "cocktail bars") that attract customers.
Clusters impact on competition
Clusters affect competition in three ways:
Increasing the current productivity of constituent firms
Access to specialized inputs and employees
Access to information
Complementarities (products, marketing, activities, etc)
Access to institutions and public goods
Incentives and performance measurement.
Increasing the capacity of cluster participants for innovation and productivity growth.
Stimulating new business formation that supports innovation and expands the cluster.
Facility location methodologies
Factor rating method
Popular because a wide variety of factors can be included in the analysis
Six steps in the method:
1. Develop a list of relevant factors called key success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor and total the score for each location
6. Make a recommendation based on the highest point score
Angel Carracedo
Location cost-volume analysis
An economic comparison of location alternatives on the basis of quantitative factors
expressed in total costs
Also known as Break-Even Analysis
Four steps in the method:
1. Determine fixed and variable costs for each location
2. Plot the cost lines for each location
3. Select location with lowest total cost for expected production volume
4. Solve algebraically for break-even points over the relevant ranges
Centre of gravity method
Finds location of distribution centre that minimizes distribution costs
Considers
Location of markets
Volume of goods shipped to those markets
Shipping cost (or distance)
Place existing locations on a coordinate grid
Grid origin and scale are arbitrary
Maintain relative distances
Calculate x and y coordinates for 'centre of gravity'
Assumes cost is directly proportional to distance and volume shipped
Transportation model
An iterative procedure that finds the least costly means of moving products from
several points of supply to several points of demand
Solution will minimize total production and shipping costs
A special class of linear programming problems
Geographic information system (GIS)
Important tool to help in location analysis
Enables more complex demographic analysis
NOTE: LOOK AT SLIDES FOR EXERCISES REGARDING FACILITY LOCATION
METHODOLOGIES
