Unit 4.

Location

One of the most important strategic decisions is the location, as it has a major impact on the
overall risk and profit of the company. Some costs that are influenced are taxes, wages, raw
material costs and rents, which can affect up to 50%.
Airports are also relevant due to fast and low cost transport.
However, companies make location decisions infrequently and usually because demand has
outgrown the current plant’s capacity or due to shifts in demographics and customer
demands.
Location options include:
-​ Expanding an existing facility
-​ Maintaining current sites while adding another facility
-​ Closing the existing facility and moving to another location
The objective of the location strategy is to maximize the benefit of location to the firm
Once management is committed to a location there are many costs firmly in place and
difficult to reduce.

Factors that affect location decisions

It is becoming harder to decide due to globalization and many companies are considering
opening new offices outside their home country. One approach to selecting a country is to
look at some Key Success Factors (KSFs). Once we decide which country is best, we focus
on a region and then a community and finally a specific site inside that community.
We should also consider labor productivity.
Key factors at different levels:
-​ Country decision:
-​ Political risks, government rules, attitudes and incentives
-​ Cultural and economic issues
-​ Location of markets
-​ Labor talent, attitude, productivity, costs…
-​ Availability of supplies, communications, energy…
-​ Exchange rates and currency risk
-​ Region/community:
-​ Corporate desires
-​ Culture, taxes, climate…
-​ Labor availability, cost, attitudes…
-​ Environmental regulation
-​ Government incentives and fiscal policies
-​ Proximity to raw materials and customers
-​ Land/construction costs
-​ Site:
-​ Size and cost
-​ Air, rail, highway and waterway
-​ Zoning restrictions
-​ Proximity of supplies and services needed
-​ Environmental impact issues

Another important thing is the combination of production and the wage rate.
Labor cost per unit = Labor cost per day/Production (units per day)
Although wage rates and productivity may make a country look economical, unfavourable
exchange rates may negate those savings but they could also take advantage of relocating
or exporting to a country with a favourable exchange rate. But currency rates usually
fluctuate a lot in all countries.

We can divide location costs in two categories, tangible and intangible. Tangible ones are
those that are readily identifiable and precisely measured (utilities, labor, material, taxes,
depreciation…) Intangible costs are less easily quantified (quality of education, public
transportation facilities, community attitude… and quality of life variables)

We should also consider political risk, while the government when deciding may not last in
time. Also, worker values may differ between countries and can affect decisions. Another
challenge is dealing with another country’s culture such as punctuality or corruption.

Proximity to markets is also important as locating close to customers is important

(particularly for services) and can be useful if goods are expensive or difficult to transport.
And if they use JIT, it is even more important.

Proximity to suppliers is also important due to perishability, transportation costs and bulk as
they could face big inbound costs and products that reduce in bulk during production need
facilities near the raw material.

Proximity to competitors is also usual as competing companies are near each other because
of a critical mass of information, talent, venture capital or natural resources is there.

Methods to evaluate location alternatives

Factor Rating Method

It is a location method that includes objectivity into the process of evaluating hard to evaluate
costs (such as education, labor skills…). It has 6 steps:
-​ Develop a list of key success factors
-​ Assign a weight to each to reflect its relative importance
-​ Develop a scale for each factor (de 1 a 10 o de 1 a 100)
-​ Have a management score each location for each factor
-​ Multiply the score by the weights for each factor and total the score for each
-​ Make a recommendation based on the maximum point score

Locational Cost-Volume Analysis

Is it a method of making an economic comparison of location alternatives. It identifies fixed
and variable costs and graphs them for each location, determining which one provides lower
cost. Can be done mathematically or graphically, but graph has advantage of showing the
range of volume for which each one is preferable. It has 3 steps:
-​ Determine the fixed and variable costs for each location
-​ Plot the costs for each location, with costs on vertical axis and annual volume
horizontally
-​ Select the location with the lower total cost for the expected production volume
Center-of-Gravity Method
This method is a mathematical technique used to find the best location (minimize distribution
costs) for a single distribution point that services several stores or areas. Takes into account
the location, volume of goods shipped and shipping costs. We place the locations on a
coordinate system. The origin of the coordinate system and the scale used are arbitrary, with
relative distances correctly represented. The number of containers also affects cost so
distance alone is not the principal criterion. This method assumes that that cost is
proportional to both distance and volume shipped so the ideal location minimizes the
weighted distance between the warehouse and its retail outlets.

Transportation model
Is a technique for solving a class of linear programming problems, to determine the ebay
pattern of shipments from several points of supply to several points of demand to minimize
total protection and transportation costs. Some special purpose algorithms have been
developed for this and it finds an initial feasible solution and then makes step by step
improvements until finding the optimal one.

Service location strategy

In the industrial sector the objective is minimizing cost but in the services sector it is
maximizing revenue, as location has more impact on revenue than cost for them. The main
determinants of volume and revenue for a service firm are:
-​ Purchasing power of the customer drawing area
-​ Service and image compatibility with demographics
-​ Competition in the area
-​ Quality of the competition
-​ Uniqueness of the firm’s and competitor’s locations
-​ Operating policies
-​ Quality of management
A realistic analysis can provide an expected revenue number.

Geographic Information Systems

They store and display information that can be linked to a geographical location, may
include:
-​ Census data
-​ Maps
-​ Utilities
-​ Rivers, mountains, lakes and forests
-​ Airports, colleges and hospitals
Brown GIbson Approach for site selection
It is a versatile approach especially designed for the location selection problem. Its steps
are:
-​ We establish the critical factors and evaluate them for each location as 0 (not
feasible) or 1 (feasible) and directly discard any location that has a 0.
-​ We compute the objective factors (only includes costs, measured in money) for each
one and obtain the sum for each location of the objective factors.
-​ We determine key subjective factors (give each a weight depending on how
important they are) (all the rest that are not in money, subjective or objective, even if
they are costs they can be evaluated for example as expensiveness) and give them a
score from 0 to 1 based on how good (or bad if it is something negative, you inverse
the scale). Si la suma no da 1, los pasas a %.
-​ Combine the objective and subjective factors by giving each a weight and calculating.
If site selection is based entirely on costs the the weight for objective will be 1 and so.
-​ Select the site with the highest score.

If one factor doesn’t differentiatie the locations, we don’t use it.

En el pairwise comparison nos darán ya la tabla final dice.