Location Strategies

Location Decisions Long-term strategic decisions. Usually expensive & difficult to reverse. Affect fixed & variable costs. Transportation cost is up to 25% of product price. Other costs: Taxes, wages, rent etc. Objective: Maximize benefit of location to firm.

Some of the objectives in facility location decisions: (1) It must first be close as possible to raw material sources and customers; (2) Skilled labor must be readily available in the vicinity of a facility’s location; (3) Taxes, property insurance, construction and land prices must not be too “high;” (4) Utilities must be readily available at a “reasonable” price; (5) Local, state and other government regulations must be conducive to business; and (6) Business climate must be favorable and the community must have adequate support services and facilities such as schools, hospitals and libraries, which are important to employees and their families.

Industrial Location Decisions Cost focus. Revenue varies little between locations. Production separate from consumption. Location is major cost factor. Costs vary greatly between locations. Shipping costs. Production costs (e.g., labor). It is helpful to begin this discussion by asking students how and under what conditions location impacts costs and revenues. Once they have begun to consider these issues, then the decision for industrial or service organizations can be explored.

Service Location Decisions Revenue focus. Costs vary little between market areas. Production/service together with consumption. Location is a major revenue factor. Affects amount of customer contact. Affects volume of business.

Some of the objectives in facility location decisions: (1) It must first be close as possible to raw material sources and customers; (2) Skilled labor must be readily available in the vicinity of a facility’s location; (3) Taxes, property insurance, construction and land prices must not be too “high;” (4) Utilities must be readily available at a “reasonable” price; (5) Local , state and other government regulations must be conducive to business; and (6) Business climate must be favorable and the community must have adequate support services and facilities such as schools, hospitals and libraries, which are important to employees and their families.

Organizations That Locate Close to Markets/Customers Government agencies. Police & fire departments, post offices, public libraries. Retail sales and Services. Fast food restaurants, supermarkets, gas stations. Doctors, lawyers, barbers, banks, auto repair, etc. When transporting finished goods is more expensive than transporting materials. Bottling plants, breweries. Electricity production. This and the following slide suggest organizations which need to be physically close to their markets

Organizations That Locate Close to Suppliers or Materials By necessity. Mining, fishing, farming, etc. When transporting materials is more expensive than transporting finished goods. Perishable raw materials. Seafood processing. Heavy or bulky raw materials. Steel producers. Processing reduces bulk. Lumber mills, paper production. This and the following slide suggest organizations which need to be physically close to their markets

Location Decision Sequence Country Region/Community Site Stress that the location decision process is basically another process in which one attempts to continuously narrow the range of alternatives considered.

Factors Affecting Country Decision Government rules, attitudes, stability, incentives. Labor availability, attitudes, productivity, cost. Availability of supplies, communications, energy. Culture & economy. Location of markets. Exchange rate. Students, especially those from other countries, should be able to contribute significantly to a discussion of factors affecting one’s choice of country.

Factors Affecting Region/Community Decision Labor availability, costs, attitudes towards unions. Proximity to customers & suppliers. Costs and availability of utilities. Land/construction costs. Government incentives (taxes). Environmental regulations. Corporate desires. Attractiveness of region (culture, climate, etc.). Discussion of this slide might include comments on the impact of information technology on the priorities attached to the factors listed.

Factors Affecting Site Decision Access to air, rail, highway, and waterway systems. Proximity to needed services/supplies. Site size and cost. Zoning restrictions. Environmental impact issues. What impact does the increasing rate of environmental change have on a firm’s site choice? For example, would one build a single site, or a collection of sites which might be tied together by technology? Does one have to choose a site near desired services, or can these services often be secured through technology? .

Location for Service Organizations Focus on Revenue and Volume of Business, which are determined by: Purchasing power and demographics of customer drawing area. Competition in the area (amount and quality). Relative attractiveness of the firm’s and competitor’s locations. Uniqueness of location and offerings. Physical qualities of facilities and neighboring businesses. Operating policies and quality of management. This slide makes the distinction between an industrial and a service organization. Students may be asked to cite examples for each of the qualities listed.