Unit 5 Operations Management Location

Learning Objectives To be able to explain the causes and consequences of location and relocation – domestically and internationally

Start with this Which location is better and why?

Location Location decisions have three key characteristics – Strategic in nature – Difficult to reverse – Taken at the highest management level and not delegated

Optimal Location One that selects the best site for expansion of the business or for its relocation, given current information – It is a compromise that balances High fixed costs with convenience for customers Low costs of a remote site with limited supply of suitably qualified labour Quantitative factors with qualitative ones Opportunities of receiving government grants in areas of high unemployment with the risks of low sales as average incomes in the area may be low

Optimal Location List some of the disadvantages to a business of non optimal location decisions using the examples below ProblemDisadvantages to business High fixed site costs High break even level of production Low profits – losses even High variable costs E.G. Labour Low unemployment rate High unemployment rate Poor transport infrastructure Example

ProblemDisadvantages to business High fixed site costs High break even level of production Low profits – losses even If operating at low-capacity utilisation, unit fixed costs will be high High variable costs E.G. Labour Low contribution per unit produced or sold Low profits – losses even High unit variable costs reduce competitiveness Low unemployment rate Recruitment problems High staff turnover High unemployment rate Average consumer disposable income may be low Poor transport infrastructure Raised transport costs Relatively inaccessible for customers Difficult to operate JIT

Factors influencing location decisions Qualitative Factors Non-measurable factors that may influence business decisions Qualitative Factors Non-measurable factors that may influence business decisions Quantitative Factors Measurable in financial terms and will have a direct impact on either the costs of a site or the revenues from it and its profitability Quantitative Factors Measurable in financial terms and will have a direct impact on either the costs of a site or the revenues from it and its profitability

QUANTITATIVE FACTORS Site and other capital costs Vary greatly from region to region within a country and between countries Labour Costs Businesses which are labour intensive, where wages make up a high percentage of costs, look closely at average wages at possible locations for their business. A business has to pay highly for skilled labour if they locate to an area which lacks those skilled workers. Transport Costs Businesses that use heavy and bulky raw materials will incur high transport costs if suppliers are far. Service industries, such as hotels, need to be conveniently located. Government Grants May be necessary to stimulate the economy of a location. Grants may be given or funds to help with wages or for training. Sales revenue potential Level of sales made can depend directly on Location. Confectionary shops have to be just that – convenient Once these quantitative factors have been identified, and cost and revenues estimated, the following techniques can be used to assist in location decisions

1.Profit Estimates 2.Investment Appraisal 3.Break-Even Analysis Investment Appraisal methods NPV Net Present Value Future return put into today’s values Payback How long will it take the company to pay back the loan? ARR Average rate of return % return on your investment which you can use to compare different strategies

QUALITATIVE FACTORS Labour Supply Quantity of workers must be taken into account. This is how many workers would have access to the business. Quality (skill level) of workers must be taken into account. This is whether workers with necessary skills will have access to the business. Labour Supply Quantity of workers must be taken into account. This is how many workers would have access to the business. Quality (skill level) of workers must be taken into account. This is whether workers with necessary skills will have access to the business. Safety Avoid potential risk to the public and damage to the company’s reputation. Safety Avoid potential risk to the public and damage to the company’s reputation. Room for further expansion Expensive to relocate if a site proves to be too small. If there is room to expand managers should take this into consideration when deciding whether to buy or not. Room for further expansion Expensive to relocate if a site proves to be too small. If there is room to expand managers should take this into consideration when deciding whether to buy or not. Managers Preferences In small businesses managers’ personal preferences regarding desirable work could influence options Managers Preferences In small businesses managers’ personal preferences regarding desirable work could influence options Ethical Considerations For example a move from the UK to India – think about all the issues this could flag up Ethical Considerations For example a move from the UK to India – think about all the issues this could flag up Environmental Concerns A business may be reluctant to set up in an area where there is particular sensitivity to the environment Environmental Concerns A business may be reluctant to set up in an area where there is particular sensitivity to the environment Infrastructure To ensure delivery systems can still be put into place Infrastructure To ensure delivery systems can still be put into place

Other locational issues The pull of the market – What do they want? The move towards internet shopping Planning restrictions External economies of scale Multi site locations – have a lot of advantages and disadvantages for both customers and the business

Change of Location Relocation due to business growth or decline – A business may decide to relocate for two main reasons If a business does well and sees an increase in demand for goods or services then they would increase capacity by relocating to larger premises If a business is struggling and sees a lack of demand for the goods or services it sells then a possible solution would be to move to a smaller location to reduce costs

Change of Location Re-development of current location to meet business needs – A business may need to re-develop a site rather than move A business may be too big to actually move to another location so the current site would be re-developed. The cost of moving may be dramatically higher than re- development costs The installation of new technologies may not require a move but a business may need to update its premises

So is it impossible to succeed once you have made a bad location decision? Article – thriving in a bad location