Least-Cost Location Theory Cost minimization is half of profit maximization equation (along with maximizing revenues) Cost minimization theory: - labor-cost minimization - transportation cost minimization Cost minimization - an industrial location strategy that seeks to minimize what the firm pays to produce and distribute its products or services DISCUSSION: * Why is cost minimization so important to a business?

Sources: PBS & Ingolf Vogeler Minimizing Labor Cost Maquiladoras – foreign-owned assembly plants in Mexico (mostly textiles and consumer electronics) Over 11,500 maquiladoras along border with U.S.; employ 2 million+ Mexicans Revenues from maquiladoras, exceed make up 85% of trade between Mexico and U.S. Sources: PBS & Ingolf Vogeler Average work week is 60-70 hours; wages about $5.75 per day. Women are 70% of maquiladora workforce. Since 2000, some maquiladoras have closed as corporations move assembly-line jobs to even lower-wage countries, mainly China.

Fixed and Variable Costs Influence the Optimum Location for Economic Activity Classical economic geography models focus mainly on the variable cost of transportation

Determining the best location for a mfg Determining the best location for a mfg. plant with raw materials in Minnesota, Florida, and Texas & the market in New York (but with differing amounts of raw mat’s needed)

Weber Triangle Three factors: Transport costs: Transport costs Labor costs Agglomeration Result in a per unit savings Transport costs: One market and two sources: Equal distance and shipping costs dictates a market location Two weight-losing materials results in an intermediate location

Weber’s Theory of Location Weber’s theory results in 3 generalizations: Using pure materials in the production process will always dictate a market location Weight-loss materials usage will pull the plant closer to the sources Intermediate location chosen most often No handling costs at terminal

Weber’s Theory of Location Labor Costs: Location chosen always has least combined costs A location my have higher transport costs, but more inexpensive labor Isotims: lines of equal transport cost Isodapane: line of total transport costs (sum of isotims)

Transportation Cost Minimization DISCUSSION: * What raw materials need to be processed close to where they are extracted due to high transportation costs? Raw Material Oriented Tendency for industry to locate near its source of raw materials in order to save on transport costs Usually occurs when raw materials lose weight in the production process (e.g., paper, steel)

Transportation Cost Minimization DISCUSSION: * What raw materials need to be processed close to markets due to high transportation costs? Market Oriented Tendency for industry to locate near population centers in order to save on transport costs Occurs when product is more costly to transport than raw materials (e.g., beverages, glass)

Break-of-Bulk Oriented Transportation Cost Minimization DISCUSSION: * What raw materials would be processed at a break-of-bulk point? Break-of-Bulk Oriented Location between sources of raw materials and markets – for products that must be divided and shipped from a central point of entry Intermodal transportation – e.g., moving from rails to trucks or ships to trucks, or ports to pipelines

Where is the best location for a steel manufacturing plant? Recipe for steel (traditional) Coal = 2 to 3 tons (+ energy*) Iron ore = 1½ to 2 tons Limestone = ¼ to ½ ton Mix all solid ingredients. Heat at about 600º F until thoroughly melted.* Pour molten blend into molds. Cool and serve. Makes one ton of finished steel.

The recipe for making steel has changed (new technology) How has this affected the location of modern steel-producing areas?

Shipbreaking industry, Bangladesh Shipbreaking yards in Bangladesh alone dismantle about 90 giant ships a year, mostly oil tankers, generating millions in revenue, employing tens of thousands, and providing a significant proportion of the iron and steel used by local industry. However, there is a dark side to the industry in which the workers must toil in extremely hazardous conditions that frequently lead to death or serious injury and which is tremendously harmful to the environment. ... A majority of ships are built in South Korea and China, filling orders placed by Japan, the UK, the US, Norway, Singapore and Denmark. Until the 1970s, shipbreaking was done in the countries of origin, using heavy machinery on salvage decks. But increasing environmental regulations and labour costs resulted in the transfer of this work -- first to Korea and Taiwan, and then to South Asia after the Asian Tigers upgraded away from this work. Source: www.sos-arsenic.net

Consider transport costs of a car’s components Consider transport costs of a car’s components. Where’s a good place to locate your assembly plant?

Over 50,000 U.S. auto-making jobs in these foreign-owned plants (New York Times data and map, 2005)

The cost of transporting data has declined to near zero Low transmission costs, plus ability to digitize data, revolutionized the location choices for high-tech industry Source: Probe Research, Inc., Telcordia (Bellcore); Progressive Policy Institute.

“Post-Fordist” Production – High Tech Industry Adapting the traditional models of economic geography Greater flexibility of production Less reliance on storage of inventory – seek prompt delivery of goods needed for production (“just-in-time”) Suppliers’ location Need to have access to fast delivery systems (= airports) Agglomeration of management Still occurs! High-tech innovators locate closer to airports; universities; amenities; venture capital (tends to be a “footloose” industry) Internationalized spatial division of labor Lower labor costs needed for production – industry locates manufacturing in lower wage areas (secondary) but tech and management stays in core area (quaternary)

Economic Base Model Figure 6.7 (p. 146) DISCUSSION: * Where does the "regional multiplier" effect manifest itself in this model? Figure 6.7 (p. 146)

Weber’s Theory of Location Agglomeration: Weber recognized that clustering will result in a per unit savings Example: