OPERATIONS MANAGEMENT

Location Topic 5.5 (SL)

Location of Business Every business has to be located somewhere. Location refers to the geographical position of a business i.e. where it is sited. A sole trader who works as a window cleaner may operate from home, where as a multinational car company will have factories, offices and outlets in many countries.

Location of Business For both businesses however, where to locate may be the most important decision they make and can determine their success. It is a very expensive decision to reverse.

Business Location

Factors Affecting Location Decisions Quantitative factors Quantitative factors are those can be numerically calculated such as the cost of purchasing or renting premises.

Qualitative Factors Qualitative factors are those that deal with the psychological and emotional aspects of a location or relocation, such as familiarity with an area or consideration for the welfare of workers in the local community. Qualitative factors are not easy to measure but they can be just as important as quantitative factors when deciding where to locate a business

Quantitative Factors Cost of site The amount, type and cost of land are all important factors in choosing a location. The cost of land will vary greatly across regions and countries. For example the cost of a site in the South East of England will be significantly higher than a similar site in the North East.

Availability of Labour Quantitative Factors Availability of Labour The availability of workers, their skill level and wage rate they need to be paid is crucial in deciding the where to locate. Some businesses may need skilled labour whereas others require a large supply of lower-cost, unskilled labour. (quality & cost of labour).

Availability of Labour Quantitative Factors Availability of Labour Where labour skills are in short supply (e.g. in some high-tech industries) it often happens that similar businesses locate themselves close to each other. They might also be close to colleges and other training organizations that provide the main source of newly trained employees.

Availability of Labour Quantitative Factors Availability of Labour Businesses that require large numbers of unskilled workers might prefer to be located in areas of low labour costs. These are also often areas of high unemployment – where recruitment may be easier than in areas where there are labour shortages.

Availability of Labour Quantitative Factors Availability of Labour Many multi-national companies that require large amounts of unskilled labour, such as Nike to make trainers, have located factories in S.E. Asia where the wage rate is very low and there are many available workers.

Proximity to Raw Materials Businesses that use substantial quantities of raw materials may find it cheaper to locate near to the source of those inputs as this will reduce transport costs. Such businesses are often called “bulk-reducing” as the weight or size of the finished product is less than the combined raw materials that went into making it. Good examples include: steel-producers, sawmills, sugar factories, oil refineries.

Quantitative Factors Proximity to Market By contrast, businesses that assemble components (“bulk-increasing”) often choose to locate closer to where the customer markets are. This is because the cost of transporting the bulkier or heavier finished product is greater than the cost of transporting the raw materials or components.

Quantitative Factors Proximity to Market Good examples include: breweries, car manufacturers, bakeries. In some cases moving the final product is not possible, such as for services like restaurants and high street shops. In these cases the businesses will locate at the market itself.

Quantitative Factors Infrastructure Infrastructure covers the modes of transport for people, materials and information. Businesses need to ensure there is adequate infrastructure provision or costs can rise, such as extra transport costs. It is the government that is largely responsible for providing and maintaining local infrastructure.

Infrastructure The key infrastructure considerations are: Road/rail/sea and air links. The most appropriate mode will depend on the type of business and product, but road is used by over 80% of business. Communications network. For example is there mobile phone coverage and suitable telephone lines (e.g. availability of broadband internet access). Access to basic facilities such as water and electricity (and enough power).

Government Incentives Government policy also influences business location. Governments often offer incentives to start new businesses, or relocate existing ones, in areas that need economic development (“regeneration”). This has led to certain areas being called enterprise zones or assisted areas where firms are offered grants or low interest loans if they locate into these economically depressed regions.

Government Incentives Their aim is to: Promote employment Encourage economic development and regeneration Promote business efficiency, investment and competitiveness Provide training to the labour force to assist in growing employment

Factors Affecting Location Decisions National / International Factors: There are lots of different reasons why location is important to a business and location matters to some businesses much more than it does to others.  Some of the more qualitative factors include:

Factors Affecting Location Decisions National Factor: Labour Workers must be available locally, or must be willing to travel to work at the business. These workers must have the right skill If there is high unemployment locally, you might find it easier to recruit workers, and maybe you won’t have to pay them as much as you would elsewhere.

Factors Affecting Location Decisions National Factor: Labour But if there is high unemployment, local people may not have as much to spend with your business. Often a location becomes a centre for related industries - Staffordshire for potteries, Sheffield for steel, and the local people have particular skills.

Factors Affecting Location Decisions National Factor: Land/Building The right amount and type of land and buildings must be available. For some businesses, you need a lot of space - perhaps your business is noisy or creates fumes and needs to be well away from where people live. Some businesses need to be near their customers, or to their suppliers.

National Factor: Transport and Communications Links Workers need to be able to travel to work There is a need to be able to transport materials and products in and out of your business. Telephone, postal and Internet services might be better in cities than in the countryside

National Factor: Natural resources Primary industries (agriculture, mining, etc.) need to be sited near to natural resources. Because of the costs of transport of raw materials, secondary businesses (manufacturing, etc.) may also be sited close to resources that are important to their businesses.

National Factor: Customers Every business needs to be able to reach its customers. For a retail shop, you might want potential customers to be walking past all the time. An Internet business might be able to locate almost anywhere!

National Factor: Language As businesses become more global, you need people who can speak the same language as your customers. This is one reason why, for example, India has been successful in attracting call centres and software development from the UK and North America.

National Factor: Competitors Some businesses need to be in a location that suits their image. Remember, though, high class locations tend to have high rents!

National Factor: Image In some cases, you might want to be the only business of your type nearby - perhaps this would be good for a petrol station or a news agent. Other businesses cluster together ie locate near other organization that provide for similar or complimentary markets - restaurants in Soho or Chinatown, fashion shops and jewelers on Bond Street.

International Factors: Historical A sugar refining firm is likely to own plant in countries where sugar is grown, as well as a network to market and service the business worldwide. Service Many products and services need local country support - e.g. Bosch washing machines. 

International Factor: Access to Markets Companies manufacturing in EU have access to the whole market. Nissan opened in Sunderland for this reason, and this also explains why they started making trucks in the USA, to access that market.

International Factor: Access to Raw Materials Extraction of natural resources in countries where they are found. Access to Labour Usually this means cheap labour where regulations are less stringent than in the Developed nations.

International Factor: Tax Avoidance By means of transfer pricing, multinationals organize their affairs to minimize their overall tax liability. Local Incentives Regional grants and incentives are sometimes given to encourage overseas firms to set up locally and boost the economy.

International Factor: Some problems of international trade & impact on location decisions: Currency fluctuations Exchange controls Political instability and unrest Tariffs and other restrictive practices

International Factor: Some problems of international trade & impact on location decisions: Language and cultural barriers - UK firms have an advantage that English is widely spoken around the world. Differences in ethical approach.

Costs of relocation or expansion The costs and logistical difficulties are far more difficult in locating an industrial facility (high capital costs), whereas service industries - such as call centres - are cheaper to re-locate, which partly explains recent moves by UK financial institutions to India.

Question: Explain the causes and consequences of location and relocation, both domestically and internationally.