5.5 Location Chapter 34

Picking a Location Location decisions have 3 characteristics: They are strategic – they have a long term impact on the business. They are difficult to reverse due to cost considerations. They are made by the highest levels of management.

Optimal Location What is optimal location? A business location that gives the best combination of quantitative and qualitative factors

Bad Location? Problems that occur with non-optimal locations: High fixed cost sites High break-even level of production Low profits – or even losses If low capacity, increased or high unit costs High variable costs – like labor Low contribution per unit produced High unit variable costs reduce competitiveness Low Unemployment rate Problems recruiting qualified staff Staff turnover could be a problem Pay levels may need to be high to attract and retain staff Poor Transit Structure Increased transportation costs for materials and finished goods Relatively inaccessible to customers Difficult to operate JUST-IN-TIME inventory stock management

Factors that influence location Quantitative Factors These are 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. Qualitative Factors Non-measurable factors that may influence business decisions

Quantitative Factors Site and capital costs (buildings or shop-fitting costs) Prime office and retail space could be expensive Building in a greenfield site (undeveloped land) must be compared with retrofitting an existing building

Quantitative Factors Labor Costs Is the business labor intensive? An medical office will need a lot of skilled staff. A computing center will need a lot of computer hardware and very few people

Quantitative Factors Transportation Costs Heavy and bulky raw materials like steel or grain will be costly to ship May need to locate near suppliers Service industries (hotels and retailing) need to be located near customers

Quantitative Factors Sales Revenue Potential Sales can be directly related to location Convenience stores need to be convenient for customers Locations can add value or foster an image Expensive retailers on Madison Avenue Prestigious financial address on Wall Street

Quantitative Factors Government Grants Grants may be offered to entice a company to locate to a particular location within a country, state, or city. Often used to attract business to areas with high unemployment.

Making a Decision 1 Profit Estimates 2 Investment Appraisal Compare revenues and costs for each location and determine potential profit opportunity 2 Investment Appraisal Calculate the payback of capital investment to prepare each location 3 Break-even Analysis The lower break-even level, the better the site – if all other things are equal

Qualitative Factors Safety Room for further expansion Avoid potential risk of public safety. A factory might locate in a rural area to reduce the risk of an industrial accident harming the public vs higher transportation costs. Room for further expansion Locating to a site that has little room for expansion, may force another relocations

Qualitative Factors Managers’ Preference Labor Supply In a small business, managers preferences to desirable work location or close to home may be a factor. Large corporations will consider the impact of earnings and profits to shareholders. Labor Supply Availability of skilled labor and cost of labor

Qualitative Factors Ethical Considerations Will move cause workers to be redundant? Would laying off workers cause bad publicity? What if the move involves locating to a country with less stringent environmental laws and other regulations?

Qualitative Factors Environmental concerns Infrastructure A business may be reluctant to setup in an environmentally fragile location. Infrastructure Quality infrastructure may be important Access to roads, waterways, ports, and communication – reliable Internet access, cell and land telephone lines, and reliable power

Other Location Issues The pull of the market Planning restrictions Development of suburbs, and easy transportation with cars Planning restrictions Zoning laws and regulations that restrict where companies can locate to protect communities External economies of scale Cost reductions when “like” companies are clustered together (Silicon Valley in California)

Multi-Site Locations Advantages Disadvantages Greater convenience for consumers McDonald’s restaurants in every town Coordination problems between the locations Lower transportation costs Breweries can supply large cities from regional locations rather than distribute nationally Potential lack of control and direction from senior management based at head office Production-based companies reduce the risk of supply disruption if there are technical or industrial problems in one factory Different cultural standards and legal systems in different countries – the business must adapt to these differences Opportunities for delegation of authority to regional managers from head office – helps to develop and improve staff skills and improve motivation If sites are too close to each other, there may be a danger of “cannibalism” where one location takes sales away from another location Cost advantages of multi-sites in different countries

Globalization & Location Offshoring The relocation of a business process from one country to another by the same company. Multinational A business with operations or production bases in more than one country. HL

Reasons to Relocate Globally 1 To reduce costs Potential for higher profits by relocating abroad to take advantage of lower labor rates. Call Centers India TV Production Czech Republic Toys China Vacuum cleaners Malaysia HL

Reasons to Relocate Globally Labor Comparison Chart to Germany* *German has some of the highest labor costs in the world. Country Weekly Pay in Euros Germany Wages India 26 300 China 43 600 Bulgaria 45 Brazil 62 800 Hungary 165 2200 HL

Reasons to Relocate Globally 2 Access to Global Markets Rapid economic growth in foreign markets create huge potential for sales Best way to access is to BE there Domestic markets maybe saturated; therefore limiting growth Threats from government regulations Response to a competitor entering a foreign market – be there first mentality HL

Reasons to Relocate Globally 3 Avoid protectionist trade barriers Avoid paying tariffs Avoid trade agreement limitations European Union NAFTA ASEAN (Association of South East Asian Nations) Example: Toyota has plants in the USA to avoid import tariffs Trade Barrier: Taxes (tariffs) or other limitations on the free international movement of goods and services HL

Limitations to International Locations Language and other communication barriers Cultural differences Level of service concerns Time difference problems, time delays in phone messages, language barriers Supply-Chain concerns Issues develop if production is not near raw materials or bought-in goods Ethical considerations Loss of jobs in current country Using child labor or very low-wage labor in new country Could move create a negative public image Can well-qualified staff be recruited if the company is viewed as unethical HL