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  Low profits – or even losses  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  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  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  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  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  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 AdvantagesDisadvantages  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

Effects of Globalization  Discovery Channel Video  The Other Side of Outsourcing