LESSON 7

LOCATION DECISIONS

TOPICS: LEARNING OUTCOMES:

 Strategic Importance of At the end of the lesson,
Location Decisions students must be able to:
 Factors Affecting Locations 1. Understand the strategic
Decisions importance of location
 Service Locations Strategy decisions.
2. Identify and explain major
factors affecting location
decisions.

Topic 1: • Strategic Importance of Location Decisions

World markets continue to expand, and the global nature of business is

accelerating. Indeed, one of the most important strategic decisions made by many
companies, including FedEx, Mercedes-Benz, and Hard Rock, is where to locate their
operations. When FedEx opened its Asian hub in Guangzhou, China, it set the stage for
“round-the-world” flights linking its Paris and Memphis package hubs to Asia. When
Mercedes-Benz announced its plans to build its first major overseas plant in Vance,
Alabama, it completed a year of competition among 170 sites in 30 states and two
countries. When Hard Rock Cafe opened in Moscow, it ended 3 years of advance
preparation of a Russian food-supply chain. The strategic impact, cost, and international
aspect of these decisions indicate how significant location decisions are.
Location greatly affects both fixed and variable costs. Location has a major
impact on the overall risk and profit of the company. For instance, depending on the
product and type of production or service taking place, transportation costs alone can
total as much as 25% of the product’s selling price. That is, one-fourth of a firm’s total
revenue may be needed just to cover freight expenses of the raw materials coming in
and finished products going out. Other costs that may be influenced by location include
taxes, wages, raw material costs, and rents. When all costs are considered, location may
alter total operating expenses as much as 50%.
The economics of transportation are so significant that companies—and even
cities— have coalesced around a transportation advantage. For centuries, rivers and
ports, and more recently rail hubs and then interstate highways, were a major
ingredient in the location decision. Today airports are often the deciding factor,
providing fast, low-cost transportation of goods and people.
Companies make location decisions relatively infrequently, usually because
demand has outgrown the current plant’s capacity or because of changes in labor
productivity, exchange rates, costs, or local attitudes. Companies may also relocate their
manufacturing or service facilities because of shifts in demographics and customer
demand.
Location options include (1) expanding an existing facility instead of moving, (2)
maintaining current sites while adding another facility elsewhere, or (3) closing the
existing facility and moving to another location.

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 The location decision often depends on the type of business. For industrial
location decisions, the strategy is usually minimizing costs, although locations that foster
innovation and creativity may also be critical. For retail and professional service
organizations, the strategy focuses on maximizing revenue. Warehouse location
strategy, however, may be driven by a combination of cost and speed of delivery. The
objective of location strategy is to maximize the benefit of location to the firm

Topic 2: Factors Affecting Locations Decisions

Selecting a facility location is becoming much more complex with globalization.

Globalization has taken place because of the development of:
1. Market economics;
2. Better international communications;
3. More rapid, reliable travel and shipping;
4. Ease of capital flow between countries; and
5. High differences in labor costs. Many firms now consider opening new offices,
factories, retail stores, or banks outside their home country.
Location decisions transcend national borders. In fact, the sequence of location
decisions often begins with choosing a country in which to operate. One approach to
selecting a country is to identify what the parent organization believes are key success
factors (KSFs) needed to achieve competitive advantage.
Once a firm decides which country is best for its location, it focuses on a region
of the chosen country and a community. The final step in the location decision process is
choosing a specific site within a community. The company must pick the one location
that is best suited for shipping and receiving, zoning, utilities, size, and cost.
Besides globalization, a number of other factors affect the location decision.
Among these are labor productivity, foreign exchange, culture, changing attitudes
toward the industry, and proximity to markets, suppliers, and competitors.

Labor Productivity
When deciding on a location, management may be tempted by an area’s low
wage rates. The management must be interested in the combination of production and
wage rate. In other words, labor productivity must be considered when choosing a
location or the business. For example, if Otis Elevator pays $70 per day with 60 units
produced per day in South Carolina, it will spend less on labor than at a Mexican plant
that pays $25 per day with production of 20 units per day:

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Exchange Rates and Currency Risk
Although wage rates and productivity may make a country seem economical,
unfavorable exchange rates may negate any savings. Sometimes, though, firms can take
advantage of a particularly favorable exchange rate by relocating or exporting to a
foreign country. However, the values of foreign currencies continually rise and fall in
most countries. Such changes could well make what was a good location in 2015 a
disastrous one in 2019. Operational hedging describes the situation where firms have
excess capacity in multiple countries and then shift production levels from location to
location as exchange rates change.

Costs
We can divide location costs into two categories, tangible and intangible.
Tangible costs are those costs that are readily identifiable and precisely measured. They
include utilities, labor, material, taxes, depreciation, and other costs that the accounting
department and management can identify. In addition, such costs as transportation of
raw materials, transportation of finished goods, and site construction are all factored
into the overall cost of a location. Government incentives may also affect a location’s
cost.
Intangible costs are less easily quantified. They include quality of education,
public transportation facilities, community attitudes toward the industry and the
company, and quality and attitude of prospective employees. They also include quality-
of-life variables, such as climate and sports teams, that may influence personnel
recruiting.

Political Risk, Values, and Culture

The political risk associated with national, state, and local governments’
attitudes toward private and intellectual property, zoning, pollution, and employment
stability may be in flux. Governmental positions at the time a location decision is made
may not be lasting ones. However, management may find that these attitudes can be
influenced by their own leadership.
Worker values may also differ from country to country, region to region, and
small town to city. Worker views regarding turnover, unions, and absenteeism are all
relevant factors. In turn, these values can affect a company’s decision whether to make
offers to current workers if the firm relocates to a new location.
One of the greatest challenges in a global operations decision is dealing with
another country’s culture. Cultural variations in punctuality by employees and suppliers
make a marked difference in production and delivery schedules. Bribery and other
forms of corruption also create substantial economic inefficiency, as well as ethical and
legal problems in the global arena. As a result, operations managers face significant
challenges when building effective supply chains across cultures. Table 8.2 provides one
ranking of corruption in countries around the world.

Proximity to Markets
For many firms, locating near customers is extremely important. Particularly,
service organizations, like drugstores, restaurants, post offices, or barbers, find that
demographics and proximity to market are the primary location factors. Manufacturing
firms find it useful to be close to customers when transporting finished goods is
expensive or difficult (perhaps because they are bulky, heavy, or fragile). In addition,
with just-in-time production, suppliers want to locate near users. For a firm like Coca-
Cola, whose product’s primary ingredient is water, it makes sense to have bottling

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plants in many cities rather than shipping heavy (and sometimes fragile glass) containers
cross country.

Proximity to Suppliers
Firms locate near their raw materials and suppliers because of:
1. perishability,
2. transportation costs, or
3. bulk.
Bakeries, dairy plants, and frozen seafood processors deal with perishable raw
materials, so they often locate close to suppliers. Companies dependent on inputs of
heavy or bulky raw materials (such as steel producers using coal and iron ore) face
expensive inbound transportation costs , so transportation costs become a major factor.
And goods for which there is a reduction in bulk during production (e.g., trees to lumber)
typically need facilities near the raw material.

Proximity to Competitors (Clustering)

Both manufacturing and service organizations also like to locate, somewhat surprisingly,
near competitors. This tendency, called clustering, often occurs when a major resource
is found in that region. Such resources include natural resources, information resources,
venture capital resources, and talent resources.

Topic 3: Service Location Strategy

While the focus in industrial-sector location analysis is on minimizing cost, the

focus in the service sector is on maximizing revenue. This is because manufacturing
firms find that costs tend to vary substantially among locations, while service firms find
that location often has more impact on revenue than cost. Therefore, the location focus
for service firms should be on determining the volume of customers and revenue.
There are eight major determinants of volume and revenue for the service firm:
1. Purchasing power of the customer-drawing area
2. Service and image compatibility with demographics of the customer-drawing
area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management

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ACTIVITY/ TASK

Answers on the activity/task shall be written on whole sheet/s of yellow paper

and must be submitted not later than the agreed deadline. Late submissions will not
be accepted and will result to a failing grade.

A. Problem Solving
Imagine yourself as an Operations Manager of an international business. You are
tasked by the board of directors to select a location for the new branch that your
company will build. You are given the following information: In Myanmar (formerly
Burma), 6 laborers, each making the equivalent of Php3 per day, can produce 40 units
per day. In rural China, 10 laborers, each making the equivalent of Php 2 per day, can
produce 45 units. In Billings, Montana, 2 laborers, each making Php 60 per day, can
make 100 units. Based on labor costs only, which location would be most economical to
produce the item?

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