Chapter 11 location DECISIONS

Chapter 11
LOCATION
DECISIONS


LEARNING OBJECTIVES
You should be able to:
 Explain the impact of location decisions on a supply
chain.
 Identify the factors influencing location decisions.
 Understand the impact of the Regional Trade
Agreements on location decisions.
 Use several location evaluation models.
 Understand the advantages of business clusters.
 Understand the importance of sustainable
development
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CHAPTER OUTLINE
•
•
•
•
•

Introduction
Global Location Strategies
Critical Location Factors

Facility Location Techniques
Helpful On-Line Information for Location
Analysis
• Business Clusters
• Sustainable Development

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Introduction
Location decision can impact firm’s competitive advantage. It is
very costly to move or shut down the facility so Facility location
must be part of the firm’s supply chain strategy.
Companies can locate anywhere in the world due to increased
globalization, technology, transportation, & open markets.
Location still key matters for firm. Many successful industry
clusters (Silicon valley, Wall Street,…) show that innovation &
successful competition are geographically concentrated.
Global location decisions involve location of the facility, defining
its strategic role, & identifying the markets it serves
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Location Strategies
Dr. Kasra Ferdows suggests 6 location types
 Offshore factory – this kind of factory produce at low cost

with:
 Minimum investment in technical/managerial resources
 Make use of low labor costs.
 Buy local parts/components, export finished goods.( Ex. Samsung in
VN)

 Source factory –
 plant mgmt involved in supplier selection & production planning.
 This kind of factory is controlled by low production cost, fairly
developed infrastructure and availability of skilled workers

 Server factory –
 Based primary on government incentives & low exchange risk & tariff
barriers to reduce taxes & logistics costs.
 Involved in making minor improvements in products and process
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Location Strategies
(cont.)

 Contributor factory –
 involved in product development, production
planning, critical procurement decisions, &
developing suppliers.

 Outpost factory –
 Is set up at location of advanced suppliers,

competitors, research facilities where easy to get
access almost current information on materials,
components, products and technologies.

 Lead factory –
 is a source of innovation & competitive advantage
for firm.
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Critical Location
Factors
 The most challenging task for one company is
where to position assets strategically to create
a long term competitive advantage.
 To solve above question partially, need to
answer following questions:
 What will be the reaction of shareholder, clients, competitors,
employees or market?
 Will the location provide a sustainable competitive advantage?
 What will impact on product, service quality or deliver
performance?
 Can hire right people?
 What will be the effect on Supply chain?
 What is the projected cost?

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Critical Location
Factors
(Cont.)

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Location Factors

(Continued)

Regional Trade Agreements (RTA) & WTO
World Trade Organization (WTO) successor to the
General Agreement on Tariffs/Trade (GATT). Functions
include:
 Administering agreements,
 Forum for trade negotiations,
 Trade disputes,
 Monitor trade policies,
 Aid for Developing countries
 International organizations.

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Location Factors

(Continued)

RTA & the WTO (Continued)
European Union (EU): [1950] Set up after the WWII, the
EU consists of 27 members
North American Free Trade Agreement (NAFTA): [1994]
among the U.S., Canada, & Mexico
Southern Common Market (MERCOSUR): [1991]
among Argentina, Brazil, Paraguay, & Uruguay
Association of Southeast Asian Nations (ASEAN):
[1967] in SE Asia
Common Market of Eastern and Southern Africa
(COMESA)
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Location Factors

(Continued)

Competitiveness of Nations
Degree to which a country produces goods &
services which meet the needs of international
markets, while maintaining or expanding personal

real income over time. Made up of 323 criteria,
grouped into 4 factors –
1.
2.
3.
4.

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Economic performance (79 criteria)
Government efficiency (72 criteria)
Business efficiency (71 criteria)
Infrastructure (101 criteria)

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Location Factors

(Continued)

2006-07 World Competitiveness Rankings
Rank
1.
2.
3.
4.
5.
6.
7.

8.
9.
10.
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Global Competitiveness
Report (WEF)
Switzerland
Finland
Sweden
Denmark
Singapore
US
Japan
Germany
Netherlands
UK
Table 11.2

World Competitiveness
Yearbook (IMD)
US
Singapore
Hong Kong
Luxemburg
Denmark
Switzerland
Iceland
Netherlands
Sweden

Canada
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Location Factors

(Continued)

12 Pillars of Competitiveness
 Institutions
 Infrastructure
 Macroeconomic stability
 Health & primary
education
 Higher education &
training
 Goods market efficiency
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 Labor market efficiency
 Financial market
sophistication
 Technological
readiness
 Market size
 Business sophistication
 Innovation
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Location Factors

(Continued)

Government Taxes & Incentives
 Several levels of government must be considered
when evaluating potential locations.
 Countries with high tariffs discourage importing
goods into the country.
 High tariffs encourage multinational corporations to
produce locally.
 Many countries have foreign trade zones (FTZs)
where materials are imported duty-free as inputs to
production

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Location Factors

(Continued)

Currency Stability
 Impacts business costs & consequently location decisions.

Environmental Issues
 Trade liberalization creates need for environmental
cooperation

 NAAEC – North American Agreement on Environmental
Cooperation

 Coordination on environmental issues will mitigate
 Greenhouse gas production & Ozone depletion
 Production of Nitrogen & Sulfur Dioxide
 Deforestation

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Location Factors

(Continued)

Access & Proximity to Markets
 Relocation to China not just for cheap labor but for access
to the market

 In the service industry, proximity to customers is even
more critical
 Convenience is a factor in consumer choice

Labor Issues





Labor availability, productivity, & skill
Unemployment & underemployment rates
Wage rates; turnover rates; labor force competitors
Right-to-work laws

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Location Factors

(Continued)

Access to Suppliers & Cost
 Supplier proximity influences the delivery of materials
& effectiveness of the supply chain.

Utility Availability & Cost
 Supply of electricity has not kept pace with the high
speed of development.
 In heavy industries the availability & cost of energy
are critical considerations.
 Telecommunication costs have dropped dramatically.
Many organizations now have back office operations
& call centers internationally to serve the U.S. market.
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Location Factors

(Continued)

Quality-of-Life Issues










Education
Economy
Natural Environment
Social Environment
Culture/recreation
Healthcare
Government/politics
Mobility
Public Safety

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Location Factors

(Continued)

Land Availability & Costs
 As land & construction costs in big cities continue
to escalate, the trend is to locate in the suburbs &
rural areas.

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Facility Location
Models
The Weighted-Factor Rating Model
Compares the attractiveness of several
locations along a number of quantitative &
qualitative dimensions.





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Identify the factors

Assign weights to each factor. The weights sum
to 1.
Determine a score for each factor.
Multiply the factor score by the weight, then
sum the weighted scores
The location with the highest total weighted
score is the recommended location.
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Facility Location
Models
(Continued)

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Facility Location
Models
The Break – Even Model

(cont.)

This model is suitable where we can classify the fixed
and variable cost for each potential location.
• Identify the location to be considered
• Determine the fixed cost for each facility( land, property taxes,
insurance, equipment, buildings)

• Determine the unit variable cost for each facility( labors,
materials, utilities, transportation cost)
• Construct the total cost line for each location on a graph
• Determine the break-even point on graph
• Identify the range over which each location has the lowest cost

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Facility Location
Models
(cont.)

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Facility Location
Models
•

Base on above data, we have:
• TC(QN) = 500,000 + 300Q
• TC(HN) = 750,000 + 200Q
• TC(HP) = 900,000 + 100Q, where Q: quantity

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(cont.)

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Helpful Online
Information for
Location
Analysis
Web sites that provide useful information for use
in location analysis:




www.developmentalliance.com was developed by
the International Economic Development council
& Conway Data, Inc
www.mappinganalytics.com was developed to aid
in site selection for a wide array of businesses

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