OPERATIONS MANAGEMENT 1. Location Topic 5.5 (SL) 2

OPERATIONS

MANAGEMENT

1

Location

Topic 5.5 (SL) 2

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. 3

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.

4

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.

6

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

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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. 8

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).9


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.10


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.

11


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.

12

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.s

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.14

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. 15

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.

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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).

17

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.

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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 19


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:

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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.

21


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.22


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.

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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

countryside24

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.25

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!

26

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.

27

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!

28

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.

29

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. 30

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.

31

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.

32

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.33

International Factor:

Some problems of international trade &

impact on location decisions:

Currency fluctuations

Exchange controls

Political instability and unrest

Tariffs and other restrictive practices

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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.

35

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.

36

Question:

Explain the causes and consequences of location and relocation, both domestically and internationally.37

Documents

OPERATIONS MANAGEMENT 1. Location Topic 5.5 (SL) 2