Operational Strategies: Location

OPTIMAL LOCATION - one that selects the best site for expansion of the business or for its reloaction, given current information. A location that gives the best combination of quantitative and qualitative factors

Not easy to achieve, as the optimal site is a compromise between conflicting benefits and drawbacks e.g. a well positioned high-street shop has the potential for high sales, but will have higher rental rates than an out of town shop

Location decisions have three key characteristics:

• strategic in nature - as they are long term
• difficult to reverse if an error in judgement is made - costs
• taken at the highest management levels

High fixed costs

• high break even point
• low profits - possibly losses
• low capacity utilisation can lead to unit fixed costs being high

High variable costs e.g. labour

• low contribution per unit produced or sold
• low profits - or even losses
• high unit variable costs reduce competitiveness

Low unemployment rate

• problems with recruiting suitable staff
• staff turnover likely to be a problem
• pay levels may have to be raised to attract and retain staff

High unemployment rate

• average consumer disposable incomes may be low - leading to relatively low demand

Poor transport infrastructure

• raies transport costs for both materials and finished products
• relatively innaccesible for customers
• difficult to operate just-in-time

Quantitative factors

• Site and other capital costs (such as building or shop fitting)
• Labour costs (depends on whether the business is capital or labour intensive)
• Transport costs (heavy raw materials.. incur high costs if suppliers are a long way away)
• Sales revenue potential (location may even allow value to be added)
• Government grants (incentives to locate in a certain geographical location)

Qualitative factors

• Safety (e.g. industrial plants)
• Room for further expansion (long term consideration..?)
• Managers' preferences (small businesses)
• Ethical considerations (relocating from the UK will cause redundancies, for example)
• IT infrastructure (varies considerably around the world)

Reasons:

Cost reduction

Access to global (world) markets

Avoidance of protectionist trade barriers

Issues and problems with international location:

Language and other communication barriers

Cultural differences (marketing)

Level of service concerns (off-shoring of call centres for example)

Supply chain concerns

Ethical considerations